White Paper: How Malaysian Banks can Elevate B40 and MSME Lending

15 Pages Posted: 3 Oct 2019

See all articles by Azira Abdul Adzis

Azira Abdul Adzis

Massey University

Jonathan A. Batten

RMIT University

Zunarni Kosim

Universiti Utara Malaysia

Shamsul Bahrain bin Mohamed Arshad

Universiti Utara Malaysia - School of Economics, Finance and Banking

Date Written: September 24, 2019


The B40 (Bottom 40% of Household Income) and MSME (Micro Small Medium Enterprise) are a critical component of the Malaysian economy and financial system. They are supported by a complex financial market ecosystem. MSMEs tend to lack financial market and technological sophistication and demand for external financing is driven by mature firms typically older than 5 years. Younger firms rely on personal savings and informal financing networks. There are opportunities in the domestic market for lenders to overcome known supply-side impediments.

Malaysia’s situation is not unique. Internationally, while shifting demand and supply side impediments affect MSME access to finance, credit supply side factors dominate. Since most MSMEs are family owned firms, agency considerations may also underpin the preference for external financing by informal or private lenders. However, in the post Global Finance Crisis setting, supply-side impediments have provided the funding opportunity for alternative non-bank financial intermediaries. In the European Union, which has the benefit of a single currency, the alternative finance market is growing. Importantly, participation is characterized by younger and more financial literate and technology savvy borrowers.

In Malaysia, well known demand and supply-side impediments along with poor technical infrastructure and financial literacy, especially in remote and agriculturally based areas, limit what is easily achieved in terms of expanding the B40 and MSME loan portfolio. Option-like risk management products could also be made available to reduce earnings volatility and improve credit quality, especially for MSMEs, although these will need to be designed (in the case of Malaysia) to be shariah compliant. Demand side improvements could focus on improving the bank-customer relationship with engagement at the early business stage, while supply side improvements could focus on alternate methods of credit scoring and more granular loan segmentation, especially for urban-based B40 borrowers.

Nonetheless, there is still scope for innovative financing solutions for loan book growth using (a) partnerships with digital data providers and Fintech operations; (b) underwriting lending services directly by government; and (c) indirectly through the reevaluation of current regulatory capital requirements that further support B40 and MSME lending. Also, a more activist banking agenda including community outreach could form the centerpiece of any new lending strategy to support a financially inclusive society.

Keywords: Alternate Financing, B40, Bank lending, Developing Economics, Emerging Financial Markets, Malaysia, Micro Small Medium Enterprise,

JEL Classification: A13, G20, O16, R11, Z18

Suggested Citation

Abdul Adzis, Azira and Batten, Jonathan A. and Kosim, Zunarni and bin Mohamed Arshad, Shamsul Bahrain, White Paper: How Malaysian Banks can Elevate B40 and MSME Lending (September 24, 2019). Available at SSRN: https://ssrn.com/abstract=3458870 or http://dx.doi.org/10.2139/ssrn.3458870

Azira Abdul Adzis

Massey University ( email )

New Zealand

Jonathan A. Batten (Contact Author)

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

Zunarni Kosim

Universiti Utara Malaysia ( email )

Sintok, KY KEDAH DARUL 06010

Shamsul Bahrain Bin Mohamed Arshad

Universiti Utara Malaysia - School of Economics, Finance and Banking ( email )

Sintok, Sintok 06010

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics