|CEO Forum of Developtment Finance Institutions 2005 'Revving Up SMES As The Engine Of Growth'|
'REVVING UP SMES AS THE ENGINE OF GROWTH'
TAN SRI NOR MOHAMED YAKCOP
12 September 2005
H. E. Ambassador Jesus P. Tambunting
Y. Bhg. Datuk Zamani Abdul Ghani
Tan Sri-Tan Sri,
Ladies and Gentlemen.
Assalamu'alaikum Warrahmatullah-Hiwabarrakatuh and a very good morning.
It is an honour and great pleasure for me to be here today to address this distinguished gathering of CEOs, Directors and senior management from member nations of the Association of Development Finance Institutions of Malaysia, Association of Development Financial Institutions in Asia and the Pacific, Association of National Development Financial Institutions in Member Countries of the Islamic Development Bank, and Latin America Association of Development Financial Institutions.
2. Let me take this opportunity to congratulate your efforts at organising the Forum of the Development Finance Institutions 2005, with this year's theme "Revving Up SMEs as The Engine of Growth". Your collaboration and support for this Forum reflect your strong commitment towards further strengthening the development of SMEs in our regions.
3. DFIs are specialized institutions established to develop and promote strategic sectors for economic development. A key function of DFIs is to narrow the gap in the supply of financial services that are not normally provided by the banking institutions. It is the efforts of DFIs which have made a direct and very significant contribution in providing expedient capital for broader-based growth within the national economy. DFIs financing of the SME businesses has contributed to the sustenance and enhancement of these businesses as well as strengthening its multiplier effect on the economy.
4. Malaysia, in particular, had established DFIs which are largely funded by the Government to accelerate the growth in identified priority sectors of the economy. To enable them to perform these functions, the Government has accorded DFIs special benefits in the form of funding at lower rates, implicit Government guarantees to the institutions' debts, special status for their debt instruments and favourable tax treatment.
5. As expertise to appraise complex industries and new technology are required, our DFIs have also developed and evolved into specialized institutions, dedicated to financing national infrastructure, agriculture, capital intensive and high technology industries, export oriented industries as well as the maritime sector. This development is, particularly, vital as SMEs involvement in such sectors are not adequately served by commercial banking institutions. Indeed, it has been our DFIs primary objective to provide financing facilities for the enhancement of SME businesses in these sectors through creating a pool of dynamic, resilient and competitive small and medium size enterprises and entrepreneurs. Many of the successful international businesses the world over that we see today started out as SMEs, bearing testament to the fact that today's SMEs are tomorrow's business leaders and innovators.
6. As in many industrializing economies, SMEs in Malaysia represent an important segment of the economy as they form an integral part of the value chain in the overall production network. As ancillary and supportive industries, they have assumed the important role of strengthening both the forward and backward linkages in the nation's industrial development, particularly through their support to larger companies, including the MNCs. In this regard, in terms of the number of establishments, our SMEs account for more than 90% of companies in the manufacturing sector, comparable to those of Japan, Taiwan and Germany of around 99%.
7. In terms of its contribution to export earnings, while most of our SMEs' production are domestic oriented, they do contribute to some 12 percent of the nation's exports. However, this level is significantly lower than those in the European Union, where their SMEs contribute to some 55 percent of its total export and in the United Kingdom, of about 43 percent. In addition, our SMEs contribution to the nation's GDP remains small at some 6 percent in comparison to between 30 to 40 percent in Australia, Japan and Germany. In the manufacturing sector, however, their contribution is higher at about 18% of the total value added in the sector. Their contribution to total workforce is also small, i.e. about 3 percent of total employment, significantly lower than the 70 to 78 percent in Japan, Taiwan and Germany. Total employment created by Malaysian SMEs in the manufacturing sector, however, is significantly higher at 17.5 percent.
8. These figures indicate that our SMEs have not moved fast enough or gone far enough out of their traditional role of suppliers of parts and components to large companies and multinational corporations. Indeed, the large number of our SMEs base would itself provide tremendous opportunities for them to become growth catalyst in the economy, and even becoming global players, as is the case for SMEs of developed economies.
9. While several of our SMEs have been successful in moving up the value chain, with some having the capabilities to become part of larger companies' production network, including MNCs, much more needs to be done. In addition, currently they are largely in the electrical and electronics as well as in the machinery and engineering sub-sectors.
10. SMEs are engines of growth in all economies and they offer critical sources of industrial and firm-level innovations to drive new market opportunities, products, services and technologies. They play an important role in providing job opportunities and nurturing the creation of an entrepreneurial culture within a nation. When such SMEs achieve the level of development necessary to support the growth of economies, they become a sustainable source of comparative advantage, contributing to the competitiveness of even the larger incumbent companies which depend on the availability and competencies of home grown SMEs in the delivery of their integrated supply, production and distribution chains.
11. It is apparent even from the developed economies' experience that SMEs are a key engine for growth in an economy and are vital for these economies to continue growing, and enabling them to compete on an international level. The successes of Japan and Taiwan's SME sectors, as well as the Mittelstand of Germany should be an inspiration to those of us committed to the growth of the SME sector.
