Digital Banks – A New Source of Financing for Micro, Small, and Medium Enterprises
By Min-Khen Tan, Ah-Suat Lee, Tai-Seng Wong, & Yen-Hong Ng
Covid-19 and Business Challenges to MSMEs in Malaysia
Digital Banks could serve as a new source of financing for Micro, Small, and Medium Enterprises (MSMEs). The issuance of digital banking licenses by the Bank Negara Malaysia (BNM, 2022) to five reputable institutions is expected to ease the financing constraints of MSMEs in Malaysia by allowing them to have easier terms of financing, a lower interest rate, and a quicker application procedure.
In the past 2 years, the streak of COVID-19 pandemic outbreaks has weakened Malaysia’s economy. According to Ernst & Young Malaysia (EYM) (2020), “COVID-19 “Business Impact Survey”, the pandemic disruption includes business cash flow liquidity issues and unemployment issues. The decline in the business’s revenue was mainly because of the demand cut-back. For instance, the Research for Social Advancement (REFSA) (2021) showed that in the year 2020, the retail overall sales growth rate had declined by 16.3%, approximately 30% of malls had closed, and 300,000 people were jobless. Likewise, according to Deloitte Malaysia (2020), financial burdens such as cash flow issues happened, especially for those non-essential sectors including real estate, construction, retail outlets, and travel agencies, which were forced to close as they faced difficulties keeping up with the monthly expenses.
Transitions to Digitalised Business
Due to the Malaysian government’s Movement Control Orders (MCO), companies digitalized their businesses, which shifted their business activities and transactions online to sustain and survive in the market. The transition challenges include maintaining and managing good communication with clients and customers online. In these instances, companies are required to upgrade their technology and systems to ensure connectivity with their employees and support the “Working from Home” (WFH) practice. Therefore, there is a huge demand for technology-enabled processes and business systems. According to EYM’s “Business Pulse Survey,” about 37% of respondents from micro, small, and medium enterprises (MSMEs) in Malaysia say that technology helped their business during the pandemic (Ernst & Young 2022).
Based on the EYM’s “COVID-19 Business Impact Survey“, Malaysia’s e-commerce industry capitalized on the market during the MCO period, resulting in an approximately 24.7% market growth in 2020. In addition, comparing between 2019 and 2020, the e-commerce platform, Lazada Malaysia, has generated a 120% increase in sales (Ernst & Young 2020). As a result, consumers’ purchase behavior and payment methods have changed dramatically during the pandemic. Bank Negara Malaysia (BNM) (2021) indicated that e-payment is continuing to grow as the average e-payment transaction increased from 170 per capita in 2020 to 221 per capita in 2021. Also, due to the COVID-19 pandemic, the amount of money raised through mobile banking doubled from RM 200 billion in 2019 to RM 460 billion in 2020 (Malaysia Fintech Report 2021).
Digital Bank Financing for MSMEs
According to the Deloitte Digital Banking SMEs report (2015), MSMEs have accounted for approximately 77% of all SMEs in Malaysia since 2014. MSMEs are still facing difficulties in financing their businesses in the long run. In EYM’s “COVID-19 “Business Impact Survey”, 63% of the MSMEs respondents experienced a negative impact on their business finances during the pandemic (Ernst & Young 2020). Then, in the same report, the local SMEs indicated that they have limited access to funding. The main reasons, for instance, are long processing times, a reluctance to be in debt, and other challenges in the application process.
The BNM (2021) acknowledged the limitations in financing faced by MSMEs. Hence, lately, the BNM awarded five digital bank licenses out of 29 applications from companies across different industries. Idris (2022) mentioned that The Small and Medium Enterprise Association of Malaysia (SAMENTA) is optimistic that a digital bank with lower banking and financing costs could be able to provide services, especially to micro and online businesses. Similarly, the license winner, a super-app Grab-led consortium, mentioned that digital banking is the key beneficiary for SMEs and that they will provide financial assistance to those underserved and unserved segments (Ignatius 2022). Digital banking can provide financial services online without any physical substance, removing additional barriers to financing, particularly for rural MSMEs. With the introduction of digital banking, MSMEs are anticipated to be able to enjoy easier access to loans, with a more competitive borrowing rate, and a faster application process. Data analytics could also be used in digital banking to help find out more about how customers behave and how to make better products within the MSMEs.
