Market-based Financing

for SMEs in Malaysia:

Issues, Challenges, and Way Forward

In partnership with
Market-based Financing
for SMEs in Malaysia:
Issues, Challenges, and Way Forward

February 2024

Authors:

Gopi Krishnan
Azleen Osman Rani

Reviewed by:

Shigehiro Shinozaki,
Senior Economist, Economic Research and Development Impact Department, Asian Development Bank

Any designation of or reference to a particular territory or geographic area, or use of the term
‘country’ in this publication, does not indicate any judgments by the Asian Development Bank or other
partners as to the legal or other status of any territory or area.

The authors would like to thank Tan Sri Andrew Sheng, ICMR’s Distinguished Fellow and the Asian
Development Bank for their expert contribution to the report. The authors would also wish to
acknowledge the contribution of the Board of Directors of ICMR, the Securities Commission Malaysia,
SME Corp. Malaysia, MATRADE, and all survey respondents and interview participants for providing
input and valuable comments. The authors would also like to acknowledge the contribution of Ivy Hii
Siaw Hung, Liew Jiaxhen, and Julianna Roslan for their dedicated efforts in contributing to the analysis
and writing of this report. Last, but not least, the authors thank the ICMR team for their tireless work in
completing this report.

All views and errors remain the authors’ own.

Contents
Executive Summary 6

Chapter One
Introduction 11

1.1 Background 12
1.2 Why this study is important 14
1.3 The evolving story: An increased role for market-based
financing mechanisms 16
1.3.1 Shifting global macroconditions 17
1.3.2 Facilitate Malaysia’s economic reforms 19
1.3.3 Diversification in the financing ecosystem 20
1.3.4 Support beyond financial capital 22
1.4 Objectives of the study 24
1.5 Scope of the study 24
1.6 Conclusion 25

Chapter Two
The Current Landscape of Market-based Financing in Malaysia  27

2.1 Overview of SMEs in Malaysia 28

2.1.1 Financing SMEs in Malaysia 31
2.1.2 Public market 33
2.1.3 Private market 38
2.2 Alternative financing 45

Chapter Three
Survey and Interview Insights 50

3.1 Background 51
3.2 Research methodology 51
 3.2.1 SME categories & demand and supply-side definition 51
3.2.2 Quantitative study: Survey 52
3.2.3 Qualitative study: Interview 54
3.3 What we found 55
3.3.1 Survey section 1: Post-COVID-19 environment 55
3.3.2 Survey section 2: External financing history, purposes,
and experience 58
3.3.3 Survey section 3: Awareness of and willingness to
consider market-based financing 63
3.3.4 Survey section 4: Key barriers and opportunities for
market-based financing 65
3.3.5 Survey section 5: Digitalisation and ESG 68
3.3.6 Findings from interviews with government agencies
and regulators 73
3.3.7 Findings from interview with the intermediaries 74
3.4 Conclusion 75

Chapter Four
Policy Recommendations  76

4.1 Market-based financing and the real economy 77

4.2 Recommendation 1: Filling the risk capital gap for capital
formation of SMEs 82
4.2.1 Streamlining government programmes 83
4.2.2 Enhance public financing 84
4.2.3 De-risking investment 85
4.3 Recommendation 2: The “Missing Middle”: Supporting
growth capital needs 87
4.3.1 Encourage blended financing options 88
4.3.2 Reduce “growth capital” gaps 91
4.4 Recommendation 3: Optimising exit strategies for SMEs
through public equity capital and M&A 95
4.4.1 Recommendations for enhancing the LEAP market’s
appeal 95
4.4.2 Reshape LEAP market to become a niche/specialised
SME market exchange 98
4.4.3 Setting the stage for a more vibrant M&A environment 99
4.4.4 A renewed focus on driving corporate value via capital
market reform 101
4.5 Recommendation 4: Strengthening the SME ecosystem:
beyond financing 103
4.5.1 Leveraging on FinTech for financial inclusion 103
4.5.2 Data infrastructure to improve access to funding 105
4.5.3 Role of islamic and social finance 107
4.5.4 Growing talent and financial education 112
4.5.5 Broadening access to markets and supporting
internationalisation 117
4.6 Conclusion 120

Chapter Five
Conclusion 121

References 125
Executive Summary

In Malaysia’s pursuit of economic reforms, the

significance of Small and Medium Enterprises
(SMEs) cannot be overstated. These enterprises
and innovation within SMEs has never been more
critical. This study aims to offer insights into the
current state of access to market-based financing
serve as the backbone of the nation’s economic for SMEs in Malaysia, alongside the challenges and
growth, playing a pivotal role in driving innovation, opportunities presented.
creating employment opportunities, and fostering
inclusive development. As the economic landscape Diversifying financing options is crucial to
evolves towards innovation-driven sectors, SMEs accommodate the evolving needs of SMEs at
become central to this transformation, contributing various stages in their business life cycle, meeting
to technological advancements and the overall the increasing demand for funding. In Malaysia,
resilience of Malaysia’s economy. This is in line with regulatory bodies have been supportive of
the government’s recent reform policies announced developing financial tools tailored to each SME’s
in 2023, such as Madani Economy, National Energy life cycle. However, this study reveals gaps in access
Transition Roadmap (NETR), and New Industrial to financing at different stages of a business’s life
Master Plan (NIMP) 2030. cycle. Addressing these gaps is vital to ensure the
success of SMEs.
To unlock the full potential of SMEs, it becomes
imperative to establish a well-developed ecosystem To understand the financing challenges of SMEs
where access to finance serves as a key enabler, in Malaysia, ICMR conducted an enterprise-level
connecting various other ecosystem enablers across survey targeting key decision-makers in different
distinct stages of a business’s life cycle. Limited types of SMEs, including startups, micro, small, and
financing poses a substantial hurdle for SMEs to medium-sized enterprises (MSMEs), and mid-tier
grow and has the potential to jeopardise the entire companies (MTCs). The survey, complemented by
SME ecosystem’s development. As such, the role qualitative interviews and focus groups, provides a
of market-based financing in catalysing growth comprehensive overview of the financing landscape

6
for SMEs, shedding light on the challenges and Recognised Market Operators (RMOs), advisers,
opportunities faced by startups, MSMEs, and MTCs. sponsors, and other intermediaries should
The key findings are: strengthen their networks with business
associations and government agencies to
• 64% of SMEs have experience in raising external disseminate information on market-based
finance, with most opting for funding from the financing offerings to SMEs.
banking sector, while market-based financing
is the less utilised financing option. Market- • Digital technology adoption was embraced
based financing is primarily used for business by 73% of SMEs, broadly but with varying
expansion, while banking sector financing is motivations. MTCs prioritised digitalisation in
more commonly used to meet their working financial management, while startups and SMEs
capital needs. focused primarily on marketing and sales. A
positive impact from digitalisation was reported
• Among respondents with no experience in by 89% of SMEs, with a significant portion
market-based financing, 61% were aware of its (72%) marketing their products on e-commerce
availability, while 39% remained unaware. This platforms, which became a major revenue source
sentiment was echoed in interviews, particularly for SMEs.
regarding crowdfunding platforms like Equity
Crowdfunding (ECF), and Peer-to-peer (P2P) • Environmental, social, and corporate governance
financing. Of those aware, 85% expressed a (ESG) practices were not universally
willingness to consider market-based financing, adopted among SMEs, with only around half
while only 15% ruled it out for future funding incorporating ESG principles. Notably, MTCs
needs. This willingness is contingent on a better led with an impressive 68% adoption rate. The
understanding of market-based financing, trust, decision to incorporate ESG practices was
ownership control, and concerns about exit primarily driven by external factors, particularly
strategies, underscoring nuanced considerations the growing demand from customers indicating
across different business sizes. its growing business imperative. For startups,
the lack of government incentives was seen
• Primary hurdles for SMEs adopting market- as a predominant barrier, while MSMEs faced
based financing included complex and lengthy challenges due to the complexity of ESG
procedures, stringent requirements, high funding reporting. In contrast, MTCs identified the high
costs, and a surprising lack of outreach by cost of issuing ESG financing instruments as a
industry players. Based on interviews, these significant hurdle.
challenges were notably more pronounced
outside urban areas such as the Klang Valley. • A higher percentage of companies leveraging
Unlike banks, where information can be obtained market-based financing embraced both
by approaching a branch, SMEs reported digitalisation and incorporated ESG practices,
unfamiliarity with where and how they can highlighting a potential synergy between
access market-based financing. market-based financing and ESG and sustainable
business practices. The survey also indicated
• Across all business sizes, networks play an that SMEs conducting comprehensive business
important role for accessing information. reviews, including financial, macro, digitalisation,
Leveraging networks through government and ESG considerations, tended to enjoy better
agencies and business associations was the access to external financing.
top-preferred medium for obtaining information
about market-based financing. Startups showed Additionally, insights from interviews with
a greater inclination towards digital platforms government agencies and intermediaries further
and online sources. Therefore, regulators, described challenges and opportunities in the SME

7
Executive Summary

landscape. The key findings are: limit the interest of investors. Likewise, merger
and acquisitions (M&A) deals focusing on SMEs
• Knowledge gaps and talent shortages within the
are limited and need to be further enhanced.
SME financing ecosystem, especially regarding
market-based financing, were consistently
In light of the findings, this report presents a set
highlighted during our interviews by various
of recommendations to effectively address the
stakeholders. ESG as a growing business
intricate funding requisites throughout the SME life
imperative augments this challenge. Addressing
cycle and fortify the overarching ecosystem. The
talent shortages and reducing knowledge
recommendations are anchored from two main
gaps is considered a critical factor to ensure
perspectives:
a robust financing ecosystem supporting SME
development in Malaysia. These knowledge gaps
and talent shortages underscore the need for
1. Addressing SME’s life cycle funding
more targeted interventions to support various
needs:
stakeholders based on their specific needs.

The report focuses on narrowing funding gaps

• SMEs face a significant challenge due to the
across the SME life cycle, categorised broadly into
scarcity of data available to investors, financial
risk capital, growth capital, and late-stage capital
institutions, and agencies providing grants and
stages.
loans. Information asymmetries result in higher
costs for monitoring and evaluating SMEs, • Risk capital: This pertains to capital formation
exacerbating challenges in accessing financing. for early-stage SMEs, where the government
plays a pivotal role due to higher uncertainties
• SME assistance should also facilitate the and failure rates. Streamlining government
transition from SMEs to MTCs, enabling them assistance, broadening the role of fund-of-funds
to become larger corporations. However, (FoF), and providing guarantee schemes to
government support predominantly focused SMEs will increase private sector participation
on MSMEs may inadvertently create a certain and enhance investor protection to finance early-
unintended “comfort zone” for MSMEs to remain stage SMEs.
as they are. Support mechanisms and incentives
should be growth-oriented to foster the growth • Growth capital: Recommendations focus on
of MSMEs to grow faster and larger. enhancing capital allocation to support SMEs’
growth by diversifying financing options. This
• The current investment landscape is changing involves encouraging the offering of innovative
significantly, with investors, particularly venture funding structures using a blended financing
capitalists (VCs), shifting focus from “growth at approach and expanding the product offering
all costs” to considering revenue, profitability, for market-based financing. Encouraging more
and long-term sustainability of the businesses, private capital participation is critical not
as VCs grapple with rising funding costs (hurdle only for providing capital but also for offering
rates). support beyond capital, such as access to
markets, knowledge and talent development,
• There is a need to focus on the availability of and technological support. Areas like promoting
effective and efficient exit strategies for SMEs, corporate venture capital (CVC) in the private
and investors. Companies exploring listing on equity market are emphasised.
the Leading Entrepreneur Accelerator Platform
(LEAP) market face high issuance fees and a • Late-stage capital: The focus is on optimising
lack of vibrancy and liquidity constraints, which exit strategies for SMEs through public equity
increase the financial burden for the issuer and capital and M&A structures. Recommendations

8
 concentrate on enhancing the role of the LEAP building, and addressing talent shortages.
market by addressing issues related to the Specific actions recommended in this regard
high cost of issuance and reshaping it into a include enhancing accelerators and incubators
specialised SME exchange that focuses on NETR programmes, strengthening University-Industry
and NIMP identified sectors. Regarding M&A, the linkages, and fostering a risk-taking culture
report highlights the need to harness more M&A which allows for “creative destruction” for more
activities involving SMEs by targeting incentives innovation to flourish.
and intervention programmes to attract
Multinational Corporations (MNCs), Government • Market access and internationalisation:
Linked Companies (GLCs), and local corporates. Broadening market access and supporting
internationalisation are critical for SME growth
and competitiveness. The report highlights the
2. Strengthening SME ecosystem beyond need for SMEs to leverage bilateral, regional,
pure financing: and multilateral agreements signed by Malaysia,
focusing on assisting SMEs in entering new
The report emphasises the significance of markets. The Comprehensive and Progressive
leveraging FinTech, enhancing data infrastructure, Agreement for Trans-Pacific Partnership (CPTPP)
focusing on the roles of Islamic finance and social and the Regional Comprehensive Economic
finance, growing talent and financial education, as Partnership (RCEP) are highlighted as major
well as broadening market access and supporting multilateral agreements for Malaysian SMEs to
the internationalisation of SMEs. explore.

• FinTech integration: The role of FinTech in Strengthening Malaysia’s role within the
supporting SME financing needs is gaining Association of Southeast Asian Nations (ASEAN)
traction due to its inclusive nature and the use region is also crucial, with the suggestion of
of digital tools to broaden financial coverage. positioning Malaysia as an ASEAN ‘Test-Hub’ due
To further enhance the role of FinTech, the to its robust infrastructure and growing middle-
report suggests developing data infrastructure class consumer base.
by leveraging the existing ImSME platform to
improve data availability for assessing SME Expanding the export of service sectors
creditworthiness. among SMEs is recommended, with support
from agencies such as Malaysia External Trade
• Islamic finance and social finance: The report Development Corporation (MATRADE), which
underscores the role of Islamic Finance and has a proven, successful model under the
Social Finance in supporting SMEs, particularly Mid-Tier Companies Development Programme
those with impact-based goals, by leveraging (MTCDP) to promote trade activities can be
both concessional and private capital. further scaled.

To encourage an entrepreneurial culture,

the government could consider the In conclusion:
“Entrepreneurship for All” programme, aiming to
level the playing field for aspiring entrepreneurs, The role of SMEs in Malaysia’s economic
especially those from low-income households. development is indispensable. Recognising the
heterogeneity among SMEs is crucial, particularly in
• Growing talent and financial education: The identifying high-growth startups and scale-up SMEs
report emphasises various intervention measures driven by innovation, growth and investments, and
to support SMEs, including building networks, network expansion. This group not only requires
providing effective incentives for capacity greater policy focus and government support

9
Executive Summary

but is also particularly suitable for market-based shortage, adaptation of digital technologies, and
financing. While the role of market-based financing embedding sustainability principles within business
is gaining traction, the report highlights policy organisations is equally important. One-size-fits-all
recommendations to further enhance its role in solutions are insufficient, and policy interventions
supporting innovative, high-growth SMEs. should target various levels, including specific SME
categories, to tap into new growth areas with high
It is important to recognise that focusing on potential. By strengthening the SME ecosystem,
financing alone does not solve all barriers faced by Malaysia aims to bolster its contributions to
SMEs. Addressing challenges such as knowledge the economy, employment, technological
constraints, limited managerial skills, business advancements, and break away from the middle-
acumen, financial management skills, access income trap, becoming a resilient advanced
to technology and innovation assets, talent economy with a greater focus on sustainability.

10
Chapter One

Introduction

11
Introduction

1.1 Background

In recent months, the Malaysian government

has unveiled a series of economic reforms and
development policies aimed at revitalising economic
like ownership background, industry focus,
technological orientation, and organisational
behaviour contribute to the diversified landscape
growth, ensuring its robustness and sustainability for within the SME. Micro and traditional SMEs prioritise
the future. A recurring theme in all of these policies is maintaining their businesses, emphasising stability
the imperative to strengthen the Small and Medium and continuity over scaling up operations. On
Enterprise (SME) ecosystem, as it plays a pivotal the other hand, high-growth startups and scale
role in enhancing local business capabilities and up SMEs, fuelled by innovation and higher risk
competitiveness. investments, may require more government support
and capital allocation, especially in their early
Micro, Small, and Medium Enterprises (MSMEs) and stages to realise their full potential. To unlock the
Mid-Tier Companies (MTCs) are critical components full potential of SMEs, it is essential to establish
of Malaysia’s growth engine, leading the way in a well-developed ecosystem where access to
job creation, promoting innovation, and fostering finance plays an important role, connecting various
inclusive growth opportunities. For the purposes of ecosystem enablers across different stages of the
this research, we will collectively refer to MSMEs, business life cycle. A lack of external financing
startups, and MTCs using the umbrella term “SMEs” poses a significant obstacle to SME growth and can
to simplify the terminology, notwithstanding the potentially jeopardise the SME ecosystem (Beck
need to recognise the heterogenous nature of the and Demirguc-Kunt, 2006; Ardic et al., 2011; Gupta
different types of SMEs. and Gregoriou, 2018).

While SMEs are often categorised based on Bank lending is the primary source of financing for
size metrics such as employment and turnover, SMEs, providing direct debt to fund their business
recognising their heterogeneity is vital. Factors operations, working capital, and expansion.

12
According to the Bank Negara Malaysia (BNM), the 2008-09 financial crisis. As the banking
the banking sector accounts for over 90% of the sector continues to adjust to a stricter regulatory
total financing requirements for SMEs in Malaysia.1 environment and tighter financial conditions, it is
To support SME development, bank lending not important that a more diversified set of options
only comes directly from commercial banks, but for SME financing is made available to reduce
is also complemented by various lending schemes the vulnerability of SMEs to changes in the credit
administered by BNM, government agencies, and market.
Development Financial Institutions (DFIs).
Traditional capital market instruments, such as bond
While bank lending remains a prevalent source of and equity markets have typically served larger
SME financing, relying solely on it is increasingly corporations and have limited usage by the SMEs.
unsustainable (Shinozaki, 2014). Some middle- However, with the evolution of the capital market
income countries faced a credit crunch in the landscape facilitated by the advancements of digital
aftermath of the 2008-09 financial crisis (World technology and changing investor preferences, the
Bank, 2019) and credit tightening in the banking potential for alternative instruments in the capital
sector made SMEs’ dependence on banks markets such as the development of specialised
increasingly challenging. What is more, alternatives markets or exchanges and crowdfunding models
to traditional debt finance, such as venture capital, using digital platforms is increasingly being
growth capital, and angel investing were affected recognised as an important source of funding for
even more severely by the financial crisis, thus SMEs. In addition, under the broader term “market-
penalising innovative SMEs in need of finance based financing”, the role of venture capital,
(OECD, 2020b). private equity, and angel investing has significantly
increased providing new financing opportunities for
During both the 2008-09 financial crisis as well as innovative, high growth potential start-ups.
the more recent COVID-19 crisis, policy responses
through the banking system either through As the Malaysian economy seeks revitalisation with
expanded lending, special lending facilities or new growth sectors taking the lead, the role of
guarantee schemes and other credit measures market-based financing in accelerating innovation
became the main tool to support finance for SMEs. among SMEs has never been more crucial. Market-
Generally, market-based financing such as equity based financing plays a pivotal role, facilitating the
instruments gained more attention in the post- allocation of capital that empowers SMEs to thrive
crisis landscape, which marked a shifting focus, and make significant contributions to Malaysia’s
from cyclical issues to more longstanding structural socio-economic development.
issues in SME access to finance (OECD, 2020b).
The objective of this research is to provide insights
Megatrends such as globalisation, digitalisation, into the current state of access to market-based
and demographic changes will continue to reshape financing for SMEs in Malaysia. The study will
the landscape for businesses and policies on SME address the awareness, willingness, and challenges
financing. Against this backdrop, financial markets faced by SMEs in accessing market-based financing
have become more complex and interconnected and explore potential solutions to expand the reach
than ever before. The role of the financial system, in and depth of market-based financing in Malaysia.
its ability to support the creation and expansion of The findings will be valuable for policymakers, the
SMEs and entrepreneurs and to foster new sources entrepreneurial community, and investors seeking
of growth and value creation for the real economy to better meet the funding needs of SMEs and
have been called under question, especially since entrepreneurs in Malaysia.

1 https://www.bnm.gov.my/sme-financing

13
Introduction

1.2 Why this study is important

countries like the United States, Germany, and

Canada, SMEs have contributed nearly 90% of
total employment and half of the Gross Domestic
Product (GDP).

Under the National Entrepreneurial Policy

(DKN) 2030, Malaysia aims to increase its SMEs’
contribution to GDP from the current 38.4% to
50% by 2030, aligning with the average share of
SMEs in Organisation for Economic Cooperation
and Development (OECD) countries. However, it is
crucial not only to emphasise increasing the share
of contribution but, more importantly, to undergo
a paradigm shift toward enhancing the quality of
SMEs. This means focusing on producing higher
value-added goods and services with international
market reach and the ability to generate high-
paying jobs.

As the country progresses, SMEs become more

formal and productive, with a focus on adopting
The uniqueness of this study lies in its exclusive new technologies and expanding their market
focus on SMEs’ access to market-based financing reach (see Figure 1.1). In Malaysia’s case, this shift
in Malaysia. Most existing research on SME is from an upper-middle-income economy to a
financing has primarily revolved around the banking high-income economy. To achieve this, SMEs require
sector and other financial institutions, including robust support for technological upgrading and
Development Financial Institutions (DFIs), factoring, innovation activities, enabling them to produce high
and leasing companies. While we acknowledge the value-added products and services while extending
pivotal role banks and other financial institutions their reach to international markets. This will create
play in SME financing, our research delves greater opportunities for job creation, particularly in
specifically into the distinct potential of market- high-paying positions.
based financing to provide diverse funding options
to investors and business owners. This, in turn, One critical determinant of SMEs’ progress across
fosters the growth of SMEs and contributes to a various development stages is their ability to
thriving SME ecosystem in Malaysia. access financing. According to the International
Finance Corporation (IFC), 40% of formal MSMEs in
Malaysia has long aspired to break free from the developing countries face an unmet financing need
middle-income trap and transition into a developed of US$5.2 trillion annually. Closing these financing
economy. The recently launched Madani Economy gaps can be achieved through sustainable economic
Framework has set key indicators for Malaysia to development, improved governance, and enhanced
rank among the World’s top 30 largest economies credit information (Fouejieu et al., 2020).
by 2030. In alignment with this vision, the role of
SMEs is to develop local business capabilities and In developed economies, SMEs not only enjoy better
enhance international competitiveness. In developed access to financing but more significantly, they

14
have a range of diverse financing options at their In alignment with the government’s efforts to
disposal. A cross-country study by the World Bank reform and revitalise the Malaysian economy, this
(2013) of 150 countries showed a clear pattern that research aims to explore the role and opportunities
as income grows, the entire financial sector which presented by market-based financing in supporting
includes both the banking and the market-based the growth of SMEs. This, in turn, will have a far-
sector grows. Given that SMEs often have complex reaching impact on the broader economy. By
and varied business models based on their life cycle focusing on the specific strengths and weaknesses
stages, market-based financing can offer alternative within the current market-based financing
funding solutions tailored to their needs. It matches ecosystem, our research aims to both recognise
their risk profiles and plays a complementary role the limitations of market-based financing for SMEs
alongside traditional bank financing. Furthermore, as well as unlock the full potential benefits that
innovation is key to breaking free from the middle- market-based financing can bring to the growth and
income trap, and market-based financing is development of SMEs in Malaysia.
ideally positioned to support more risk-taking and
innovation-led activities.

Figure 1.1:
Malaysia’s SMEs transformation towards high-income journey

SME Contribution to GDP vs GDP/Capita

Lower middle income Upper middle income High income

70%
SME Contribution to GDP

60% Indonesia
Singapore
50% Vietnam Australia
Pakistan Malaysia
Thailand US
40% Philippines 2022:
India 38.4%
Brazil Taiwan
30%
20% Bangladesh
In most OECD countries, SMEs
10% contribute more than 50%of GDP*
0%
0 2 4 6 8 10 12 30 40 50 60 70 80
GDP Per Capita (USD '000)

• Reduce informality • High Value

• High Informality • Technology & innovation driven
• Increase in productivity
• Low productivity • Global market participations: highly
• Technological adaptation
• Low technology – Learning from doing integrated to global value chain
• Low market reach • Quality jobs creation
• Growing market reach
• Limited Access to Financing • High Access to Finance: Diverse
• Moderate Access to Finance
Financing Options

Source: Developed by author using various data sources

15
Introduction

1.3 The evolving story: An increased role for market-based

financing mechanisms

The role of market-based financing is becoming cater to SMEs. In addition, from an overall financial
increasingly vital in the current geo-financing system perspective, the availability of broader
landscape. Given the shift in global macroconditions financing options from market-based financing
and the government’s economic reform agenda mechanisms can help reduce risk concentration
as well as tighter regulations in the banking and improve the resilience of the financial system.
system, there is a growing need for a more
diversified financing ecosystem. This is especially Despite the varied policy initiatives established by
relevant for the SMEs which have always been the Securities Commission of Malaysia (SC) to offer
disproportionately impacted by economic crises. a wide range of market-based financing instruments
in Malaysia, our domestic financial system remains
The current landscape for a market-based financing dominated by commercial banks. This gives
ecosystem in emerging markets, such as Malaysia an obvious advantage to large enterprises and
is rapidly evolving from traditional capital markets government-related companies and limits access to
such as equities and bond markets. To encourage financing for SMEs and new ventures.
innovation, capital markets in Malaysia today have
broadened to offer more alternative sources of However, today the vulnerability of the SMEs to
market-based financing including new platforms shifting global macro conditions and the changing
such as Equity Crowdfunding (ECF), and Peer-to- risk landscape has become more pronounced.
peer (P2P) for SMEs and entrepreneurs to seek Against this backdrop, Malaysia’s aspirations to
funding. move into a high-income economy will need
to focus more on quality SMEs which rely on
Enabling factors which have increased the range technological upgrading and innovation activities,
of market-based financing options available to enabling them to produce high value-added
Malaysian SMEs today include capital market products and services while extending their reach
policy developments which broadly encourage into international markets.
innovation in Malaysia’s capital markets, while at
the same time, aimed at widening the investment In particular, these newer, innovative, and fast-
opportunities for retail investors and addressing the growing companies which have a higher risk-return
lack of liquidity in our equity markets, specifically. profile will likely be less suited for debt financing
In addition, external factors such as advancements offered by banks. Thus, the long-term success
in technology, the rise of platform business models, of these types of SMEs may also be dependent
and the younger demographic preferences for low- on the availability of a more diversified financing
cost convenient platforms have also contributed to ecosystem which can respond to their different
these developments. financing needs at different stages of their life
cycle. Specifically, these SMEs will also likely face
There is also an increased recognition that direct a multitude of challenges in a rapidly changing
alternative financing platforms can offer certain macro environment, including digitalisation
benefits such as allowing for a lower amount of and technology, climate change, the pursuit of
financing raised typically for SMEs, more flexible Sustainable Development Goals (SDGs) and ESG
requirements with eased disclosure requirements disclosures, as well as evolving talent requirements
and comparatively lower admission costs to better among others. In this context, these types of

16
SME businesses may be more willing to explore In the following section, we will delve further into
market-based financing mechanisms which offer the shifting structural factors above which rely on
“knowledge capital” or “smart capital” alongside an increased role for more market-based financing
financial capital if it can better serve their firm- mechanisms for SMEs.
specific needs.

1.3.1 Shifting global macroconditions

Even as the global health crisis from the pandemic Establishing a strong value chain, especially in
gradually recedes, the aftershock on the global emerging economic sectors, will benefit the broader
economy and the evolving geo-economic trends has economy and, in particular, SMEs, by facilitating
led to higher levels of uncertainty. Global growth technology transfers and access to new markets.
is decelerating, and there are mounting concerns
about a global recession due to the collective In contrast to the growing threats to global trade,
tightening of monetary policy, which has raised the development of digital technology, with a
the cost of capital for investment in productive strong emphasis on open-source platforms, is
economic activities. Geopolitical risks, xenophobia, accelerating the speed of knowledge transfer and
and nationalism are influencing the flows of capital, altering the way goods reach markets. Generative
labour, and goods. Economic sanctions, anti-migrant Artificial Intelligence (AI) is bridging the knowledge
labour policies, and trade wars are challenging the gaps between advanced and developing countries
fundamental principles of Laissez-faire, prompting by learning rapidly and effectively. The rapid
policymakers and economists to reconsider new acceleration of information flow is expected to
economic models. expedite mass-market transformations, including
the way global exports operate.
While every crisis presents opportunities, the
current geopolitical trends are opening up new The services sector, particularly the export
economic prospects for developing countries of computer services worldwide, has seen a
like Malaysia. The transition from U.S. hegemony remarkable 45% growth above pre-pandemic levels,
to a multipolar world is creating opportunities driven by demand for software, cloud computing,
for non-aligned nations to attract Foreign Direct machine learning, and cybersecurity.2 Furthermore,
Investment (FDI) for reshoring and friend shoring. digitally delivered services have experienced nearly
Malaysia’s ability to offer an English and Chinese- a fourfold increase in value since 2005, surpassing
speaking workforce will be a key comparative the growth rates of goods exports and other service
advantage, alongside our robust infrastructure sectors (see Figure 1.2).
network and various tax and non-tax incentives.

2 Based on Global Trade Outlook and statistics by WTO https://www.wto.org/english/res_e/booksp_e/trade_outlook23_e.pdf

17
Introduction

Figure 1.2:
Fast-growing global exports of digitally delivered services

450

400
Digitally delivered
350
services exports
300

250 Goods
exports
200

150

100
Other
services
50 exports

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: World Trade Organization (WTO) estimates

Malaysia is well-positioned to capitalise on the SMEs as a vital component of Malaysia’s economic

increasing demand for digitally delivered services, reforms under the Madani Economy Framework.
thanks to its youthful, internet-savvy population, Allocating capital for digitalisation, innovation, and
with internet usage exceeding 90%.3 In 2022, SMEs technological upgrades can significantly expedite
accounted for 50.1% of total employment in the the transformation of SMEs. Both the government
services sector. However, the services sector’s and the market can play pivotal roles in supporting
share of total exports remains low at 2.0%.4 The these endeavours.
government has included the internationalisation of

3 Department of Statistics Malaysia (DOSM) data on usage of ICT and E-Commerce establishment 2022 shows that internet usage in 2021 is
at 90.6%
4 Micro, Small and Medium Enterprises (MSMEs) performance 2022 from DOSM

18
1.3.2 Facilitate Malaysia’s economic reforms

MSMEs experienced a robust rebound in growth Economy Framework, the NETR Phase I, the New
in 2022 after a sharp contraction in 2020 due Industrial Masterplan 2030, and the Mid-term review
to the COVID-19 pandemic, followed by a slow of the 12th Malaysian Plan has set the direction
recovery in 2021 when MSME growth lagged the and laid the pathway for transforming Malaysia
broader economy (see Figure 1.3). The government into a “Prosperous, Inclusive, and Sustainable”
provided support to MSMEs through various nation. These reforms have identified several key
incentive packages to ensure their survival during indicators, with the transformation of SMEs into new
the challenging period of intermittent lockdowns. drivers of growth that can compete in international
However, the circumstances have now evolved, and markets being a focal point. Under the National
the support for MSMEs must transition from mere Entrepreneurial Policy (DKN) 2030, specific
survival to fostering growth. targets have been established to increase SME
contributions to GDP, employment, and exports to
The recent unveiling of a multitude of economic 50%, 80%, and 30% respectively by 2030.
reforms through initiatives such as the Madani

Figure 1.3:
MSMEs rebounded strongly in 2022 Malaysia’s real GDP growth

15
11.6
10 8.7
6.3 5.9
4.3 4.4
3.3
% YoY

5
1.3
0

-5
-5.5
-10 -7.3
2018 2019 2020 2021 2022

MSME GDP Growth (%) Real GDP (%)

Source: DOSM, CEIC

As the backbone of the Malaysian economy, the technological advancements, an innovation-centric

development of SMEs is a critical component economic growth strategy, and robust institutional
of Malaysia’s journey toward becoming a truly support. It envisions a substantial integration of
developed nation. To meet these ambitious Malaysian SMEs into global value chains, a goal
targets, aspiration alone is inadequate and must further facilitated by initiatives like the CPTPP
be complemented by effective execution. The and RCEP, reinforcing the nation’s commitment to
realisation of the DKN 2030 vision demands the fostering a competitive and interconnected SME
cultivation of a robust SME ecosystem fuelled by landscape.