12. Governments need to instil within their economies a productive and conducive eco-system and culture to support the growth of SMEs. This critical component of the economy can lay the foundation for long-term growth. Towards this end, SME financing problems have to be set against and seen through a more general context. Firstly, financial resources for development, be they domestic or external in origin, are in short supply in practically all developing countries. Secondly, governments having realised this problem, have introduced new and innovative policy measures in order to widen and deepen investor interest as well as the investment base. Thirdly, financial intermediation and the related infrastructure and facilities can be improved and made more sophisticated.
13. The growth potential of SMEs is not determined by domestic demand alone, but also by regional parameters. SMEs, therefore, must not remain only as suppliers for the domestic market. They must enhance their capacity and capability to become regional and, ultimately, global entities, and compete for access to global supply and production chains. Today, outsourcing has become an important part of the fast changing business strategies of large conglomerates, including MNCs, in manufacturing as well as in services. These companies are increasingly outsourcing the supply and management of their non-core businesses across regions. These activities provide potential opportunities, particularly to SMEs, to become suppliers and to participate in global outsourcing activities.
15. In Malaysia, the Government has focussed on a comprehensive approach towards SMEs development, one that closely weaves together the key needs of SMEs by increasing their access to capital, providing greater access to business services and improving the business enabling environment in which they operate. The Government policies and strategies to promote the SME businesses are aimed at preparing them to develop and grow into strong, efficient, and viable enterprises. These have been translated into various initiatives, especially through the following:
1 facilitation of fund supply through Government supported loans, grants and credit guarantees to obtain business assets and working capital. Since 1990, a sum of about RM14 billion has been put in place as special funds for the development of SMEs. This incorporates the Funds for Small and Medium Industries, New Entrepreneurs Fund, Shipping Fund, Food Fund as well as the Tourism Fund;
2 promotion of business start-ups and venture business through attractive tax incentives, including a lower corporate income tax of 20%, as well as double deduction of specified expenses and higher rates of capital depreciation; and
3 promoting the establishment of venture capital, especially in start-ups in high growth and high-technology ventures. These funds include those managed by MAVCAP, Malaysian Debt Ventures, and MSC's ventures, as well as MTDC. All these institutions have been established to promote economic growth via SMEs.
16. Another strategic direction for the development of SMEs is the recent establishment of the SME Bank which will be operational on 3 October 2005. The Government decided to merge two of its development financial arms, namely Bank Pembangunan & Infrastruktur Malaysia Berhad and Bank Industri & Teknologi Malaysia Berhad, to create a larger and stronger development financial institution specializing in infrastructure, maritime and high-technology sectors, and a subsidiary company which would specialize in providing both financial and non-financial assistance to SMEs, i.e. the SME Bank. The Bank will complement existing SME financing offered by commercial banks. In this regard, the Bank will have to fast track it's expertise and innovation in providing attractive and more cost effective financing schemes and products.
17. More importantly, the new bank has been tasked to function as a one-stop centre to integrate and meet the business advisory needs of SMES and continuing education and training programmes, especially for start-ups, as they evolve through the small and medium stages of growth. In addition, the Bank will also promote the creation of entrepreneurs in new areas, including commercialisation of research and development.
18. However, in undertaking this function, a major challenge is to put in place the enabling infrastructure to support the creation of timely and relevant advisory services. Managing the availability of these advisory services in response to demand, in an integrated and structured manner will be a priority with the new bank. A greater challenge in SME capacity building resides in the ability to accurately assess their market potential across diverse industries and phases of growth. Tracking SME needs and connecting them to existing competencies and capabilities would not only improve the Bank's ability to match financing with performance potential, but also enhance its understanding of SMEs' demand for knowledge and advisory support.
19. Towards this end, the SME Bank is mobilising the support of numerous professional, academic and corporate intermediaries and partners in an effort to respond to market and industry expectations. Through an integrated and focused approach in knowledge sourcing and management, the bank's advisory network will involve extensive collaboration with key service providers within local and multinational firms, commercial banks, government ministries and agencies, national and international industry and institutes of higher learning. As local capacity is being built, it is envisaged that these partnerships and strategic alliances for knowledge support would extend beyond national borders in the procurement of services.
20. To further promote SMEs to venture abroad and expand their exports of goods and services, the merger of EXIM Bank and Export Credit Insurance Berhad (MECIB) will be completed on 3 October this year. The merger is part of the Governmentâ€™s
21. The upside for the growth of SMEs is tremendous, and similarly, for DFIs to enhance efforts to finance this growth. As DFIs, the challenge of tapping into this potential is in your hands. As we build on the enabling infrastructure and address the many divergent issues in accelerating SMEs' development, shared learning and experiences are equally important in supporting its development. I strongly believe that a common knowledge sharing platform such as this Forum, to generate ideas, best practices and benchmarks would lead to more robust and integrated SME capacity building in our regions. It is my fervent hope that this gathering will be the catalyst to such a goal.
22. In conclusion, I would like to take this opportunity to once again thank the organizers for kindly inviting me to address this Forum. I wish you success in your deliberations, and for those of you who have travelled to Malaysia, I wish you a pleasant stay.
23. On that note, I have great pleasure in declaring open the International CEO Forum of the Development Finance Institutions 2005.