The National SME Development Council released an inaugural SME Annual Report 2005 today. The publication of the report, which will be released annually, is an important initiative of the Council to enhance the dissemination of information on SMEs in Malaysia. The report provides a review on the status and performance of SMEs, as well as highlights the major programmes undertaken by the Government during the year in promoting the development of SMEs.

The SME Annual Reports 2005 highlights the following:

A. The Macro Perspective

National Agenda for SME Development

A strong and dynamic SME sector would stimulate the economy and contribute to achievement of a wide range of economic development objectives. In recognition of SMEs' substantial contribution to the economy, the strategies and initiatives to promote SME development feature prominently in all of the Government's economic development plans over the years. Over the recent decade, a clear policv for accelerating the development of SMEs has been charted through specific strategies outlined in the Second Industrial Master Plan, Third Outline Perspective Plan and Eight Malaysia Plan.

Broadly, strategies to promote the development of SMEs have been formulated against the backdrop of a changing and challenging economic environment. Emphasis was placed on enhancing capacities and capabilities of SMEs, and enhancing their access to financing. High on the agenda is to strengthen their competitiveness, mainly through greater use of technology and upgrading the skills and knowledge of the workforce.

To further enhance the Government's role, and for greater coordination and focus in SME development, the National SME Development Council was established in June 2004. The formation of the Council, which is chaired by the Prime Minister, represents the Government's highest commitment in promoting the development of SMEs. The Council provides the direction for the Government policies to ensure that sufficient support programmes are in place, and are effectively coordinated and implemented to assist SMEs.

Status and Performance of SMEs

A nationwide Census on Establishment and Enterprises was conducted in 2005 on business enterprises in the agriculture, manufacturing and services sectors. A preliminary assessment based on the 523,132 business establishments that responded to the Census indicated that 99.2% or 518,996 of the business establishments are SMEs, of which 411,849 are micro enterprises.

• Most of the SMEs (86.5% or 449,004) are in the services sector, mainly engaged in the retail, restaurant, wholesale, transportation and communication, and professional services businesses.  
• 37,866 or 7.3% SMEs are in the manufacturing sector, mainly in the textile and apparel, metal and mineral products, and food and beverages industries.  
• 32,126 or 6.2% of SMEs are involved in the agriculture sector, mostly in food crops, market produce and horticulture, and livestock.

The Census results confirmed that SMEs are a major source of employment, providing jobs for over 3 million workers or 65.1% of total employment in these business establishments.

• 2.2 million workers were employed by SMEs in the services sector, while 740,000 and 131,000 workers were employed in the manufacturing and agriculture sectors respectively.

In terms of contribution to the economy, SMEs generated RM154 billion or 47.3% of value added and RM405 billion or 43.5% of output in 2003. The Census also showed that 4,257 SMEs exported their goods and services totaling RM38 billion in 2003. Productivity levels of SMEs are found to be significantly lower than large enterprises, recording value-added per establishment of RM0.3 million compared with RM41 million for large enterprises.

Only 2,747 businesses invested in R&D, of which 2,355 are SMEs. SMEs invested RM2 billion in R&D out of the RM4.3 billion spent in total by establishments in the Census. Less than 10% of SMEs engaged in marketing and promotion activities.

The Census also revealed that 84% of the SMEs relied on their own or internally generated funds and funds sourced from friends and family members, while 16% sourced their funding from financial institutions. In contrast, 50% of large enterprises relied on the financial institutions. Of the 523,132 establishments, 54,011 SMEs indicated having difficulty obtaining financing from the financial institutions, mainly due to lack of collateral.

B. Key Initiatives Promoting SME Development

The Government, through various Ministries and Agencies, has undertaken a lot of initiatives and programmes to support the development of SMEs. The aim is to promote the development of competitive and resilient SMEs towards increasing their contributions to the economy. Towards this end, a holistic and comprehensive approach is being undertaken, encompassing three broad strategic thrusts, namely, strengthening enabling infrastructure; building the capacity and capability of SMEs; and enhancing access to financing.

Strengthening of Infrastructure for SME Development

One of the strategic priorities of the Government is to develop and strengthen infrastructure that is required to create an enabling environment to support the growth of SMEs and entrepreneurs.

Initiatives in this aspect encompass developing and enhancing physical infrastructure and information management, as well as ensuring regulations and operating requirements are conducive to SME development. A significant milestone in strengthening the infrastructure is the introduction of the common definitions for SMEs in 2005 by the National SME Development Council. The common definitions will facilitate the collection and compilation of SME data for assessment and policy formulation. The Council also initiated the establishment of the National SME Database to address the information needs of the industry and policy makers. To enhance policy formulation and monitoring, the Council endorsed the adoption of the SME Policy Formulation and Evaluation Framework.

The establishment of on-line portals and business directories such as the SMEinfo portal, FAMAXchange, Agribazaar and HRD Portal (a training portal), is an important initiative to facilitate and increase the outreach of information dissemination.

