Sarawak's small and medium-sized businesses thrive with increased financial support

Often standing in the shadows of mega-investments made by large international oil corporations, agriculture plantations and, more recently, mining companies, it is the multitude of Sarawak’s smaller, less heralded companies that account for the vast majority of business taking place in the state. Small and medium-sized enterprises (SMEs) accounted for nearly 99% of total registered companies in the country in 2013, and contributed approximately 33% of Malaysia’s GDP in 2014.

In spite of the growth of the sector and the mushrooming number of SMEs operating throughout Malaysia, the government continues to step up efforts to boost the efficiency of SMEs so as to increase their contribution to the national economy. The framework of this initiative is laid out in the SME Masterplan 2012-20, which seeks to improve their GDP contribution to 41% by 2020. Other major targets laid out in the plan include: increasing the SME employment share from 59% to 62%; increasing the export share from 19% to 25%; achieving a 6% annual increase in registration of new companies, including 10% annual growth for highgrowth and innovative firms; increasing labour productivity from RM47,000 ($14,297) to RM91,000 ($27,628); and intensifying formalisation to promote growth and fair competition by reducing the informal sector from 31% of gross national income in 2010 to 15% in 2020.

LOCAL FOCUS: Sarawak’s growing economy dovetails nicely into a number of the targets of the master plan, particularly in terms of improving the lot of ethnic Bumiputera populations as well as focusing on rural areas that pervade the state. “The government is committed to narrowing the income gap between rural and urban populations. This will require heavy investment in infrastructure,” Joseph Salang Gandum, president of the Dayak Chamber of Commerce and Industry, told OBG.

Early successes in the master plan are focusing largely on the linkages with new heavy industrial projects being developed in the Sarawak Corridor of Renewable Energy (SCORE). These include support services for construction crews and eventually full-time employees for providing housing and amenities, food catering, maintenance, logistics and transportation.

“SMEs are mushrooming, especially cottage industries in the northern areas of Kuching such as baking lapis [a traditional layered cake] and home-stay services,” Abdul Wahap, mayor of Kuching City North, told OBG. “While these businesses are good for the economy, we need balance between economic progress and programmes like CBS [Kuching City’s Clean, Beautiful and Safe developmental initiative]. The growth needs to be managed properly with a total solution.”

INCENTIVES: To further support the economic development brought about by SMEs, both the state and federal governments are rolling out financial incentives, infrastructure development and other aid packages. Although much of the monetary support being thrown behind SME development is coming from the federal government, Sarawak is also moving forward with a number of its own support services.

The deputy international trade and industry minister, Hamim Samuri, noted in a local March 2014 press article that SME performance in Sarawak is booming and its investment is the third largest in the country following Johor and Selangor. In terms of value, in 2013 Johor SMEs recorded investments of about RM14.4bn ($4.38bn), Selangor recorded RM9.8bn ($2.98bn) and Sarawak recorded RM8.28bn ($2.52bn). Driven largely by the inflow of SCORE investment funds, Sarawak’s SME sector is surging to the front of the pack after nearly doubling its 2012 investment of RM4.72bn ($1.44bn).

This recent influx of business is continuing to drive the subsector, which already boasted 43,830 SME establishments, according to the most recent National Economic Census by the Department of Statistics carried out in 2011, equating to 6.8% of the national total. Belying its smaller population, geographic isolation and comparatively less-developed infrastructure, this ranked the state fifth in SME GDP contribution out of Malaysia’s 16 states, trailing only Selangor (19.5% of total SME contributions), Kuala Lumpur (13.1%), Johor (10.7%) and Perak (9.3%). In spite of the recent growth that has led to Sarawak punching above its weight in this category, a number of challenges still remain for further growth in the sector. Aside from the usual factors affecting all business in Sarawak, such as the dearth of qualified labour and higher transport and logistics costs, access to financing is often a significant barrier for smaller businesses as they usually lack the credit history or collateral sought by credit lenders.

