Economic Update

Published 27 Nov 2017

Malaysia has taken another step towards expanding its digital economy, with the newly tabled 2018 budget containing a series of initiatives designed to promote growth in tech companies and ICT skills development.

Included in the budget, submitted to Parliament on October 27, was a RM250m ($59.1m) pledge to improve the digital education of Malaysian school students. The funding forms part of the long-term National Transformation 2050 plan, and is targeted at boosting embedded programming and creative technology.

Public spending targets digital opportunities

Efforts to improve the digital skills of future generations have been complemented by the allocation of an additional RM100m ($23.6m) to the government’s eRezeki and eUsahawan programmes.

The initiatives, overseen by the Malaysia Digital Economy Corporation (MDEC) and launched in 2015, connect low-income households to digital income opportunities, providing training and employment to selected citizens.

The MDEC expects around 350,000 Malaysians will take part in the programmes next year.

The budget also included a number of measures aimed at promoting business development and growth in the start-up scene, with RM1bn ($236.3m) put towards venture capital investment in selected sectors, along with a widening of tax exemption guidelines to include management and performance fees.

The changes will make corporate and individual investors in venture capital companies eligible to claim tax deductions up to a maximum of RM20m ($4.7m) a year, while exemptions on income tax will be extended until the end of 2020.

Tech companies targeted as Digital Free Trade Zone launches

These incentives come amid a broader national strategy designed to expand the digital economy.

The tech industry has been identified as a key future growth driver, with the government rolling out a series of plans to improve digitalisation rates of businesses and boost the technological literacy of individuals.

ICT-related businesses have accounted for 18.2% of GDP so far this year, according to the MDEC, and are on track to exceed the target of 20% by 2020, highlighting the importance and growth potential of the sector.

A key component of plans to boost ICT growth was realised with the launch of Malaysia’s Digital Free Trade Zone (DFTZ) in November, the first of its kind to be established outside China.

Located in Kuala Lumpur International Airport, the DFTZ offers technical and market expertise, as well as tax incentives to assist businesses looking to export their goods and services abroad, while also acting as a digital headquarters for local and international tech companies operating in Malaysia.

The development, jointly established by the Malaysian government and Chinese e-commerce firm Alibaba, is also expected to provide local businesses with an opportunity to break into the Chinese market.

Around 1900 export-ready small and medium-sized businesses (SMEs) are initially expected to utilise the DFTZ’s services, the MDEC’s CEO, Yasmin Mahmood, told regional press last month, with the site expected to double SME exports and create 60,000 new jobs by 2025.

Fintech services earmarked for expansion

As well as SMEs, the financial technology (fintech) segment also stands to benefit from the Malaysian government’s commitment to technological advancement.

Given mobile phone and internet penetration rates of 141% and 81%, respectively, banking industry leaders have identified significant potential for fintech products and services in the country.

These factors, combined with Malaysia’s increasing rates of digitalisation, have led to a series of fintech developments.

In May Bank Negara Malaysia (BNM), the country’s central bank, established both a regulatory “sandbox” for the segment, and a unit called the Financial Technology Enabler Group to facilitate the entrance of new players and innovation in the market.

Six companies are currently undergoing testing within the regulatory sandbox, each over a 12-month period. Three of these firms – GoBear, which was the first to join in January; WorldRemit; and a joint venture called CIMB Bank & Paycasso Verify – are foreign owned. The remainder are the domestic firms GetCover, MoneyMatch and Jirnexu, which was the last to come onboard in late October.

The Islamic finance segment has also earmarked fintech as a key area of potential growth.

Speaking at the Islamic Fintech Dialogue seminar in Kuala Lumpur in October, Marzunisham Omar, the assistant governor of the BNM, urged the Islamic banking segment to take a leading role in developing the digital banking ecosystem, arguing that offering sharia-compliant fintech products and services could help accelerate the adoption of such technology in the country.

While growth in the global Islamic financial services industry has slowed in recent times, Malaysia has bucked this trend, with the segment expanding by around 10% last year, according to the Islamic Financial Services Board’s “Industry Stability Report” for 2017,  highlighting the potential room for growth in digital products.