From another perspective, MSMEs offer competitive advantages for digital banking to penetrate. According to Daim (2021), the Malaysian government expected that by 2025, MSMEs could contribute approximately 45 percent of the country’s GDP and 25 percent of total exports. Likewise, based on the Department of Statistics Malaysia (2021), MSMEs contribute approximately 38 percent of Malaysia’s Gross Domestic Product (GDP). Hence, there is no doubt that MSMEs play a vital role in the nation’s economy and offer a competitive edge base on digital banking development. As such, the introduction of digital banking in Malaysia is crucial and timely to support MSMEs’ progress, which in turn fosters Malaysian economic advancement.
References
Bank Negara Malaysia. (2021). BNM annual report 2021. https://www.bnm.gov.my/documents/20124/6458991/ar2021_en_ch1.pdf
Daim, N. (2021, December 7). MSMEs projected to contribute 45 per cent of national GDP by 2025. New Straits Times. https://www.nst.com.my/news/nation/2021/12/752055/msmes-projected-contribute-45-cent-national-gdp-2025
Deloitte Malaysia. (2015). Delottie digital banking for small and medium-sized enterprises. https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/financial-services/sea-fsi-digital-banking-small-medium-enterprises-noexp.pdf
Deloitte Malaysia. (2020, May 4). The financial impact on COVID-19. https://www2.deloitte.com/my/en/pages/financial-advisory/articles/financial-impact-of-covid-19.html
Department of Statistics Malaysia Official Portal. (2021, July 28) Small and medium enterprises (SMEs) Performance 2020. https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=159&bul_id=KzdrS25pRTZ1VGFkcTlNY0FEczBYUT09&menu_id=TE5CRUZCblh4ZTZMODZIbmk2aWRRQT09
Ernst & Young Malaysia. (2020, June 1) Covid-19: Impact on Malaysian businesses. https://www.ey.com/en_my/take-5-business-alert/covid-19-impact-on-malaysian-businesses#:~:text=The%20severity%20of%20the%20COVID,challenging%20most%20economies%2C%20including%20Malaysia’s.
Ernst & Young Malaysia. (2022, March 23). EY survey: The majority of Malaysian businesses are prepared to live with COVID-19 and are progressing the adoption of technology into their operation. https://www.ey.com/en_my/news/2022/03/the-majority-of-malaysian-businesses-are-prepared-to-live-with-covid-19
Fintech News Malaysia. (2021). Malaysia fintech report 2021. https://fintechnews.my/wp-content/uploads/2021/05/Fintech-Report-Malaysia-2021-Fintech-News-Malaysia-x-BigPay.pdf
Fintech News Malaysia. (2022, January 14). Why Malaysia’s new digital banking license matters. https://fintechnews.my/30430/virtual-banking/digital-banking-license-malaysia/
Idris, A. N. (2022, April 29). SAMENTA hopes digital banks will focus on serving underserved SMEs. The Edge Market. https://www.theedgemarkets.com/article/samenta-hopes-digital-banks-will-focus-serving-underserved-smes
Ignatius, C. (2022, April 29). Grab-led digital bank consortium selected to receive Malaysia digital banking license. Business Today. https://www.businesstoday.com.my/2022/04/29/grab-led-digibank-consortium-selected-to-receive-malaysia-digital-banking-license/
Research for Social Advancement (REFSA). (2021, July 22). How Has Covid-19 Affected Malaysian Business Sectors? https://refsa.org/how-has-covid-19-affected-malaysian-business-sectors/
Authors’ Profile & Contacts
Mr. Tan Min Khen is an Approved HRDF Trainer and Certified Alibaba Trainer. He is currently an Applied E-commerce Lecturer at the Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Kampar Campus. To contact him, email: tanmk@utar.edu.my
Dr. Lee Ah Suat, a lecturer in the Faculty of Business & Finance, Universiti Tunku Abdul Rahman, Kampar Campus. She is a Chartered Accountant of the Malaysian Institute of Accountants and an associate member of the Chartered Institute of Management Accountants (CIMA). She has a Ph.D. degree in Business Economics from UPM. To contact her, email: leeas@utar.edu.my
Mr. Wong Tai Seng is an Approved HRDF Trainer. He is currently a Tax Lecturer at the Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Kampar Campus. He is a Member of the Chartered Tax Institute of Malaysia and a fellow member of the Association of Chartered Certified Accountants (ACCA). To contact him, email: wongts@utar.edu.my
Ms. Ng Yen Hong, a senior lecturer in the Faculty of Business & Finance, Universiti Tunku Abdul Rahman. She is a graduate of the Association of Chartered Certified Accountants (ACCA) and Master of Science (Business Economics). She is also a certified Microsoft Office Specialist (Excel Associate). To contact her, email: ngyh@utar.edu.my
