SMEs bring vigour to economies

Muhammad Abdul Mazid | Published: November 30, 2018 21:10:35 | Updated: November 30, 2018 21:12:21

Traditionally, small and medium-sized enterprises (SMEs) are known as the backbone of national economies and their vital significance for sustainable and viable economic development has never waned. This is amply demonstrated in the development pathways followed by three South Asian economies -- Malaysia, Indonesia and Thailand -- while at the same time grappling with many emerging challenges. 

Malaysian Small Medium-sized Enterprises (SMEs) is the largest business establishment and a vital component of the country's economic development. Studies were conducted on their development, challenges and future green prospects, especially in services sector. Malaysian SMEs contribute to the largest business establishment in Malaysia especially the services sector and majority of them are micro size establishments. 98.5 per cent of business establishments in Malaysia are SMEs cutting across all sectors totaling 907,065 in numbers. They accounted for 36.6 per cent of Malaysia's GDP in 2016.

Nevertheless, there are factors that hinder SMEs from further expansion. This is mainly because of high cost of raw materials, high initial cost of investment and shortage of skilled labour. The concept of green environment is still in infancy in Malaysian SMEs. Environmental management literature mostly published in the developed countries has proven that ISO 14001 Environmental Management System (EMS) implementation has a positive and significant relationship with SMEs performance.

SME Corporation Malaysia (SME Corp. Malaysia) is a central coordinating agency under the Ministry of International Trade and Industry that formulates overall policies and strategies for the SMEs and coordinates the implementation of development programmes across all related ministries and agencies. It acts as the focal point for research and data dissemination on SMEs, as well as provides advisory services for SMEs. SME Corp. Malaysia also assumes the role of the Secretariat to the National SME Development Council (NSDC) which is chaired by the Prime Minister of Malaysia.

Now a glimpse at SMEs in Indonesia. According to the Cooperatives and SME Ministry, in 2014, Indonesia had 57.9 million SMEs which contributed around 58.92 per cent to the country's GDP and absorbed 97.30 per cent of the country's workforce. In 2015, although SMEs' contribution to Indonesian GDP dropped by around 3 per cent, the workforce absorption rate stayed at 97 per cent,. 

Indonesia's SMEs sector is currently grappling to overcome a host of tough challenges. This is most notably in the form of rapid technological development and regional economic integration that came into sharp focus with the start of the ASEAN Economic Community (AEC). However, with the Indonesian government now more determined than ever to push the growth of SMEs, the sector could be in a position to turn these challenges into exciting opportunities.

SMEs are crucial to the economy in terms of sustainable growth and employment. In Indonesia, they now face a new reality of being challenged on their home turf from the AEC and thus the need to be more competitive and innovative in order to survive is crucial.

Since becoming Indonesia's president in 2014, JokoWidodo has shown real commitment to supporting the country's SME sector. This special government attention is something the sector has merited, being a foremost contributor to Indonesian gross domestic product (GDP) and employment. The issue of the cost of lending to SMEs has been raised repeatedly by President JokoWidodo. On taking office in 2014, the lending rate of government-backed micro loans for SMEs known locally as KUR, was as high as 22 per cent.  The figure was deemed "unfair" and "dangerous" by Vice President JusufKalla and was radically slashed by half in 2015 to 12 per cent. In a bid to further boost SME growth, in January 2016, the government again lowered the lending rate, this time to as low as 9 per cent. The Indonesian government has announced plans to further slash the lending rate next year.

Moreover, the government has also decided to set an ambitious KUR disbursement target of just over 100 trillion IDR - a striking figure when compared to last year's disbursement target of 30 trillion IDR.

Another proof of the government's support for the country's SMEs is the special provision it has made in the changes on the Negative Investment List, a list of business sectors that are closed for foreign investors. However, in a bid to significantly attract foreign investment, the government removed 35 sub-sectors from the list, allowing for companies in these sectors to be fully-owned by foreign investors. Interestingly, in the revision, the government specified that 19 selected sub-sectors will be reserved for small-scale firms and cooperatives. It further ruled that 62 areas of business will only be accessible to international investors if they partner with local SMEs.

As regards the SMEs in Thailand, the Office of SMEs Promotion (OSMEP), Thailand reported that SMEs accounted for 41.1 per cent of GDP in 2015, or a 5.3 per cent increase from 2014. In 2015, economic activity generated by SMEs was valued at BT1.63trn ($45.9bn), according to OSMEP. Within manufacturing and export-oriented SMEs, food and beverage manufacturing accounted for 17.0 per cent of total GDP contribution in that year, followed by SMEs in the furniture (13.0 per cent) and chemicals (12.3 per cent) segments.

Since SMEs are so important for the Thai economy, it is important to increase their resilience. One of the ways to increase their resilience is to provide them with stable finance. SME credit, which amounted to 32.8 per cent of total commercial bank loans in 2012, is still small in scale. Conversely, the ratio of non-performing loans (NPLs) remains high in SME lending, at 3.4 per cent compared with a gross NPL rate of 2.2 per cent in 2013. While the strong appetite of SMEs for growth has shifted bank lending from large firms to retail financing and portfolio guarantee schemes and helped the trend of SME credit in Thailand, the lack of collateral is still a critical barrier for Thai SMEs in raising business funds (ADB 2014).

SMEs account for the majority of businesses in Thailand. In February 2017, the Bangladesh-based SME Foundation reported that 99.7 per cent of enterprises in Thailand are SMEs, the second-highest in South-east Asia after South Korea, at 99.9 per cent. SMEs account for 80.3 per cent of employment in Thailand, second only to South Korea's 87.7 per cent, and are responsible for 26.3 per cent of export earnings, behind India (42.4 per cent) and China (41.5 per cent), but ahead of Sri Lanka (20 per cent), South Korea (18.8 per cent) and Indonesia (15.7 per cent).

Dr Muhammad Abdul Mazid is former Secretary to the government and former Chairman, NBR. mazid.muhammad@gmail.com

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