19
Introduction

As such, addressing financing challenges emerges to achieve inclusive and sustainable progress.
as a critical factor in fortifying the SME ecosystem. In this respect, market-based financing plays a
The SME Association of Malaysia has called special role in supporting innovation and SME
on the government to allocate more capital to transformation, a point emphasised in the Prime
facilitate the transformation of SMEs in line with Minister’s speech during the launch of Madani
the industrial and digital revolution to ensure their Economy. Market-based financing is vital for
competitiveness.5 While the government has a assisting startups, MSMEs, and MTCs by attracting
pivotal role to play in supporting SME financing, it investments from both domestic and foreign
cannot solely meet the funding requirements for the sources. Facilitating risk capital and growth capital
transformation of SMEs and Malaysia’s economy. for investments in the country’s new growth
strategy is crucial to ensure the success of the
A combination of public, private, international nation’s economic reform agenda under the Madani
capital, and philanthropic contributions is essential Economy initiative.

1.3.3 Diversification in the financing ecosystem

Since the financial crisis of 2008/2009, Western In Malaysia, a similar process of bank deleveraging
economies’ banking sectors have shifted their focus began much earlier, stemming from the 1997/98
to deleverage and have imposed stricter regulatory financial crisis. Between 2000 and 2010, domestic
capital requirements. The introduction of Basel III credit to the private sector from banks declined from
aims to restrict excessive leverage within the banking its peak of 152% of GDP in 1997 to below 100% of GDP
system to enhance overall bank stability. However, this in 2008. In response, corporate bonds and Sukuk, an
has had repercussions on access to credit, especially instrument under market-based financing, emerged to
for SMEs, which are often perceived as riskier bridge the credit gap left by the banking sector. The
compared to larger corporations and households. corporate bond market grew substantially, increasing
In response, international institutions like the OECD from less than 1% of GDP in 2001 to 45% of GDP in
and the European Union (EU) have underscored the 2020. This shift toward market-based financing was
significance of market-based financing as a source of strategically planned in the Capital Market Masterplan
diversified funding, employing risk-sharing instruments I by SC, coinciding with banking sector consolidation
to support various business sectors, particularly SMEs. under the Financial Market Master Plan I by BNM.

Among Southeast Asian economies, the average While there is evidence that the role of market-based
share of MSME loans to GDP from 2010 to 2021 financing for SMEs is gaining global traction, it is also
stood at 14.2%, with non-banking financing to GDP important to note that market-based financing should
for the same period at only 4.2%. Nevertheless, not be viewed as a substitute for banking credit.
the growth in banking credit to national GDP Rather, the emphasis should be on understanding the
contracted by 3.3% annually, whereas non-bank need for a diversified financing ecosystem that can
and market-based financing exhibited an increase cater to businesses with varying risk profiles. Direct
of 13.4% annually during the same period. This market-based investments can carry higher risks
highlights the increasing reliance of SMEs on non- compared to traditional banking credit as market-
bank and market-based financing, even though based financing shifts the risk to investors, whereas
banking credit remains a major source of funding in excessive credit risk can be detrimental to public
the region. savings and lead to systemic economic failures.

5 https://www.nst.com.my/news/nation/2023/07/935636/sme-malaysia-calls-government-support

20
A well-developed capital market can efficiently strategies. This collaborative effort should aim to
allocate capital to innovative and productive alleviate the burden on SMEs by simplifying complex
economic sectors. However, not all capital market compliance requirements, including those related
instruments are suitable for SME fundraising, to sustainability disclosures. For example, the Joint
primarily due to the high cost of issuance, Committee on Climate Change (JC3), co-chaired by
scalability, liquidity, and investor demand. Market- BNM and Securities Commission of Malaysia (SC)
based financing also requires regulations and established collaborative actions for building climate
policies which reduce risk and strengthen resilience within the Malaysian financial sector, while
investor protection without eliminating the SMEs’ Capital Markets Malaysia launched the Simplified
contribution to long-term economic growth. ESG Disclosure Guide (SEDG) for SMEs in Supply
Chains in October 2023.
This, however, requires an understanding of which
types of market-based financing are conducive to Diversifying financing options is imperative to
economic growth and which ones can increase its accommodate the evolving needs of SMEs at
fragility and the probability of more market failures. different stages in business life cycles, meeting the
Given that each type of financing has its own merits growing demand for funding (see Figure 1.4). Many
and limitations, policy initiatives which have led to SMEs encounter difficulties in accessing financing,
more innovative financing instruments are being especially in their early stages. As a result, they
introduced, including but not limited to, hybrid often resort to informal sources like self-financing
financing models where the banking sector and or assistance from family and friends.6 Early-stage
market-based financing can coexist and complement businesses, with limited credit history and operating
each other. Both banking sector and market-based in high-risk environments without substantial
financing institutions can collaborate to establish tangible assets, find it challenging to secure
comprehensive guidelines and overarching policy traditional straight debt financing.

Figure 1.4:
SME financing across life cycle stages

Life cycle stage

Pre-commercialisation Early stage Growth/expansion stage Late stage Matured

LEAP Market ACE Market Main Market

Private placement Bonds/ sukuk

Market-
Angel investment Venture capital Private equity
based
financing Equity Crowdfunding

Initial exchange offering

Peer-to-peer (P2P) Financing

DFIs e.g. SME Bank, EXIM Bank, Agrobank

Banks
CGC
and Fl
Commercial banks

Family, friends, Private market, Crowdfunding, Public market,

government, crowdfunding Specialised exchange Bond market, M&A deals

Source: Adapted from BNM & SC

6 According to Bank Negara Malaysia survey in 2018, 51% of MSMEs relied on self-financing and 17.0% were funded by family and friends.

21
Introduction

Similarly, emerging high-growth areas may People can now directly invest in businesses
entail higher risks, necessitating an innovation through platforms like ECF and P2P financing,
ecosystem that embraces the potential for failure— offering businesses and investors direct access to
an aspect that may not align well with the risk- meet their various financial needs. RMOs facilitate
averse nature of traditional banking. This is where the flow of capital supply and demand, cultivating a
private capital plays a pivotal role in supporting dynamic market for financing SMEs and fostering a
entrepreneurs, from the inception of their ideas to thriving entrepreneurial ecosystem.
commercialisation, and eventually, reaching mature
stages suitable for the public market. Government Regulators are also exploring innovative ways
intervention can encourage partnerships with to enhance access to market-based financing,
private investors, fostering support for startups and recognising that not all capital market instruments
technopreneurs, thus further promoting the growth are suitable for addressing SMEs’ financing
of innovative sectors. Government grants can help requirements. In 2017, Bursa Malaysia introduced
facilitate innovation and further serve as a signal or a specialised SMEs market known as Leading
validation for private capital to crowd-in investment Entrepreneur Accelerator Platform (LEAP), aimed
in high-risk innovation activities. at bringing together SMEs, sophisticated investors,
intermediaries, and advisers onto a single platform
Moreover, the increasing rate of internet penetration to create a conducive marketplace for raising funds.
and digitalisation within both the public and The LEAP market is expected to offer transparent
business communities have created fertile ground capital formation and price discovery mechanisms
for crowdfunding financing to flourish in Malaysia. compared to private markets.

1.3.4 Support beyond financial capital

For SMEs, it is worth delving deeper into This inherently provides them with a motivation
understanding the role of market-based financing to extend support beyond financial capital to the
mechanisms which involve investors and the startups or SMEs, which can include the sharing of
intermediaries and their relationship with the expertise, financial planning, knowledge transfers,
SMEs or startups they fund. There are various business guidance, enhancing market access,
financing sources, such as angel investments, networking opportunities, assistance with business
Venture Capital (VC) funds, Corporate Venture strategies, governance issues including ESG, and
Capitals (CVCs), LEAP market, ECF, and P2P talent development and acquisition.
lending which are characterised by different
motivations, targets, scale, and operating models, For example, let’s consider a young entrepreneur
but are highly complementary in the financing with a brilliant idea for commercialisation but lacks
continuum, especially for early-stage firms. the experience and knowledge to bring the product
For instance, VC funds, private equity firms, or service to the market. Venture capitalists, CVCs,
and business angels provide more than just and ECF platforms can step in to offer valuable
the provision of financial capital to SMEs. The support through direct engagement with the
structure of their financing arrangements includes businesses or by providing capacity-building
their own equity stake in the SMEs or startups, programmes through training, networking, and
which incentivises them to ensure the success of establishing strategic partnerships with industry
the businesses. leaders.

22
This mentorship and guidance empower SMEs to Consider Dropbox, a cloud storage and file-sharing
navigate the complexities of the market, develop service that participated in the Y Combinator
effective branding strategies, efficiently manage (YC) accelerator and funding programme. The
their businesses, and attract the right talent needed programme not only provided capital in the form
for success. of funding but also offered intensive monitoring,
business advice, and networking opportunities.
Government grants, seed capital from angel The mentorship received from YC played a pivotal
investors, and backing from ECF platforms serve role in the early success of Dropbox, which has
as crucial validations of a startup’s credibility, now become a well-known brand in the cloud
rendering it more attractive for subsequent funding storage platform industry. YC has since become a
rounds as it grows. This recognition opens doors major player in Silicon Valley, contributing to the
to additional capital, bolstering the startup’s emergence of numerous companies valued at over
position for future success. Despite the fact that $1 billion today, including Stripe, Airbnb, Instacart,
ECF platform as a business is not required to and Coinbase.7
provide additional support to issuers after the
post-ECF event, doing so demonstrates its quality By combining financial support with knowledge-
and credibility. In line with Ordanini, Miceli, Pizzetti based capital or smart capital, market-based
and Parasuraman (2011), the ECF platforms, on top financing can play a central role in connecting
of connecting the financiers and fundraisers, also the various enablers within the SME ecosystem,
act as a marketing platform for the ventures to allowing it to flourish. It acts as a vital catalyst
introduce and promote their products and services. for fostering growth, innovation, and sustainable
When the products or services offered meet their development for startups, MSMEs, and MTCs.
expectation, investors can also eventually become Through this multifaceted approach, market-based
consumers. Thus, it helps to increase the number financing can be a powerful enabler for the success
of customers, increase sales, and encourage of SMEs, propelling them towards realising their full
performance. potential and making a significant impact on the
economy.

7 https://www.cnbc.com/2018/03/23/y-combinator-notched-its-first-ipo-with-dropbox.html

23
Introduction

1.4 Objectives of the study

To make market-based financing a viable funding 2. To identify challenges and awareness

source for SMEs, this study will critically assess surrounding market-based financing for SMEs
the challenges and willingness of SMEs to access 3. To identify solutions that could accelerate
market-based financing instruments in Malaysia. The access to market-based financing and better
policy recommendations arising from this study are serve the financing needs of the SMEs.
expected to further strengthen the access to capital
4. To identify the opportunities of market-based
for SMEs using market-based financing, especially
financing to strengthen the SME ecosystem in
to support the new growth economic sectors as
Malaysia.
part of the structural reform under the Madani
Economy, National Energy Transition Roadmap
By identifying the underlying issues and addressing
(NETR) and New Industrial Master Plan 2030
the current financing challenges, the research aims
(NIMP) frameworks. The SMEs will continue to be
to improve the financing landscape in Malaysia.
the backbone of the Malaysian economic growth to
The role of market-based financing goes beyond
become prosperous, inclusive, and sustainable.
funding, also to ensure it is connected strongly with
the success of the SME ecosystem in Malaysia.
The study aims to meet the following objectives:

1. To understand the role of market-based

financing to support SME’s financing needs in
Malaysia.

1.5 Scope of the study

This study focuses on market-based financing, On the supply side enablers, we conducted
also known as capital market financing, which qualitative interviews with various key stakeholders
encompasses various instruments such as Initial within the SME ecosystem, including regulators,
Public Offerings (IPO) (which include listing of advisers, RMOs, government agencies, and investors,
shares on the MAIN, ACE, and LEAP markets), Bond to obtain their perspectives on the issues and
instruments (Debt securities), Venture Capital (VC), challenges related to financing SMEs. This will aid
Private Equity (PE), ECF, and P2P financing. us in bridging the gaps between the supply and
demand of capital for financing SMEs and identifying
To comprehend the capital needs, we have potential solutions to address these gaps.
conducted an enterprise-level survey to assess the
financing history of SMEs in Malaysia and gauge Throughout this study, we performed quantitative
their awareness and interest in utilising market- and qualitative analysis by categorising the sample
based instruments for financing in the future. We based on the following classifications: Start-ups,
will also investigate the impact of digitalisation MSMEs, and MTCs. The categorisation of Startups,
initiatives and ESG practices at the firm level on MSMEs, and MTCs will adhere to the official
accessing market-based financing. Furthermore, definitions provided by the respective government
we interviewed MSMEs, startups, and MTCs to agencies, as depicted in Figure 1.5.
gather their feedback and identify potential
solutions to address their financing issues.

24
Figure 1.5:
Definition of MSMEs, Mid-tier Companies, and Startups

Manufacturing Services and others

Annual revenue RM50 million ≤ RM500 million Annual revenue RM20 million ≤ RM500 million
MTC
Annual sales turnover RM15 million ≤ RM50 million Annual sales turnover RM3 million ≤ RM20 million
OR Medium OR
Number of employees 75 ≤ 200 Number of employees 30 ≤ 75
Annual sales RM300,000 < RM15 million Annual sales turnover RM300,000 < RM3 million
OR Small OR
Number of employees 5 < 75 Number of employees 5 < 30
Annual sales turnover < RM300,000 Annual sales turnover < RM300,000
OR Micro OR
Number of employees <5 Number of employees < 5

Startup, as defined by MOSTI in 2021, is " a technology or innovation enabled business at

an early stage, with a scalable business model and a high growth strategy.

Source: SME Corp. Malaysia, MATRADE and MOSTI

1.6 Conclusion

In short, market-based financing plays a pivotal contributes to the growth and success of
role in empowering SMEs to flourish in today’s entrepreneurs.
dynamic business landscape, characterised by the
internet, innovation, knowledge, and technology. In addition, it is also important to recognise that
This financing approach offers a range of funding market-based financing requires regulations
options, including listing opportunities (IPO), VC, and policies which reduce risk and strengthen
PE, ECF, and P2P lending. By providing access investor protection without eliminating the SMEs’
to these diverse funding sources, market-based contribution to long-term economic growth.
financing addresses the challenges posed by limited The role of policymakers and regulators is to
collateral and credit history, reducing reliance on tackle market failures which can increase market
a single funding channel and enhancing financial fragility. This is, however, fundamentally linked to
resilience. understanding the different needs of different types
of SMEs.
However, the role of market-based financing
extends beyond mere funding provision. It offers This study recognises that market-based financing
valuable support to SMEs in various ways, including covers a wide range of SMEs’ business models and
mentorship, networking opportunities, access their life cycle stages, which necessitates different
to markets, partnership building, validation, and types of funding. For instance, not all SMEs have
fostering trust, especially for new startups. This growth ambitions requiring equity funding. The
comprehensive support ecosystem significantly World Bank (2013) identified that many SMEs fail

25
Introduction

within a few years of establishment, and many of Nonetheless, we believe that the findings of this
the surviving SMEs do not grow much beyond their study remain crucial for policymakers, industry
starting size, with only about 5 per cent considered players, investors, and SMEs themselves, given that
“competitive SMEs” with high-growth prospects market-based financing continues to evolve and
but which contribute disproportionately to overall expand its reach among SMEs. It is poised to drive a
economic performance.8 new era of entrepreneurial success and strengthen
the entrepreneurial ecosystem in Malaysia. This,
This study aims to address both common in turn, is aimed at facilitating Malaysia toward
challenges and specific challenges based on the becoming a developed nation in the years to come.
type of business, whether they are MSMEs, MTCs, The ongoing growth of market-based financing
or Startups. By encompassing this diverse array of holds significant promise for fostering innovation,
business models and life cycle stages, the study enabling sustainable growth, and driving economic
seeks to gain comprehensive insights into the SME progress as part of the economic reforms in
financing ecosystem. However, the diversity among Malaysia.
SMEs may present challenges in drawing universal
conclusions, as the needs and requirements of each
type of business can vary significantly.

One limitation of this study is the lack of

comprehensive data on the actual demand for
market-based financing. Unlike the well-established
banking sector, market-based financing is
relatively new, especially in emerging markets
such as Malaysia, and its demand is not adequately
measured. Time series data is limited, particularly
for instruments specifically tailored to MSMEs, such
as the LEAP market, ECF and P2P financing, which
are relatively recent additions to the Malaysian
capital markets.

8 The report identified that by their seventh year, 60 per cent of firms have exited, around 20 per cent remain self-employment or single
proprietor firms, 15 per cent are small and medium firms but with low or stagnating growth. The last segment accounting for less than 5 per
cent of the cohort have a strong growth history and good growth prospects – and are a powerful engine of new growth and innovation.

26
Chapter Two

The Current Landscape

of Market-based
Financing in Malaysia

27
The current landscape of market-based financing in Malaysia

T he landscape of SME financing in Malaysia has

undergone substantial changes, especially in
the aftermath of the 1997/98 Asian Financial Crisis.
Key reform blueprints, such as the Capital Market
Masterplan and the Financial Sector Masterplan,
led by the SC and BNM respectively, have played
pivotal roles as instrumental frameworks driving
capital market and financial sector reforms in
Malaysia. These masterplans have served as catalysts
for implementing diverse structural changes, with
a particular emphasis on expanding the array of
financing instruments accessible to local businesses.
Notably, a consistent theme throughout these
masterplans is the persistent commitment to
prioritising support for SMEs, acknowledging their
vital role in the economic landscape.

In this chapter, our attention is to unveil the current

landscape of market-based financing in Malaysia.
This involves a comprehensive exploration of
the diverse market-based financing instruments
currently available in the Malaysian market. We
delve into their performance, examining their as we draw comparisons between Malaysia and
effectiveness and impact on SMEs. Furthermore, its regional peers, offering valuable insights into
our investigation extends beyond national borders relative strengths and areas for improvement.

2.1 Overview of SMEs in Malaysia

The SMEs are critical driver of economic region. In 2022, approximately 97.4% of business
development in the Association of Southeast Asian establishments in Malaysia fall under the SME
Nations (ASEAN) region. Currently, the region has category. The SMEs contribute 38.4% to Malaysia’s
over 72 million registered SMEs, with Indonesia GDP in 2022, reflecting a gradual increase from
alone accounting for a significant 91% of the total 37.0% in 2015. In the regional context, Indonesia
registered SMEs in ASEAN (refer to Figure 2.1). leads with the highest SME contribution to GDP,
SMEs play a crucial role in contributing 44.8% to followed by Singapore at 61% and 44% respectively.
the GDP and providing employment for 85% of
the workforce in the region.9 Furthermore, SMEs While Thailand initially registered a higher SME
constitute between 97% and 99% of all registered contribution to GDP at 41% in 2015, this figure
business establishments in the area. dropped significantly to 34.6% in 2021 following the
challenges posed by the COVID-19 pandemic.
Malaysia ranks just after Thailand with the
third-highest number of registered SMEs in the

9 development of Micro, Small, and Medium Enterprises in ASEAN (MSME), ASEAN

28
 Figure 2.1:
Number of SMEs in 2021

Indonesia 65,465,497

Thailand 2,621,725

Malaysia 1,226,494

Philippines 1,076,279

Viet Nam 651,138

Cambodia 512,870

Singapore 290,300

Lao People’s Democratic Republic 133,721

Myanmar* 75,116

Brunei Darussalam 6,169

Source: ADB Asia SME Monitor,10 *Year 2020, ^Year 2019

Figure 2.2:
Share of SMEs contribution to GDP (in %) in 2021

Indonesia^ 60.5

Singapore 43.9

Malaysia# 38.4

Thailand* 34.2

Brunei Darussalam^ 26.7

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Source: ADB Asia SME Monitor 2022. *Year 2020 ^Year 2019 # Malaysia 2022 data from DOSM

10

10 Data from ADB Asia SME Monitor is provided based on definition of MSME categories

29
The current landscape of market-based financing in Malaysia

The services sector which encompasses mainly sized firms comprised of 19.7% and medium-sized
wholesale & retail activities, has consistently firms constituted the balance 1.6%.
contributed more than 80% of all MSMEs
throughout the span of 2015 to 2022 period. Across most ASEAN countries, SMEs serve as the
Zooming on to 2022 structure, services sector primary source of employment, ranging from as
retained its position as the largest sector at 84.7% high as 96.9% in Indonesia to the lowest at 37.5%
and construction sector at 7.9%. About 5.6% of in Vietnam. In Malaysia, the employment share
MSMEs are concentrated in manufacturing sector, for SMEs stood at 48.2% in 2022, experiencing a
followed by 1.4% in agriculture sector while the marginal increase in contribution of less than 2%
remaining 0.4% in mining & quarrying sector. In over the past seven years (from 46.6% in 2015). The
terms of business size, microenterprises are the majority of SME employment in Malaysia occurs in
largest component of MSMEs, accounting for 78.7% the services sector, followed by manufacturing and
of the total MSME establishments in 2022, small- agriculture.

Figure 2.3:
Share of MSMEs contribution to employment (in %)

Indonesia 96.9

Thailand 76.9

Singapore 70.9

Philippines 64.7

Brunei Darussalam 55.7

Malaysia 48.2

Vietnam 37.5

0 10 20 30 40 50 60 70 80 90 100

Source: ADB Asia SME Monitor 2022. Data for Malaysia is as of 2022; Philippines, Singapore, and Thailand as of 2021;
Brunei, Indonesia, and Vietnam as of 2019

Non-MSME labour productivity has consistently potential need for sectoral reorganisation towards
remained 1.5 times higher than that of MSMEs technology and capital-intensive approaches,
since 2015. This disparity is attributed partly to the reducing reliance on manual labour, especially from
productivity gains of larger firms which have been foreign workers.
supported by increased capital investment and a
greater presence of highly skilled workers. The most Despite the domestic focus, Malaysia’s SMEs exhibit
significant labour productivity gap was observed a declining share of exports, dropping from 17.7%
in the mining & quarrying sector, standing at 12.3 in 2015 to 10.5% in 2022. Manufacturing services
times higher for non-MSMEs. Nonetheless, MSMEs in contribute the largest share at 8.3%, followed
this sector achieved the highest productivity value, by services at 2.0%, and agriculture at 0.2%.
reaching RM137,490 per worker in 2022 while the Emphasising internationalisation becomes crucial to
construction sector reported the lowest productivity fostering growth and competitiveness in the global
at RM39,080 per worker (SME Corp. Malaysia, market. Facilitating integration with global value
2024). The construction sector emerges as the least chains is imperative to internationalise SMEs in
productive sector in SMEs in Malaysia, suggesting a Malaysia effectively.

30
2.1.1 Financing SMEs in Malaysia

The role of the banking sector and non-bank decreasing over the past five years, predating the
financing institutions (NBFI) in supporting SME COVID-19 pandemic. The SME loan share declined
development varies across the region. Vietnam, from 18.3% in 2017 to 15.4% in 2021. Additionally,
Indonesia, and Malaysia heavily rely on bank the rejection rate for SME loans has increased over
financing, while Brunei primarily supports SMEs the years, rising from 16% in 2012 to 37% in 2020
through finance companies and pawnbrokers. (refer to Figure 2.4). The majority of bank lending
It is crucial to note that data representing NBFI is directed towards financing the household sector,
collected from each country may differ based on comprising 59% of total bank loans in 2022. While
how each country classifies NBFIs. the banking sector continues to play a critical
role in financing SMEs, it is important to diversify
In Malaysia, SMEs remain highly dependent on the financing opportunities available for SMEs in
bank financing, which contributes to more than Malaysia.
90% of total financing. Nevertheless, the share of
SME financing relative to total bank loans has been

Figure 2.4:
Rejection rate for SME loans

37
Rejection (%)

27 27
25 25 25
20 20 19
16 18 18

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: ADB Asia SME Monitor

Despite various initiatives to diversify the sources Government, not the Ministry of Finance (MOF) or
of financing for SMEs, the share of NBFI to total BNM. Additionally, post the 1997/98 financial crisis,
loans in Malaysia is the lowest among regional peers many finance companies underwent consolidation
(refer to Figure 2.5).11 In Malaysia, NBFI data only and mergers to enhance the resilience of the
includes private equity, venture capital, factoring, banking sector in Malaysia (Cook, 2003). This
and leasing companies, omitting information on may result in a lower contribution of financing
pawnshops and other money lending entities. This companies to total loan in Malaysia.
differentiation could be attributed to the fact that
licensing for moneylending and pawn brokerage
falls under the Ministry of Housing and Local

11 However, it is key to recognise that the definition of NBFI is not uniform across the region, and data discrepancies may be a significant
factor in the observed variations

31
The current landscape of market-based financing in Malaysia

Figure 2.5:
Share of bank loans and NBFI financing across ASEAN

30.0
26.0
25.0
21.0 21.5
% of Total Loans

20.0

15.4
15.0
11.5
10.0
7.2 6.9 7.7
6.3 7.0
4.8 4.5
5.0
1.1 1.0
0.2 0.10
-
Brunei Indonesia Lao PDR Malaysia Myanmar* Philippines Singapore Viet Nam
Darussalam

MSME Bank Loan NBFI Financing

Source: ADB Asia SME Monitor

Notes: End-of-year data except * fiscal year data (ended 31 March in Myanmar). Brunei Darussalam: B$ million (finance companies
and pawnbrokers); Indonesia: Rp billion (finance companies, microfinance institutions, and government pawnshops); Lao
PDR: KN million (microfinance institutions, pawnshops, and leasing companies); Malaysia: RM million (private equity, venture
capital, factoring, and leasing companies); Myanmar: MK million (microfinance institutions); Philippines: P million (credit unions
and cooperatives [2015-2018], pawnshops [2009-2018], and nonstock savings and loans associations [NSSLAs; 2014-2020]);
Singapore: S$ million (finance companies); Viet Nam: D million (People’s Credit Funds and microfinance institutions).

To ensure that SMEs can reach their growth instruments will be conducted, considering market
potential, diversified access to financing is crucial, size, liquidity, and Malaysia’s position within the
a point that will be continually emphasised in this regional market. This will provide a comprehensive
report. In the following section, market-based understanding of various financing options available
financing options will be categorised into three in Malaysia and its challenges, facilitating the
classifications: public market, private market, development of SMEs in Malaysia.
and alternative financing. An analysis of selected

32
2.1.2 Public market
Public markets are financial markets where including SMEs with greater fundraising
securities are traded on an exchange. Companies access and visibility via the capital market. It
seeking additional capital may opt to be listed is accessible only to sophisticated investors.
on the public market by undergoing an IPO. In
Malaysia, there are three market options for IPO: the As the LEAP is a specialised market catering
Main, ACE (Access, Certainty, Efficiency), and LEAP more specifically to SMEs, this report will focus on
markets. In addition to being a broader source of analysing the LEAP market. This market plays a
capital for SMEs, the public market is also typically crucial role in providing financing options for SMEs
viewed as a means of strengthening a company’s and will contribute valuable insights to the report.
brand and profiling to enhance its credibility as
well as an exit strategy or access to liquidity for the
founders and/or investors of the SME. Being a listed
company provides a level of confidence not only LEAP market
to potential investors, but also potential partners
or consumers which helps to strengthen the SME’s The LEAP market was launched in 2017, as a
market presence. specialised market to provide fundraising access,
mainly to SMEs via the capital market in Malaysia.
Each market is unique in terms of listing criteria, The main advantage for LEAP compared to the
target companies, and investor accessibility. The private market is the role of the exchange to
main characteristics of each market are: provide efficient and transparent capital formation
and price discovery mechanisms. To ensure SMEs
i. Main Market is for established companies
are able to access to the capital market, the listing
that meet Bursa Malaysia’s quality, size, and
requirements for the LEAP were made more flexible
operations standards for listing. A profit track
with facilitative rules and regulations as well as
record or minimum market capitalisation
aiming for lower cost of compliance.
must be reached to list on the Main Market.
The Main Market may be accessed by
Bursa Malaysia has distinguished its LEAP market
institutional and retail investors.
from its regional counterparts’ SME exchanges
ii. ACE Market is a sponsor-driven market through a notable feature: its less stringent
designed for companies with growth approach to attract Malaysian SMEs. Unlike many
prospects. Sponsors must assess the SME exchanges in other jurisdictions that impose
suitability of the potential issuers, taking into requirements such as profit-testing or basic capital
consideration attributes such as business assessments, the LEAP market is positioned for
prospects, corporate conduct, and adequacy SMEs by adopting a more flexible stance (refer to
of internal control. Both institutional and retail Figure 2.6). This approach aligns with the OECD’s
investors can invest in ACE Market. perspective on SME exchanges, emphasising a focus
iii. LEAP Market is an adviser-driven market on SMEs’ risk and performance rather than merely
which aims to provide emerging companies, firm size.12

12 In OECD’s report of Opportunities and Constraints of Market-Based Financing for SMEs, Public equity markets, specifically SME Exchanges,
can be perceived as natural platforms for equity financing of those SMEs that have important growth prospects, with a specific focus on
the firms’ risk and performance characteristics rather than on their size.

33
The current landscape of market-based financing in Malaysia

Figure 2.6:
Listing requirements of selected specialised SME exchanges

Stock exchange With Profit-testing requirement

MAI, Thailand At least 2 years of operating track record, and minimum net profits from operations
of THB 10 million over the latest year, there must be an accumulated net profit in the
period prior to the filing of an application

SME, Philippines Must have a cumulative EBITDA of at least Php 15 million OR cumulative operating
revenue or sales of at least Php 150 million for the last 3 years

Stock exchange Other form of Capital requirements

GEM, Hong Kong Does not directly imply a need for profit-testing but requires a positive cashflow from
operating activities of at least HKD 20 million in aggregate for the two years preceding
the listing

Acceleration, Indonesia No profit-testing, follow requirements of Small and Medium Asset Sized Company
regulated by POJK 53: Asset ≤ Rp250 billion

Catalist, Singapore No profit-testing but requires base capital of SGD 250k

(For high-growth, not
specifically SMEs)

Source: Listing requirements from respective exchanges

The absence of profit-testing or basic capital i. SMEs must be a public company incorporated
requirements aims to facilitate a smoother listing in Malaysia.
process and specifically cater to the unique needs ii. Has a clear identifiable core business.
of Malaysian SMEs. With a focus on minimal
iii. 10% public shareholding spread at the point of
documentation, the LEAP market promises a quick
admission only.
process of application to listing. In fact, Bursa
iv. Meets the suitability assessment by an
Malaysia’s official listing information suggests that
approved financial adviser.
this entire process can be completed in a mere three
weeks. v. Does not require a minimum profit or operation
track record, nor is there any minimum market
The requirements for listing on the LEAP market capital requirement.
include:

34
Figure 2.7:
LEAP market value proposition

a. Alternative platform to raise funds

b. Facilitative rules & regulations and lower cost of compliance
c. Enhanced visibility and profiling
d. Early exposure to prepare for a potential listing on the ACE / Main Market
For SMEs

a. Greater price discovery and tranparen cy

b. Capitalise on the potential growth of a LEAP Market company
c. Ease / early flexibility of divestment of investment
d. Access to a wider pool of investments
For Sophisticated Investors

a. Access to additional revenue stream for a new segments

b. Enhanced visibility / profiling
c. Facilitative rules & regulations and lower cost of compliance
d. Potential to guide issuers / clients to graduate to the ACE / Main Market
For Financial Advisors

Source: SME Corp. Malaysia, SME Annual Report 2016, Chapter 6, Access To Finance

The LEAP market in Malaysia provides a new LEAP has showcased considerable growth. LEAP
investable asset class for sophisticated investors as has a listing of an average of 10 companies annually,
well as open listing opportunities for SMEs. There securing an average funding of RM3.7 million per
are currently 47 companies listed in the LEAP listing and the upward trajectory of the LEAP
market in Malaysia. Over the period from 2017-2022, market is evident.