• SMEinfo Portal (www.smeinfo.com.my) was launched in January 2006 to provide a one-stop information resource for SMEs. Among the information provided in the Portal is detailed information on all Government programmes, sources of financing and advisory services. The Portal also contains an online SME Business Directory, providing a platform for SMEs to advertise their company and products.  
• AgriBazaar (www.agribazaar.com.my) is an internet system for farmers, producers, retailers and exporters to interact and conduct their trading on-line. It provides business information, including data on new supply, supply feedback, price quotations, logistic services, inventory management, market projections and payment management. Therefore, SMEs using AgriBazaar will be able to discover the best prices for their products, gain greater access to the market, and thus, expand their business.

A major development was the establishment of the National Institute for Entrepreneurship or ISKEN in January 2005 to create and develop world-class entrepreneurs. Envisioned as more than a mere training institute, ISKEN will, in addition to conducting relevant business training courses, actively provide market data and research to support entrepreneurs, and provide consultancy services.

Enhancing Capacity and Capability of SMEs

Enhancing the capacity and capability of the SMEs, forms the second strategic thrust for SME development, in strengthening the competitiveness and resilience of the SMEs. In order to help SMEs build capacity and capability, the Government's assistance and programmes focus on seven broad areas, namely, marketing and promotion; training and human resource development; advisory services; entrepreneur development; technology development; product development; and awareness and outreach.

Marketing and Promotion

The Government provides both financial and non-financial support to enhance SMEs' marketing and promotion capability, with assistance extending to cover areas like direct promotional activities, brand and franchise development, as well as linkages with large companies.

To assist SMEs to expand their market, several programmes are in place, including the Market Development Grant (a matching grant scheme to cover expenses in promoting SMEs' products oversees), Industrial Linkage Programme (a programme to link SMEs with large companies and multinationals) and Local Market Expansion Programme (to link Bumiputera ICT companies with GLCs).

An important area is to assist SMEs in branding and packaging of their products. Key programmes include "Grant for Enhancing Product Packaging, Design and Labelling Capabilities of SMEs", Brand Promotion Grant and Malaysia's Best brand for agriculture products.

Training and Human Resource Development

An important initiative to assist SMEs to train their workers and undertake skills upgrading is the appointment of the Human Resource Development Berhad (PSMB) to coordinate and oversee training and human resource development for SMEs. PSMB also manages the Human Resource Development Fund, and offers several schemes specifically to encourage SMEs to train their workers. PSMB has also established an HRD Portal (www.hrdportal.com.my), an on-line training resource centre for employers, employees and training providers.

Advisory Services

Government agencies provide a wide range of advisory services to SMEs, generally in the areas of business and financial management, and technical advisory.

Bank Negara Malaysia offers a comprehensive financial advisory services to SMEs, through the "Laman Informasi, Nasihat dan Khidmat" (LINK) as well as a dedicated unit to handle SMEs queries and complaints. In addition, the Bank also assists SMEs to restructure their non-performing loans through the Small Debt Resolution Scheme.

SMIDEC offers advisory services to SMEs, including through the SME Experts Advisory Panel, aimed at providing technical assistance to SMEs to improve their efficiency, productivity and technological capabilities.

The Ministry of Science, Technology and Innovations (MOSTI) provides technical advisory services pertaining to standards and certification, in view of helping SMEs to meet international standards.

Entrepreneur Development

Government supports for entrepreneurship development takes the form of programmes designed to provide an infrastructure to make it easier for entrepreneurs to enter business, inculcate the entrepreneur spirit and educate potential entrepreneurs.

Key programmes to develop entrepreneurs include the Vendor Development Programme, Franchise Development Programme and Groom Big Programme.

There are also several programmes to develop entrepreneurs in ICT, such as the Start-up Development Programme, Bumiputera ICT Entrepreneur Development Programme and National Incubation Development Programme.

Technology Development

To facilitate and assist SMEs to improve their operations, the Government provides both financial and non-financial support programmes to encourage SMEs to adopt better technology as well as overall process improvements through the use of specific methods for efficient systems and business processes.

To facilitate SMEs to upgrade their technological capabilities, the Ministry of International Trade and Industry (MITI) provides "Grant for Product and Process Improvement" and "Soft Loan for ICT Adoption". In addition, the Malaysian Technology Development Corporation (MTDC) administers the Technology Acquisition Fund.

Product Development

A number of programmes is in place to encourage SMEs to engage in research and development activities in order to improve the quality of their products. These programmes include the Enhancement Programme by SMIDEC, Industry Research and Development Grant Scheme (administered by MOSTI), and Commercialisation of R&D Fund (by MTDC).

In response to the growing opportunities available for Halal products, the Government introduced the Grant for Development and Promotion of Halal Products in 2005. This Grant, administered by SMIDEC, provides assistance to local companies in preparing, developing or improving Halal products, as well as in acquiring related certification and quality standards.

Awareness and Outreach

Multiple channels are used to disseminate information and raise the level of awareness and outreach of Government programmes.

Major exhibitions include:

• SMIDEX 2005;
• Malaysia International Halal Showcase; and
• Gerak Usahawan.

