One of the main provisions of the government’s 2012 budget was the establishment of the RM2bn ($645.2m) Sharia-compliant Small and Medium-sized Enterprises (SMEs) Financing Scheme (SSFS). In October 2011 the government also launched the RM500m ($161.3m) Sharia-compliant Commercialisation Innovation Fund (CIF). These initiatives should have positive implications not only for businesses, but also for a range of the country’s Islamic banks.

SMALL BEGINNINGS: According to statistics from SME Corporation Malaysia, the government’s central advisory and information service for SMEs, in 2010 this category of business accounted for 32% of GDP. At the same time, SMEs employed 59% of the workforce and accounted for 19% of Malaysia’s exports. Thus, SMEs represent a significant part of the economy, a fact acknowledged early on by the government, which established the SME Corporation’s forerunner, the Small and Medium Industries Development Corporation in 1996. SME development has taken a major role in every national economic development plan since.

In 2011 the government unveiled the SME Master Plan 2012-20, which aims to smooth the procedures surrounding SME establishment, raise SME productivity and prepare the sector for further trade liberalisation. This comes as part of ASEAN programmes to bring down trade barriers and encourage foreign investment. Under the SSFS, the government has undertaken to pay two percentage points of the profit rate charged by participating Islamic banks when financing approved projects. Some RM2bn ($645.2m) has been allocated for financing applications under the scheme for 2012-13.

The SME Corporation provides the vehicle for these applications, with 13 Islamic banks participating in the project. These are Affin Islamic Bank, Alliance Islamic Bank, AmIslamic Bank, Bank Islam Malaysia, Bank Kerjasama Rakyat Malaysia, Bank Muamalat Malaysia, CIMB Islamic Bank, Hong Leong Islamic Bank, Kuwait Finance House (Malaysia), Maybank Islamic, Public Islamic Bank, RHB Islamic Bank and HSBC Amanah Malaysia.

To make a successful application – the scheme will be allocated on a first-come-first-served basis – an SME must have sharia-compliant facilities, while also complying with several other criteria, including being at least 60% Malaysian owned. The SME must be involved in non-financial sector business and cannot be part or fully owned by a government-linked company, a publicly listed company or a multinational firm. The maximum financing amount for which an SME can obtain the two percentage point profit rate rebate under the scheme is RM5m ($1.6m), with this available for a maximum five-year period from disbursement.

QUALIFYING CRITERIA: The CIF also offers the two percentage point government rebate on financing from the participating Islamic banks for sharia-compliant SMEs to commercialise their research and development. While this scheme follows national policy to boost SMEs, it also dovetails with a wider government initiative under the Economic Transformation Programme to support innovation and generate higher-value-added in industry. The rebate will be available for SMEs from 2012 onwards. In order to qualify, a company has to be both sharia-compliant and registered under the 1-InnoCert scheme, an initiative run by SME Corporation that certifies innovation-based SMEs.

When the CIF was launched, there were some 1151 companies certified under 1-InnoCert. A RM5m ($1.6m) maximum financing is applied for the rebate, with SMEs involved in financial services excluded.

From the point of view of the Islamic banks, the two schemes should go a long way to mitigating the risks of financing SMEs, and particularly of financing innovative – and thus untested – products. For SMEs, the advantages of becoming sharia-compliant are also boosted, thus potentially leading to an increase in the number of enterprises Islamic investors can participate in. In the longer term though, the schemes may give sharia-compliant SMEs that extra help they need to become larger and more successful outfits, with benefits for the industry and for the wider economy.