Fixing Malaysia’s zombie MSMEs

Why many MSMEs are not much more than the ‘walking dead’

Micro Small and medium enterprises (MSMEs) are the backbone of the Malaysian economy, amounting to 97.4 percent of total business enterprises in the country. That’s 1,226,494 businesses, where 903,174 are micro-enterprises.

MSMEs generate 38.2 percent of Malaysia’s GDP, and provide employment for 7.3 million people, or 47.8 percent of Malaysia’s total workforce, plus more within the informal sector. MSMEs accounted for more than RM 124.3 billion in exports, which was 11.7 percent of Malaysia’s aggregate exports in 2021.

MSMEs were the most affected group of businesses during the Covid-19 MCOs, of which many have still not fully recovered. This was not true of most of corporate Malaysia, and members of Malaysia’s 1.6 million strong civil service, who received regular pay rises during the same time.

Malaysia like many other countries suffered a contracting economy, where monetary policy instruments like interest rates didn’t assist MSMEs, because many have not borrowed through formal institutions. Their debt is much more complex, owing money to friends and relatives, and debt through creditors. The nexus of bankruptcies is clearly falling on those proprietors of MSMEs, due to the range of debt.

Many of Malaysia’s MSMEs have become nothing more than ‘walking dead’ enterprises, where they cannot afford to expand, are finding it very difficult to cover monthly costs, and can’t afford to shut down because of debt.

Funding

Financial institutions represent the prime source of finance for businesses. However, the eligibility criteria are out of the reach of most MSMEs. Thus, most MSMEs are ineligible, and thus unable to gear their businesses properly.

SME lending by banks to MSMEs has actually declined from 2014 to 2020. According to the OECD, only 20 percent of loans to MSMEs are funded by banks.

MSMEs also struggle to meet micro-credit criteria through TEKUN Nasional, and Amanah Ikhtia Malaysia. Most MSMEs fund themselves through savings, personal loans, friends and relatives, or funds from other sources attracting high interest repayments. Venture capital avenues are also out of the reach of most MSMEs, as they are not innovation-based start-ups, or have any competitive advantages that serve as barriers to entry to other firms. Venture capital and even crowd funding is geared more towards innovation-based start-ups, that are considered mid to upper-tier SMEs, which only make up 2.0 percent of the total number of SMEs.

This leaves most MSMEs short of funds for both working capital, expansion, digitization, and improving productivity. Some MSMEs are even unable to pay monthly salaries to employees until the middle of the month, and struggle to pay for materials and supplies to just keep operations going. Under such circumstances, many proprietors are living in poverty within their own businesses, as they are not able to pay themselves and adequate salary.

Market barriers to entry

The Malaysian government has placed a number of unusual restrictions upon SMEs opening and operating businesses in selected industries. These are institutional barriers to entry to marketplaces.

For a non-Bumiputera company to undertake multi-level marketing, the minimum paid-up capital required is RM 1,500,000 (RM 500,00 for a 100 percent Bumiputera company). For a single-level marketing, or postal order sales business, RM 500,000 is required for a non-Bumiputera company, and RM 100,000 is required for a Bumiputera company.

This puts direct marketing and postal order marketing channels out of the reach of most SMEs.

For companies manufacturing food, cosmetics, or traditional medicines, full GMP and HACCP certifications are required, which cost many hundreds of thousands of Ringgit to comply with. Traditional products also require full pharmaceutical registration, which wiped out the minyak gamat cottage industry in Langkawi, during the 1990s. There is no cottage industry class certification system in Malaysia, like other ASEAN countries.

MSMEs just cannot afford to enter these markets.

The archaic Approved Permit (AP), or import permits system still exists in Malaysia for many different types of items. Observation over the years has shown this has benefitted an elite group of people, at the cost of small-time entrepreneurs.

This raises the cost of goods and restricts entry into a number of markets.

There are also race-based equity restrictions for certain types of businesses like freight forwarding and customs agents. New forms must be 51 percent Bumiputera owned, unless they are foreign owned.

This restricts entry into a number of industries, and a disadvantage to non-Bumiputera companies.

 Malaysian pasarayas, supermarkets, and hyper-markets insist on enormous new line and promotional fees, which can cost up to 50 percent of sales for small SMEs. These are prohibitive costs for MSMEs that produce a small range of products. In addition, most retail outlets insist on 90 day payment cycles which severely strain liquidity of small businesses.

All the above factors severely limit the ability of MSMEs to find and develop their own markets.

Madani economic reforms

In the recent Madani economic policy framework, the prime minister Anwar Ibrahim last month presented a plan for MSMEs.

The new Madani economic reforms give special attention to SMEs, bringing RM 100 million for digitalization, RM 200 million for market development, and mid-tier company development programs, and RM 400 million in additional micro-financing. However, the devil will be in the details of how MSMEs can access these funds, and whether these funds will really reach needy enterprises.

It looks like micro-SMEs will lose out. While the government and appointed GLCs will invest RM 1.0 billion to match private funds in start-ups, especially technopreneurs, the bulk of MSMEs, will be outside the criteria for these grants.

The major issue with the Madani economic plan is that it didn’t properly undertake a situational audit of the existing stock of MSMEs to really find out their needs. The provision of grants and handouts has come top-down.

By far the majority of MSMEs are ‘hand to mouth’ operations, and require a completely different set of tools and reforms to allow them to regain buoyancy and potentially grow.

Such programs could include;

·        Access to part-time out of business hours education on relevant skills needed to start-up, operate and expand a business,

·        Move new sources of micro-finance into communities through developing savings and loans cooperatives, run by communities themselves,

·        Moving from an innovation through technology approach, towards an innovation through new ideas to create more business diversity within MSMEs,

·        Focus on the development of value adding activities within businesses, rather than a focus on raising productivity through Industry 4.0. initiatives. Adding value to present activities will bring greater benefits to MSMEs, than focusing on productivity orientations. This will make MSMEs much more agile,

·        Focus on appropriate technologies before jumping into Industry 4.0. technologies that few MSMEs can even afford, and

·        Undertake the reforms needed to solve the problems mentioned above, so the economy can further be deregulated for the benefit of the small business person.

Originally published in FMT 7th August 2023

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