Figure 2.8:
Number of listings on Malaysia’s MAIN, ACE & LEAP markets

30
25
25
20
15
15
11 11 12
11 10
10 9 7
7 5 5
5 6 4
5 2 2 2
0
2017 2018 2019 2020 2021 2022

MAIN ACE LEAP

Source: Bursa Malaysia

35
The current landscape of market-based financing in Malaysia

Since its inception in 2017, LEAP has registered a Malaysia is not alone in recording limited liquidity on
strong 55.6% compounded annual growth rate for a specialised SME exchange. Trading on Thailand’s
the period 2018 to 2022, whereas ACE and the main MAI is 28 times lower than on the SET, Singapore’s
market has registered 29.0% and 0.1% respectively Catalist is 188 times lower than STI and Hong
for the same period. Nonetheless, the strong growth Kong’s GEM is over 1,000 times lower than the
rate could be mainly attributed to the low base effect, HKEX.15 In the instance of Hong Kong’s GEM, the
where the LEAP was first introduced only in 2017. severely low liquidity environment eventually led
Within the region, number of companies listed and to insider trading and market manipulation, which
market capitalisation in LEAP is higher compared further reduced investor activity on the exchange.
to some of the regional counterparts like the As a result, GEM had no new listings since 2021 as
Philippines’ SME Board and Indonesia’s Acceleration SMEs sought to list on foreign exchanges such as
Board, but still relatively smaller compared to NASDAQ.16
other regional SME exchanges like Korea’s KONEX,
Thailand’s MAI, and Singapore’s Catalist. Nevertheless, it is crucial to recognise that
specialised exchanges differ across the region. Each
Due to the higher risks associated with investing exchange has its unique features tailored to address
in SMEs, the LEAP market is only accessible the specific requirements of domestic SMEs. While
to sophisticated investors. This restriction to a a direct comparison between these specialised
significantly smaller pool of investors created a exchanges may offer a general sense of where LEAP
low liquidity environment for companies listed on stands in relation to its regional peers, it may not
LEAP.13 While no exact figures are available, in 2022 fully capture the nuanced intricacies of each market
it was reported that many SMEs on LEAP had not across the region.
experienced a single trade,14 limiting their ability to use
their listed status as a means of raising further funds.

13 In 2022, Asas Advisory Services, in Rethinking the LEAP Market, identified lack of liquidity as the main reason for three of the five
companies delisting from LEAP. The remaining two sought delisting to transfer to ACE. https://asasadv.com.my/rethinking-the-leap-
market/
14 As reported by The Edge on 27 June 2022. https://theedgemalaysia.com/article/liberalising-leap-market
15 From Bloomberg, as of 13 December 2023. Trading is measured by the turnover/traded value for each of the exchanges relative to their
main index
16 Hong Kong’s small brokers push for new rules to revive IPOs | The Straits Times

36
Figure 2.9 & Figure 2.10:
Number of listings on specialised SME markets and their market caps

Number of listings on specialised SME markets

450
400
350
300
250
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
GEM (HK) SME Board (PH) MAI (TH)

Acceleration Board (ID) Catalist (SG) KONEX (KR)

LEAP (MY)

Market Capitalisation (USD billion)

MAI (TH) 15

GEM (HK) 11

Catalist (SG) 7

KONEX (KR) 2.9

LEAP (MY) 1

SME Board (PH) 0.54

Acceleration Board (ID) 0.23

0 2 4 6 8 10 12 14 16

Source: Bloomberg, respective stock exchanges

37
The current landscape of market-based financing in Malaysia

2.1.3 Private market

Investee companies in the private market are

generally within the early to growth stages of the
business life cycle. Specifically in the early stage,
companies are faced with large uncertainties such
as market, financial, and operational challenges.
Navigating these challenges requires expertise
and financing that the entrepreneurs may not
have. This is where the private market enters
the picture. Due to the significantly higher risks
undertaken by private market investors, only
qualified sophisticated, and institutional investors
may participate in investment activities. Limiting
the access to private markets was conducted as a
means of investor protection for retail investors. This
is because retail investors do not have access to the
same resources as more sophisticated investors, and
thus are unable to bear the associated risks.

Angel investment

Private markets refer to the investment in the Generally, an angel investor can be defined as
capital of privately owned companies versus an individual investing their personal money into
publicly traded companies.17 This includes angel early-stage companies. The investment is either in
investment, venture capital, and private equity the form of direct (investor as a direct shareholder)
investment. The private market is characterised or indirect (investment via structured syndicate)
by its higher risk profile and limited access for investment.18
investors.
Within Southeast Asia, angel investment is largely
Similar to the public market, private markets driven by Angel Investment Networks (AINs). These
provide access to capital and branding support for networks not only play the pivotal role of convening
SMEs. However, the private market offers additional trade deals, but also provide value added services
support in the form of access to strategic advice such as due diligence, negotiation, and post-
and mentorship from industry professionals and investment evaluation for investors.
access to additional markets and investors through
the network effect. Southeast Asian AINs mainly service commercial-
driven startups, with only Singapore’s Angels
of Impact focusing on impact-driven SMEs (see
Figure 2.11).

17 As defined by Russell Investments

18 Angel Behavior Survey Report 2023

38
 Figure 2.11:
Mapping out Southeast Asian AINs

Commercial

AngelCentral 1000x Club

Angel.ID Bangkok
Singapore
Indonesia
BANSEA
Singapore
Manila Angel
NEXEA Investors Network
Malaysia Cambodia Investor Club
Cambodia Philippines
Angel-eQ
Malaysia Business
Indonesia Angel Network
BizAngel
Malaysia Malaysia

Bangkok
Corco Angel Venture Club
Vietnam
Cambodia Thailand Angel Network
Vietnam

Ladies Myanmar Angel Network

Investment Club Myanmar
Singapore HATCH! Ventures
Club Investible she1K Vietnam CRIB
Singapore Singapore Singapore
ANGIN
Start Up Indonesia SME
FairCap Angels
Myanmar

Angels of Impact
Singapore

Impact

Source: The Emergence of Angel Investment Networks in Southeast Asia

With the emergence of cross-border collaboration Within Malaysia, the angel ecosystem can be
between the AINs such as through the ASEAN characterised by five identifiers; newly developed
Angel Alliance, it may be in AINs’ best interest ecosystem, available investment opportunities,
to expand either their network (NEXEA Australia perceived weak investment ecosystem, difficulty in
allows startups in Australia and New Zealand accessing high quality deal flow; and government
to seek funding within Southeast Asia) or their involvement being both positive and negative.
portfolio, by offering funding for more impact- (Harrison, Scheela, Lai, & Vivekarajah, 2018). There
based companies to continually attract new is a reported lack of knowledge on angel investors
investors and entrepreneurs. from both the investor (who may not know they

39
The current landscape of market-based financing in Malaysia

qualify as angels) and entrepreneur side (who active participation from angel investors, many
may not know where to find angel investors). countries, including Malaysia, offer some form of tax
This knowledge gap then contributes to the incentives to attract angel investors.
underdevelopment of the ecosystem, making it
harder for angel investors to seek quality deals. The introduction of tax incentives in the 2013
Entrepreneurs are also hesitant to share their budget led to a spike in the growth of angel
business plans with investors. Coupling this with investors in Malaysia (Figure 2.12). However,
a lack of publicly available information affects preceding years have shown a slowdown in
investor confidence, leading to reduced investment new memberships, suggesting that either tax
disbursements. incentives alone may not be sufficient to entice the
registration of new angel investors, or that the local
To add to the current situation, all of Malaysia’s startup ecosystem lacks the vibrancy needed to
AINs operate within the same focus area. As such, grow the participation of angel investors. Moving
entrepreneurs who do not operate within the into new growth areas with innovation at the centre
same focus areas may have a more difficult time in of development is likely to attract angel investors,
sourcing financing locally and are forced to turn to both locally and from abroad, to invest in Malaysian
foreign investors. As a means of encouraging more startups and scale up SMEs.

Figure 2.12:
New MBAN members

MBAN membership

70

60
58

50
43 43 46
40
34
34
30
25
20
13
10

0
2013 2014 2015 2016 2017 2018 2019 2020

Source: MBAN Annual Report 2020 (latest available)

40
Venture Capital (VC) and Globally both VC and PE recorded spikes in
Private Equity (PE) investment during the COVID pandemic, recording
a year-on year (y-o-y) growth of over 30%.20 This
VC and PE is one of the cornerstones in the spike was largely due to the surge in demand for
global entrepreneurial ecosystem, with funding healthcare related investments during the period.21
of successful companies contributing to new job However, the growth spurt was short-lived as capital
creation, innovation, and overall economic growth. raised began to moderate post-COVID. This is
In addition to providing capital, VC and PE firms especially evident within the VC sphere, where only
typically also act as mentors to entrepreneurs by $117 billion was raised as of September 2023.
providing strategic advice, guidance, and sharing
of business expertise. Additionally, entrepreneurs Several factors were identified as contributing to
are able to benefit from the network effects the decline in funds raised, including global market
by developing partnerships through mutual uncertainties that emerged following post-COVID
connections made via the VC/PE firms. It is reopening, and the shortage of exit opportunities
reported that around 60% of deals are either from a for VC-backed startups which led to constraints
VC’s former colleague or work acquaintance (30%), on funds being recycled back into the industry
referrals from other investors (20%) or existing and increasing cost of capital due to monetary
portfolio companies (8%).19 tightening across major central banks, globally.22

Figure 2.13:
Capital raised from global VC and PE activities

Capital Raised ($ billion) YoY Change (%)

2020 2021 2022 2023* 2020-2021 2021-2022

VC 253.9 354.2 301.4 117.3 39.5% -14.9%

PE 463.9 613.8 535.8 367.0 32.3% -12.7%

Source: Pitchbook. 2023 data is as at September 2023

19 20 21 22

The tumultuous market conditions also negatively affected VC and PE activity within ASEAN. PE deal value
declined by 52% in 2022,23 while Malaysia experienced the largest decline in VC funding in the region (Figure 2.14).

19 From survey conducted by Harvard Business Review. https://hbr.org/2021/03/how-venture-capitalists-make-decisions

20 Based on data from Pitchbook Q3 2023 Global Private Market Fundraising Report. Calculations are the authors’ own
21 According to the KPMG Q3 ’23 Venture Pulse Report, energy, health care devices & supplies, and health care services and systems recorded
the highest growth in terms of total investment. These sectors continue to grow in importance relative to others, in spite of the overall
slower pace of investment in recent years.
22 The Transient Era of Billion Dollar Funds
23 Southeast Asian private equity: Macro fundamentals remain robust

41
The current landscape of market-based financing in Malaysia

Figure 2.14:
Capital raised from ASEAN VC activities

Capital Raised ($ billion)

YoY Change (%)
9M 2022 9M 2023

Singapore 8.5 4.3 -49%

Indonesia 2.9 1.2 -61%

Malaysia 0.6 0.1 -86%

Philippines 0.6 0.1 -79%

Thailand 0.5 0.6 13%

Vietnam 0.7 0.6 -7%

Source: Deal Street Asia

In Malaysia, early and growth stage investments PE investments are sourced from a wide array
represented the largest proportion of new VC and of investors, ranging from government agencies,
PE investments in 2022,24 contributing to over sovereign wealth funds, to insurance companies
70% of total new investments for the year. VC and (Figure 2.15).

Figure 2.15:
Source of funds for VC and PE in Malaysia (2022)

100%
Sovereign wealth funds
90%
Insurance companies
80%

70% Asset managers

60% Pension and provident funds

50%
Endowments and non-profits
40%
Financial institutions
30%
Individuals and family offices
20%
Corporate investors
10%

0% Government agencies and

PE VC investment companies

Source: SC Annual Report 2022

24 From SC Annual Report, Growth stage investments

42
One of the main challenges faced in Malaysia is in assessing investment opportunities within
the high dependence on government for venture government VCs. In addition to the lack of
funds. Callagher, Smith, and Ruskoe (2015) expertise, startups have also shared that there is a
identified that there are risks embedded with lack of coordination among the various ministries
government involvement in venture funding. Among which leads to lost time in trying to identify the
the risks identified include the perceived lack right contact for funding purposes. The difficulty
of understanding amongst government officials in obtaining financing was also cited as one of the
regarding venture capital. Another challenge lies reasons Malaysian startups seek financing from
within the mismatch of expectations between the foreign VCs.
government and public VCs, which affects their
ability to operate efficiently. As a means of promoting VC investment in the
country, the Malaysian government introduced
This sentiment is shared by startups in Malaysia specific tax incentives for VC companies, VC
who have shared that there is a lack of expertise management companies, and investors.

Figure 2.16:
VC tax incentives in Malaysia

Beneficiary Incentive Key requirements

Venture Capital Tax exemption for registered VCC: o VCC incorporated under Companies Act
Company (“VCC”) • Exempt period of 5 years or remaining 2016 (“CA 2016”)
life of the fund (whichever shorter) o VCC must be registered with SC no later
than 31 Dec 2023
• Exemption on all sources of statutory
income (other than interest income o At least 50% of funds must be invested
arising from savings or fixed deposits in qualifying venture companies
and profits from Syariah-based deposits)

Venture Capital Tax exemption for registered VCMC o VCMC registered with SC
Management Company • Exempt period from YA2018 to YA2026 o VCMC must meet substance tests (min.
(“VCMC”) local spend and staffing requirements)
• Exemption on management fees,
share of profits, carried interest, and
performance fees derived from a tax-
exempt VCC

Investors (companies or Tax deduction on investment made into a o Investment is in the form of the holding
individuals with business venture company (whichever is lesser) unlisted shares of the venture company
income) (at the point of investment)
o Investment must be held for at least 3
years from the date the investment

Tax deduction on investments made in o VCC had maintained, on average over a

a qualified VCC, equal to the investment 3-year period, at least 50% of invested
made into a VCC or up to RM20 million funds in qualifying venture companies
annually (whichever is lesser) o Investment into the VCC must be held
for at least 3 years from the date the
investment

Source: SC website as at December 2023

43
The current landscape of market-based financing in Malaysia

Malaysia is not alone in introducing tax incentives for VCs. Various other countries have also introduced similar
measures, as highlighted below.

Figure 2.17:
Selected countries’ VC tax incentives

Tax relief on
Country Name of scheme income
investment disposal
received

Early-Stage Venture Capital Limited Partnership

/ / /
program

Australia
Venture Capital Limited Partnership program X / /

Tax incentive for Early-Stage Investors / X /

Germany “INVEST -Venture Capital Grant” / / X

Tax Incentives to Promote Venture Investment X X /

Japan
Angel Tax System / X /

Tax exemptions for venture capital companies X / /

South Korea
Tax deductions and exemption from capital gains
X / /
tax for individual investors in venture capital funds

Enterprise Investment scheme / X /

Seed Enterprise Investment Scheme / X /

Venture Capital Trust / / /

United
Kingdom
Social Investment Tax Relief / X /

Private Placement Withholding Tax Exemption X / X

Business Property Relief X X /

Qualified small business stock (QSBS) X X /

USA
Investment tax credits / X X

Source: European Commission (2017)

44
2.2 Alternative financing

According to OECD (2020b), fostering alternative At a global level, there was a great variety in ECF
financing instrument, is one of the most important and P2P activity between 2019 and 2020 (Figure
policy responses to narrow financing gaps across 2.18). The most notable were regulatory changes
the ASEAN region. While OECD used a broader regarding non-bank lending in China, which
term of alternative financing as funding other effectively erased China’s P2P industry. Within Asia
than bank lending, in this report, we have used the Pacific, both ECF and P2P had positive growth
term alternative financing to refer specifically to for the period, with ECF’s high growth mainly
ECF and P2P Financing as part of the alternative attributed to an increase in new issuers.25
marketplaces included in the Capital Market
Masterplan 3.

Figure 2.18:
ECF and P2P volume by region, 2019 and 2020

ECF P2P
2019 2020 2019 2020 YoY
Geography YoY Growth
($ million) ($ million) ($ million) ($ million) Growth
APAC 219.4 333.5 52.0% 1,623.9 1,819.6 12.1%

China 0.1 0.0 -100.0% 13,434.6 0.3 -100.0%

Europe 224.1 279.7 24.8% 1,481.3 1,843.6 24.5%

Latin
American
10.3 12.6 22.3% 58.7 29.9 -49.1%
& the
Caribbean
MENA 12.9 12.5 -3.1% 152.2 124.3 -18.3%
Sub Saharan
10.3 1.2 -88.3% 15.6 13.7 -12.2%
Africa

UK 474.6 549.3 15.7% 2,537.9 3,262.2 28.5%

USA &
141.9 331.5 133.6% 1,509.2 8,280.7 448.7%
Canada

Total 1,093.7 1,520.4 39.0% 20,813.5 15,374.4 -26.1%

Source: The 2nd Global Alternative Finance Market Benchmarking Report (2021)

25

25 The 2nd Global Alternative Finance Market Benchmarking Report

45
The current landscape of market-based financing in Malaysia

During this period, the Malaysian alternative paled in comparison to Singapore and Indonesia
financing industry grew in its significance within (Figure 2.19). In this light, Malaysia is on the right
Asia Pacific, ranking third in both ECF and P2P in track to grow its alternative finance models.
2020. However, the total funds raised in Malaysia

Figure 2.19:
Top three countries in Asia Pacific for ECF and P2P

ECF P2P

Country $ million Country $ million

Singapore 206.0 Indonesia 910.2

Australia 39.5 Japan 640.3

Malaysia 20.0 Malaysia 67.8

Source: The 2nd Global Alternative Finance Market Benchmarking Report (2021)

ECF in the Malaysian market

ECF in Malaysia has raised a total of RM560 million up to 2022 over 330 campaigns. The industry recorded
a spike in investment in 2021, coinciding with the introduction of tax exemptions for individual investors that
invest in ECF for a minimum of 2 years.

Figure 2.20:
ECF funds raised and number of campaigns in Malaysia (RM Million)

250 120
Amount Raised (RM Mil)

Number of Campaigns

100
200

80
150
60
100
40

50
20

0 0
2017 2018 2019 2020 2021 2022 Jun-23

Amount raised Campaigns

Source: SC website (as of December 2023)

46
ECF investment in Malaysia is accessible to all of RM50,000 total invested at any one time, while
investors, subject to certain imposed limitations no limit is imposed on sophisticated and angel
for retail and angel investors. In view of investor investors. For issuers, a campaign must raise a
protection, retail investors are limited to a maximum minimum of 80% of the target amount for funds
single investment of RM5,000, and total investment to be kept. Any amount raised above 100% is
cap of RM50,000, while angel investors are subject to returned to the investors. The amount that an issuer
a maximum of RM500,000 within a 12-month period. is eligible to raise depends on the risk assessment.
To promote its use among SMEs, P2P financing
In an effort to support ECF in Malaysia, the Malaysia is exempt from taxes for arrangements made
Co-Investment Fund (MyCIF) was introduced in between SMEs and investors from January 1, 2022
2019. The role of MyCIF is to co-invest on a 1:4 ratio to December 31, 2026.
basis, with MyCIF investing RM1 for each RM4 raised
from private investors for a maximum investment As of end of 2022, P2P financing raised RM3.9
of RM1 million. Since its inception, MyCIF invested a billion over nearly 55,000 campaigns. The growth
total of RM99 million into 241 ECF campaigns.26 in P2P in Malaysia was in part supported by MyCIF,
which also caters to P2P issuers. Operating under
similar conditions, MyCIF invested RM541 million
P2P in the Malaysian market into 35,000 campaigns since its inception. Through
its P2P scheme, MyCIF has invested 40% of its funds
P2P investing in Malaysia is available for all into non-Klang Valley issuers in 2022.27
investor categories, subject to a suggested limit

Figure 2.21:
P2P funds raised and number of campaigns in Malaysia (RM Million)

1,800 30,000
Amount Raised (RM Mil)

Number of Campaigns
1,600
25,000
1,400
1,200 20,000
1,000
15,000
800
600 10,000
400
5,000
200
0 0
2017 2018 2019 2020 2021 2022 Jun-23

Amount raised Campaigns

Source: SC website (as of December 2023)

26 MyCIF Annual Report 2022

27 MyCIF Annual Report 2022

47
The current landscape of market-based financing in Malaysia

Figure 2.22:
Breakdown of P2P loan tenure and amount in Malaysia

3 months or less 4 to 6 months More than 12 months 7 to 12 months

3%
11%

15%

71%

RM 50, 000 and below >RM 50,000 - RM 200,000 >RM 200,000

6%

24%

70%

Source: SC website (as of December 2023)

48
In Malaysia, P2P financing is primarily used for and take the necessary action to prevent extreme
short-term and smaller amounts of finance with events such as China’s P2P collapse.
around 70% of loans having a tenure of 3 months or
less, and 70% of loans carrying a value or RM50,000 SC has taken a proactive approach in regulating
and below. P2P activities in Malaysia by elevating supervisory
efforts to ensure regulatory compliance among
On the surface, the debt-based structure of P2P operators. To foster future growth, the SC has
financing presents as a viable alternative to bank also opened applications for operators with
financing. Features such as fast access to funds, unique value propositions such as providing debt-
less stringent requirements, and financing flexibility based financing for MTCs and Shariah-compliant
make P2P an attractive option for SMEs. However, offerings.29
these features are not without their drawbacks.

P2P financing costs are relatively high in Malaysia, Conclusion

ranging from 10%-18% per annum, acting
prohibitively towards SMEs in search of financing. Overall, the Malaysian capital market has a wide
range of financing options for SMEs to utilise and
is on par with more developed countries. However,
Figure 2.23: the reach of these financing options is limited, as
P2P lending rates in ASEAN illustrated by the small amount of fundraising within
each of the instruments, and Malaysia’s position
Countries Min Max
amongst its regional peers.
Indonesia 12% 24%
There is a need to recognise that there is no one-
Malaysia 10% 18%
size-fits-all approach to financing for SMEs. Factors
Philippines 12% 36% such as the development stage, market conditions,
and business models vary significantly. Additionally,
Singapore 8% 15%
the financial health and risk tolerance of individual
Thailand - 15% SMEs differ, influencing the suitability of financing
options. Simply having a variety of financing
Vietnam 10% 20%
options for SMEs is insufficient in ensuring that
Source: Various their various needs are met. To this end, financing
options need to be tailored to suit a broader range
of SMEs and promote the long-term viability and
As the number of issuers grows, so too does the sustainability of the Malaysian SME landscape.
risk of default. This has been the case in Indonesia
where delinquency among P2P issuers has Given the role of market-based financing within
increased in recent years. In May 2023, the 90-day the SME ecosystem, identifying factors that may
default level increased to 3.36%, the highest figure promote or hinder its use is crucial in fostering the
since the pandemic when the default rate was over growth of high-quality SMEs to achieve the national
5%.28 Therefore, regulators must be ready to step in target of 50% SME contribution to GDP by 2030.

28 Debt trap: Millions of Jakartans owe trillions to online lending platforms. https://www.thestar.com.my/aseanplus/aseanplus-
news/2023/07/09/debt-trap-millions-of-jakartans-owe-trillions-to-online-lending-platforms
29 SC Annual Report 2022

49
Survey and Interview Insights

Chapter Three

Survey and Interview

Insights

50
3.1 Background

T his section will delve into the methodology and

analysis employed in examining market-based
financing for SMEs in Malaysia. Our research adopts a
funding source. In contrast, our study differentiates
itself by placing market-based financing at the
forefront of the discussion.
comprehensive approach, utilising both quantitative
and qualitative analyses using enterprise-level surveys Recognising the limited information on how local
and interviews. Specifically, we focus on assessing the SMEs perceive market-based financing, which is
willingness and challenges faced by SMEs in raising crucial for understanding the current challenges
funds through market-based financing. Additionally, and opportunities, we identified the necessity for
we incorporate feedback from various stakeholders an enterprise-level survey in our research. The
within the SME ecosystem to further strengthen our survey was exclusively designed for SMEs to gain a
argument. comprehensive understanding of their perspectives.
Complemented by in-depth interviews with
Chapter 1 highlighted existing studies on SME key stakeholders in the market-based financing
financing, which often focus on public sector ecosystem, this approach not only filled gaps in the
financing and traditional financial institutions, with survey data but also provided additional insights,
market-based financing considered an alternative enriching the depth of our study.

3.2 Research methodology

3.2.1 SME categories & demand and supply-side definition

In this section, we provide a contextual backdrop to and technology-driven, as opposed to the generic
our study by delving into the diverse landscape of definition for MSMEs.
SMEs in Malaysia. As highlighted in Chapter 1, the
term “SME” serves as an umbrella for the purposes Throughout our study, we employed the terms
of this report only, encompassing three categories “demand-side” and “supply-side” to delineate
of enterprises within the Malaysian ecosystem, two crucial segments of our respondents and
namely the MSMEs (national definition endorsed by interviewees. The demand-side represents
the National Entrepreneur and SME Development SMEs actively seeking financing (demand for
Council (NESDC)), MTCs (defined by MATRADE) capital), while the supply-side encompasses
as a continuation from the MSME definition, and entities providing financing or facilitating the
Startups (defined by MOSTI under their SUPER financing process, including regulators, agencies,
roadmap). The startup definition, which is solely intermediaries, platform providers, and other
based on the definition of whether an SME is a organisations (suppliers of capital). Having
“technology- or innovation-enabled business at an established this contextual foundation, we now
early stage….” does not provide any quantitative proceed to detail the methodology and key
criteria for us to ascertain the size of a company, findings of our study, shedding light on the
but in the context of our study, we see start-up as financing challenges faced by these diverse SME
a separate group of SME that are highly innovative categories in Malaysia.

51
Survey and Interview Insights

3.2.2 Quantitative study: Survey

In order to gain insights into the financing In the manufacturing sector, MSMEs are firms with
challenges and issues encountered by start-ups, sales turnover not exceeding RM50 million or the
MSMEs, and MTCs, ICMR conducted a survey that number of full-time employees not exceeding 200.
was distributed to the key decision-makers from For services and other sectors, MSMEs are defined
these entities, encompassing C-suite executives, as firms with sales turnover not exceeding RM20
Managing Directors, Proprietors, Business million or the number of full-time employees not
Owners, Company Owners, and Senior Managers. exceeding 75.30 Meanwhile, MATRADE defines MTCs
The questionnaire was distributed online using in Malaysia as companies with annual revenues
assistance from various parties, namely SME Corp. ranging from RM50 million to RM500 million in
Malaysia, MATRADE, Malaysian Consortium of Mid- the manufacturing sector and RM20 million to
Tier Companies (MCMTC), Digital Penang, and Green RM500 million in other sectors. As for startups, the
Zebras. Hard recruitment quotas were implemented Ministry of Science, Technology, and Innovation
for start-ups, MSMEs, and MTCs to ensure a (MOSTI) characterises a startup as a technology or
representative sample. With the aim of engaging innovation-enabled business at an early stage with a
only the intended respondents, screening questions scalable business model.
were included at the beginning of the survey.
Specifically, eligible respondents were categorised Figure 3.1 illustrates the profile of survey
into the respective segments (start-ups, MSMEs, respondents, encompassing a total of 401 company
and MTCs) based on criteria such as revenue responses. Among these, 109 represent startups,
turnover, number of employees, and whether they 242 are from MSMEs, and 50 are from MTCs.
identified as start-ups. As highlighted in Chapter The respondents are distributed across diverse
2, the definitions of the respective segments were geographical regions and sectors in Malaysia, with
adopted from established sources in Malaysia. the highest concentration hailing from Selangor
(34%) and the service sector (63%).
To recap, MSMEs are defined based on sales
turnover and the number of full-time employees.

Figure 3.1:
Survey respondent profile

Geographical distribution Sector and ownership distribution

Others
14%
Startups MSMEs MTCs Total
Perak Sector
3% (109) (242) (50) (401)

Sabah
4% Selangor Services 61% 65% 56% 63%
34%
Sarawak Manufacturing 19% 11% 28% 15%
5%
Wholesale 8% 11% 4% 9%
Pulau Construction 6% 10% 8% 9%
Pinang
7% Johor Agriculture 5% 2% 0% 3%
Kuala
10% Lumpur Mining 1% 1% 4% 1%
23%
Total 100% 100% 100% 100%

30 All SMEs must be entities registered with SSM or equivalent bodies. Exclusions comprise entities public-listed on the main board,
subsidiaries of publicly-listed companies, multinational corporations (MNCs), government-linked companies (GLCs), Syarikat Menteri
Kewangan Diperbadankan (MKDs), and state-owned enterprises.

52
This survey development process (see Figure 3.2) Subsequently, the draft questionnaire underwent
involved a thorough literature review, delving into a meticulous review by several experts in SME
existing knowledge on SME financing challenges. financing. Their invaluable insights and expertise
This informed the development of the draft played a pivotal role in refining the survey
questionnaire, ensuring alignment with current questions, enhancing clarity, relevance, and
industry trends, emerging issues, and established effectiveness in extracting meaningful data. Prior to
best practices. To ensure alignment with regulatory the official distribution, a pilot test engaged a select
perspectives, a dedicated feedback session was group of representatives from each SME segment.
conducted with regulators. This engagement aimed This trial run identified potential ambiguities,
to gather insights into the regulatory landscape, redundancies, or challenges in the questionnaire,
shaping the survey questions to capture information guiding refinements for optimal clarity, relevance,
relevant to regulatory considerations and and respondent comprehension.
compliance within SME financing.

Figure 3.2:
Survey development process

Expert
Feedback
Literature Review Questionnaire Pilot Test
Session
Review

The final survey was predominantly structured into SMEs about the various avenues offered by market-
five sections. based financing.

