Is Malaysia’s alternative financing up to the challenge?

Many Malaysian MSMEs, which form a key element of the economy, urgently need funds to succour growth, and a key challenge is getting the private sector to inject finance

The Securities Commission Malaysia (SC) will be focusing on strengthening the alternative financing avenues to meet the funding requirements of micro, small and mid-sized companies (MSMEs).

While relatively nascent, alternative fundraising channels for MSMEs, such as equity crowd-funding (ECF) and peer-to-peer (P2P) financing are gaining traction with 261.52-million-ringgit (US$63.94 million) worth of capital raised to date since 2015, according to SC chairman Syed Zaid Albar in conjunction with the release of the SC 2018 annual report on March 14.

SC points out that these alternative financing avenues succeed because they enable underserved issuers to connect with traditionally untapped pools of investors, while offering cheaper, faster and more convenient delivery channels. Each avenue is also tailored to meet the unique requirements of businesses at every stage of their business lifecycle.

The supply of capital to alternative financing avenues will be underpinned by augmenting wider efforts to grow Malaysia’s venture capital and private equity industry. To this end, SC will focus on diversifying sources of funding beyond government-backed funds, while also encouraging investment at different stages of investee companies’ life cycle.

According to SC, MSMEs and entrepreneurs constitute the backbone of the Malaysian economy, accounting for 66% of total employment and 37.1% of GDP in 2017. Mirroring the broader growth of the digital economy, MSMEs have seen a shift from traditional brick-and-mortar businesses to more digitally-led businesses, changing the way they interact with consumers.

Recognizing the importance of the digital economy in fuelling economic growth and opportunities, the government proposed initiatives in the 2019 budget towards supporting new technology development and ensuring sufficient funding for entrepreneurs through conventional as well as alternative financing sources.

In line with these developments, the capital markets have evolved to provide for a wider spectrum of MSMEs. While the traditional sources of funding such as banking, public equity and debt remain relevant, alternative avenues of financing such as ECF, P2P financing, venture capital (VC), private equity (PE) and leading entrepreneur accelerator platform (LEAD) are fast gaining acceptance as ways to complement traditional funding channels.

In 2018, Malaysia’s six P2P financing platforms raised 180.05 million ringgit, up 452% from the previous year. About 93% of the P2P investors are repeat investors.

In July last year, SC invited new applications for ECF and P2P financing operators. These applications are currently being assessed and the SC is expected to make an announcement on the successful operators in the first half of 2019. The potential introduction of new ECF and P2P financing operators is intended to serve a wider range of businesses and investors across different sectors and segments.

Meanwhile, the LEAP market launched by Bursa Malaysia continues to make progress in meeting its objective of providing a capital-raising platform for SMEs that complements other firms of capital-raising channels. In 2018, a total of 10 SMEs successfully raised 57.43 million ringgit on the LEAP market, bringing the total amount raised since its inception in July 2017 to 69.93 million ringgit.

There are 13 locally-incorporated companies currently on the LEAP market, coming from diverse sectors, including technology, healthcare, consumer and industrial products and services, as well as media and telecommunications.

VC and PE, which are also essential components in the Malaysian entrepreneurship funding system, saw a total fund commitment of 6.08 billion ringgit as of 2018. The key growth challenge lies in the limited participation of institutional and private investors. As a result, a significant share of funding in the industry is sourced from government funds.

To address this issue, the development efforts in 2018 were geared towards promoting awareness of VC and PE in the Malaysian capital markets, and encouraging private investors’ participation in these sectors.

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