Malaysia’s zombie MSMEs

 

Micro small and medium enterprises (MSMEs) are the backbone of the Malaysian economy, making up 97.4% of the business enterprises in the country. That amounts to 1,226,494 businesses, of which 903,174 are micro-enterprises.

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

MSMEs were the most affected group of businesses during the Covid-19 MCOs. Many have still not fully recovered. This is 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 offered MSMEs no assistance, because few have borrowed from formal institutions. MSMEs’ debt is much more complex, with money owed to friends and relatives, and debt through other creditors.

A significant number of bankruptcies are clearly falling on the proprietors of MSMEs, due to the range of debt.

Many of Malaysia’s MSMEs have become nothing more than ‘walking dead’ enterprises, not being able to afford expanding, are finding it exceedingly difficult to cover monthly costs, but also unable to shut down due to 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 therefore unable to gear their businesses properly.

Lending by banks to MSMEs has declined from 2014 to 2020. According to the Organisation for Economic Co-operation and Development (OECD), only 20% of loans to MSMEs are funded by banks. MSMEs also struggle to meet the criteria for micro-credit through Tekun Nasional, and Amanah Ikhtiar Malaysia.

Most MSMEs fund themselves through savings, personal loans, friends and relatives, or funds from other sources which attract high interest repayments.

Venture capital avenues are also out of the reach of most MSMEs, as they are neither innovation-based start-ups, nor have any competitive advantages that serve as barriers to entry of other firms. Venture capital and even crowdfunding is geared more towards innovation-based start-ups, which 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, digitisation, 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 an 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 RM1,500,000 (RM500,00 for a 100% Bumiputera company). For a single-level marketing, or postal order sales business, RM500,000 is required for a non-Bumiputera company, and RM100,000 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, compliance for which may 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 in the 1990s. Unlike elsewhere in the Asean region, there is no cottage industry class certification system in Malaysia.

MSMEs just cannot afford to enter these markets.

The archaic approved permit (AP), or import permit 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 firms must be 51% Bumiputera-owned, unless they are foreign-owned.

This restricts entry into a number of industries, and is 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% of sales for small MSMEs. 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 the 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, Prime Minister Anwar Ibrahim presented a plan for MSMEs.

The new Madani economic reforms give special attention to SMEs, bringing RM100 million for digitalisation, RM200 million for market development, and mid-tier company development programmes, and RM400 million in additional micro-financing.

However, the devil will be in the details of how MSMEs can access these funds, and whether they will really reach needy enterprises.

It looks like micro-SMEs will lose out. While the government and appointed GLCs will invest RM1 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 did not 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 programmes could include –

• Giving access to part-time out-of-business hours education on relevant skills needed to start-up, operate and expand a business.
• Moving 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 one invovling innovation through new ideas to create more business diversity within MSMEs.
• Focusing 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.
• Focusing on appropriate technologies before jumping into Industry 4.0. technologies that few MSMEs can even afford.
• Undertaking the reforms needed to solve the problems mentioned above, so the economy can be deregulated for the benefit of the small businessperson.

 - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.