Section 1 was aimed at obtaining an understanding of Transitioning to section 4, the survey took a deeper
the evolving business landscape, particularly within dive into SMEs’ key considerations, explaining both
the post-COVID-19 environment. This section aimed to the barriers and opportunities associated with
contextualise the challenges and adaptations faced by market-based financing. This section aimed to
SMEs in response to the evolving economic scenario. uncover the factors influencing an SME’s decision-
This is especially important given the risk landscape making process with respect to its financing
for SMEs today are continuously being reshaped decisions and shed light on particular impediments
and most businesses are operating in a climate of as well as potential pathways for growth.
higher uncertainty. The level of business acumen and
strategic knowledge of the SMEs will also correspond The final section, section 5, inquired about both
to their financial knowledge for their business growth. the digitalisation efforts within SMEs and the
integration of ESG-related activities by these
Moving to section 2, the survey delved into the firms. This exploration sought to reveal the extent
external financing history of SMEs, with an aim of technological adoption within SMEs and their
to unearth insights into their past experiences commitment to sustainable and responsible
with diverse financing methods. This exploration business practices. While not directly related to
extended to understanding the primary purposes financing, digitalisation and ESG are now front and
of finance for their businesses and their perceptions centre of policymakers’ agendas for market-based
regarding the types of financing they have used. financing. SMEs which are making strides in their
digitalisation and ESG journey can also be seen as
Section 3 was strategically dedicated to assessing more prepared for business growth and innovation
the awareness of SMEs regarding available market- and are more resilient to economic shocks, both
based financing options. The focus here was to crucial for long-term market-based financing.
gauge the level of familiarity and knowledge within

53
Survey and Interview Insights

3.2.3 Qualitative study: Interview

In addition to the survey, ICMR conducted Education, Medical, Tourism, Transportation, and
interviews and focus group sessions with both more. Interviewees were recruited and screened
the supply-side and demand-side, a two-pronged internally by ICMR to ensure a diverse range of
approach to complement the data collection perspectives and experiences were captured. Prior
process. These qualitative methods offered deeper to the interviews, an interview guide and a focus
insights into the challenges and opportunities of group discussion guide were developed, including
market-based financing for companies in Malaysia. open-ended questions that covered topics related
They allowed us to capture information not covered to market-based financing, financing history, and
in the survey questions, providing a more nuanced business challenges.
understanding of the key challenges.
All these interviews and focus group sessions
On the supply-side interview sessions, ICMR were conducted in person and, when necessary,
interviewed a total of 18 key stakeholders, via virtual platforms to accommodate geographic
including regulators, key agencies supporting dispersion. The interviews typically allowed
SMEs, intermediaries, and VC players from the participants to provide detailed responses
market-based financing ecosystem. The aim was and engage in constructive discussions. The
to comprehensively understand the supply-side qualitative findings were subsequently triangulated
dynamics and their implications on the market- with the quantitative survey data to provide a
based financing landscape in Malaysia. comprehensive understanding of the financing
landscape for SMEs in Malaysia. Throughout this
Simultaneously, ICMR conducted interviews report, verbatim quotes derived from the interviews
with a total of 19 SMEs to gain insights into their have been integrated to provide direct perspectives
financing difficulties and other challenges faced. from the participants. To maintain confidentiality
These SMEs encompassed startups, MSMEs, and and preserve interviewees’ anonymity, pseudonyms
MTCs, representing various sectors such as Fintech, have been used in place of their actual names.
Logistics, Construction, Manufacturing, Engineering,

54
3.3 What we found
3.3.1 Survey section 1: Post-COVID-19 environment

Business landscape in the context of the sustenance during this challenging period. Notably,
post-COVID-19 it was the MSMEs that bore the brunt of these
challenges, while larger MTCs demonstrated the
The survey findings underscored a pronounced anticipated resilience. According to ADB Institute’s
negative impact of the COVID-19 pandemic on working paper, MSMEs are more vulnerable to the
SMEs, with a staggering 71% of SMEs grappling pandemic’s negative impact on their supply chain,
with adverse effects. Central to these challenges labour supply, and final demand for goods and
were the stringent lockdown measures and services than larger firms (Sonobe et al. 2021).
the imperative to secure funding for business

Figure 3.3:
Impact of the COVID-19 pandemic on SMEs

Negative Impact Positive Impact No Impact

Total SMEs 71% 17% 12% 100%

Startups 68% 21% 11% 100%

MSMEs 75% 13% 12% 100%

MTCs 56% 30%* 14% 100%

*The survey revealed that MTCs were the most resilient whereas MSMEs were worst hit during the pandemic

Further reinforcing these survey findings, a study Within the cohort of negatively affected SMEs, a
conducted by the OECD (2020a) provides a global significant majority faced a substantial revenue
perspective on the impact of COVID-19 on SMEs. decline of at least 30% and had to delay or halt
This comprehensive study, which compiled surveys ongoing projects due to the pandemic. This aligns
from 41 SMEs worldwide, including countries such with the broader findings from the OECD (2020a),
as China, the US, Finland, the UK, and Korea, aligns which corroborate that more than half of SMEs
with ICMR survey’s outcomes. The OECD study globally faced severe losses in revenues. Our
highlights how SMEs, given their limited resources survey also shows that the struggles of startups
and pre-existing obstacles in accessing capital, were further exacerbated, particularly in raising
were disproportionately affected by the ongoing financing, given that most stimulus packages
COVID-19 pandemic. This convergence of findings announced during the pandemic primarily targeted
from the survey and the OECD study underscores the assistance of MSMEs.
the global nature of the challenges faced by SMEs
and emphasises the urgent need for targeted This challenge was further compounded by the fact
support and resilience-building measures within this that most stimulus packages announced during
vital sector. the pandemic were primarily designed to assist

55
Survey and Interview Insights

MSMEs. It is important to note that these stimulus and credit history, similarly find it difficult to raise
initiatives, predominantly facilitated through banks, financing as most of the government assistance
were strategically targeted at supporting MSMEs, during pandemic were channelled through the
making access to bank financing more accessible banking sectors. For example, a construction
for this specific segment. Consequently, startups, company we interviewed shared their experience
which typically encounter difficulties in accessing of being unable to raise financing during the
traditional bank financing, found themselves with COVID-19 pandemic, considering their business was
limited avenues for financial support through these deemed to be at high risk of default. This real-world
packages. example reinforces the challenges that some SMEs
encountered during this period despite government
Nevertheless, based on the interviews, there are intention to support SMEs during the pandemic.
some SMEs, especially those without collateral

Figure 3.4:
How SMEs were negatively impacted by COVID-19

Impacted aspects Startups MSMEs MTCs

Revenue declined by more than 30% 70% 73% 86%

Delayed or halted projects 57% 57% 61%

Difficult to obtain financing 47%* 33% 36%

Workforce reduced by more than 30% 22% 37% 25%

Business review The survey revealed that the majority (75%) of

SMEs have conducted business reviews within the
Within this section, a number of questions delved last 2 years post COVID-19 pandemic. Notably,
into the aspect of business reviews, exploring these reviews tend to concentrate more on internal
whether SMEs conducted such assessments within factors such as financial and digital reviews,
the last two years specifically due to the COVID-19 rather than external macroeconomic and ESG
pandemic. This is important to ensure our SMEs are considerations. As such, SMEs appeared to be
prepared to face post-pandemic challenges and prioritising immediate controllable in response to
able to shift gear from survival to growth mode. the uncertainties brought about by the pandemic.
Hitt and Collins (2007) highlighted that firms Among the companies surveyed, MTCs emerged as
that develop a decision-making process based the segment conducting the most comprehensive
on reliable and diverse knowledge are more likely review, encompassing various facets of business
to make high-quality strategic decisions, which operations. This suggests that larger enterprises
will strongly determine the firm’s performance. recognise the multifaceted nature of their business
Additionally, there are also questions seeking to operations and the interconnectedness of various
categorise the types of business reviews undertaken aspects.
during this period, offering a nuanced perspective
on the multifaceted approaches SMEs employ to
navigate and adapt to the challenges posed by the
pandemic.

56
Figure 3.5:
Types of business review conducted

Startups MSMEs MTCs

Financial 81% 76% 84%

Digital 52% 60% 68%

ESG 33% 41% 70%

Macro 25% 38% 57%

75% of the SMEs that have conducted business focused on financial aspects, and enhanced access
reviews, especially those encompassing financial to external financing. Companies that invest time
aspects, had significantly higher access to external and resources in assessing their financial health
financing, both from traditional banking channels and operational efficiency are positioned more
and market-based financing. This indicates a favourably by both banks and market-based
potential correlation between the inclination financing entities.
to conduct business reviews, particularly those

Figure 3.6:
Types of external financing and business reviews

Bank finance
No
business
review,
17.5%

86% 84%
Conducted 72%
business review 67% 65%
82.5% 50%
47%
39%

Market-based finance
No
business Macro review Digital review ESG review Financial review
review,
12.2% Used Bank Used Market-based

Conducted
business review
87.8%

57
Survey and Interview Insights

Interestingly, based on the feedback obtained from Of the 25% of SMEs that did not conduct any
interviews with SMEs, when companies reviewed form of business review, 42% reported either
the financing options relevant to them, they were neutral or positive impacts from COVID-19, while
more willing and confident to approach new the remaining 58% experienced adverse effects
financing options. Some raised concerns about due to the pandemic. Close to half of them cited
the lack of knowledge and understanding of a a lack of awareness about the necessity for such
particular financing instrument, which lowered their evaluations. Additionally, around 40% expressed
confidence in adopting it. This particular insight concerns related to expertise and the associated
from SMEs underscores the practical implications costs involved in conducting comprehensive
of conducting business reviews and the role of reviews. This underscores a substantial gap in the
financial literacy in making informed financing strategic management and adaptability of SMEs,
decisions. It highlights the need for SMEs to not emphasising the imperative for improved talent
only assess their financial health but also invest in skillsets within this sector. Lack of expertise and
understanding various financing options to make skills can impact the SMEs business acumen and
well-informed choices in the ever-evolving financial limit their competitiveness and capacity to grow
landscape. and innovate.

Figure 3.7:
Impacts from COVID-19 by respondents who did not conduct business reviews and reasons for not
conducting business review

Proportion of respondents who did not conduct business reviews said:

60%
49%
41% 41%
Neutral or 40%
positively
impacted by Negatively
20%
COVID, 42% impacted
by COVID,
58% 0%
No expertise Costly I do not know
or talent I needed to
conduct reviews

3.3.2 Survey section 2: External financing history, purposes,

and experience

External financing history SMEs, offering insights into the diverse funding
avenues they explore.
The question on external financing within the survey
aims to provide a comprehensive understanding The survey findings showed that a significant 64%
of the financial strategies employed by SMEs, of SMEs used external financing, embracing a
with a focus on the sources they utilise beyond spectrum including banks, Development Financial
internal resources. This inquiry seeks to discern the Institutions (DFIs), government grants, non-bank
prevalence of external financing adoption among credit, and market-based financing. Notably, among

58
these options, bank financing emerged as the most Decomposing the types of market-based financing
utilised, while market-based financing experienced preferred, startups and MSMEs predominantly
lower adoption rates. This is in line with a study by favour alternative and private market instruments
OECD (2015), which emphasises that bank lending such as ECF, P2P lending, VC, and PE. This shows
remains the predominant external source of finance that startups and MSMEs often gravitate toward
for many SMEs and entrepreneurs. The OECD more agile and dynamic funding options. On the
findings, mirrored in our survey, reveal a consistent other hand, MTCs, with a more established financial
reliance on straight debt from banks to address standing, show a preference for traditional market-
a spectrum of financial needs, including startup based instruments like bonds and equities which
funding, managing cash flow, and supporting crucial are also more accessible to bigger companies
investments. This nuanced instrument preference reflects
diverse financing needs across different scales of
We delved into this finding further through more enterprises.
targeted questions during a focused-group
interview session with startups. It was revealed These findings align with the framework outlined
that, when initiating a new business, their default by BNM (2022) and SC (2021), which delineates
financing choice was traditional banks due to its funding sources for businesses at various stages of
ease and commonality. However, these startups development. According to this framework, VC, PE,
later found bank financing unavailable to them due ECF, and P2P are earmarked for early and growth
to issues like business immaturity, difficulty in profit stages, while equity and bonds become more
tracking, the need for collateral or guarantees and pertinent in the growth, late to matured stages.
inadequate financial information. As a result, they Additionally, insights from SC (2021) indicate that
turned to other sources such as grants or market- VC, PE, ECF, and P2P financing, although relatively
based financing as alternative funding sources. small in size, have gained strong traction in catering
This highlights the evolving financing landscape for to selected segments of MSMEs. This stands in
startups and the growing importance of market- contrast to MTCs, which, having outgrown existing
based financing as a viable option for SMEs facing financing avenues for MSMEs, exhibit a distinct
traditional financing constraints. financing landscape.

Figure 3.8:
External financing instruments used by respondents

Startups MSMEs MTCs

Bank 55% 68% 55%

DFI 31% 41% 55%

Government Grant 35% 37% 34%

Non-bank Credit 31% 29% 24%

Market-based financing 15% 18% 34%

For those who used market-based financing, they utilise more of:

Startups MSMEs MTCs

Alternatives Private Markets

Most used (ECP, P2P) (VC, PE)
Equities
Instruments
Private Markets Alternatives
Bonds
(VC, PE) (ECP, P2P)

59
Survey and Interview Insights

Despite the relatively low adoption of market- recognising the inclusivity and flexibility offered by
based financing among SMEs, there was a notable market-based financing, particularly for historically
willingness among youth and women entrepreneurs underrepresented groups in the entrepreneurial
to explore and use these market-based options. landscape.
This underscores a potential shift towards

Figure 3.9:
Company ownership

% of companies that have used and/or are willing to use market-based financing

1 98.0% 2 89.6% 77.0% 75.1%

Youth-owned companies Female-owned companies Bumiputera-owned companies Local-owned companies
31.4% 20.8% 14.9% 14.5%
66.7% 68.8% 62.2% 60.6%

63.7% 65.2% 62.8% 56.6%

Non-youth-owned companies Male-owned companies Non-Bumiputera-owned Foreign-owned companies
9.4% 11.0% 10.7% 8.6%

54.3% 54.1% 52.2% 48.0%

Have used market-based financing Despite the low adoption of market-based financing among SMEs,
Willing used market-based financing there is a high willingness to use market-based financing among
youth and women entrepreneurs
Purpose of financing choice

In terms of the purpose of financing choice, like inventory, salaries, raw materials, and rental
this survey delved into the specific objectives expenses. In contrast, market-based financing
for which SMEs opt for one type of financing emerged as a preferred avenue for SMEs looking to
over the other as this inquiry provides valuable embark on expansion initiatives, signalling a distinct
insights into the strategic decision-making strategic focus toward a growth orientation. The
processes governing financial choices. The survey findings illuminate not only the preferred financing
highlighted a divergence in the purposes served methods for particular purposes but also a more
by bank and market-based financing. Specifically, nuanced preferences and considerations that guide
bank financing primarily catered to working SMEs in aligning their financial strategies with their
capital needs of the SMEs, covering essentials specific business needs.

60
 Figure 3.10:
Purposes of financing choice

Bank financing mainly for working capital:

100%
78%
80%
54% 59%
60%
37%
40%
14%
20%
0%
Starting a new Refinancing Expanding my Purchasing Working
business existing debt business assets capital

Market-based financing mainly for expanding business:

80% 73%
63% 67%
60%
39%
40%
24%
20%

0%
Starting a new Refinancing Purchasing Working Expanding my
business existing debt assets capital business

Through our interactions with SMEs experienced in high-growth firm. This highlights the multi-faceted
market-based financing, a broader perspective on its impact of investors in the growth and development
value emerged. Market-based financing is perceived of SMEs, extending well beyond the realm of a
not merely as a source of financial capital but also transactional financing approach.
as a means to access strategic advice, expand
professional networks, enhance market access, and As for factors of which influence the adoption of
leverage the knowledge and experience of investors. their financing options, flexibility and low financing
costs emerged as the top two factors. This
Notably, publications from the Harvard Business underscores the importance of financial instruments
Review (Ichii, 2018) and the World Economic and structures that provide adaptability and cost-
Forum (2023) have similarly emphasised the vital effectiveness, influencing the overall financial
role of investors, particularly venture capitalists, health and sustainability of SMEs. Interestingly,
in providing guidance and mentorship to SMEs. the survey also revealed that low awareness was
They underscore how early-stage funding extends not a significant barrier for those opting for bank
beyond financial support, contributing to laying the financing to consider alternative financing options,
foundations of a business and shaping its trajectory indicating it was more of an issue of willingness to
and strategies toward becoming an innovative and consider non-bank financing options.

61
Survey and Interview Insights

Figure 3.11:
Factors of choosing bank and market-based financing

Factors of choosing such financing Bank Market-based

Great flexibility 73% 55%

Low financing costs 69% 53%

Availability of government incentives 45% 47%

To improve the profile and credibility 39% 45%

Receive professional advice to grow business 32% 45%

Unaware of other financing options 8%* NA

External financing experience Conversely, startups emerged with the least

favourable experience in bank financing when
As shown in Figure 3.12 SMEs’ experiences with compared to both MSMEs and MTCs. As discussed
the two financing sources revealed a mixed bag. earlier, this could be attributed to the inherent
MSMEs and startups displayed a diverse experience challenges faced by startups, such as limited
with both bank and market-based financing, while operating history, perceived higher risk, and
MTCs, often positioned in a stronger financial potentially stringent eligibility criteria imposed
stance, showcased positive perceptions for both by banking institutions. This corresponds to other
financing. This indicates that MTCs encounter studies where financing constraints tend to be
relatively fewer challenges when seeking external more acute for younger firms or for startups
financing. Their favourable experiences highlight with limited track record to signal their ability to
the advantage of being more mature with a more investors and financiers (OECD, 2015). This problem
robust financial position and established operational is exacerbated for SMEs whose business model
frameworks, allowing for smoother interactions with is largely based on intangibles, as it is the case
both traditional banks and market-based financing for sectors driven by knowledge-based capital
entities. investments, such as R&D and design (OECD, 2013).

“We tried to get all sorts of financing, especially from

bank, but we were not qualified because the company
was less than 3 years and we were not profitable…”
- Startup in an advertising service

“The cost of hiring consultants and to maintain the

reporting standard for listing is very expensive…”
- Logistic company preparing for listing

62
Figure 3.12:
Experience with bank and market-based financing

Bank financing: Startups MSMEs MTCs

Satisfied with bank financing 3.23 3.61 3.94

Sufficient support by government agencies 2.93 3.33 3.69

Sufficient support by bank 3.41 3.51 3.69

Sufficient support by regulators 3.16 3.51 3.81

Provide long-term financing for my business 3.73 3.86 4.13

Financing amount was sufficient 3.25 3.45 3.88

Market-based financing: Startups MSMEs MTCs

Satisfied with market-based financing 3.50 3.44 3.90

Sufficient support by government agencies 3.83 3.74 3.90

Sufficient support by intermediaries/ advisers 3.50 3.78 3.90

Sufficient support by regulators 3.33 3.48 4.20

Sufficient support by RMOs 3.58 3.41 4.20

Provide long-term financing for my business 3.92 3.81 4.30

Financing amount was sufficient 3.67 3.41 3.80

Note: For numerical scores, a higher value indicates greater satisfaction in the respective category. Color-coding is used to signify the relative
levels of satisfaction across the three business types. Green indicates the highest values, yellow suggests medium levels, and red represents
the lowest values.

3.3.3 Survey section 3: Awareness of and willingness to consider

market-based financing

Awareness of market-based financing financing, contingent upon their specific needs

being met.
The survey also included a section to assess both
the awareness and willingness of SMEs to embrace
market-based financing. Willingness to consider market-based
financing
Of those who have not used market-based financing
before, 61% of respondents were aware of market- In particular, startups expressed a willingness to
based financing options, while a significant 39% embrace market-based financing, especially when
were still unaware of the availability of market- faced with a lack of alternative funding sources
based financing for SMEs. The sentiment was such as internal funds or bank loans. This reflects
echoed during interviews, specifically in relation a pragmatic approach among startups, leveraging
to crowdfunding platforms such as ECF and P2P market-based options to fill crucial financial gaps.
financing. Among those aware, a significant 85% On the other hand, MSMEs were more inclined
expressed a willingness to consider market-based to consider market-based financing if they could

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Survey and Interview Insights

secure a sufficient financing amount. This emphasis support with the preservation of autonomy and
on the adequacy of funds highlights the strategic trust in the chosen financing mechanisms.
importance of aligning financing options with the
specific capital needs of MSMEs. MTCs, often at a later stage of development,
exhibited a different focus. Their willingness to
Both startups and MSMEs also shared a common engage with market-based financing was intricately
ground in their willingness to explore market-based tied to exit plans, and they were particularly
financing when two key conditions are met. The attuned to the rigidity of listing requirements. This
first condition, a foundation of trust, underscores reflects a strategic approach among MTCs, where
the importance of establishing a secure and reliable considerations extend beyond immediate funding
relationship with chosen financing mechanisms. The needs to long-term positioning and potential exits.
second condition, the ability to maintain ownership,
holds profound significance which goes beyond Another key finding of the survey was that the
a mere desire for control. It reflects the strategic willingness of both MSMEs and MTCs to explore
imperative for SMEs to avoid diluting their equity market-based financing was contingent on a deeper
ownership through financing mechanisms like understanding of the concept. This underscores the
equity funding. importance of the need for a more comprehensive
understanding, as compared to SMEs already
This strategic stance is grounded in the broader having awareness of the market-based financing
narrative of SMEs seeking financial support while mechanisms. The findings revealed the necessity for
carefully assessing the complexities of equity targeted educational initiatives to empower MSMEs
dynamics to retain control and autonomy in their and MTCs with the knowledge required to leverage
business ventures. By prioritising the preservation of the potential benefits of market-based financing
ownership, SMEs strategically position themselves effectively. Efforts geared towards simplifying the
to not only secure financial support but also to intricacies of market-based financing mechanisms
retain a firm grip on the direction and decision- have the potential to pave the way for a more
making within their enterprises. Together, these widespread acceptance and utilisation of market-
conditions reveal SME’s desire to balance financial based financing among MSMEs and MTCs.

Figure 3.13:
Awareness of and willingness to consider market-based financing

SMEs are WILLING to consider market-based

61% of respondents ARE AWARE of 39% of respondents
are not aware of financing IF…
market-based financing market-based financing

MSMEs
15%
85% are WILLING to NOT
WILLING to Can raise
consider using consider
Startups sufficient
financing
MTCs
Can amount
maintain Can
control understand
the concept Clear exit
Trust better strategies
Lack of other
IF their wants/needs are met sources of funds
e.g.
internal funds Less stringent
or bank loans requirements

Startups and MSMEs MTCs are late-stage focused,

go to market-based financing they tend to focus more on
for other sources of funding. exit plans and care more about
They also would like to the rigidity of listing
maintain ownership and requirements.
have enough trust.

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3.3.4 Survey section 4: Key barriers and opportunities for
market-based financing

Key barriers and opportunities Alongside procedural challenges, high funding

costs and concerns regarding exit strategies
The survey also brought to light both the obstacles contributed to the reluctance to opt for market-
and potential avenues for market-based financing based financing. Addressing these financial aspects
adoption among SMEs. As shown in Figure 3.14, the and providing clearer and more efficient pathways
primary hurdle faced by SMEs are the complicated for exits could potentially mitigate these concerns.
and lengthy procedures associated with market- Surprisingly, not being approached emerged
based financing. Application-related concerns, as another significant barrier. This highlights a
including stringent requirements, emerged as the top potential opportunity for financial institutions which
two reasons for the unwillingness to embrace market- offer market-based financing to proactively reach
based financing. This indicates a crucial area for out and increase their engagement with SMEs and
improvement in streamlining processes by regulators to demystify the process.
and financiers to encourage wider adoption.

Figure 3.14:
Reasons for unwillingness to use market-based financing

Top 5 reasons for unwillingness to use

market-based financing

Complicated and lengthy procedures

Stringent Requirements

High funding cost

Concern over exit strategies

I have not been approached

Consistent with our interview findings, feedback from investors to finance high risk businesses,
from Startups, MSMEs, and MTCs highlights several leading to risk capital gap for these early-stage
challenges in the financing landscape: SMEs.

1. Funding for SMEs remains challenging: 2. Restricted exit strategies: Startups in Malaysia
Obtaining financing remains challenging, face constraints in terms of exit strategies, with
particularly for SMEs lacking sufficient credit IPOs being the primary route. However, some of
history, profit track records, or collateral. While the SMEs feel that there is a noticeable scarcity
market-based financing instruments could cater of M&A deals and opportunities in the Malaysian
to this group, there is often a lack of risk appetite corporate landscape, compared to the growing

65
Survey and Interview Insights

global trend toward trade sales as an exit are perceived as having onerous compliance
strategy for private companies. A more diverse processes, and the associated costs can be
range of exit strategies is needed for SMEs prohibitive for SMEs. Some interviewees also
seeking market-based financing. raised concerns about the high cost of listing for
the Leading Entrepreneur Accelerator Platform
3. Knowledge deficits in market-based financing: (LEAP), which questions the economics and
Generally, there is sufficient awareness of incentives for SMEs to list on the LEAP market.
market-based financing options but the more
detailed knowledge on where, how, and who to
approach to obtain market-based financing is Source of information
still low among SMEs. Many of those interviewed
are not even familiar with the term market- Given that SMEs face challenges in understanding
based financing until we provide them with the market-based financing, identifying preferred
definition and examples of what constitutes mediums to disseminate information effectively
market-based financing. Product reachability is important, especially for policymakers and
remains an issue, especially in the P2P and ECF industry players. Respondents were also asked to
markets where these market-based offerings are indicate their top preferred medium to obtain more
still relatively unknown for many SMEs. Some information about market-based financing. This
startups, even after successfully securing VC/PE question aims to discern the preferred channels
funding, admit to having a limited understanding through which SMEs seek information on market-
of alternative market-based financing avenues. based financing, providing insights into the most
Separately, some startups in our interviews effective communication mediums for disseminating
highlighted that local VCs lack the necessary relevant knowledge and fostering awareness within
skills and knowledge to evaluate their business the SME community.
effectively and in giving fair valuations. However,
the flip side to the story is that some of the The survey revealed that, across all business
VCs addressed that startups often overvalue sizes, leveraging networks through government
themselves by leveraging intangible assets such agencies and business associations/chambers
as innovative ideas and intellectual property, is the top-preferred medium for obtaining
which are not commercially viable. information about market-based financing.
This underscores the importance of established
4. Higher funding costs: SMEs expressed concerns networks in disseminating information and signals
over the high cost of funding when utilising an opportunity for collaboration between financial
market-based financing, especially for P2P entities and these intermediary bodies. This is also
financing. Double-digit return expectations for aligned with research on successful entrepreneurial
short-term loans can impact SME profitability ecosystems which are characterised by being in an
significantly. Nonetheless, our engagement with information-rich environment, both from organised
various stakeholders showed that ECF and P2P and accidental networks in which there is a process
have high traction among Startups and MSMEs for information-diffusion and tacit knowledge-
particularly due to digital convenience as well as sharing.
the speed of disbursement. The lack of information
and data to understand credit risks also leads to Notably, for startups with a greater inclination
high pricing, which remains a concern and is one towards digital platforms, online sources emerged
of the reasons why some SMEs shy away from as the preferred medium for obtaining information
using the digital financing platforms. about market-based financing. This emphasises the
significance of tailored digital strategies to cater
5. Burdensome compliance and transition to the specific information-seeking behaviours of
support: Many market-based financing options startups.

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Figure 3.15:
Top 3 preferred medium to obtain information about market-based financing

Startups MSMEs MTCs

Business Associations/
Rank 1 Online Sources* Government Agencies
Chambers
Business Associations/ Business Association/
Rank 2 Government Agencies
Chambers Chambers
Networking and word of
Rank 3 Government Agencies Trade shows and events
mouth
*Online sources include: Social media, articles, websites and advertisements

Additionally, our interviews with SMEs also revealed The portal aggregates diverse information,
that many of them face challenges in accessing encompassing business guides, detailed site maps
information about market-based financing. They outlining stages in business formation, strategies
find that the information is scattered on different for growth and expansion, and guidelines for exiting
websites and fragmented, leading to additional a business. Additionally, it features sections for
resource costs due to issues like duplication of news and events, enabling MSMEs to upload their
information and difficulty in access. Furthermore, planned programmes. Published material covering
awareness among SMEs regarding the availability policies, regulations, and publications like the SME
of one-stop information centres like SMEinfo Portal Masterplan and various annual reports is also readily
needs further enhancement. available on the portal.

Specifically, the SMEinfo Portal by SME Corp. These insights underscore the importance of
Malaysia serves as a centralised online information streamlining and improving the accessibility of
repository dedicated to meeting the diverse needs information sources to make them more user-
of MSMEs. This comprehensive platform is designed friendly for SMEs, higher awareness of such
to provide SMEs with extensive information and platforms should also be raised to increase the
resources to aid them in various aspects of their outreach and effectiveness of the platform.
business operations. It covers a broad spectrum
of topics, including financing, training, and various
government initiatives and support programmes
tailored for entrepreneurs and MSMEs.

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Survey and Interview Insights

3.3.5 Survey section 5: Digitalisation and ESG

Digitalisation digital technology in their business operations. This
signifies a substantial integration of digital tools and
The digitalisation trend accelerated strongly during platforms within the SME sector, indicating a shift
the COVID-19 pandemic, when digital activities towards technologically driven business practices.
emerged as a fundamental condition for many firms Among the SMEs leveraging digital technology,
to continue operating. Increasing the digital adoption the top factor motivating digitalisation efforts
rate is particularly relevant for SMEs, especially was for them to gain access to new markets. This
as they face a disproportionate impact during the underscores the pivotal role that digitalisation plays
periods of crises such as the recent pandemic. in helping expand market reach for SMEs to gain
growth opportunities. According to OECD (2021),
Efforts to increase government support for the pandemic opened up opportunities to new
digitalisation are aimed at levelling the playing markets and products by upscaling their uptake of
field for SMEs. In Malaysia, the high broadband digital tools as well as cost-saving measures.
penetration rate31 across the country is aimed at
facilitating more online business, making it more The survey further revealed distinct patterns in
viable, efficient, and cost effective for SMEs to the areas where digitalisation is implemented. For
access to markets. However, as technological startups and MSMEs, the focus primarily lay in
advancements such as artificial intelligence (AI) marketing and sales, indicating a targeted effort
continue to accelerate, there is a risk of a widening to enhance visibility and customer engagement. In
divide between SMEs which have made the digital contrast, MTCs prioritised digitalisation in financial
leap and the others which struggle with digital management, reflecting a strategic approach
transformation. towards optimising their financial systems, again
highlighting the different levels of sophistication of
The questions on digitalisation in the survey further digital adoption as businesses mature.
revealed the extent and nature of digital adoption
within SMEs. Specifically, in the survey, digitalisation In terms of the impact of digitalisation, an
in the context of this study includes aspects such overwhelming 89% of SMEs reported a positive
as: impact from digitalisation on their overall operations.
This widespread positive sentiment highlights
• enterprise resource planning,
the transformative role that digitalisation plays
• big data, in reshaping the operational dynamics of SMEs.
• eCommerce, It shows that digital technology is not merely an
• online advertisement, and auxiliary tool but a fundamental driver of enhanced
efficiency, heightened competitiveness, and overall
• marketplace
improved business performance within the SME
sector. The findings suggest that SMEs, by embracing
This section aims to provide a comprehensive
digitalisation, are experiencing a paradigm shift in
understanding of how SMEs are leveraging digital
their approach to operations, leveraging technology
tools and platforms in their operations. While not
as a catalyst for growth and resilience in an
directly related to financing, digital adoption is now
increasingly digitised business environment.
at the front and centre of policymakers’ agendas for
market-based financing.

The survey illuminated the prevalent trends and

impact of digital technology adoption among SMEs.
Specifically, a notable 73% of SMEs have embraced

68
Figure 3.16:
Digitalisation of SMEs in terms of adoption, factors, areas, and impact

How many have leveraged digital

Of the 73% who leveraged:
technology:

Ranking Factors of digitalisation

1 Access to new market
Yes
73% 2 Customer expectation

3 Company's internal push

4 Better access to finance

No 5 Incentives from gov

27% 6 Shareholder and investor push

7 Regulatory requirement

Areas where digitalisation is implemented: Impact of digitalisation on business:

Startups MSMEs MTCs No Impact, 9% Negative Impact,

2%
Marketing & Sales 76% 79% 70%
Customer
64% 54% 70%
Relationship

Financial
55% 60% 75%
Management
Positive
Supply Chain impact,
43% 39% 70%
Management 89%

A significant 72% of SMEs marketed their a substantial share of sales from e-commerce
products on e-commerce platforms, highlighting platforms, ranging from 25-50%. This reinforces
the increasing reliance on online channels for the pivotal role of digital platforms in shaping the
product promotion and sales. Most SMEs reported business landscape for SMEs.

Figure 3.17:
Use of e-commerce platforms for product marketing
How many market their products Share of sales from
on e-commerce: e-commerce platform:

50%

Yes 40%
72%
30%

20%

No 10%
28%
0%
Below 25-50% 51-75% 76-100%
25%

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Survey and Interview Insights

Environmental, Social, and different business sizes, a notable pattern emerged.

Governance (ESG) MTCs led the way with a commendable 68%
adoption rate, followed by 57% of MSMEs, and 49%
Integrating ESG principles into business practices of startups.
is more crucial than ever. It is no longer merely
a positive addition but is strongly tied to the This variance suggests that larger enterprises, such
resiliency and sustainability of a business. as MTCs, may have a comparative advantage in
Furthermore, ESG should not only be prioritised by dedicating talent, resources and capacity to ESG
larger corporations; it is equally important for SMEs initiatives. In other words, the integration of ESG
to consider ESG in order to meet the expectations practices is potentially influenced by the scale and
of their customers, investors, and other stakeholders resources available to businesses. MTCs, with their
and is especially critical for SMEs which are a part larger size and resource base, seem to be at the
of the global supply chain. ESG and digitalisation forefront of embracing ESG principles, underscoring
should be addressed in tandem to capitalise on the potential correlation between organisational
synergies, as both are important for SMEs to adapt capacity and the ability to adopt sustainability and
and future-proof their business models. good governance practices. This insight not only
highlights the current landscape of ESG adoption
The survey showed that the incorporation of ESG among SMEs but also prompts considerations
practices was not yet universal, with only half of about the scalability and resource implications of
the SMEs incorporating ESG principles into their incorporating sustainable and responsible business
operations. Delving into the breakdown across practices within varying business sizes.

Figure 3.18:
Incorporation of ESG practices

How many have incorporated ESG in their business:

Yes 68% 57% 49%

No
54% 46% of of of
MTCs MSMEs Startups

The decision to incorporate ESG practices was policies, and the expectations of shareholders and
predominantly driven by external factors, with investors. This strategic alignment with market
growing customer demand playing a central role. forces and governance frameworks indicates
Among the SMEs that have adopted ESG practices, a responsive approach to changing business
the key factors included the increasing demand landscapes.
from customers or buyers, internal company

70
Figure 3.19:
Key factors of ESG incorporation

Of the 54% who leveraged, the key factors are:

Ranking Factors of ESG incorporation

1 Growing demand from customers or buyers

2 Company’s internal policy

3 Shareholders/investors

4 Government incentives

5 Regulatory requirements

6 Suppliers

7 Employees

8 Lenders

“ESG disclosure is crucial, it will impact

the financing prospects and it will become necessary
for my future funding success…”
-An entrepreneur with 20 years of experience in
managing multiple businesses.