Information portals include:

• SMEinfo Portal (www.smeinfo.com.my);
• Training Portal (www.hrdportal.com.my);
• Portal Usahawan (www.mecd.gov.my); and
• Technopreneur Development Portal (www.technopreneurs.net.my).

Recoginition programmes include:

• Enterprise 50 Award; and
• Asia Pacific ICT Awards.

SMEs Access to Financing

A well-developed financial infrastructure that is able to meet the diverse financing needs of SMEs is essential to support the competitiveness and continuous growth of SMEs.

Lending Performance to SMEs

SMEs can obtain financing from various types of financial institutions, including banking institutions, development financial institutions, leasing and factoring companies, as well as venture capital companies. To complement the financial institutions, the Government has also established special funds for SMEs.

The main provider of funds for SMEs is the banking institutions. The total outstanding SME loans expanded at an annual rate of 6.5% since 2001, to reach RM96 billion or 42.6% of outstanding business loans at end-2005. Between 2002 - 2005, banking institutions approved an averaged of RM31.2 billion of financing annually to SMEs, whilst disbursements averaged at RM86.9 billion annually. In 2005, the banking system approved RM35.8 billion of financing to more than 85,000 SME accounts, whilst RM110.7 billion was disbursed to SMEs. In the first five months of 2006, the banking system approved RM13.5 billion of financing to about 30,000 SME accounts, whilst RM 48.2 billion was disbursed. The total outstanding SME loans grew by 12.4% to RM101.7 billion at end-May 2006.

The DFIs that provide financing to SMEs include the SME Bank, EXIM Bank, MIDF, Bank Pertanian and Bank Pembangunan for high-technology and ICT companies. In 2005, the DFIs approved RM2.3 billion of financing to more than 5,000 SME accounts. In the first five months of 2006, the DFIs approved RM2.3 billion of financing to about 2,300 SME accounts.

As at end-2005, there wre 81 Government funds/financing schemes for SMEs with a total allocation of RM12.7 billion. Of these 81 funds, 49 were in the form of soft loans, while the remaining were in the forms of grants (20) and equity financing and venture capital funds (12). In addition, Bank Negara Malaysia has five special funds for SMEs with a total allocation of RM11.4 billion.

Major Initiatives to Enhance SMEs' Access to Financing

The major initiatives include:

• establishment of the SME Bank in October 2005;
• transformation of Credit Guarantee Corporation;
• strengthening of Bank Pertanian;
• establishment of the Small Debt Resolution Scheme;
• introduction of two new trade finance products, namely the multi currency trade finance and indirect exporter financing scheme; and
• establishment of two venture capital funds for agriculture sector.

C. Moving Forward - Strategies for SME Development

The National SME Development Blueprint 2006, a one-year action plan launched in December 2005, outlines the direction for SME development in 2006. It contains objectives, strategies and targets for SME development in 2006, key programmes and financial commitments and Ministries and agencies involved in implementing the programmes. In 2006, a total of 245 key programmes involving RM3.9 billion have been earmarked for implementation.

In line with the objective of enhancing national competitiveness and economic resilience, the key priority for SME development outlined in the Ninth Malaysia Plan (9MP) is to develop competitive and resilient SMEs that are equipped with strong technical and innovative capacity, as well as sound business management skills. The Government's SME development efforts during the 9MP period will focus on strengthening the capacity and capability of SMEs to enable innovation, production of high-quality products and services at competitive prices and integration into international supply chain.

The emphasis for SMEs in the manufacturing and manufacturing-related services (MRS) sectors is on upscaling and transformation of businesses into strong knowledge intensive and value creating entities, with an allocation of RM2.2 billion set aside for this purpose. Initiatives to further develop the manufacturing and MRS sectors include the setting up of a Services Sector Development Fund for SMEs to assist potential entrepreneur to upgrade their technical and professional skills. In addition, a RM600 million Strategic Investment Fund will be established to attract quality investment in projects which are knowledge intensive, labour saving and have high-technology content. For SMEs in MRS sector, soft loans of RM220 million will also be allocated to entrepreneurs for the purchase of new machinery and equipment for their expansion. To support SMEs with the provision of industrial site at more competitive rate, an allocation of RM927.5 million will be provided in the form of soft loans to relevant Government authorities. An allocation of RM833 million will also be provided to build business premises and office space for SMEs.

For SMEs in agriculture and agro-based sector, efforts will centre on the development of "New Agriculture", which involves expansion into large-scale commercial farming, cultivating high quality and value-added agricultural activities, as well as unlocking the potential in biotechnology, with an allocation of RM11.4 billion for the 5-year period. The initiatives to develop agriculture entrepreneurs includes special training, credit facilities and technical assistance to Bumiputera agriculture entrepreneur as well as FELDA settlers and participants of other land development projects.

Given that more than 85% of SMEs in the country are involved in wholesale and retail trade, concerted efforts will also be made to provide a comprehensive supporting infrastructure for SMEs in distributive trade. These include provision of business premises and related services, as well as strengthening managerial and technical skills.

Secretariat
National SME Development Council
7 August 2006

See also: Small and Medium Enterprise (SME) Annual Report 2005 Publication