There has been some relief in this vein, however, with various public and private financiers increasingly looking to this growing segment for future customers. A few of the most prominent banks recently setting their sights on smaller Sarawak businesses are EXIM Bank, Credit Guarantee Corporation Malaysia (CGC) and Alliance Bank. CGC, which has a proven track record as the leading credit guarantee provider in Malaysia by providing SMEs with limited collateral with credit guarantees, provided RM1.5bn ($456.3m) in financing, which benefits about 2300 SMEs in all sectors in 2013, according to statements made by the CGC president and CEO, Wan Azhar Wan Ahmad, to the press in April 2014. This includes RM296m ($90.04m) in loan guarantees enabling Sarawak SMEs to obtain financing, with the company expecting to provide an additional RM2.7bn ($821.34m) of financing for about 5600 SMEs in 2014.

Alliance Bank Malaysia, also noted for its focus on SMEs, operates branches in Sarawak and is expecting to roll out new products and promotions in the state such as the SME Innovation Challenge, which the bank launched in 2013 for Peninsular Malaysia.

NATIONWIDE INITIATIVE: Financial support has been stepped up for the SME Masterplan in recent years, with SMEs featured prominently in the past two national budgets. The government allocated RM120m ($36.5m) in 2014 for an integrated package to increase innovation and productivity, which included financing for mechanisation and automation, and other measures intended to upgrade the capacity of SMEs. Various assistance and incentives efforts were covered under the Green Lane Policy programme for financing, tax incentives and procurement. These included: interest rate subsidies of 2% or a maximum of RM200,000 ($60,840) per year; stamp duty exemption for loan agreements under the soft loan incentive scheme; tax deduction on expenses incurred for obtaining 1-InnoCERT certification; government procurement incentives encompassing approved manufacturers status company registration without a site visit, as well as bonus marks given in technical evaluation; and priority incentives to participate in procurement exercises by Ministry of Finance-incorporated companies. In addition, the number of businesses qualifying as SMEs also increased in 2014 when the bar was lowered through a more inclusive reclassification of the category.

This emphasis is set to continue into 2015 with provisions in the new annual budget targeting the sector. Businesses in the service sector have been singled out with the formation of a new Services Sector Guarantee Scheme, which allocates to RM5bn ($1.52bn) for SMEs in the services sector, allowing for a maximum financing of RM5m ($1.52m) per business together with 70% government guarantee. The scheme is expected to benefit 4000 SMEs nationwide.

The 2015 budget will also reintroduce the Services Export Fund (SEF), holding RM300m ($91.26m) in funds intended to encourage SMEs to conduct market feasibility studies and undertake export promotion to penetrate new markets. Other programmes laid out in the budget include a SME Investment Partner programme designed to allocated RM375m ($114m) over five years to SMEs in the form of loans, equity or both, particularly at the start-up stage; RM10m ($3m) for the Business Accelerator Programme under SME Corp; and RM80m ($24.34m) for a soft loan scheme for automation and modernisation of SMEs under the Malaysian Industrial Development Finance Berhad.

ISLAMIC FINANCING: Much of the 2015 funding is earmarked to aid targeted demographics of SME owners such as Bumiputera and businesses that rely on Islamic financing. With 1.88m of the state’s 2.63m inhabitants listed by the DOSM as Bumiputera (71.5%) as of mid-2014, national funding earmarked for the ethnic groups could have a substantial impact in Sarawak. Provisions included in the budget to specifically target this demographic include RM1.8bn ($547.56m) from the country’s largest microfinance provider Amanah Ikhtiar Malaysia to be used for financing operations for 346,000 SMEs, along with another RM200m ($60.84m) allocation from the Malaysian hajj pilgrims fund Lembaga Tabung Haji, which will dip into its coffers to establish the sharia-compliant Restricted Investment Account under Bank Islam to provide SME owners financing and credit from RM50,000 ($15,210) to RM1m ($304,200) starting in January 2015.

Another sharia-compliant product targeting SME development and launching in 2015 is the RM150m ($45.63m) Investment Account Platform, which is set to provide opportunities to investors in financing entrepreneurial activities and developing viable SMEs, as well as to attract institutional and individual investors.