“Our clients are mainly listed companies,

so they ask us to be ESG compliant”
-A tech-based MTC which has been operating in Malaysia
for more than 10 years

In the interviews with SMEs, we found that many influence business strategies and financial
are aware of the growing importance of ESG prospects. This awareness highlights the need for
in the business landscape. However, some hold a more comprehensive understanding of ESG and
misconceptions about ESG, often perceiving it as its broader implications on business operations and
solely related to environmental concerns, such as funding prospects.
“being green.” What is vital to grasp here is that
ESG practices go beyond the environmental aspect; The survey further elucidated key reasons for SMEs
they encompass environmental and social impact, not incorporating ESG principles. For startups,
as well as governance elements, which significantly the lack of government incentives emerged as a

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Survey and Interview Insights

predominant barrier, emphasising their reliance MSMEs cited the complexity of ESG reporting as
on external support. The current government the main hindrance. This highlights the need for
assistance for startups may not emphasise the streamlined and accessible reporting mechanisms.
need to measure the impact of the grants on the In contrast, MTCs identify the high cost associated
environment and society, which can lead to the with issuing ESG financing instruments as a barrier,
startups’ view that government incentives are pointing to the economic considerations influencing
lacking for ESG integration into their business. larger enterprises.

Figure 3.20:
Key reasons for not incorporating ESG

Startups MSMEs MTCs

ESG reporting is very High cost of issuing ESG

Rank 1 Lack of government incentives
complicated financing instruments
High cost of issuing ESG High cost of issuing ESG ESG reporting is very
Rank 2
financing instruments financing instruments complicated
ESG reporting is very
It will increase my cost of
Rank 3 complicated & it will increase Not relevant to my business
production
the cost of production

Notably, a higher percentage of companies that strategies. Furthermore, 78% of these companies
have leveraged market-based financing have have incorporated ESG principles, showcasing
embraced both digitalisation and incorporated ESG a dual commitment to sustainable business
practices. Among companies that have leveraged practices and the utilisation of alternative financing
market-based financing, a substantial 86% have methods. This intersection reflects a strategic
also embraced digitalisation. This synergy approach, where SMEs leverage both technological
indicates a recognition of the interconnected and advancement and sustainable practices to enhance
synergistic benefits of both sustainable practices their market positioning and financial strategies.
and technological innovation in reshaping business

Figure 3.21:
Market-based financing, digitalisation and ESG incorporation

Out of the 12% of companies that had used market-based financing

Leveraged on Incorporated ESG:

digitalisation:

No
14% No
22%

Yes Yes
86% 78%

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3.3.6 Findings from interviews with government agencies
and regulators

Interviews with agencies play a crucial role in the transition challenge. While MSMEs receive
gaining a comprehensive understanding of the government assistance in the form of subsidised
SME ecosystem. These insights shed light on the loans and other financial and non-financial
challenges and opportunities faced by SMEs and programmes, this support can inadvertently
provide valuable perspectives from organisations disincentivise them from aspiring to grow beyond
actively involved in supporting and monitoring the SME level. According to agency A, “some
these businesses. Aside from the interview insights informal businesses are hesitant to grow and would
that we have provided along with the survey remain unregistered to retain their B40 status in
findings in the earlier section, below are some of the order to continue to benefit from the subsidies
key insights that we further summarised from the provided by the Government”. Additionally, it was
interviews with relevant agencies and regulators: also mentioned that there were companies started
for the sole purpose of accessing SME grants,
in which they do not create more value to their
Lack of information and data on SMEs products or services provided. To encourage MSMEs
to grow larger and faster, the support mechanisms
One of the foremost challenges raised by and incentives provided should be designed to drive
government agencies is the scarcity of data and the growth of SMEs.
information that are available to the investors,
financial institutions or agencies providing grants
and loans. This information gap not only hinders Shifting investment landscape
SMEs’ access to financing but also increases the
cost of financing for them. Notably, the information In-depth insights from interviews further illuminate
asymmetries are particularly pronounced for a significant transformation in the investment
micro to small-scale SMEs compared to larger landscape. Notably, investors, especially venture
enterprises, given the latter’s obligation to produce capitalists, are shifting their focus from “growth
audited financial statements and uphold more at all costs” to considering revenue, profitability,
rigorous disclosure standards. The deficiency in and long-term sustainability. This shift is partly
SME information was highlighted in interviews, driven by VC firms grappling with rising funding
particularly concerning SMEs exploring listing costs due to inflationary pressure and consolidated
options in the capital market, who encountered monetary tightening in major central banks globally
demanding information disclosure requirements. (also known as the hurdle rates). Understanding
These information gaps faced by SMEs also this evolving landscape is vital for SMEs seeking
amplify the monitoring and evaluation costs, a investment and for managing their cash flows
concern accentuated by the heterogeneity within prudently to ensure continuity and survivability of
the SME sector. As such, addressing information the business.
asymmetries emerges as a pivotal priority to
enhance market transparency and efficacy for SMEs.
Knowledge gaps and financial decisions

Transition challenges for SMEs Insights gleaned from interviews, particularly

with Agency B dedicated to early-stage startups,
In the course of interviews with government underscore the pervasive challenges that startups
agencies, Agency A raised a concern regarding grapple with money management. The impact

73
Survey and Interview Insights

reverberates, affecting both their growth trajectory importance of fundamental business knowledge
and their ability to secure crucial funding. Agency beyond just financing in any aspect of business
B emphasised the need for capacity-building management. Furthermore, startups often face
programmes tailored to enhance entrepreneurs’ uncertainty when identifying optimal funding
fundamental business knowledge, with a specific avenues, leading them to select financing options
focus on financial management encompassing that may not align with their business needs. Hence,
basic accounting and cash flow management. As addressing these knowledge gaps is essential to
noted by Agency A, “some of the startups do not empower startups in making informed financial
have basic accounting knowledge, hence they do decisions, as the financing decision plays an
not understand the importance of cash flow and important role on sculpting the business’s future
account tracking…”. This insight demonstrated the trajectory.

3.3.7 Findings from interview with the intermediaries

Intermediaries play a crucial role in connecting Complexities in university-industry

SMEs with investors and facilitating their access linkages
to various grants and funds available to them.
Their insights are invaluable in comprehending Insights from intermediaries further revealed a
the challenges and opportunities within the SME significant challenge – the complexities in the
landscape. These intermediaries serve as the bridge connections between universities and industries.
between SMEs and investors, offering unique While collaborations with academia hold promise
perspectives on the intricacies of business growth for innovation, the practical implementation of
and financial transactions. innovative and new ideas encounters roadblocks,
despite the strength of their underlying concepts.
Establishing robust connections between
Talent mismatch and human capital universities and industries is crucial for tapping into
challenges the wealth of research and knowledge available
within academic institutions. These linkages can
As per insights from intermediaries in Malaysia’s drive innovation, help businesses leverage cutting-
startup ecosystem, one significant challenge edge research, and foster a culture of learning
startups face is the struggle to identify and retain and growth, ultimately contributing to the overall
the right talent for their businesses. Getting their development of the business landscape. However,
businesses off the ground is often hindered by navigating the intricacies of these collaborations
the difficulty in locating individuals possessing presents its own set of challenges, including issues
the requisite skills to propel the business forward. surrounding intellectual property (IP) and the
The intermediaries provided examples, citing absence of structured arrangements for licensing.
instances of startups with innovative ideas but Addressing these complexities is pivotal in bridging
lacking practical and technical knowledge to create the gap between theoretical research and real-
prototypes. Another case highlighted a blockchain world application, unlocking the full potential of
company’s difficulties in securing an adequate these collaborations.
number of programmers to develop their system.
The talent challenge extends beyond recruitment, as
retaining the skilled individuals proves to be another
on-going concern.

74
Barriers to entry for LEAP and ACE to list appear to be more motivated by the allure of
markets brand recognition due to the benefits of obtaining
preferable bank financing rates or bigger projects
Insights gathered from interviews shed light on as a “listed company” rather than for the purpose
another notable challenge faced by companies of obtaining capital. Moreover, there is a mismatch
contemplating LEAP market listing. These between the listing requirement versus actual
companies exploring listing on the LEAP market business practice, particularly concerning the profit-
face substantial issuance fees, which can place a test for IPOs on LEAP. Overcoming these barriers is
significant financial burden on them when seeking critical to fostering a thriving ecosystem for SMEs
for IPO as an exit strategy. Some entities seeking seeking to access these markets.

3.4 Conclusion

In conclusion, our survey and interview provided Additionally, insights from interviews with
a comprehensive overview of the financing government agencies and intermediaries further
landscape for SMEs, shedding light on the illuminated challenges and opportunities in the
challenges and opportunities faced by startups, SME landscape. A critical hurdle was the lack
MSMEs, and MTCs. The seismic impact of of accessible data on SMEs, hindering financing
the COVID-19 pandemic was palpable, with a access and elevating costs. Transitioning from
majority of SMEs navigating adverse effects, SMEs to MTCs faced obstacles, potentially due to
particularly pronounced among MSMEs. When existing support structures. The evolving investment
considering external financing, SMEs exhibited a landscape, with increased focus on sustainable
preference for bank financing while market-based growth, demanded SME alignment with investor
financing experienced lower adoption rates. The expectations. Knowledge gaps, talent mismatch, and
willingness to explore market-based financing complexities in academia-industry collaborations
was influenced by factors such as trust, control, underscored the need for targeted interventions.
and specific business needs, emphasising the Barriers to LEAP and ACE markets, like substantial
nuanced considerations across different business fees, highlighted financial challenges. Integrating
sizes. Moreover, the barriers to market-based these insights emphasised the imperative for
financing ranged from complicated procedures to nuanced interventions, addressing information
concerns about funding costs and exit strategies. gaps, facilitating growth transitions, and navigating
Information-seeking behaviours, digitalisation investment dynamics. In short, this chapter delved
trends, and the varying impact of ESG practices into the challenges and dynamics of SME financing
added further layers to the SME financing based on the findings from surveys and interviews,
landscape. presenting barriers and opportunities for informed
interventions and policy considerations.

75
Policy Recommendations

Chapter Four

Policy
Recommendations

76
4.1 Market-based financing and the real economy

S MEs play an indispensable role in Malaysia’s

transition to a high-income economy (World
Bank, 2021). The challenge lies not only in
address unique challenges of specific SMEs and
entrepreneurs, with a particular emphasis on
those pursuing high growth and innovation-driven
increasing their contribution to GDP to 50% by ventures. The implementation of these policies
2030 but also in facilitating their progress towards often spans across different government ministries
becoming more technologically driven, enhancing and agencies and operates at various levels of
their competitiveness, and producing high-value- government (federal, state, and local), exhibiting
added goods and services for both domestic and considerable diversity based on institutional
international markets. arrangements and the extent of decentralisation.

For Malaysia, there is a significant policy focus Focusing on policies aimed at specific SMEs and
on the critical role SMEs play to achieve national entrepreneurship is crucial, particularly when
policies i.e. Malaysia Madani Economy, NETR dealing with ventures entering new growth areas
and NIMP 2030. Government policies on SME characterised by distinct challenges and high
development are also evolving, with emerging focus uncertainties. Despite the complexities involved,
on understanding better how it operates within such ventures also hold the potential for economic
the ecosystem and is connected to various other profits (referred to as alpha) and the possibility of
policies. Availability of finance is a critical feature of exponential growth, ultimately transforming into
a successful SME ecosystem. gazelles or even potential unicorns. Recognising
the inadequacy of one-size-fits-all solutions, it is
However, it must be complemented by a recognition imperative to adopt an approach that emphasises
that different types of SME businesses have different policy interventions at multiple levels, aligning
funding requirements. SMEs are often associated with the aforementioned categories of policies
synonymously with innovation, growth, and suggested by the OECD. This nuanced approach is
entrepreneurship. But not all SMEs are prioritising better suited to effectively address the diverse and
growth and innovation. Many SMEs have neither dynamic issues faced by SMEs, ensuring a more
the inclination nor the ability to grow, innovate or tailored and responsive policy framework.
be involved in international markets. Some barriers
could exist including scarce resources, low business The role of market-based financing is crucial in
acumen and strategic thinking and a strong desire enabling the development of high-growth and
to retain independence which might override the quality SMEs needed for Malaysia to transition
desire for growth, which is dependent on external towards becoming a high-income nation, in
funders giving advice (Curran and Blackburn, 1999). particular by providing the necessary capital for
financing the SMEs’ growth and innovation.
According to the OECD (2023), intervention
strategies to support the diverse needs of SMEs Our survey revealed that SMEs prefer market-based
and entrepreneurship can be categorised into three financing as their primary means of capital raising
key areas. These encompass 1. Targeting broad- to expand their businesses. This is in contrast to the
based policies, such as those related to taxation, the SMEs which prefer bank-based financing mainly for
labour market, trade, and infrastructure; 2. Targeting working capital. These different preferences stem
sector-specific policies, which involve targeted from the flexibility and diversity of financing options
development efforts in sectors like renewable available for SMEs, in which market-based financing
energy within the National Energy Transition can play an important complementary role to bank-
Roadmap (NETR); and 3. Targeting policies to based financing. With a diversified financing option

77
Policy Recommendations

encompassing early to mature stages of financing, transition towards embracing digitalisation and ESG
market-based financing provides a pool of capital principles for greater competitive strength. These
from various sources and instruments tailored two elements are intricately linked to market-based
to specific needs and suitability, contributing to financing and structural reforms of the economy.
a ‘funding escalator’ and ‘cocktails’ of different Digital technologies enhance efficiency and open
funding sources (OECD, 2014). up opportunities for exploring new and innovative
business models, while adherence to ESG principles,
However, findings from the survey and subsequent specifically driven by shareholders and regulators
interviews indicate that gaps exist in financing can drive SMEs to operate in a sustainable and
availability along the life cycle stages of the socially responsible manner. Consequently, by
SME, with each cycle presenting its own unique providing financing support for the four core focus
challenges for policymakers and industry players areas of innovation, growth, digitalisation, and
to address. Likewise, promoting digitalisation ESG principles, market-based financing serves as
and ESG principles in SMEs has a transformative a catalyst for transitioning Malaysia’s SMEs into a
impact on the economy. Market-based financing modern, sustainable, and high-growth sector (see
serves as a vital catalyst for SMEs seeking to Figure 4.1).

Figure 4.1:
Market-based financing for SMEs in Malaysia

Low Income Middle Income High Income

s Transit
nomic
70%
ion
t eco ac
SME Contribution to GDP

o tiv
60% sro iti Malaysia’s SME
ras
g Innovation Contribution to reach
es
d

50% 50% by 2030

an

2023 contribution to GDP

preneurship

38%
40%
Market-Based
Digitalisation
Financing for
30% ESG
SMEs in
Malaysia
tre

20%
En

10%
Growth
0% g
Divers ncin
ification of fina

While the SMEs play a pivotal role in Malaysia’s life cycle funding needs and strengthening the
economy, contributing significantly to employment, overall SME ecosystem. In this chapter we will look
innovation, and economic growth, it faces into policy recommendations that could address
unique challenges that hinder their growth and the following changes and reduce financing gaps by
development. These challenges can be broadly SMEs, especially to finance the innovation activities
categorised into two main areas: addressing SMEs’ (see Figure 4.2).

78
Figure 4.2:
Policy recommendation to strengthen SME ecosystem in Malaysia
1 2

Addressing SME’s lifecycle funding needs Think ecosystem, not just economics

Blurring of boundaries between private and public markets Role of Islamic

Leveraging on fintech Developing data
Revenue c finance and social
for financial inclusion infrastructure
Late-stage capital finance

b
Growth capital Mature or special SME
exchanges face public
Expansion stage market barriers of
a requires flexibility liquidity, high costs, lack
Risk capital and cost of funding is of investor diversity,
a barrier, access to new "behind the scenes"
markets, "smart capital", challenges Growing talent and the Broadening access to
Capital formation stage with
new funds, convenient importance of financial markets and supporting
high costs of funding, high
path to exit & targeted education internationalisation
rates of failure, low access
to any external funding, financial education
Life cycle
information asymmetries, stage
low investor protection, low
financial literacy

Life cycle funding needs: A multifaceted met by bank financing, such as angel investors,
challenge venture capital, and crowdfunding platforms. At the
same time, the government plays a pivotal role in
Financing is a critical aspect of SME growth, and the facilitating and attracting private funding for early-
availability of funding varies across different stages stage startups and high-growth and competitive
of the business life cycle. Each stage presents SMEs. The primary role of the public sector is to
distinct challenges for SMEs, investors, industry, reduce the risk and barriers for SMEs to grow by
and policymakers to address in order to narrow the complementing and encouraging the development
financing gaps. of the private capital industry. However, due to the
unpredictable and high-risk nature of risk capital,
Risk capital: Early-stage SMEs often struggle to policy design at this stage can be particularly
secure funding due to the higher perceived risk. complex and outcomes uncertain.
A key challenge at this stage is the difficulty in
predicting early on which businesses have the Growth capital: As SMEs transition from early to the
highest growth potential. Not all SMEs can be mid-stages of their life cycle, innovation and growth
considered as high-growth, competitive SMEs. activities become more crucial. Once they have
World Bank (2013) identified that only a small successfully negotiated the start-up phase, these
subset of SMEs grow robustly after establishment high-growth innovative SMEs become more market-
but will contribute disproportionately to overall driven and with increased revenue generating
economic performance. These SMEs will often have capacities which reduce the risk of full enterprise
needs and challenges that are easily addressed by failure. However, challenges in accessing sufficient
a broad set of SME policies. For instance, they may growth capital can limit their potential to “scale-up”
have a relatively bigger need for finance at an early and make a sizeable contribution to the national
stage to undertake more risky activities, something economy, in terms of innovation, employment, and
traditional banks are wary to fund. overall productivity and income growth. This is
also the critical stage where the SMEs can better
This early stage requires risk capital and innovative respond to new business opportunities, absorb
financing solutions that are more unlikely to be new technology and prioritise sustainability

79
Policy Recommendations

considerations such as ESG. Some SMEs will seek Strengthening the SME ecosystem:
to access new markets through internationalisation beyond financing
and will be able to play an important complementary
relationship with large firms. Policy attention While financing is essential, it is not the sole
focused on this complementary relationship can determinant of an SME’s success. For instance,
create a healthy ecosystem of firms, facilitating a fostering a culture of innovation and encouraging
process of ‘entrepreneurial recycling’ (Mason and SMEs to adopt new technologies are equally
Harrison, 2006). important to enhance their competitiveness
and productivity. This includes providing
At this stage, SMEs can use options such as private access to technology infrastructure, access to
equity and specialised markets, such as the LEAP markets through internationalisation and public
market, to raise financing. Digital tools such as P2P procurement (OECD, 2015), funding for research
and ECF are also increasingly becoming preferred and development and other higher risk, innovative
choices of financing for SMEs to meet their working activities, and increased technology adoption which
capital needs and the expansion of business can collectively generate mutually reinforcing
activities. benefits. Therefore, a robust SME ecosystem
encompasses factors beyond a specific set of
Late-stage capital: Mature SMEs seeking to interventions or a transactional financing approach
expand into new markets or pursue mergers and but instead recognises a more systems-based form
acquisitions could raise financing from IPOs and of support and policies to help Malaysian SMEs
bond markets. SMEs that have reached this mature become globally competitive and resilient. In this
stage will seek diverse financing options to optimise report, we explore some areas which could further
their capital allocation and facilitate transition enable the market-based financing solutions for
activities such as changes in ownership and mergers SMEs. These include:
and acquisitions (M&A) opportunities. For private
SMEs, they will seek a viable exit strategy for their Leveraging FinTech for financial inclusion: The role
entrepreneurs and early-to-mid stage investors of FinTech is gaining traction, with innovation in
to realise their investment returns and grow the financial technology and digitalisation facilitating
business further. the development of more inclusive financing tools.
Alternative financing, such as P2P lending and ECF,
Policymakers must thus adopt a holistic approach plays a critical role in supporting SME financing,
that addresses both the life cycle funding needs of especially for those that traditional banking services
SMEs and the broader factors that influence their may overlook. A commonly identified challenge
success. Encouraging the development of a diverse of FinTech is its reach and distribution, as it may
range of financing options tailored to the specific not always be accessible to different segments
needs of SMEs at different stages of their life cycle of the population of entrepreneurs and SMEs.
provides options for SMEs to access financing that Targeted thematic funding leveraging on FinTech
best suit their business and risk profile. This includes can better serve specific groups requiring special
expanding access to complement traditional bank attention, such as youth and women, increasing the
loans, developing alternative financing channels, likelikood of success of their businesses. Policies
creating mezzanine finance with options to convert designed to enhance market-based financing for
debt to equity, and providing a clear path for an exit SMEs should aim to “level the playing field” for
strategy. This will help to strengthen and thrive the these underrepresented groups so that they do
SME ecosystem in Malaysia. not unintentionally fall through the cracks of policy
support and access to FinTech.

80
Developing data infrastructure: The ability to should aim at reducing SMEs’ organisational
access financing and the high cost of financing inadequacies and improving business skills and
for SMEs are often directly linked to the lack of can include training in areas such as financial
data and information on SMEs. To tackle this management, marketing, technology adoption, and
challenge, the government can play a crucial role business strategy. Emphasising talent development
by developing data infrastructure and promoting for the market-based financing industries is also
the democratisation of data. The government crucial to ensure that stakeholders have relevant
could leverage the use of various existing public knowledge and skillsets to offer support SMEs,
databases, such as CCRIS by BNM, SCORE by SME particularly in emerging industries and high-tech
Corp. Malaysia and upcoming digital initiatives sectors. Mentorship from corporate leaders help the
like digital ID and e-invoicing to enhance credit young entrepreneurs to grow their business faster
assessment. This would provide SMEs with and safer.
diversified options for funding and help overcome
the issues related to information asymmetry and Broadening access to markets and supporting
transparency. internationalisation: Providing SMEs with access
to domestic and international markets is critical for
Role of Islamic and social finance: Malaysia has their growth. Initiatives such as promoting trade,
an unparalleled opportunity to tap on Islamic networking opportunities, and export support
finance and social finance in supporting SME can help SMEs expand their reach globally. This
development in Malaysia. Leveraging Zakat and includes facilitating the implementation of trade
Waqf for capacity building and financing SMEs agreements such as CPTPP and RCEP, providing
and social enterprises provides more opportunities access to export financing, and promoting SMEs
for young and new entrepreneurs to start their in international markets. The government’s strong
businesses. By blending concessional and non- promotion of SME internationalisation can be
concessional sources of funds, Islamic and socially complemented by market-based financing, playing
responsible investment instruments can be a critical role in providing necessary financial
deployed to finance various business activities, support, including value chain financing and
particularly those with positive impact on the factoring services.
economy and society such as agropreneurship and
halal industry to help economic activities in the Another form of support for access to markets
rural area. Moreover, providing opportunities to for SMEs is through public procurement as
become entrepreneurs to all levels of society will governments themselves can provide an important
foster a greater entrepreneurial culture and help marketplace for SMEs. Countries such as the United
social mobility (Aparicio et al., 2022). At a broader States, and other OECD countries such as Australia
level, Islamic finance also encourages the concept of have made comprehensive efforts to increase the
“wealth circulation” so that wealth is not exclusively “share” which small firms obtain of government
circulated among the rich in the society and ensures contracts and can provide market validation for the
a fairer and more equitable mobilisation and SMEs.
distribution of resources, thus expanding financial
inclusion. In summary, by understanding and addressing
both the life cycle funding needs of the SMEs
Growing talent needs and the importance of and strengthening the overall SME ecosystem,
financial education: Equipping SMEs with the policymakers can create a more conducive
necessary skills and knowledge for effective environment for SMEs to thrive, fostering their
business management is essential for their long- ability to contribute significantly to Malaysia’s
term sustainability. Support and capacity building economic growth and development.

81
Policy Recommendations

4.2 Recommendation 1: Filling the risk capital gap for capital

formation of SMEs

In the early stages of an SME’s life cycle, between both public and private actors, as well as
entrepreneurs may have just initiated their business actors from the third sector and from civil society
operations or be in a pre-operational phase, (Mazzucato, 2016).
characterised by ideation or prototyping. During
this period, the failure rates of SMEs are notably Our Malaysian government has demonstrated
higher. Other than a few countries such as the its strong commitment to supporting SMEs by
United States, United Kingdom and Canada, private providing various forms of financing facilities,
capital tends to steer clear of very early-stage including grants, loans, guarantees, and
financing and concentrate on growth and expansion development programmes encompassing capacity
stages due to higher investor risk aversion. building, training, and networking. Nevertheless,
research based on an “ecosystem approach”
Most SMEs at very early stages tend to rely on (OECD, 2014) points toward the need for top-down
internal financing in the form of a combination of initiatives to be complemented with bottom-up
self-financing, loans from family and friends and efforts which are not restricted to the quantity of
bootstrapping. The other major challenge is that SMEs but more importantly improving the quality
the external funding cost of the early stage capital of SMEs. Moreover, these bottom-up efforts should
formation can be substantial. Limited information not be seen as the exclusive responsibility of
disclosures, higher failure rates coupled with government but one in which government agencies
persistent information asymmetry, increases the are better connected to other entrepreneurial
difficulty and costs to invest in the startups, as it actors.
requires higher-risk appetite from the investors.
In terms of expanding the role of government, three
The government’s role in giving support, especially key findings from the analysis suggest that policy
for early-stage SMEs, is pivotal for them to move enhancements are needed in the government’s
out of “survival” phase where success or failure SME development programmes. The enhancements
is highly uncertain. Research indicates that SMEs would address areas of concern including efficiency
receiving both financial and non-financial assistance and effectiveness of various government support
from the government exhibit a higher survival rate measures targeted to SMEs by streamlining
compared to those solely receiving either financial government programmes, collaboration and
or non-financial aid, or none at all (Park, Lee & Kim, partnerships not only between ministries but also
2020). More recent literature has also started to involving private investment through expanding the
challenge the role of government to move from current fund-of-funds (FoF) structure to include a
producing policy simply for fixing explicit market wider array of parties, and risk-related concerns that
failures toward a role which is involved in market- were raised throughout the survey and interviews
making and market-shaping. Indeed, markets through introduction of government guarantees for
themselves are outcomes of the interactions debt type market-based financing products.

82
4.2.1 Streamlining government programmes

Survey respondents and interviewees have support programmes for entrepreneurs and SMEs.
consistently highlighted the necessity for an While the portal serves as a crucial information
improved mechanism to access information about gateway for the SMEs, further enhancements,
government programmes available to them. particularly focusing on improving user experience,
The lack of awareness and information poses a will attract more SMEs to utilise the platform.
significant obstacle to the development of SMEs,
particularly in their early stages. Establishing an In August 2023, the government had announced
effective communication channel is crucial to the introduction of a single window initiative to
mitigating information asymmetry and expanding further support the Malaysian startup ecosystem.
the reach of government programmes, thereby The initiative aims to improve coordination and
positively impacting SME performance in Malaysia collaboration between agencies and has an
(Shamsuddin et al., 2020). The information provided ultimate target of creating 5,000 new startups
should be easily accessible, and the application by 2025.32 This government effort is a step in
process should be user-friendly. the right direction towards developing a more
successful entrepreneurial ecosystem by addressing
A centralised gateway that consolidates all various concerns surrounding financing, product
funding programmes provided by the government innovation, marketing and specialised knowledge.33
into a single portal can significantly boost SME The single window initiative should expand its
participation in these programmes. For instance, coverage beyond just focusing on government
the German Federal Ministry for Economic Affairs initiatives. It also should include private initiatives
and Climate Action hosts a database of all funding and international engagements in areas such
programmes on its website. These programmes as market access, fundings, online learning and
feature user-friendly interfaces, allowing searches other resources related to startup development. A
based on target areas, funding organisations, and similar approach was undertaken in India with the
various filters for refining search results according introduction of the Startup India initiative which was
to company size, eligible persons, and funding launched in 2016. Startup India is a flagship initiative
types. to catalyse startup culture and build a strong and
inclusive ecosystem and entrepreneurship in India.
Presently, the SMEinfo portal, which was developed by It focuses on three key pillars i.e. simplification and
BNM in 2006 and handed over to SME Corp. Malaysia handholding, funding and incentives as well as
in 2008, serves as a centralised online information incubation and industry academic partnership. The
repository for SMEs, providing information on government can model the single window initiative in
financing, training, government initiatives, and Malaysia by learning from the success of Startup India.

32 PM Anwar: Single window initiative will be implemented to strengthen startup company ecosystem Accessed on 11 December 2023.
https://www.nst.com.my/news/nation/2023/08/948395/pm-anwar-single-window-initiative-will-be-implemented-strengthen-startup
33 Malaysia’s single window initiative boosts startup ecosystem and digital identity. Accessed on 12 December 2023. https://
commonwealthchamber.com/malaysias-single-window-initiative-boosts-startup-ecosystem-and-digital-identity/

83
Policy Recommendations

4.2.2 Enhance public financing

There is growing concern regarding the insufficient In addition to consolidating VC agencies, there
availability of risk capital to support early-stage are particular benefits to further enhancing the
entrepreneurial and innovative activities. While coordination and consolidation of funding from
various ministries and government agencies offer various government agencies, a recommendation
grants, seed investments, and matching funds to by ICMR (2019) but which was not fully captured
address funding gaps in this segment, the direct under the previous establishment of Penjana Kapital
involvement of different government agencies due to different ministerial responsibilities. The
in new venture investment poses a significant recommendation was based on the FoF model
risk of fund misallocation or funding duplication. implemented by Korea’s Venture Investment
To address this challenge, there is a need for a Corporation (KVIC). The model is premised on a
centralised and consolidated pool of grants, seed similar active role of the state and decides on the
investments, and matching funds to enhance the strategies and sets the milestones. However, not
SME ecosystem. limited to a government matching fund (which is
the model Penjana Kapital operates on), there is
In response to this need, the government established also a difference in the FoF structure where KVIC
Penjana Kapital Sdn Bhd on July 1, 2020, with the invests in different VC funds and sources its capital
goal of accelerating the development of a future from limited partners (LPs) which includes multiple
innovation economy. This entity provides matching ministries such as Ministry of Education and Ministry
facilities under a FoF structure to attract private of Environment which maintain separate accounts.
capital for investments in Malaysia’s startups. As The success of the Korea FoF (KFoF) in attracting
of July 2023, Penjana Kapital has successfully both local and foreign VC companies is seen where,
raised RM1.3 billion, with RM600 million from the as of 2022, 57% of all venture funds operating
government and the remaining RM770 million from in Korea are funded by KVIC. This provides a
local and foreign investors. However, recognising the compelling example for Malaysia to improve its
importance of scale and international experience existing FoF structure.
in building a competitive VC ecosystem, the
government has announced the consolidation of To implement a similar approach in Malaysia,
venture capital agencies, combining Penjana Kapital consolidating fragmented funding management
and MAVCAP under Khazanah Nasional Berhad across ministries and agencies to support the
during the Budget 2024 announcement. SME ecosystem could significantly improve the
efficiency of public funding distribution. Khazanah,
Khazanah Nasional, drawing on its own deal with its role in developing an FoF structure akin
origination experience and partnerships with to KFoF, could potentially attract Development
international VC players like Antler, Gobi Partners, Financial Institutions (DFIs) and different ministries
and 500 Global, is expected to further strengthen to become LPs and invest in the FoF structure
the venture capital ecosystem. This consolidation managed by Khazanah. This pooling of capital
aims to position Malaysia as a key player in the would contribute to the economic growth of
global venture capital space, fostering economic Malaysia by supporting high-growth innovative
activities that enhance Malaysia’s competitiveness startups and SMEs, fostering the development of a
and economic resiliency towards becoming a high- competitive and resilient VC ecosystem.
income economy.

84
4.2.3 De-risking investment

To enhance private participation in financing SMEs, While the guaranteed schemes enable increased
the government’s role in providing guarantees, participation from investors, particularly retail
grants, and co-investment structures is crucial. investors with a lower risk appetite, the elevated
Current guarantees, primarily facilitated by Credit costs remain a hindrance to SMEs seeking P2P
Guarantee Corporation (CGC), are predominantly financing. To address this challenge, policymakers
distributed through traditional banking channels, should consider measures to reduce the cost of
as depicted in Figure 4.3. Although some P2P guarantees specifically for P2P lending. By doing so,
lending platforms have started incorporating CGC they can effectively lower the overall funding costs
guarantees in their programmes, feedback from for SMEs participating in P2P programmes, fostering
these platforms indicates that the cost of CGC a more accessible and cost-effective financing
guarantees is higher for P2P programmes compared landscape for small businesses.
to their counterparts in the banking sector. This
higher cost translates to elevated borrowing
expenses for SMEs participating in P2P funding.

Figure 4.3:
Guarantees provided by CGC

Conventional Schemes Islamic Schemes Government Funded Schemes

BizJamin Scheme BizJamin i-Scheme Flexi Guarantee Scheme (FGS) –

(Malaysian-owned with at (Malaysian-owned with at Guarantee cover ranging from 30% -
least 51% shareholding) – least 51% shareholding) – 80% as required by participating
CGC guarantee coverage CGC guarantee coverage financial institutions.
ranges between 30% to 90% ranges between 30% to 90%
Franchise Financing Scheme (FFS) –
BizJamin NRCC Scheme BizJamin-I NRCC Scheme Unsecured portion will be covered
(Malaysian shareholder(s) (Malaysian shareholder(s) 80% and 90% on the secured portion.
must have a minimum 30% must have a minimum 30%
shareholding) - CGC shareholding) - CGC
guarantee coverage ranges guarantee coverage ranges
between 50% to 70% between 50% to 70% Direct Financing
BizJamin Bumi Scheme (51% BizJamin Bumi i-Scheme
shareholding owned by (51% shareholding owned by Bumiputera Entrepreneur Project
Bumiputera) - The guarantee Bumiputera) - The guarantee Fund-I (TPUB) – Term and revolving
coverage ranges between coverage ranges between financing for 100% Bumiputera
30% to 90% with multiple of 30% to 90% with multiple of companies up to RM 3 mil (5% per
5% 5% annum (on first application and RM 5
mil (BFR* Maybank Islamic +1% per
annum) on subsequent application.

Source: CGC Malaysia official website

85
Policy Recommendations

The Malaysia Co-investment Fund (MyCif) was To build upon this success, the MyCif model
established as part of Belanjawan 2019 with the could be expanded to include funding from other
aim of co-investing in SMEs and Social Enterprises ministries, each with its specific Key Performance
alongside private investors through ECF and P2P Indicators (KPIs). For example, Ministry of Women,
platforms. With an allocated amount of RM230 Family and Community Development can allocate
million, MyCif has successfully co-invested in funds using a structure like MyCif to facilitate
programmes worth RM638 million under the crowdfunding campaigns specifically to assist
ECF and P2P platforms in 2022. This signifies women entrepreneurs. This expansion would serve
that for every RM1 provided by MyCif, the fund to increase access and provide additional options
has managed to attract RM2.28 from the private for SMEs seeking funding for their businesses.
sector. This success demonstrates that MyCif has By broadening the scope of MyCif and involving
significantly benefited SMEs while concurrently multiple ministries, the government can further
attracting substantial private sector investment. stimulate private sector participation in supporting
the growth and development of SMEs in Malaysia.

Figure 4.4:
MyCif structure

For all MSMEs and startups that successfully raised funds from ECF and P2P
platforms, MyCIF will invest in the following ratio:

Maximum
Investment
Platform Investment
Ratio
Platform

General MSME Scheme 1:4

ECF and P2P
Agriculture Scheme RM1
million
1:2
Environmental, Social,
ECF Only
Governance (ESG) Scheme

Social Enterprise Scheme P2P Only 1:1 RM500,000

For instance, in case of 1:4 investment ratio, MyCIF will invest RM1 for every
RM4 successfully raised from private investors on the participating platforms.

Source: SC – Malaysia Co-Investment Fund (MyCIF)

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4.3 Recommendation 2: The “Missing Middle”: Supporting growth
capital needs

In this recommendation, we focus on the “Missing at a certain stage of development it is common

Middle”, which refers to challenges faced by SMEs for these entities to use a combination of market-
in accessing growth capital. This term encapsulates based financing and banking services to optimise
the difficulties encountered by SMEs seeking capital their capital structure and meet specific financial
for business expansion, which includes initiatives needs. The choice between market-based financing
such as broadening market access, expanding and traditional banking depends on factors such
product ranges, and enhancing production as the company’s growth stage, risk tolerance,
processes to improve efficiency. The challenge capital requirements, and strategic objectives. This
is particularly pronounced for high-growth SMEs approach, encompassing a variety of alternative
and startups that may lack the requisite collateral funding options, becomes a vital tool for SMEs
and credit history needed for traditional financing. looking to bridge the funding gap and unlock their
However, these entities often possess valuable growth potential.
intangible assets, such as innovative ideas,
intellectual property, and specialised expertise, Market-based financing is better suited to tailor its
which can serve as a foundation to support their approach to the specific needs of SMEs at different
funding needs. stages of development. For instance, private equity
firms play a key role in providing growth capital
Furthermore, when considering MTCs, they find to SMEs, particularly those involved in high-risk,
themselves in a unique position. They are too innovative activities compared to angel investors
large to qualify for SME-targeted government who invest predominantly in seed or start-up
assistance or stimulus packages, yet they lack the companies. By offering funding in exchange for
scale and capabilities of larger listed corporations. equity ownership or via a debt structure, the
Despite their potential for significant business market-based financing empowers SMEs to expand
growth, this group receives limited direct support operations, develop new products or services, and
from the government, predominantly through enter new markets. They provide a platform for
entities like MATRADE. MTCs are well-suited to SMEs to connect with a broader pool of investors,
raise financing from market-based sources, and including venture capitalists, business angels,
our recommendations focus on enhancing market- and institutional investors. Digital tools, such as
based financing support specifically tailored to P2P lending platforms and ECF platforms, have
foster the development of MTCs. democratised access to finance for SMEs. These
platforms offer alternative routes to traditional bank
Traditional bank loans have the scale to support loans, enabling SMEs to finance working capital
mid-growth stage SMEs, but often lack the risk needs, expand business operations, or launch new
appetite, highlighting the crucial complementary ventures.
role of market-based financing. This has been
reflected in our survey findings where market-based In this section, we will address the “Missing Middle”
financing is mostly used by SMEs to expand their challenges and the need to fill the “emerging
business, compared to bank financing which is growth capital” gap needed for SMEs to accelerate
preferred for raising working capital. Nevertheless, their growth trajectory.

87
Policy Recommendations

4.3.1 Encourage blended financing options

Blended financing is characterised by the strategic investment attractiveness of sustainable initiatives

use of development finance to mobilise additional while achieving the capital owner’s investment
resources for sustainable development. This has objectives, i.e. financial and social returns. De-
emerged as a powerful tool in accelerating the risking instruments from the public sector and
transition to sustainable development solutions. philanthropic contributions help to accelerate
Blended finance is a financial solution to enhance private sector funding as project failure risk is
the role of public financing and facilitate crowding distributed. Indeed, public sector financing is crucial
in from private investors by de-risking the in high-risk business cycle projects while the private
investment. Figure 4.5 shows how blended financing sector could contribute to the same project at a
can encourage catalytic capital from the public lower risk.
sector and philanthropic contributions to enhance

Figure 4.5:
Blended financing

Public

Development
Funding PPP

Blended
Finance
Grants &
Philanthropy Private
Social
Enterprise

Source: Author

This approach has gained prominence in key been instrumental in partially funding green projects
development projects, especially related to through a USD 150 million loan. This initiative
energy transition and SDGs in many developing supports infrastructure financing led by PT Sarana
countries. For example, Indonesia has successfully Multi Infrastructure, employing a mix of financing
used a blended financing approach to finance instruments from diverse public and private funding
infrastructure development projects under the “SDG channels. The ADB’s commitment to the SIO-
Indonesia One (SIO)” programme. In collaboration Green Financial Facility (SIO-GFF) is pivotal, as it
with the Asian Development Bank (ADB), SIO has has approved a USD 150 million loan to finance a

88
minimum of 10 projects, with at least 70% of the Blended financing can mobilise funds to support
funding dedicated to green infrastructure. Beyond SMEs engaged in these mission-based projects,
the direct financial support, ADB estimates that the fostering innovation and growth in sectors
SIO-GFF has catalysed up to 8 times the invested critical to Malaysia’s sustainable development
funds, fostering climate-friendly infrastructure goals.
and aiding Indonesia in transitioning its economy
towards a sustainable trajectory. 2. DDIs driven by GLCs and GLICs: With GLCs and
GLICs steering Direct Domestic Investments
In the case of Malaysia, the integration of blended (DDIs), SMEs can benefit from blended financing
financing within the Madani Economy Framework, partnerships. These collaborations with larger
NETR and NIMP holds significant promise for mature companies can lead to positive spillover
growth and sustainability, especially for SMEs. effects and create more opportunities for
Blended financing is particularly suitable for SMEs, SMEs to participate in supply chains and value-
offering them a unique opportunity to access a mix added activities within strategic sectors such
of private investment and grants. At mid-growth as E&E, the digital economy, and aerospace.
stage, innovative and high growth SMEs are likely to Blended financing ensures that SMEs have
attract private financing to supplement with grants access to diverse funding sources, fostering their
from public sector. The provision of government integration into these key industries.
grants serves as a validation of the potential
innovation outcomes of a project. This validation 3. Outcome-based tax incentives for high-impact
not only boosts the credibility of the initiative but activities: The introduction of outcome-based tax
also acts as an incentive for private investors to incentives under the Madani Economy Framework
assess the potential growth prospects stemming provides SMEs engaged in high-impact activities
from the innovation. The alignment of government with a unique opportunity. Blended financing
support signals confidence in the project’s viability, mechanisms can help SMEs access additional
encouraging private investors to consider the capital, leveraging tax incentives to attract private
long-term growth potential of the SMEs. This investment. This approach not only stimulates
synergy between public and private through SME growth but also aligns their activities with
blended financing support mechanisms creates a the strategic sectors identified in the Madani
conducive environment for fostering innovation and Economy Framework.
sustainable growth within the SME sector, especially
among the mid-growth stage SMEs. 4. Matching funds for startups: Under the Madani
Economy Framework, the Government and GLICs
As the government and key stakeholders actively will invest RM1 billion of additional funds to match
pursue a balanced economic landscape, SMEs with private funds to boost local startups, SMEs
emerge as pivotal players in achieving these goals. and technopreneurs. Blended financing models
Blended financing, with its combination of public facilitate the efficient channelling of these funds
and private funds, becomes a catalyst for SME to SMEs, providing them with the capital needed
growth in alignment with the broader national to innovate, expand, and contribute to economic
development policies. The following outline how development. This approach encourages a vibrant
SMEs can strategise to benefit from national entrepreneurial ecosystem and supports SMEs in
development policies using blended financing: emerging industries.

1. Catalysing SME growth through NIMP and NETR 5. Support for local food industry: The allocation
frameworks: The NIMP and NETR frameworks, of RM200 million under Agrobank to enhance
with their emphasis on specialty chemicals, the Self-Sufficiency Level (SSL) and food
CCUS solutions, and responsible transition security presents an opportunity for SMEs in the
scenarios, open avenues for SME involvement. agricultural sector. Similar funding arrangements

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Policy Recommendations

using MyCif P2P funding approach can 7. Leveraging technical assistance from
accelerate food production and address food international organisations: To explore
security issues. Blended financing can amplify innovative blended financing tools to support
the impact of this support by attracting private SMEs, the regulators can work with international
investment, including young entrepreneurs into organisations such as United Nations Capital
modern agricultural technology applications. Development Fund (UNCDF) to develop a
This ensures that SMEs in the agro and food blended financing programme similar to the
industries have the necessary resources to BUILD (Bamboo-UNCDF Initiative for the Least
modernise and increase production. Developed) fund, which is a blended impact
investment vehicle co-created by Bamboo
6. Wage increase policies for economic sharing: Capital Partners and UNCDF to finance SME
The commitment to policies supporting an business in the least developed countries (LDCs).
increase in wages relative to GDP aligns with Malaysian regulators can leverage the BUILDER
the goal of inclusive economic growth. Blended Technical Assistance (TA) Facility managed at
financing can play a role in supporting SMEs to arm’s length by UNCDF to provide technical
adapt to these policies by providing them with support on portfolio building and business
financial resources to invest in skills development, advisory.34
technological upgrades, and increased
productivity. This in turn, contributes to the
overall growth and competitiveness of SMEs.

Figure 4.6:
Blended financing approach to finance NETR and NIMP2030

Concessional
Funding: Grants &
Guarantees

Social
Return

Investors Invest Invest Output

Energy
(Equity, Debt Transition
Market & NETR & NIMP Final
Projects &
Alternative 2030 Projects Users
Mission Based
Market) Return Projects Revenue;
Dividend
Income

Loan Return

Bank Loans

Source: Author

34 See UNCDF https://www.un.org/ldcportal/tags/build-fund

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 The strategic integration of blended financing and innovative approach to provide inclusive
within Malaysia’s development policies provides funding avenues. This funding is aimed at
SMEs with a robust mechanism for growth, meeting the needs of SMEs, providing seed
innovation, and sustainability. By aligning capital, microfinancing, and structured training.
with the key initiatives outlined in the Madani The government has allocated RM25 million in
Economy, NIMP, and NETR frameworks, blended Budget 2024 as matching grants to augment
financing becomes an enabler for SMEs to thrive, seed capital components. The focus is primarily
contributing significantly to Malaysia’s economic on entrepreneurs from low-income households
development and resilience. (asnaf/B40), aligning with the broader goal of
fostering inclusivity in economic development.
Blended financing is not only confined to large- As of May 2023, this initiative has successfully
scale projects but is also making a significant supported 3,389 new entrepreneurs.
impact on inclusive financing initiatives. An
exemplary case is iTEKAD, an initiative by BNM, The P2P can also tap into similar structures
collaborating with other cooperative parties like iTEKAD to increase their offerings by
leveraging Zakat and Waqf. The iTEKAD has incorporating a blended financing approach
gained attention from the financial sector focusing on financial inclusiveness to support
and SMEs, encouraging exploration of new SMEs from low-income households.

4.3.2 Reduce “growth capital” gaps

The current landscape in Malaysia poses significant mechanisms that cater specifically to the unique
challenges for SMEs seeking to raise bonds, needs of SMEs, promoting inclusivity in the financial
hindering their access to vital growth capital. market.
According to a World Bank (2020) report on
the domestic bond market in Malaysia, bond 1. Strategic development of SME bond market:
market arrangers focus on larger issuances, giving While the current Malaysian bond market is
preference to fundraising of above RM250 million. not the most conducive for fundraising by
This is mainly due to tepid interest among the big SMEs, a targeted approach could be explored
institutional investors like the Employees Provident through the development of SME Bond
Fund (EPF) to subscribe to small debt issuances markets. Partnership with the Credit Guarantee
coupled with limits imposed by their investment Corporation (CGC) will add a layer of security,
mandates, which have resulted in subdued interest enticing investors to participate in financing
in smaller debt issuances. The preference for SMEs by reducing its risks. Credit guarantees for
larger bond issuances further marginalises SMEs SMEs are mostly distributed via DFIs and banks
with more modest working capital or capital and often not for SMEs to directly raise funds
requirements. This disinterest in smaller debt from the bond market. This is not specific to
issuances has repercussions, discouraging SMEs Malaysia but is also seen as general practice in
with limited capital needs from participating in other jurisdictions. The direct bond fundraising
the local bond market. The reluctance of investors by SMEs is generally associated with high risk
to engage with smaller debt papers may also be and faces problems such as inefficient financial
compounded by an additional liquidity premium, management, accounting standards, as well
making the issuance of debt more costly for SMEs, as issues related to governance, disclosures,
as noted by the World Bank. transparency and performance.

In light of these challenges, it becomes imperative However, SME bonds remains relevant especially
to explore alternative financing options and with government guarantee schemes, drawing

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Policy Recommendations

lessons from Korea’s Credit Guarantee Agency, incorporating credit enhancements, such as
the Chinese Government in the SME Private guarantees, the bond market could continue to
Placement Regulation and the enactment of stand as a substantial source for SME financing
civil and fiscal law in Italy.35 To minimise the in Malaysia.
risk of failure and at the same time allow SMEs
to tap into the bond markets, e.g. a SME CGC 2. Positioning P2P financing for the mid-tier
guaranteed bond targeted to medium-size companies: In the quest to reduce “growth
enterprises that has a clear revenue stream capital” gaps, the role of P2P can be expanded
could be offered via private placement method to act as lending tools for a bigger financing
to institutional investors, including GLICs. The and longer tenure needs of MTCs. Currently,
guaranteed programme for SMEs could also be the campaign size of the P2P segment is
extended to financing small to medium scale notably smaller, with 70% of the issuers raising
government infrastructure projects where the RM50,000 or less, primarily targeting short-term
future revenue is predictable and safe. This will working capital needs.36 To enhance the role of
provide opportunities for investors to diversify P2P and provide diversity within the space, the
investment portfolios while injecting much-needed Securities Commission Malaysia announced in
capital into the growth endeavours of SMEs. 2022 that they would open new applications
for the registration of new ECF and P2P market
An alternative avenue to access the bond market operators, focusing on offering debt-based
for SME financing involves consolidating a financing for MTCs. In June 2023, Bursa Malaysia
substantial pool of SME assets for securitisation RAM Capital Sdn Bhd (BR Capital) received
or issuing SME covered bonds. The asset- the approval-in-principle from SC Malaysia to
backed securities (ABS) and collateralised operate as a new debt fundraising platform.
debt obligations (CDO) are commonly utilised
instruments for SME securitisation (Nassr & BR capital will facilitate both listed and unlisted
Wehinger, 2015). In Malaysia, Cagamas has SMEs and MTCs tapping into a new pool of
introduced an innovative programme to support capital outside the traditional wholesale market
SMEs in their greening initiatives. Instead of with greater flexibility to these companies to
securitising the debt, Cagamas utilises the debt raise funds. The platform caters for issuers that
proceeds to acquire eligible noncarbon emitting have financing requirements of at least RM5
industrial hire purchase receivables, focusing million with minimum tenure of 1 year.
on SMEs actively contributing to environmental
sustainability. The success of this approach While BR Capital opens up a new form of
is evident in the launch of the first ASEAN alternative funding for SMEs and MTCs, we
sustainability bond in October 2020, amounting foresee continued efforts to liberalise alternative
to RM100 million. This initiative garnered market space to attract RMOs with specialised
significant investor interest, attracting a total capabilities such as the blockchain technology
order of RM240 million or book-to-cover ratio of and leveraging on innovative Islamic P2P lending
2.4 times and final price of 43 to 45 basis points platforms can revolutionise SME financing. With
above corresponding Malaysian Government decentralised financing technology, P2P can
Securities (MGS) rate. Hence, by aggregating bring transparency to transactions, instilling
SME risks, introducing innovative solutions and confidence in SMEs seeking growth capital.

35 Sakpunpanom, S., Budsayaplakorn, S., & Santipolvut, S. The Potential of SMEs Bond Issuance in Thailand.
36 See https://www.capitalmarketsmalaysia.com/digital-peer-to-peer-p2p-financing/

92
 Simultaneously, Islamic P2P lending aligns with seeking flexible and non-dilutive capital to
ethical principles, opening funding avenues for fuel their growth. Unlike traditional loans with
businesses committed to sustainable practices fixed repayment schedule, the RBF repayments
and use blended approach by tapping on are directly aligned with business’s revenue,
concessional lending approach. embedding a counter-cyclical mechanism. This
more flexible approach provides SMEs with an
3. Exploring Revenue-Based Financing (RBF): option for better risk management, especially
Based on our interviews, the high-growth SMEs during the economic downturns. On the other
and startups have seen a shift in their business hand, for investor’s with higher risk appetite,
landscape especially with tighter financing the RBF offers potential higher returns and can
conditions. The current landscape requires them incentivise investors to identify and support
to prioritise revenue sustainability over “growth- companies with high growth prospects.
at-all-costs”, when liquidity was cheaper.
Quick access to capital, no equity dilution,
In this context, RBF model can potentially and no collateral requirements make RBF
be considered as a strategic option. It has an attractive option for SMEs navigating the
emerged as a valuable alternative for SMEs challenges of raising growth capital.

Figure 4.7:
Features and comparison of RBF

Benefits Bank Loan Venture Capital Revenue Based Financing

Founder retains Yes, but banks may have some Investors may have significant Yes
control say in business decisions say in business decisions and
take an equity stake in the
company

Suitability of Difficult for early-stage Early stage & high growth Best suited to early stage &
instrument businesses or those without high growth companies
collateral

Cost of capital Mid (Lower than RBF, higher Typically, the lowest cost of High (15%-30% p.a.)
than VC) capital, but investors will expect
a significant return on their
capital

Repayment Fixed (monthly or quarterly) Flexible (tied to milestones or Flexible

schedule exit events)

Collateral required Yes, typically assets like property No, but investors may take an No
or equipment equity stake in the company

Alignment of Banks’ interests are not always Investors’ interests are aligned Investors’ interests are
interests aligned with company interests with company’s long-term aligned with company’s
as they may still want to be success, as they expect the success. Investors are only
repaid even when company is company to eventually go public paid if company generates
struggling or be acquired revenue

Source: Various

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Policy Recommendations

The RBF financing option is growing at a fast based on revenue, the actual financing terms
pace, especially to finance SMEs with relatively such as revenue ratios vary from platform-to-
strong and stable revenue streams. According to platform and are also assessed based on the risk
research on RBF, the global RBF market size was of the programme.
valued at $901.41 million in 2019 and is projected
to reach $42 billion by 2027.37 This substantial The P2P platforms in Malaysia could consider
growth underscores the increasing prominence offering the RBF schemes, especially for high
of RBF as an emerging financial tool for SMEs growth sectors as well as a targeted investor
globally. segment of sophisticated investors. These will
provide new financing options for SMEs as well
In Singapore, Choco Up and Jenfi already as diversified investment options to investors.
provide RBF financing options on their
platforms. Choco Up is Asia’s top revenue-based Overall, policymakers should find innovative
finance platform, where they provide financing solutions to reduce “growth capital” gaps and
for Singapore-based businesses with minimum foster sustainable growth for SMEs, contributing
six months in operation and have minimum to the overall economic resilience of the nation.
monthly income of S$10,000. While the core
advantage of RBF is flexibility in repayment

37 Allied Market Research (2021). Revenue -Based Financing Market by Enterprise Size (Micro Enterprises, Small-Sized Enterprises, and
Medium Size Enterprises), and Industry Vertical (IT & Telecom, Healthcare, Media & Entertainment, BFSI, Consumer Goods, Energy &
Utilities, and others): Global Opportunity Analysis and Industry Forecast, 2020-2027.

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4.4 Recommendation 3: Optimising exit strategies for SMEs
through public equity capital and M&A

As businesses mature and expand their growth listing on specialised SME exchanges as well
aspirations, their financing needs undergo a as facilitating mergers and acquisitions (M&A).
transformation. SMEs often require substantial However, our previous analysis clearly indicate that
capital from both public and private markets to SMEs in Malaysia encounter numerous challenges
support late-stage financing. Their needs also go when attempting to access late-stage capital. While
beyond purely transactional forms of financing some of these challenges are not unique to Malaysia
as they are also driven to achieve more growth, and are also present globally, addressing them
innovation, and to enhance their international effectively is imperative.
competitiveness. At this stage of their life cycle, the
SMEs will subsequently seek more exit opportunities The following recommendations aim to mitigate
for the founders and other key investors. these challenges and enhance the availability of
late-stage financing options for SMEs in Malaysia.
Beyond the high-risk survival phase, SMEs can
secure financing through various avenues, including

4.4.1 Recommendations for enhancing the LEAP market’s appeal

Cost of listing consistently emerges as a critical interviews and is supported by publicly available
factor when SMEs evaluate market-based documents produced by accounting and CF firms.38
financing options, despite the simplified listing The majority of the fees go toward the payment
procedure introduced to ensure ease for SMEs in of advisory services, with other charges, such as
the LEAP market. It is paramount to address the processing fees and initial listing fees, only costing
disproportionately high listing costs for SMEs listing around RM9,000 and RM3,000 respectively.
in the LEAP market compared to the ACE and Main
markets. This is noteworthy, especially considering the
guidelines provided by Bursa, where the initial
The average listing size in the LEAP market is admission fee of an adviser is fixed at RM20,000,
about RM3 million to RM5 million, where the and the annual fee is fixed at RM10,000.39
cost of listing can range from RM1 million to RM2 Addressing this discrepancy is crucial for promoting
million, nearly one-third of the amount raised. This a more accessible and equitable listing environment
concern has been emphasised by SMEs in our for SMEs in the LEAP market.

38 Overall estimated cost of listing for Main market, ACE market and LEAP market is above RM5 million, RM4 million to RM5 million and RM1
million to RM2 million, respectively : https://www.crowe.com/my/insights/listing-your-company-on-bursa-malaysia-
39 Fees and Charges for the LEAP Market (Bursa Malaysia) https://www.bursamalaysia.com/sites/5bb54be15f36ca0af339077a/
assets/5c86103a39fba26bcc467dc1/LEAP_FeesandCharges_1September2018.pdf

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Policy Recommendations

Figure 4.8:
LEAP market admission fees

Fees paid for admission on LEAP market Fees charged

Bursa Malaysia processing fee RM9,000

SC’s fee for lodgement of information memorandum (to replace prospectus required for RM500
listing on MAIN and ACE market)

Initial listing fee RM3,000

Initial admission fee of Approved Adviser RM20,000

Total fee: RM32,500

Estimated Real-world Listing Costs* (Including various professional fees to the regulators, RM1 mil – 2 mil
consultants, advisers, and issuer)

Source: Bursa Malaysia and Crowe, 2023* 40

Based on our interviews with regulators and there is a push to lower listing barriers, advisers
advisers, we found a significant factor that or sponsors still need some form of tangible
contributed to the high cost of listing is the notable financial assessments to fairly value a company’s
gap between the official listing procedures required viability for listing and safeguard investor interests.
for the LEAP market and the actual business Without reliable indicators, assessing a firm’s
practice adopted by advisers and sponsors during potential becomes inherently challenging for
the listing process. This discrepancy is evident in advisers, especially those who come from a banking
procedures such as profit-testing, due diligence, background with limited experience assessing the
and compliance, adding layers of complexity and risk return profile of very early-stage SMEs.
increasing the cost of listing for SMEs. Despite the
LEAP market’s intention to have flexible listing Therefore, the LEAP market in Malaysia should
requirements and fewer barriers compared to the adopt some measure of explicit financial
ACE and main markets, the observed practices have assessment with a minimum threshold for listing.
created unintended challenges. This step will ensure a standardised assessment
fulfilled by SMEs seeking to list in the LEAP market,
It is essential to note that, although regulatory providing clarity to advisers and sponsors on how
requirements do not explicitly detail these to evaluate SME listings. By establishing a clear
processes, they are often included as part of the framework, the assessment process becomes more
listing process to ensure sufficient demand from transparent and efficient, facilitating a smoother
investors for participation in the listing. Examining and more streamlined approach to price discovery.
best practices across SME exchanges in the region Ultimately, this contributes to a more robust and
reveals that these exchanges impose specific accessible listing environment for SMEs, fostering
requirements for SMEs to tap into them (see confidence among stakeholders in the market.
chapter 2). These requirements may include setting
a minimum threshold based on profitability, capital Addressing the issues associated with the high cost
benchmarks, or evidence of positive cash flow. of listing could be achieved by expanding the pool
The rationale behind these measures is clear: while of Recognised Approved Advisers, thereby fostering

40 Crowe. (2023). Listing your company on Bursa Malaysia- IPOs in 2022. Crowe Malaysia IPO Booklet. Retrieved October 19, 2023,
from https://www.crowe.com/my/-/media/crowe/firms/asia-pacific/my/crowemy/news/crowe-malaysia-ipo-booklet-2022.
pdf?rev=ea7efccf75cc44668f02e918218227fb&hash=BFE11DE2D1172307708128B53C5EB921

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innovation and promoting price competition in recognised as approved advisers intending to list
the market. In March of this year, SC introduced a their investee companies in the LEAP market should
new transfer of listing framework from LEAP to the undergo a mandatory moratorium on shares period
ACE market. A key strategy under this framework that applies to promoters.41
involves expanding the pool of Sponsors/Advisers
to include Recognised Approved Advisers. This In the interim, an immediate and impactful measure
expansion aims to diversify the participation of to address the issue of higher listing costs could
corporate finance professionals in the Malaysian be for the government to absorb some of these
capital market, moving beyond the dominance of costs by offering listing grants to the issuers.
the investment banking industry. This approach is not unprecedented, as the SC
has already provided grants to offset up to 90%
To further enhance competition and attract SMEs of external costs incurred for the issuance of
to list in the LEAP market, the inclusion of selected Sustainable and Responsible Investment (SRI)
VC and PE players with relevant expertise and a Sukuk and Bonds. Likewise, in Singapore, the
Qualified Person as Recognised Approved Advisers SMEs are offered support of up to 20% of eligible
for LEAP market listings should be considered. This expenses, with a cap of S$300,000 for listing in the
aligns with the nature of the LEAP market, designed Singapore Catalist.
to facilitate high-growth and innovative SMEs in
tapping the capital market, gaining recognition, and However, it is crucial to note that providing
differentiating themselves as listed entities. government grants for SMEs should be considered
only after exhausting all options of market
VC and PE players possess the expertise to fairly mechanisms for improving the efficiency of market-
value companies with high growth, advanced pricing mechanisms to reduce listing costs.
technology, and innovative business structures,
in contrast to investment bankers who may rely Moreover, the support provided through
on standard measurements based on revenue government grants should be accompanied by
models. Moreover, VC and PE players can continue increased transparency in the listing fees for the
to provide mentorship support for SMEs in the LEAP market. Regulators could explore fixing
LEAP market, contributing to their ongoing growth. the cost of advisory services, mirroring other
This approach also addresses concerns raised in professional fees, to establish a price ceiling and
our interviews regarding a lack of talent and the address the issue directly. This approach may bring
necessity to focus on capacity building to support about a more standardised and controlled pricing
the private market and the LEAP market. environment for advisory services related to SME
listings, promoting fairness and transparency in the
To ensure the governance process of listing in process.
LEAP is adequately addressed, VC and PE players

41 Moratorium on share disposal for promoters in LEAP market for 12 months from the date of admission and subsequently, at least 45% must
be retained for another 36 months.

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Policy Recommendations

4.4.2 Reshape LEAP market to become a niche/specialised SME

market exchange
To bolster structural economic reforms in Malaysia, 2. Broadening investors category: The LEAP
the government, under the Madani Economy market currently is only accessible to
Framework, has introduced the NETR and the sophisticated investors. SC Malaysia plans to
NIMP. These initiatives aim to propel the Malaysian widen the sophisticated investors base by
economy into a modern, high-income state by the providing flexibilities within the calculation of
end of the decade. In this transformative journey, high-net-worth individuals (HNWIs) threshold.
SMEs play a pivotal role, and the LEAP market can SC is likely to expand the qualification of
be instrumental in facilitating fundraising exercises sophisticated investors to account for their
for these emerging growth-oriented, technologically knowledge and expertise as well as extend
advanced, and innovative SMEs. angel investors’ participation.42 While
widening the sophisticated investors base
The NETR and NIMP have identified key priority will increase the investor pool, liberalising
sectors that necessitate substantial capital allocation. the LEAP market would allow retailers
However, the government alone may not have to benefit from economic opportunities
sufficient fiscal space to finance these ambitious coming from NIMP and NETR. Efforts
plans. For instance, the NETR estimates a need for should also be made to attract institutional
RM1.85 trillion by 2050, while NIMP 2030 is projected investors, specifically the Government Linked
to require RM95 billion for the plan period. To bridge Investment Companies (GLICs) to participate
this financial gap, the LEAP market can serve as in LEAP, which is directly linked to NETR and
a strategic platform for SMEs to access funding, NIMP related projects. The Co-investment
fostering economic growth and innovation in Fund (CoSIF) under NIMP 2030 should be
alignment with the national economic agenda. expanded to SMEs listed in the LEAP market
and not restricted to only the main market or
Positioning the LEAP market to finance NIMP and ACE market.
NETR projects, with a specific focus on SMEs, can
be a strategic move. Drawing inspiration from the 3. Flexible weighted voting right structure:
Specialist Technology Company listing route in Hong Listed companies in the LEAP market should
Kong, tailored for tech companies, the LEAP market be allowed to adopt a weighted voting rights
could adopt a similar approach for green enterprises. (WVR) structure, which allows the founders
To make the LEAP market more attractive for and management to maintain control of the
investors and issuers in financing NIMP and NETR company. This is important to address trust
projects, the following changes could be considered: and control issues highlighted in the survey
and interviews. Companies venturing in the
1. Special listing track: Introduce a dedicated new growth areas under NETR and NIMP
listing track for companies seeking financing may need to maintain control to preserve
for NIMP and NETR projects. This involves the entrepreneurial culture, technological
streamlining the application and review drive and vision of the SMEs and startups.
process, leveraging technology such as The WVR structure in Hong Kong, which
blockchain and Artificial Intelligence (AI) specifically focuses on innovative companies
for documentation and licensing to enhance and is reviewed on a case-by-case basis
efficiency and transparency. can be used as a basic structure for WVR

42 See https://www.thestar.com.my/business/business-news/2023/06/15/sc-to-widen-sophisticated-investors-base-says-md

98
 implementation of the LEAP market for the With a re-evaluation of the LEAP market,
NETR and NIMP companies. focusing on niche areas to finance energy
transition and new growth industries under
4. Dedicated grants: Introduce a dedicated NETR and NIMP, the goal of transforming SMEs
listing grant for SMEs directly engaged in to contribute 50% of GDP can be accelerated.
NETR and NIMP projects. Subsidise or absorb This approach aligns with the broader economic
listing costs to attract SMEs to list on the vision and supports the government’s efforts
LEAP market. towards structural economic reforms.

5. Tax incentives: Offer tax breaks for

companies involved in NETR and NIMP
projects, encouraging more investors to list in
this space.

4.4.3 Setting the stage for a more vibrant M&A environment

The presence of a viable exit strategy is a pivotal European exit strategy data also reveals that only
factor in late-stage financing for SMEs, particularly 0.2% of European companies exit via an IPO, further
for VC and PE funds seeking potential investment underscoring the crucial role M&A plays in SME and
returns. These funds typically derive returns from startup exits.
capital gains not only through listings but also M&A
activities. Therefore, the broadening exit options With greater liquidity in private markets, SMEs
for SMEs is a crucial and often understated element are increasingly more inclined towards M&A and
for market-based financing. According to ICMR’s trade sales opportunities, hoping to leverage
interviews with local startups and SMEs, there is a other benefits such as enhanced market access,
prevailing sentiment that the current LEAP market superior technology, or exclusive information from
might not be their preferred exit route. Instead, they potential investors or acquirers. M&A can serve
often find themselves having to wait for an exit via as a powerful growth catalyst for SMEs, enabling
the IPO route, either through ACE or Bursa main them to expand their customer base, acquire new
market listing or alternatively look to list in a foreign technology, acquire talent, achieve economies of
market, due to various factors. A prolonged waiting scale, and increase overall value through post-
period for founders and investors to realise their merger synergies. However, a common observation
investments can also have spillover effects on the is that there is a scarcity of M&A deals in Malaysia,
VC and PE industry in Malaysia. particularly among local SMEs and startups.

Landström and Mason (2012) emphasised that Unlike Singapore and Indonesia, where numerous
difficulties in selling shares or the inability to unicorns engage in cross-border M&As to enhance
engineer M&A deals hinder the expansion of VC scalability, Malaysian companies have been
& PE, limiting their capacity to invest in newer relatively lagging in this aspect. As of 2021, only
SMEs or startups. Additionally, Silicon Valley Bank one Malaysian unicorn engaged in M&A acquisition
reports that the majority of successful startup exits compared to 49 deals concluded by unicorns
occur not through IPOs but through M&A deals. headquartered in Singapore.43 Most M&As in

43 See ASEAN Investment Report (2022) Pandemic Recovery and Investment Facilitation : https://asean.org/wp-content/uploads/2022/10/
AIR2022-Web-Online-Final-211022.pdf

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Policy Recommendations

Malaysia are focused on expanding market access Government Linked Companies (GLCs) in
and strengthening technological capabilities. M&A activities, there should be efforts to
establish a stronger link between GLCs and
For SMEs to fully harness the potential of the local SMEs. This collaboration should be
business landscape and reposition themselves a priority in GLCs’ agendas, aligning with
in a changing market, larger corporations and their reform objectives to support economic
Multinational Companies (MNCs) play a critical role. growth in Malaysia.
Malaysia is able to leverage the presence of GLCs
which can take the lead in building partnerships 4. Tailored incentives: Capitalise on the
and providing support for smaller businesses. This attractiveness of tax and non-tax incentives
is not merely about business growth; it is also about for local and foreign companies engaging in
crafting a sustainable, collaborative ecosystem M&A deals with local SMEs. This approach
where businesses of all sizes thrive together. can be applied on a case-by-case basis,
Although M&A deals may slow down during times with a specific focus on new growth areas
of uncertainty, with a clear policy direction, M&A identified in NIMP 2030 and NETR.
could present a unique opportunity to strengthen
the SME ecosystem in Malaysia. 5. Corporate Venture Capital (CVC) incentives:
Introduce incentives for corporates and
To achieve robust growth and encourage M&A MNCs to take equity positions in SMEs and
activities involving SMEs, targeted incentives are contribute to mentorship and capacity-
crucial: building programmes. Revenue-generating
corporates should be eligible for tax
1. FDI attraction incentives: Investment incentives to initiate offshoot startups
incentives to attract FDI to Malaysia should or engage in recycling entrepreneurship
extend beyond greenfield investments and through the acquisition of domestic startups.
also focus on attracting FDI through the Encouraging CVC activities can facilitate
M&A channel, with particular emphasis on the transition from family-owned businesses
SMEs. Encouraging SMEs to engage in M&A to more transparent business activities,
deals with MNCs looking to diversify their enriching smaller businesses and providing
production base can be a strategic approach corporates with fresh perspectives and
to expanding businesses quickly and potential innovation pathways.
integrating with the global value chain.
6. Exemption from Capital Gains Tax (CGT):
2. Complex financing support: Recognising Considering the upcoming 10% Capital Gains
the complexity of financing requirements for Tax (CGT) effective from March 1, 2024,
M&A compared to greenfield investments, exemptions should be provided for SMEs
the equity and bond markets should engaging in M&A deals to further grow their
be leveraged to further strengthen the business, with a specific focus on innovation
competitive landscape for financing M&A and new growth areas within the NETR
activities. Venture funds, through equity or and NIMP sectors. This exemption can be
debt financing, can play a role in co-financing subject to evaluation on a case-to-case basis,
SMEs engaged in M&A activities, fostering promoting a dynamic M&A ecosystem. While
regional and global competitiveness. listed shares and venture capital are set to
enjoy exemptions, extending this benefit to
3. Government Linked Companies (GLCs) SMEs involved in M&A deals will mitigate
participation: In response to SMEs expressing potential challenges posed by the new tax
a desire for increased participation from regimen.

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4.4.4 A renewed focus on driving corporate value via capital
market reform

The Malaysian equity market has experienced upholding the objectives of these roadmaps.
lacklustre growth, with the main market growing Our proposal to reshape the LEAP market by
at only a 1.7% annualised rate from 2012 to 2022. focusing on niche areas covering new growth
This can be attributed to both supply and demand sectors is an attempt to move our SMEs
issues. On the supply side, Malaysia needs more towards becoming high-growth SMEs.
innovative and “investor-ready” SME firms to attract
interest from domestic and foreign investors and 2. Drawing from international best practices:
improve market vibrancy. On the demand side, there Learning from Japan’s transformative
is a need for revitalisation to attract both local and business model can provide significant
foreign investors. insights. Their focus on capital management
KPIs and corporate governance reforms, such
Efforts toward revitalisation have been initiated, as introducing a skills matrix for independent
including the introduction of transfer frameworks directors has driven value to their stock
such as the LEAP Market Transfer Framework and market. Malaysia can adapt and implement
plans for automatic graduation from ACE to the some of these strategies to reinvigorate our
Main market. Regulators have also announced domestic capital market.
measures like fractional shares trading to encourage
more retail investor participation. 3. Valuation focus: Emulating the structural
reforms by the Tokyo Stock Exchange,
However, there are further areas of improvement Malaysia can focus on companies’ valuation
that regulators can consider to revitalise the to enhance shareholder value. Requiring
domestic equity market. Drawing inspiration from companies with a price-to-book ratio (PBR)
international benchmarks particularly in the context below 1 time to show improvement and
of ESG considerations, can enhance the intrinsic disclose their plans can prompt proactive
and perceived value of businesses. Here are some engagement from management teams. In
proposed approaches: the case of Malaysia, our analysis of the
Bloomberg data show that 52%44 of PLCs
1. Aligning with national policies: Aligning listed in main market are trading at below
the corporate sector growth strategy with the book value. Requiring the management
national blueprints such as the NETR and team to disclose their plans to increase
NIMP 2030 is crucial. Malaysian businesses, shareholders’ value and allowing investors
including those listed on the LEAP market, to track those plans will reinvigorate interest
can strategically position themselves of investors to invest in Malaysia’s domestic
to support these directives, actively equities.
participating in the green transition and

44 Data as at 23rd November 2023. Calculation based on proportion of companies listed on Bursa Malaysia with a current price to book ratio
less than 1. In total, 539 companies met this criteria of which 10 were constituents of the KLCI Index and a further 22 were constituents of
the FBM70 Index.

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Policy Recommendations

Figure 4.9:
Tokyo Stock Exchange reforms

Revised Japan’s
Three-tier Market Reforms focused
Corporate Other reforms
Structure on Valuation
Governance Code

• Prime Market: Must • All companies listed • 1/3 of prime market • TSE has made it
have a market in Prime and board members as easier for investors to
capitalisation of at Standard to become independent directors access information
least JPY 10 billion, more strongly aware about listed
total profits for the of raising their • Promote diversity in companies i.e. Japan
past two years of at corporate values senior management Direct Market (JDM)
least JPY 2.5 billion, e.g. more women, program where
and shareholder • Companies with foreigners and foreigners can trade
equity of at least JPY priceto-book ratio midcareer through their own
5 billion. They must (PBR) below need to professional to senior broker without going
also have a board of show improvement positions through a Japanese
directors with at least and disclose their broker
one-third plans. • Develop basic policy
independent on sustainability • TSE launched JPX
directors. • JPX introduced Prime Investor Relations
150 Index where the • Succession plan for that provides detailed
• Standard Market: selection based on 1. their CEO information about
must have a market Top 75 based on PBR each company listed
capitalisation of at more than 1.0 times • Requiring companies on the TSE.
least JPY 1 billion and and 2. Top 75 based to have a clear policy
total profits for the on estimated equity on executive • Expansion of trading
past two years of at spread (difference compensation. This hours
least JPY 1 billion. between return on policy should be
They must also have a equity (ROE) and aligned with the
board of directors Cost of Equity. company's long-term
with at least two strategy and should
independent • Focus on valuation be transparent to
directors. will make shareholders.
management team in
• Growth Market: must Japan doing
have a market proactive role to
capitalisation of at create shareholders
least JPY 500 million. value.
They are not required
to have a certain level
of profitability or
corporate
governance.

Source: Japan Exchange Group45

45 Japan Exchange Group, Overview of Market Restructuring, refer to https://www.jpx.co.jp/english/equities/market-restructure/market-

segments/index.html

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4.5 Recommendation 4: Strengthening the SME ecosystem:
beyond financing

In our commitment to enhance SMEs, we advocate environment that is inclusive, addressing the
for a holistic ecosystem approach that goes beyond shortage of human capital by focusing on talent and
merely focusing on traditional financing paradigms capacity development. Furthermore, the approach
to support SME growth. The strategy emphasises supports the imperative for internationalisation of
integrating financial technology to enhance reach SMEs, contributing to the resilient and sustainable
and improve the efficiency of capital allocation. growth of Malaysia’s economy.
Additionally, it aims to foster an entrepreneurial

4.5.1 Leveraging on FinTech for financial inclusion

The FinTech landscape in Malaysia is still in its nascent Policymakers and industry players should actively
stage. In April 2022, BNM announced the issuance of promote the adoption of FinTech by SMEs through
five digital banking licenses, with three consortiums initiatives such as:
operating under the Financial Service Act 2013 and
two under the Islamic Financial Service Act 2013. Even 1. Raising awareness and education: Our survey
before the advent of digital banks, SC introduced and interview findings have highlighted a notable
FinTech initiatives in various areas, encompassing lack of knowledge and awareness among SMEs
Digital Investment Managers, RMOs, and Digital regarding market-based financing. Interviews
Asset Custodians. The FinTech industry is expected with SMEs revealed a surprising lack of awareness
to enhance access to funding, bring innovation to about P2P and ECF platforms, despite their
financial services, and contribute to making financial existence since 2016. Moreover, the campaigns
services more inclusive through digital platforms. promoting crowdfunding activities have primarily
focused on the Klang Valley region, resulting in
Despite the impressive growth of FinTech in limited reachability to areas such as Kelantan,
Malaysia, particularly with P2P and ECF registering Terengganu, Sabah, and Sarawak.
annualised growth rates of 54.8% and 30.6%
respectively, from 2018 to 2022, the country’s To address this awareness gap, it is imperative
performance in attracting FinTech funding still for RMOs and regulators to actively promote
lags behind regional peers such as Singapore and ECF and P2P platforms. This can be achieved
Indonesia. These two countries accounted for 86% through online channels and by engaging with
of total FinTech funding in the region, while Malaysia business chambers, government agencies,
contributed only 4% during the same period. and state development agencies. Our survey
indicates that SMEs prefer receiving information
Therefore, concerted efforts should be made through these channels, emphasising the
to facilitate and promote FinTech growth in importance of targeted and strategic outreach
Malaysia, especially considering its potential to efforts. By expanding the geographical reach of
revolutionise the SME financing landscape. FinTech awareness campaigns and leveraging preferred
solutions offer innovative and accessible financing information channels, regulators can contribute
alternatives, expanding the reach of financial to increasing SME participation in market-based
services to underserved and underbanked SMEs. financing options.

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Policy Recommendations

2. Facilitating partnerships between traditional A study by Magoulios and Kydros (2011)

financial institutions (FI) and FinTech found that women entrepreneurs around
companies: Encouraging collaboration between the world find it difficult to access finance,
traditional FIs and FinTech companies is crucial especially in the developing countries.
to leverage the expertise of both sectors and The challenge of women accessing bank
develop tailored FinTech solutions for SMEs. financing is more pronounced compared to
Notably, some digital banks in Malaysia have other financial resources. Hence, developed
already partnered with FIs. In the realm of economies such as the EU have created
ECF and P2P RMOs, establishing partnerships a specialised financial tool to support
with FIs can prove beneficial in areas such as entrepreneurship among women.
data sharing, digital expertise, joint marketing
initiatives, digital onboarding, and account In Malaysia, establishing dedicated funds to
management. provide access to capital and mentorship
for women and youth-led businesses
This collaborative approach between FIs and using market-based financing tools would
FinTech entities can yield mutual benefits, foster female and youth entrepreneurship,
offering SMEs increased accessibility and a wider encourage innovation, and promote
array of financing options. The expertise of economic empowerment. This focus is in
traditional financial institutions, coupled with the line with survey findings that highlight the
innovation and agility of FinTech companies, can high preference of women and youth to
result in the creation of specialised and effective use market-based financing to grow their
solutions tailored to the unique needs of SMEs. businesses.
By fostering such partnerships, the financial
ecosystem can evolve to better serve SMEs, b. SME digitalisation funds: Allocate funds to
facilitating their growth and fostering a more support SMEs in adopting digital technologies
inclusive and dynamic financial landscape. and enhancing their online presence. This
initiative aims to drive digital transformation
3. Targeted and thematic funds aligned with and enhance competitiveness among SMEs,
national policies: To address specific financing ensuring they are well-positioned in the
needs and promote inclusive growth, the digital economy. This will complement the
government should consider establishing SME Automation and Digitalisation Facility
thematic funds aligned with national priorities. (ADF) by BNM, which will be available until
These funds can be distributed by FinTech the full utilisation of RM1.5 billion facility to
platforms to increase reachability and serve help SMEs accelerate digital adaptation.
the financing needs of underserved groups.
Government agencies and individual ministries c. Community-based funds: Establish funds
can collaborate with P2P and ECF platforms, tailored to the needs of SMEs operating
adopting a model similar to that used in MyCif. in underserved and rural communities,
Ministries and government agencies can co- promoting regional development and
fund thematic programmes, setting their own economic inclusion. This includes supporting
targeted Key Performance Indicators (KPIs) to “Rural Industry” initiatives that have a positive
fulfil their ministerial mandates. Areas to focus impact on local communities by creating jobs
on for thematic funds include: for rural residents. Such community-focused
funds can contribute to balanced economic
a. Women and youth entrepreneurs funds: growth and development across regions.
Women and youth play a critical role in
national economic development, but often
encounter challenges in accessing financing.

104
4.5.2 Data infrastructure to improve access to funding

Traditional lenders often impose stringent credit platform, linking it with fragmented data sources
requirements, creating challenges for SMEs seeking available in the market can be a valuable step.
funding. In contrast, FinTech companies leverage
alternative data sources and advanced analytics to While creating a single-window credit assessment
assess creditworthiness, easing the process for service by centralising all fragmented data is an ideal
SMEs to access essential funding. Despite these solution, it could be initially costly and complex.
advancements, the cost of funding remains a As a starting point, regulators and FinTech players
significant hindrance for SMEs. Our interviews with can identify key data sources in existing public
RMOs reveal that the availability of information and databases, such as SCORE from SME Corp. Malaysia
data is a persistent challenge in assessing SME and CCRIS from BNM, to improve credit assessment
creditworthiness. quality and provide funding at more efficient price
levels. Additionally, upcoming government initiatives,
To address this, one potential solution is to facilitate such as digital ID and e-invoicing, could further
the democratisation of data. Drawing inspiration enhance the database, providing a significant boost
from India’s success with the India Stack, which for the FinTech industry in Malaysia.
operates the Open Credit Enablement Network
(OCEN) to revolutionise SME financing, Malaysia Expanding the ImSME platform to showcase all
can explore similar initiatives. In Malaysia, the available funding options, including government
ImSME platform by CGC Malaysia serves as the funding and market-based financing, aligns with
country’s first online SME financing/loan referral recommendations from the NIMP 2030, enhancing
platform, connecting SMEs with financiers and transparency and accessibility for SMEs seeking
providing loan referral services. To enhance this diverse funding avenues.

Figure 4.10:
Democratising access to financing

Centralised Platform Linking Key Agencies to Provide Information

(1)
Centralised Platform
Application imSME (Loan Referral Platform)
1. KYC 4.
(SSM, Competitiveness
SMEs
Digital (SCORE-SME
ID) Corp. Malaysia) (2)
Consent to PDPA
2. Credit
History:
(CTOS,
5. Business Account
CCRIS)
Conduct : (3) Aggregator
(Governance, Request
3. Business Data
ESG & Shariah
Performance
Screening (4)
(LHDN, MyBijak (toolkits–CMM) Data Flows to
Niaga, E-Wallet &
Creditors, Lenders
E-Invoice)
& Investors

Source: Author, ImSME

105
Policy Recommendations

The process of how the Centralised Platform 4. Data is analysed by funding institutions to offer
operates is as follows: funding options to the SMEs, where the SMEs
can choose the best offer based on cost of
1. Application from SMEs for funding through the
funding, instruments and other criteria preferred
ImSME portal
by SMEs.
2. Consent under the Personal Data Protection Act
(PDPA) for the funding institutions to access The democratisation of data via a centralised platform
data related to the applicant will not only enhance access to financing but also
3. Setting up an Account Aggregator that become foster a proactive approach among SMEs in disclosing
a single point for the funding institutions to deal information, such as ESG metrics or participation in
with for information on the SMEs from various SCORE. The understanding that sharing such data can
data provides linking to credit history, company contribute to securing financing on more competitive
performance, Know Your Customer (KYC) and terms is likely to motivate SMEs to engage more
Business Conduct actively in this process.

106
4.5.3 Role of islamic and social finance

Malaysia, a global leader in Islamic finance, is 1. Concessional capital for SMEs: Concessional
strategically positioned to leverage its expertise to capital, offering more favourable terms
bolster support for SMEs. The government’s current than commercial sources, presents a unique
advocacy for “Halalan Tayyiban,” incorporating opportunity for SME financing. Industry players
both Halal and Tayyib principles, reinforces the and intermediaries can innovate by developing
role of Islamic finance in fostering sustainable financing models that blend private capital
development and ethical business practices within with Zakat, Sadaqa, and Waqf. This innovative
the SME sector. Embracing this framework opens approach combines financial sustainability
avenues for innovative solutions, such as Islamic with social impact, providing a harmonious
FinTech tailored for SMEs, sustainable financing balance for investors, issuers, and the economy.
practices, and educational initiatives to enhance Blended finance becomes an effective
SMEs’ understanding of Sharia-compliant financial instrument to attract private sector investments,
instruments. By aligning Islamic finance with the distributing and sharing risks among various
broader goals of responsible and sustainable stakeholders. The structure of this blended
business activities, Malaysia can further strengthen financing is outlined in Figure 4.11, showcasing
its SME ecosystem and contribute to global a strategic framework to catalyse SME growth
advancements in ethical finance. The following while addressing social and economic needs
identifies areas of improvement and strategic simultaneously.
initiatives where policymakers can focus on:

Figure 4.11:
Islamic blended financing for financing SMEs and social impact programme

Public & Private Sadaqa, Waqf,

Investment Zakat

1
3 Islamic Social
Stock Exchange

Blended 2
8 Financing Screening 4
Process:
Social Programme
Shariah & ESG
& Capacity
Development

Exchange Contracts,
Islamic Amanah Sharing Contracts,
Body Contributory
7 Contracts, P2P Real Economy,
Startups, MSME,
5 MTCs, Halal Hubs
Profit & Loss
Sharing &
Mark-up Equity, Flexible Debt,
VC, PE, ECF, LEAP

Source: Adopted from Khan (2020), Islamic Blended Finance for Impactful SMEs to achieve SDGs, The Singapore Economic Review.

107
Policy Recommendations

The blended financing framework is explained 7. Formation of an Islamic Amanah Body to

as follows: manage the return from investment and
1. Integrating public and private investment recycle the profit back to Waqf fund or
with Sadaqa, Waqf, and Zakat. The blended continue as Sadaqa.
fund is use for financing in Islamic Social 8. The public and private investors will receive
Stock Exchange, social programme, capacity a return on investment and satisfaction of
development and financing SMEs. providing social impact in the economy.
2. All programmes will be subject to Shariah and
ESG screening following “Halalan Tayyiban” Various types of blended financing can be
principles. developed, as outlined in Figure 4.12. However,
the success of blended financing hinges on the
3. Social enterprises can raise financing from
efficacy of the application tools. A study by
Islamic Social Exchange to fund social
Tonkonogy et al. (2018) reveals that blended
entrepreneurs.
finance in the clean energy sector has witnessed
4. The blended finance also could be directly considerable success, but subject to the need to
used for financing social programmes and bridge the gap between the types of instruments
capacity development programmes e.g. required and those available. Hence, the
MyWakaf complexity and structure of blended financing
5. Blended financing can be used directly to offerings, tailored to market demand, are crucial
finance SMEs through exchange contracts, factors in ensuring the effectiveness of blended
sharing contracts and contributory contracts financing instruments for SME financing. A
using equity, Flexible Debt i.e. RBF, VC, PE, thoughtful and market-responsive approach
ECF & LEAP will be essential for maximising the impact of
6. Return from the economic activities funded blended financing in supporting the growth of
under the blended financing instruments SMEs.
received as a Profit & Loss Sharing and Mark-
Up

Figure 4.12:
Conventional Blended instruments (CB) and Islamic Blended instruments (IB)

CB blending
IB blending Market
instruments & Additional information
instruments segment
structure

Grants Waqf, Sadaqah, Preparing, Religious-based philanthropic funds (Waqf, Sadaqah,

Zakat Pioneering Zakat) may be channelled to provide training for
entrepreneurs or towards the development of social
enterprises.

Repayable grants Qard Preparing, Qard is a form of collateral free loan that can be used
Pioneering, to support startups and SMEs by providing working
Facilitating capital and growth capital.

Guarantees Kafala (third party Pioneering, Kafalah is a guaranteed contract on assets, usufruct,
guarantee) Facilitating, and/or services provided by a guarantor. In the
Anchoring context of blended finance, Kafalah can be used
to reduce risks of private investors by means of
government funding.

108
 CB blending
IB blending Market
instruments & Additional information
instruments segment
structure

Debt (concessional Murabahah line Preparing, Murabahah is cost plus financing, where the parties
loans) of credit, Sukuk, Pioneering, involved agree upon a markup on the credit line.
Salam, Istisna’ Facilitating,
Anchoring Employing Murabahah for a concessional loan
structure ensures a lower financing rate which is
supportive of companies within the growth stage of
the life cycle.

Debt (market rate) Murabahah line Anchoring, Introducing different structures allows for better
of credit, Sukuk, Transitioning access to finance across a variety of SMEs. A market
Salam, Istisna’ rate driven Murabahah is better suited to more
mature SMEs.

Equity (first loss Unrestricted Preparing, Mudarabah and Musharakah are collaborations or
absorber /risk Mudarabah, Pioneering partnerships that follow a profit and loss sharing
capital) Musharakah structure. Under the Mudarabah structure, the
mudarib (manager) bears the risk of loss up to the
amount of capital provided, whereas all parties under
the musharakah contract share the risks based on
their share of capital.

Market-based equity Musharakah Anchoring, Similar to the market rate driven Murabahah, this
(diminishing), Transitioning structure is more suited to mature SMEs.
Mudarabah

Technical assistance Waqf, Sadaqah, All stages of Religious-based philanthropic funds may also
Zakat the life cycle be channelled to provide technical assistance to
entrepreneurs in need
Source: Khan (2020)

2. Leveraging on Waqf assets for financing SMEs: Structured to address key areas such as
The BNM and SC underscores a concerted education, healthcare, property investment,
effort to harness the potential of Waqf assets financial instruments, and community
for economic and social progress in Malaysia. empowerment, myWakaf is a comprehensive
At the forefront of this initiative is myWakaf, initiative. Notably, it extends its support to
a programme steered by six Islamic banks startups and SMEs, exemplifying the versatility
affiliated with the Association of Islamic Banking of Waqf funds in promoting economic
and Financial Institutions Malaysia (AIBIM). sustainability. The structure of the Waqf fund
Operating under the oversight of the State within myWakaf is detailed in Figure 4.13,
Islamic Religious Council (SIRC), myWakaf showcasing a strategic framework that aligns
employs economic instruments to foster financial with national development priorities and
inclusion and empower society. enhances the societal impact of Waqf assets.

109
Policy Recommendations

Figure 4.13:
myWakaf Framework

Source: myWakaf

To further amplify the societal impact of serves as a precedent for using waqf assets
myWakaf, we propose an extension of myWakaf in social investments. CWSL in Indonesia has
initiatives to include Shariah-compliant P2P and effectively addressed short-term financing needs
ECF RMOs. Given their extensive experience for social infrastructure and impactful projects.
in managing crowdfunding and existing
connections to the Malaysian crowdfunding However, it is crucial to note that the current
market, integrating these platforms aligns legal and regulatory framework in Malaysia
seamlessly with myWakaf’s objective of fostering presents challenges for the development of
inclusive development. CWSL. The decentralised nature of Malaysia’s
Waqf legal and regulatory framework,
A particularly promising project within this administered at the state level, poses obstacles
expansion could involve the development of to scaling the structure and operations of
Cash Waqf-Linked Sukuk (CWSL) in Malaysia. A CWSL. Reforms are imperative to establish a
study by Sherin et al. (2023) has demonstrated conducive environment for digital, retail, and
the viability of CWSL in the Malaysian context. institutional investors to participate in CWSL
Indonesia’s successful introduction of CWSL in projects, unlocking its full potential for societal
2020, supported by the National Waqf Movement, development in Malaysia.

110
3. Entrepreneurship to all - fostering inclusivity that the government provides a basic living
in startup ecosystem: The “Entrepreneurship allowance for young entrepreneurs from low-
to All” programme is envisioned to create a income households who secure grants for
level playing field for aspiring entrepreneurs, ideation, such as the CIP Spark from Cradle or
particularly those from low-income households, other R&D grants from government agencies
providing them the opportunity to pursue (refer to Figure 4.14).
their business ideas. Recognising the financial
challenges faced by young startup founders This living allowance, extended for a
during the ideation and early startup stages, the duration of 6 to 12 months, aims to empower
programme aims to support their basic needs entrepreneurs to fully concentrate on expanding
through a monthly living allowance. Contrary to their businesses. Drawing inspiration from
the notion that founders should independently Finland’s Starttiraha programme, where
sustain themselves during this phase, the reality aspiring entrepreneurs receive a basic living
is that early-stage startups often struggle to allowance of approximately €750 euros a month
generate sufficient revenue. for a maximum of 12 months, this support
mechanism aims to encourage more young
Based on insights gained from interviews with Malaysians, irrespective of their family economic
startup founders and funding agencies, it is background, to venture into business. By easing
evident that grants allocated for ideation and financial burdens, the “Entrepreneurship to All”
early startup phases may not cover the basic programme seeks to nurture an entrepreneurial
needs of founders. Young entrepreneurs, often culture among the young generation,
backed by family and friends, face financial contributing to the vibrancy and diversity of
constraints that hinder their ability to focus on Malaysia’s startup ecosystem.
business growth. To address this, we propose

Figure 4.14:
Entrepreneurship for all framework

Grant Recipients
E.g
CIP Spark, R&D Apply
Grants
Ideation Stage

Young recipient from

low-income household Grant for R&D, business development
qualifies and commercialization expenses

Entreprenuership
for All
Monthly living allowance for
6 to 12 months

Source: Author

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Policy Recommendations

4.5.4 Growing talent and financial education

In light of the key challenges identified in Malaysia’s the needs of a rapidly evolving economy. This
current SME landscape, alongside the insights holistic talent strategy will not only empower
from surveys and interviews, it is evident that SMEs with skilled professionals but also
nurturing top-tier talent and enhancing financial contribute to the overall economic resilience and
education are pivotal for the enduring growth competitiveness of the nation.
of the country’s SME ecosystem. By addressing
critical aspects of talent and capacity building as The Malaysia Startup Ecosystem Roadmap
well as enhancing the role of university industry provides a strategic framework, emphasising
linkages, SMEs ecosystem in Malaysia could be intensive programmes for graduates of Higher
strengthened further and provide a boost to our Education Institutions (HEIs) and Technical
SMEs to be competitive. We propose the following Vocational Education Training (TVET) students.
recommendations to grow talent and financial Leveraging and expanding existing initiatives,
development in Malaysia’s SMEs: such as the Digital Maker Programme and
Digital Maker Hub, will contribute to tapping
1. Building talent to strengthen SME ecosystem: To into a broader pool of tech talent, ensuring a
reinforce Malaysia’s SME ecosystem and tackle robust supply of skilled individuals for the SME
the prevalent talent shortage, a comprehensive ecosystem.
strategy is essential. The IMD’s World Talent
Ranking highlights a significant disparity Learning from Singapore’s success in attracting
between Malaysia and Singapore in aligning global talent through strategic immigration
education with the demands of a competitive policies could help to address the local talent
economy. Addressing this gap necessitates shortage in Malaysia. The government needs
collaborative efforts involving the Ministry to streamline the visa approval processes for
of Education and universities to synchronise foreign tech talent in order to align seamlessly
educational curricula with industry needs. with the goals outlined in the Malaysia Startup
Ecosystem Roadmap. This not only facilitates
Taking cues from successful models in the rapid integration of global tech professionals
Singapore, Switzerland, and South Korea, but also positions Malaysia as an attractive
Malaysia should make consistent investments and competitive destination for innovative and
in vocational and higher education institutions. technologically skilled individuals.
The unwavering commitment demonstrated
by institutions like the National University of Enhancing existing programmes like the Malaysia
Singapore and Nanyang Technological University Tech Entrepreneur Programme (MTEP) through
sets a benchmark for educational excellence. a collaborative effort between public and private
Additionally, valuable insights can be gleaned sectors is crucial. This programme, acting as
from the Swiss education system, which a magnet for global tech talent, significantly
seamlessly integrates vocational training at the contributes to fostering a diverse and dynamic
secondary school level with university education, ecosystem within the country.
cultivating a highly qualified workforce.
Recognising the urgency of upskilling and
By emulating these successful approaches, reskilling initiatives is essential. A collaborative
Malaysia can bridge the talent gap, ensuring framework involving government agencies,
that its education system is finely attuned to educational institutions, and private enterprises

112
 must be established. By drawing inspiration and private accelerators, along with direct
from successful models such as SkillsFuture financial support, attract global accelerators,
in Singapore and the Future Skills Centre in enhancing access to formal funding. Returns
Canada, Malaysia can implement targeted on equity extracted from participating
reskilling programmes that champion continuous ventures, a proven strategy elsewhere, can
learning. This national reskilling programme promote financial sustainability and align the
should offer opportunities for individuals to interests of accelerators with the success of
upgrade their skills at various career stages, supported ventures.
ensuring a workforce equipped with the latest
competencies demanded by evolving industries. Another strategic focus should extend to the
active involvement of universities. Drawing
Additionally, a Malaysian adaptation of the talent inspiration from successful models like
development grant could strategically focus on Seoul National University (SNU) in Korea,
cultivating skills and funnelling graduates into which established Seoul Techno Holdings,
VCs. This approach would address the prevailing a company aimed at commercialising and
talent scarcity in Malaysia, fostering a more supporting technology and startups affiliated
robust and informed financial ecosystem. Hence, with SNU, Malaysia can explore similar
adopting these strategies will not only bridge endeavours. Seoul Techno Holdings offers
the talent gap but also fortify Malaysia’s SME investment to technology-based startup
ecosystem, making it more resilient, competitive, companies and operates various funds,
and adaptable to the dynamic demands of the including a mother fund and a growth finance
global market. investment fund, to support these startups.46
Founded in 2008 and based in Seoul, South
2. Capacity building programmes: Increase Korea, Seoul Techno Holdings stands as a
Quantity and Quality of Accelerators and successful example of how a university can
Incubators. In tandem with workforce play a pivotal role in nurturing and investing
development, there should be a concerted effort in technology-driven ventures. Encouraging
to enhance the capacity-building programmes Malaysian universities to establish their
for SMEs. This involves a two-fold strategy: accelerator programmes, complete with
dedicated funds raised internally, would not
a. Increase quantity of accelerator and only contribute to the expansion of high-
incubator programmes via co-investment quality programmes but also foster financial
programmes: Malaysia should focus on independence.
boosting the quantity of accelerator and
incubator programmes, recognising their b. Improve quality of accelerator and incubator
pivotal role in supporting high-growth programmes: Emphasis should not only
ventures. Sustaining these programmes be on quantity but also on the quality of
financially is challenging, making donor or accelerator and incubator programmes.
government support crucial. Flexibility in A meticulous selection process, favouring
support is essential, allowing accelerators independent companies led by internationally
to be responsive to evolving entrepreneurial proven entrepreneurs and executives, is
needs. Incentivising the establishment of crucial. Incorporating high-quality accelerator
more accelerator operators onshore, as programmes, akin to the Vigo programme
proven effective in Chile, can be a strategy. in Finland or Y Combinator in the United
Co-investments between the government States, can provide startups with invaluable

46 See CBInsights. (2023). Incubator/Accelerator: Seoul Techno Holding. https://www.cbinsights.com/investor/seoul-techno-holdings

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Policy Recommendations

mentorship and resources, propelling them to comprehensive impact assessments is

toward sustainable growth and success in the crucial, evaluating long-term KPIs and policy
global market. outcomes such as business growth, job
creation, and the sustainability of involved
In a concerted effort to drive innovation businesses which is divorced from the
and propel Malaysia towards a dynamic shortened political cycle. The reassessment
future, Khazanah Nasional has forged a should focus on the qualitative impact of
strategic partnership with Plug and Play, a these programmes on the skills, growth, and
global innovation platform headquartered innovation capabilities of SMEs. Initiatives
in Silicon Valley. This collaboration marks should be recalibrated to meet the specific
the launch of Plug and Play’s office in Kuala needs of CEOs and business leaders, ensuring
Lumpur, dedicated to supporting the “Future that learning and development programmes
Malaysia Programme.” This initiative signals are not just nominal but truly effective.
a commitment to fostering innovation,
creating a vibrant ecosystem that nurtures Moreover, there is a pressing need to include
emerging technologies and startups. Through education about market-based financing within
this partnership, Khazanah Nasional aims to these programmes. Addressing the significant
leverage Plug and Play’s global network and knowledge gap among SMEs in understanding
expertise to catalyse growth, positioning market-based financing will not only enhance
Malaysia at the forefront of innovation in the awareness but also empower SMEs to leverage
region. alternative financing avenues more effectively,
contributing to a more robust and impactful
To ensure the effectiveness and quality of entrepreneurial ecosystem in Malaysia.
entrepreneurial programmes, the implementation
of a robust assessment tool is imperative. Taking b. Skill development for strengthening SME
inspiration from established models such as the ecosystem: Skill development is a linchpin for
Seed Accelerator Rankings Project (SARP) and the growth and success of SMEs, impacting
the Global Accelerator Learning Initiative (GALI) all stakeholders within the ecosystem. A
can significantly enhance transparency and comprehensive skill enhancement strategy
provide entrepreneurs with valuable, distilled is essential not only for SMEs but also
guidance. for government agencies, educational
institutions, investors, accelerators, and
Models like SARP and GALI offer a framework incubators. This report places a particular
for evaluating and benchmarking the impact of emphasis on skill development within
entrepreneurial programmes. By adopting similar the context of capital market capacity
assessment tools, Malaysia can systematically building. Enhancing the competencies of
measure the success and effectiveness of its human capital serving the Malaysian capital
programmes, identifying areas for improvement markets, including intermediaries, sponsors,
and ensuring that entrepreneurs receive the and advisers, is pivotal. This ensures that
most beneficial support. This commitment to they possess the knowledge necessary
assessment and improvement will contribute to to understand and evaluate new growth
the overall advancement and sustainability of companies and high-tech SMEs.
Malaysia’s entrepreneurial ecosystem.
To support talent development in capital
a. Reassessing existing SME development market, various programme have been
programmes: A comprehensive reassessment introduced such as InvestED initiative by SC
of current SME development initiatives is Malaysia and Graduate Talent Programme by
imperative. Shifting from surface-level metrics Bursa Malaysia. These programmes aim to

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 provide on-the-job learning opportunities, the SME sector. To transform universities
networking opportunities, and leadership into vibrant hubs that not only disseminate
quality among young graduates in Malaysia. knowledge but also instil the skills and mindset
This will help to enhanced employability, essential for entrepreneurship and innovation,
build network and address talent issues in the Malaysia can draw inspiration from successful
capital market. models like the National University of Singapore
(NUS), recognised for producing thriving startup
c. Research talent development grant: A founders.
scheme focused on nurturing and developing
equity research talent in Malaysia. The To further support talent development within
government could provide matching grants to SMEs, Malaysia should prioritise robust
industry players to broaden and enhance the collaborations between the government,
research coverage of Malaysian-listed entities. academia, and the private sector. Leveraging
Under a matching scheme, industry players the concept of universities as Centres of
will co-invest in developing equity research Excellence, inspired by the likes of the Small
talent in Malaysia, including broadening the Business Innovation Research (SBIR) and
coverage to include ACE and LEAP market. Small Business Technology Transfer (STTR)
Programme in the United States, can bridge
The programme to train industry players can the gap between Government-Academia-
be co-developed between the Securities Industry. This collaborative model facilitates the
Industry Development Corporation (SIDC) commercialisation of innovations, contributing
and international financial institution to the growth of a vibrant entrepreneurial
institutes such as CFA Society Malaysia ecosystem.
(CFAM). This is also in line with the
Memorandum of Understanding signed Another successful model of university-industry
between SIDC and CFAM in 2021 to develop collaboration is exemplified by Venture Kick in
a strategic partnership centred on promoting Switzerland. The organisation was established
professional excellence and investor in 2007 with the express aim of doubling
education in Malaysia’s capital market. spin-offs from Swiss universities. Venture
Enhancing the quality and quantity of equity Kick offers direct contributions in the form of
research talent will help strengthen the grants and convertible loans, as well as indirect
capital market ecosystem in Malaysia. This will contributions including coaching and promotion
contribute to greater vibrancy and growth for the startups. To date, Venture Kick has
of the equity market in Malaysia. Through supported over 1,000 startups, of which 700 are
research coverage, attraction and accessibility growing high-tech companies, and assisted in
of platforms like the LEAP and ACE markets creating over 13,000 jobs.47
can be enhanced, creating a conducive
environment for the sustainable growth of the Another critical aspect of fostering innovation
Malaysian equity landscape. is revisiting universities’ Key Performance
Indicators (KPIs) and incentive structures related
3. University-industry linkages: Fostering robust to commercialisation and entrepreneurship.
university-industry linkages stands as a Learning from successful initiatives, such as
cornerstone for cultivating innovation culture substantial investments by institutions like
and entrepreneurial mindsets, especially within the National University of Singapore (NUS)

47 See Venture Kick website and 2022 annual report https://www.venturekick.ch/index.cfm?page=136332

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Policy Recommendations

and Nanyang Technological University (NTU), Mitigating the fear of failure is crucial for
Malaysia can adapt similar strategies. These fostering innovation. Allowing failure not
investments act as catalysts for innovation, only facilitates creative destruction but also
accelerating the transformation of academic encourages the entry of new, innovative firms
research into viable commercial entities. into the market. Capital allocation from both
public and private sectors to SMEs should
Furthermore, fortifying intellectual property be growth-oriented, rather than aimed at
(IP) and licensing rules is essential to create an safeguarding unproductive SMEs or larger
environment conducive to innovation. Emulating corporations from failure. In fact, permitting
the collaboration between NTU Singapore the failure of larger firms opens up new
and NUS to develop a common IP licensing opportunities for emerging SMEs. Daniel (2013)
framework can significantly expedite the highlighted various examples demonstrating
licensing and translation process for university how the failure of large corporations facilitates
technologies into spin-off companies. This the growth of new, innovative firms worldwide.
strategic move reduces the period from the usual For instance, in India, IBM decided to cease
five months to just one month, fostering a more operations in the late 1970s after the government
vibrant and dynamic innovation ecosystem in passed a law requiring foreign companies to
Malaysia. transfer 60% ownership to local shareholders.
This move led to thousands of IBM-trained
4. Fostering innovation and risk-taking culture: executives in India venturing into business
Legal Reforms in Malaysia: Mitigating the fear of process outsourcing (BPO) services, and some
failure is crucial for cultivating an environment even started their own software companies.
conducive to risk-taking and innovation
within the entrepreneurial landscape. The 5. Use of untapped resources: The government
recent amendments to the Insolvency Act, should leverage untapped resources to provide
in effect from October 6, 2023, underscore necessary support to assist SMEs to grow. These
the government’s commitment to providing a untapped resources include professional bodies,
second chance for bankrupt individuals. This civil society, retirees and volunteers to help SMEs
legal reform plays a pivotal role in indirectly and entrepreneurs with basic requirements for
alleviating the fear of failure, fostering an formalising their business, access to financing,
environment where entrepreneurs are more access to market and capacity building on
inclined to take calculated risks without the developing skills and competency of business
spectre of lifelong financial repercussions. acumen. The government could provide
tax relief, grants, awards or recognitions to
By offering a safety net for individuals facing these group for their contributions to SME
financial challenges, these legal reforms development in Malaysia. For example, the
contribute significantly to cultivating a culture government can consider providing tax incentives
where entrepreneurs feel empowered to for members of professional bodies such as
venture into new endeavours. This shift not only MICPA (Malaysia Institute of Certified Public
promotes innovation but also encourages a more Accountant) and MACS (Malaysia Association
resilient and dynamic entrepreneurial ecosystem of Company Secretaries), encouraging them
in Malaysia. Entrepreneurs, now assured of to offer personalised mentoring and training
a second chance, are more likely to explore to SMEs in areas such as business registration,
innovative ideas and undertake entrepreneurial documentation and disclosures, and basic
ventures with greater confidence, ultimately accounting requirements. SME Corp. Malaysia
contributing to the vibrancy and growth of can play a central role in coordinating this effort
Malaysia’s business landscape. by building partners similar to the role played by
Enterprise Singapore through their SME Centres.

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4.5.5 Broadening access to markets and supporting
internationalisation

Enhancing market access and supporting within CPTPP export markets. This will allow SMEs
internationalisation activities are crucial for the to expand their market with lower administration
development of SMEs in Malaysia. This is vital costs due to transparency in rules related to trade
not only for ensuring the country’s transition to a and investment under the CPTPP agreement.
high-income economy but also for strengthening
domestic business capabilities, with SMEs serving as Within the RCEP framework, participating nations
a key pillar in this endeavour. However, the current acknowledge the substantial contributions of
export performance of SMEs is lacklustre and SMEs to economic growth, employment, and
requires attention. innovation. As a result, there is a concerted effort
to promote information sharing and cooperation
Despite the goals outlined in the SME Masterplan, to enhance the capacity of SMEs to exploit the
the share of SMEs in overall exports remained low, opportunities arising from the RCEP Agreement.
accounting for only 13.5% in 2020. Alarmingly, this Chapter 14 of the RCEP agreement outlines
figure further declined to 10.5% in 2022, falling specific obligations among the parties, with the
significantly short of the targeted 23% set for 2020. aim of facilitating the sharing of RCEP-related
The primary contributing factor to this shortfall is the information relevant to SMEs. This involves
weakened linkage between Malaysia’s SMEs and the establishing and maintaining a publicly accessible
global value chain (GVC). information repository containing the full text
of the RCEP Agreement, trade and investment-
To foster the internationalisation of SMEs and related laws and regulations pertinent to SMEs,
address this issue, several considerations should be and other business-related information crucial for
taken into account: SMEs to derive maximum benefit from the RCEP
Agreement. Additionally, Chapter 14 also aims
1. Leverage bilateral, regional and multilateral to strengthen cooperation in key areas such as
trade agreements: Policymakers must formulate e-commerce, intellectual property rights, access
effective strategies to maximise the benefits to markets, and innovation. Government agencies
derived from Malaysia’s participation as a should take proactive measures to promote the
signatory in both bilateral and multilateral benefits of Free Trade Agreements (FTAs) and
Free Trade Agreements (FTA). The primary assist SMEs in exploring trade opportunities.
focus should be on enhancing the export
capabilities of our SMEs, particularly in light of In order for SMEs to effectively capitalise on
the transformative impact of the CPTPP and the trade agreements, a robust support system
RCEP on the global FTA landscape. is needed to provide guidance on updated
information regarding changes in documentation
Given that the CPTPP and RCEP collectively requirements, trade regulations, and standards
contribute 15.2% and 28.33% of global trade, set forth by trading partners. The establishment
respectively, Malaysia, as a signatory nation, should of an information portal and the formation of a
strategically position its SMEs to leverage these dedicated team to assist SMEs in navigating these
markets. It is noteworthy that both multilateral aspects would prove highly beneficial.
agreements explicitly recognise the crucial role
played by SMEs. For instance, CPTPP provides a 2. Leveraging Malaysia’s position within ASEAN:
great opportunity for SMEs to enjoy the benefit Malaysia’s strategic position within the
of zero tariffs and reduction in non-tariff barriers Association of Southeast Asian Nations (ASEAN)

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Policy Recommendations

provides unique advantages for supporting SMEs Malaysia, they initially started their operations
in their internationalisation efforts. Aligned with and business growth journey in Malaysia. With
the goals of the ASEAN Economic Community effective incentives and a flexible immigration
(AEC), the priority is to strengthen integration policy, positioning Malaysia as a regional
within ASEAN by enhancing the mobility of “Test Hub” would likely attract high-tech and
goods and people to create a single competitive innovative entrepreneurs from across the
market. Various initiatives have been undertaken region. The appeal of Malaysia as a testing
toward this objective, including the establishment hub could prompt entrepreneurs to launching
of the ASEAN Single Window platform and the their products and services, contributing to the
ASEAN Access Match platform. country’s development as a regional innovation
and a test hub.
The ASEAN Access platform serves as an
online information portal that supports the Bilateral R&D incentive programmes could further
internationalisation of SMEs in the region. enhance the role of Malaysia as a” Test Hub” of
Functioning as an information hub, it provides ASEAN region. The current structure of R&D
valuable insights into regional and international incentives predominantly favours companies
trade regulations, aiding SMEs in exploring new engaged in R&D activities within Malaysia. While
markets, particularly within ASEAN. The platform this approach encourages domestic innovation,
includes a database of distributors, business it may inadvertently discourage collaboration on
matchmakers, and other experts, facilitating R&D activities with firms outside of the country.
cross-border trade among SMEs and helping The focus on local R&D could limit the potential
overcome challenges in entering new markets. benefits of regional and global collaboration
and knowledge exchange. To optimise the
To further support SMEs in Malaysia, government effectiveness of R&D incentives, it might be
agencies and business chambers can play a vital worth considering a more inclusive approach
role in assisting them to register and benefit that recognises and rewards collaborative
from the ASEAN Access portal, granting them efforts, both domestically and internationally.
access to the broader ASEAN market. Registering The government could introduce a Bilateral
Malaysian SMEs on this platform holds the Research and Development (R&D) Incentives
potential to address connecting issues within Programme, fostering collaboration between
ASEAN and foster increased intra-regional trade. Malaysian SMEs and foreign companies or
institutions for the co-development of new
3. Malaysia as an ASEAN “test hub”: Given its technological or the enhancement of existing
comparatively smaller domestic market size technologies with commercialisation potential,
in comparison to countries like Indonesia, the thereby facilitating the internationalisation
Philippines, Thailand, and Vietnam, Malaysia of SMEs. For example, the government can
with our robust infrastructure and burgeoning provide incentives of up to 50% of the approved
middle-class consumer base, can be strategically R&D expenditure for Malaysian companies,
positioned as an ideal ASEAN “test hub.” This with the remainder sourced from their foreign
role would enable SMEs from across the region counterparts.
to test and launch their products and services
in the Malaysian market before considering Government incentinves exceeding 50% could be
further expansion. Malaysia has been a test hub considered for companies operating under FTA
for a various number of regional unicorns, such partnering countries, with a specific emphasis on
as Grab, Carsome, Airasia Digital, and Edotco. the ASEAN region. This approach is anticipated to
Even though some of them have chosen to expedite trade and technology adoption among
relocate their regional headquarters outside of SMEs, enabling them to scale up production, gain

118
 access to technological knowledge, and capture market. This approach can play a pivotal role in
new markets. It is worth noting that a similar boosting the contribution of services sector SMEs
incentive has proven successful in Israel.48 to Malaysia’s overall export landscape.

4. Focusing on exporting service sector SMEs: 5. Trade financing for SMEs: The role of financing
Malaysia should prioritise the promotion of is pivotal for the internationalisation of SMEs,
SMEs in the services sector, aligning with the and the NIMP has underscored the importance
sectorial distribution of SMEs that is heavily of encouraging more supply chain facilities for
skewed towards services, retail, and wholesale SMEs to optimise working capital and address cash
sectors, constituting 84% of the total. In contrast, flow needs. The existing P2P campaign is already
manufacturing accounts for only 6% of the offering invoice financing facilities. Furthermore,
distribution. Despite this, as of 2022, the export specialised RMOs like Capbay are providing specific
share of SMEs in services sector remains low, invoice factoring financing services to traders,
making up only 2.0% of Malaysia’s total exports. particularly SMEs, through a crowdfunding facility.

A targeted strategy must be formulated to To further enhance support for SMEs and foster
enable SMEs in the services sector to access innovation in financing their internationalisation
markets beyond Malaysia and promote their activities, it’s crucial to consider the inclusion
services globally. While SMEs currently utilise of more niche players in the financial landscape
e-commerce platforms for exporting goods to provide innovative form of trade financing in
beyond Malaysia, a comparable platform Malaysia, particularly supporting the SMEs. These
for delivering professional services such as specialised entities can bring targeted solutions
education, healthcare, legal, architecture and to address the unique challenges faced by SMEs
designing across the region is quite limited. in accessing the necessary funds for their global
Hence, supporting private sectors in the expansion. By encouraging the growth of such
development of a specialised e-commerce niche players, there is an opportunity to create
platform for this purpose could increase services a more diversified and responsive financial
sector exports of Malaysia. ecosystem, ultimately empowering SMEs in their
internationalisation endeavours.
Government agencies, such as MATRADE,
have demonstrated strong support through
capacity-building initiatives, notably the Mid-Tier
Companies Development Programme (MTCDP).
Under this programme, 323 Mid-Tier Companies
(MTCs) have been groomed, successfully
registering RM34 billion in cumulative revenue,
with 61% generated from exports. Moreover,
the MTCDP has also benefited 9,000 MSMEs
by appointing them as vendors and integrating
them into the global supply chain.

Taking the MTCDP as a successful model, the

capacity-building programme can be extended to
support MSMEs, particularly in the services sector,
fostering their growth in the international export

48 See https://innovationisrael.org.il/en/program/bilateral-programs-parallel-support

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Policy Recommendations

4.6 Conclusion

In conclusion, Malaysia’s SMEs are pivotal drivers embracing new technologies, and enhancing
of employment, innovation, and economic growth, competitiveness are vital for SME’s success. A
yet they grapple with unique challenges impeding robust SME ecosystem necessitates support
their development. Two primary areas of concern beyond transactional financing, encompassing
revolve around addressing funding needs across internationalisation, technology adoption, and
SMEs’ life cycle and fortifying the overall SME research and development. Fintech, including
ecosystem. Financing challenges vary at different P2P lending and ECF, plays a crucial role, and
stages, necessitating innovative solutions and active policies should ensure accessibility across all
government involvement to attract private capital segments, including youth and women. Islamic and
for SME investments. social finance, emphasising Zakat and Waqf, can
bolster SME development and foster fair resource
In the early stages, SMEs encounter difficulties distribution.
securing funding due to perceived high risks. The
government plays a crucial role in fostering a Equipping SMEs with skills and knowledge through
conducive environment for attracting private capital financial education and talent development is
investment to finance SMEs. As SMEs progress, essential for long-term sustainability. Broadening
acquiring growth capital becomes imperative for access to both domestic and international markets,
market-driven activities, internationalisation, and including through regional market accessing
sustainability efforts. In the more mature stage, platform, is pivotal for SME growth. This should
facilitating SMEs’ transition to the public market be complemented by market-based financing to
and broadening exit strategies for investors provide necessary support. By addressing financing
become paramount. Policymakers should adopt gaps and strengthening the SME ecosystem, the
a comprehensive and an ecosystem-focused path for SMEs to achieve high-growth, innovation,
approach, promoting diverse financing options and and greater international competitiveness becomes
addressing broader factors influencing SME success. more tangible.
Beyond financing, cultivating innovation culture,

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Chapter Five

Conclusion

121
Conclusion

T he role of SMEs in Malaysia’s economic

development is indispensable. The aspiration
to break away from being trapped in a middle-
crucial for SMEs, an equally important consideration
is the provision of diversified financing options
tailored to meet specific financing purposes. This
income economy will require the development of approach is essential for addressing the diverse
local capabilities, including enhancing the quality needs of SMEs at different stages of their business
and quantity of our entrepreneurs and SMEs. While cycle and for mitigating financing risks, ensuring
SMEs are commonly defined by their relative size the resilience of SMEs in the face of potential future
compared to larger businesses, measured by factors downturns.
such as employment, turnover, value of assets, or
other metrics, it is also important to recognise the The mapping of current financial instruments
heterogeneity of SMEs based on other factors such available to SMEs, presented in Chapter One of
as the background of their ownership, sectors, this report, illustrates that regulators have been
technology areas, and organisational behaviour facilitative in ensuring that SMEs have a variety of
(Raes, 2021). fundraising tools available, either through financial
institutions or market-based financing, across
Micro and traditional SMEs often focus on different development stages. However, through our
preserving their businesses, where stability and research, we identified gaps in access to financing
business continuity always take priority, and they at each business life cycle stage, which we address
do not aim to scale up their operations. This in the recommendation chapter 4. These gaps are
segment includes sole proprietorships and slower influenced by various factors, including limitations
growing or zero-growth firms, but they are not within SMEs themselves and other challenges
necessarily a group suitable for tapping capital within the financing ecosystem, such as those
markets (Shinozaki, 2014). In contrast, high-growth related to investors, intermediaries, regulators, and
startups and scale up SMEs are more driven by government agencies.
innovation, investment, and network expansion and
may require greater support from the government For this study, we investigated the role of SMEs
and more capital allocation to enable them to by conducting an enterprise-level survey and
explore their fullest potential. This is where market- qualitative interviews to comprehend their
based financing plays a particularly crucial role in experiences and willingness to raise financing
allocating capital to support the growth of these using market-based instruments. It was observed
types of SMEs. that only a small percentage of SMEs have utilised
market-based instruments for financing compared
It also aligns with our national target of increasing to other financial tools.
the share of SMEs in GDP from the current 38.4% to
50% by 2030, an average size of SME contribution Among SMEs that are aware of market-based
seen in OECD countries. The increase in the SME financing, their willingness to consider it is
share of GDP is also accompanied by a rise in contingent upon addressing concerns related to
employment opportunities, emphasising both the the higher cost of capital, ownership control, and
quality and quantity of job creation. Additionally, issues of trust. Meanwhile, for those unwilling to
there is a focus on enhancing SMEs’ capabilities to consider market-based financing, they attribute it to
compete in the global market by internationalising perceptions of complexity, high issuance costs, and
these SMEs. the approachability of capital market intermediaries
or RMOs. All this also points toward the need for
To ensure the achievement of this ambitious target, more market literacy to provide SMEs with sufficient
access to financing becomes a central focus of SME knowledge about market-based financing options
policies in Malaysia. Finance serves as a critical and how they function in order to enable them to
enabler for SMEs to initiate, expand, and grow make more informed financing decisions. SMEs have
their businesses. While gaining access to finance is found that financing-related information is scattered,

122
relying mostly on information within their networks To address this, it is crucial to establish inter-
through business chambers and from various firm linkages between SMEs and GLCs, MNCs,
government agencies. For startups, online sources and the corporate sector, fostering knowledge
are equally important as a source of information. transfer and technology spillover to support SME
Consequently, regulators, intermediaries, and RMOs growth and internationalisation. Strengthening
should build closer relationships with government networks and cooperation through mentorship,
agencies and business chambers nationwide to accelerator programmes, access to markets, and
disseminate information regarding market-based linking SMEs to global value chains can facilitate
financing instruments. this. The government can play an important role
in facilitating inter-firm linkages by providing both
Additionally, enhancing existing single-window tax and non-tax incentives. Simultaneously, market-
platforms for SMEs, such as the SMEinfo portal and based financing offers opportunities for equity
ImSME, can help reduce information asymmetry. investment and business partnerships with SMEs.
To improve credit assessment, financial institutions
can leverage existing fragmented data collected While market-based financing is gaining traction
from various government agencies and making among SMEs, it is essential to recognise that close
it accessible for sharing through a single-window to 90% of SMEs still rely on bank-related straight-
platform. Streamlining and centralising relevant debt financing. Our survey indicates that most
data will enhance the efficiency and effectiveness SMEs have experience with external financing from
of credit assessments for SMEs. This approach has banking institutions and less so from market-based
been successfully implemented in countries like financing. This report does not position market-
India to help SMEs access financing. Importantly, based financing as a competitor to bank financing
we encourage increased collaboration and credit but rather focuses on how both financing channels
data sharing for the mutual benefit of banking can complement each other. Both institutions,
institutions and capital market development in banks, and market-based financing entities can
Malaysia. provide broad guidelines and cross-cutting policy
strategies to ensure that SMEs are less burdened
Strengthening support provided to SMEs, with complicated compliance requirements, such as
including business development and handholding sustainability disclosures. Sharing data and credit
programmes, can help SMEs better understand the information will benefit both institutions and SMEs.
process of fundraising activities, fostering confidence
and trust in utilising market-based financing. To Our survey indicates that market-based
further incentivise support for SMEs, the government financing has the potential to be more inclusive,
can consider providing tax incentives for members particularly for attracting young entrepreneurs
of professional bodies such as MICPA and Malaysia and underrepresented groups such as women
Association of Company Secretaries (MACS), entrepreneurs. This is attributed to the digital
encouraging them to offer basic support to SMEs savviness of these groups and the challenges they
in areas such as registration, documentation, and face in raising financing through the traditional
fulfilling basic accounting requirements. banking sector, especially if they lack credit history
and collateral. In response, the government can
A significant challenge faced by SMEs in Malaysia consider diversifying its options for supporting SME
is the lack of internal capacity in areas such as financing by exploring market-based instruments
access to managerial skills, talent shortages, and for targeted thematic funds, such as those for
technology and innovation assets. Our survey women, youth, SME digitalisation, and community-
findings and interviews with SMEs and stakeholders based support.
in the SME ecosystem have underscored this issue.

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Conclusion

While the MyCif structure is available to support address other challenges faced by SMEs, including
crowdfunding financing, we encourage other knowledge constraints, limited managerial skills
government agencies to initiate similar programmes and business acumen, lack of financial management
and disburse some of their SME-based funding skills, access to technology and innovation assets,
through market-based financing channels. Beyond talent shortage, and the adaptation of digital
crowdfunding, an FoF structure can be considered, technologies, as well as embedding sustainability
by partnering with entities like Penjana Capital to principles within business organisations.
support the venture capital industry and promote
innovation in Malaysia. Approximately 78% of the According to the OECD (2023), policy responses
government’s total allocation to SME development to address the diversified needs of SMEs and
is directed towards financing SMEs, and this can be entrepreneurship should be divided into three focus
more effectively managed through collaboration areas: broad-based policies (e.g., tax, labour market,
using an FoF structure, particularly by partnering trade, or infrastructure), sectorial policies (e.g.,
with venture capital firms with international sectorial development such as renewable energy
experience. under the NETR), and targeting specific SMEs and
entrepreneurs (e.g., high growth and innovation-
It is crucial to note that the role of market-based driven ventures). These areas often cut across the
financing extends beyond pure transactional capital boundaries of ministries and government agencies,
raising but also includes business development as well as across levels of government (federal, state
support for business growth. Capital raised from and local governments), with considerable variation
market-based finance, often termed as “knowledge depending on institutional arrangements and the
capital” or “smart capital”, involves investors degree of decentralisation.
providing SMEs with capital and additional support
such as mentorship, access to markets, and Policy targeting specific SMEs and entrepreneurship
technology or knowledge spillovers. Our survey and is essential, especially for SMEs venturing into new
interviews reveal that firms opting for market-based growth areas where they face unique challenges
financing, like listing on the LEAP market or raising and high uncertainties. Yet, these ventures also
crowdfunding, do so not only for capital but also to have the potential to enjoy economic profits (alpha)
achieve other purposes such as branding, accessing and grow exponentially, becoming gazelles or
new markets, attracting talent, and facilitating ease potential unicorns. One-size-fits-all solutions do not
of financing. This multifaceted value proposition effectively address SMEs’ problems; instead, the
should be a focal point for RMOs, advisers, and approach should focus on policy interventions at
intermediaries to encourage market-based financing multiple levels, as recommended above.
among issuers and investors.
Therefore, with the support of market-based
In conclusion, the study emphasises the financing and policy interventions addressing SMEs’
indispensable role of market-based financing in needs at various levels, we are confident that SMEs
supporting SMEs in Malaysia, particularly those in Malaysia can contribute towards the targets set
driven by high growth, innovation, digitalisation under the National Entrepreneurship Policy 2030.
and ESG practises. Market-based financing not This shift will play a crucial role in elevating the
only provides capital for SMEs to grow but also contribution of SMEs to the GDP, making it a key
offers support beyond mere financial assistance. priority in Malaysia’s development strategy. It is a
However, the study also underscores that financing fundamental step towards leading the country in
alone cannot address all limitations within the breaking away from the middle-income trap and
SME ecosystem. Policies to support SMEs should fostering our transformation into becoming a resilient
not solely focus on financing but should equally and advanced economy with a focus on sustainability.

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