Small and medium-sized enterprises (SMEs) in Sarawak are on course for strong growth, as more tap into spinoff projects generated by increased investment in the state’s special economic zone, and federal and state governments urge SMEs to set up shop in Sarawak. While access to credit has been an obstacle to growth, some banks are now offering generous incentives and guaranteed, unsecured loans in an effort to boost the number of SMEs operating in the state.

SMEs have long formed the backbone of Sarawak’s economy, representing around 98% of all registered businesses in the state, according to the Ministry of Industrial Development. In a national economic census released by Department of Statistics Malaysia, Sarawak’s estimated 43,830 SMEs accounted for around 6.8% of the country’s total, giving the state the fifth-highest number of SME establishments in the country. When combined with the 40,884 SMEs operating in neighbouring Sabah, the two states make up roughly 13% of the national total of 662,939.

According to Steve Miller, senior executive vice-president of Alliance Bank, Sarawak’s SME sector could see 40% growth in 2015 and is likely to remain on a trajectory of rapid expansion in the medium term. Investment in the state’s SMEs rose to RM8.28bn ($2.52bn) in 2013, up 75% over 2012, Hamim Samuri, the deputy international trade and industry minister, said.

TRICKLE DOWN: Intensive development by larger firms in the Sarawak Corridor of Renewable Energy (SCORE) is fuelling SME growth. Investment in SCORE rose to RM7bn ($2.13bn) in the first seven months of 2014 alone, to reach RM30.4bn ($9.25bn). Energy-related Japanese firms have played a key role, investing RM15bn ($4.56bn) in the past five years.

Amidst the hype surrounding mega-investments in SCORE, the state authorities are adamant that SMEs and local entrepreneurs will be the ultimate benefactors of the corridor’s growth. “In terms of growth, we see phenomenal SME business growth in Sarawak. And this is the potential that SMEs can actually tap into,” Ting Sie King, Alliance Bank’s senior vice-president and regional head for Sarawak, told local press. Indeed, according to Sarawak’s minister of industrial development, Awang Tengah Ali Hasan, greater investment in SCORE will serve to create more opportunities for small businesses across a wide variety of sectors, ranging from logistics and support services to catering.

“The outlook for SMEs looks promising with the strong economic structure in Sarawak, namely exports, manufacturing, medium- and high-tech industries, and SCORE [Sarawak Corridor of Renewable Energy] driving growth and providing greater business opportunities for the SMEs,” Wan Azhar Wan Ahmad, president and CEO of Credit Guarantee Corporation (CGC), told local press in April 2014.

STATE SUPPORT: For its part, the government has allocated around 195 ha of land for SMEs at the Samalaju Industrial Park in SCORE, in addition to formulating policies aimed at developing more industrial estates in order to encourage SME growth. The government is also providing incentives for small businesses. In 2014 the Malaysian government allocated RM2m ($608,400) to enhance the competitiveness of locally owned SMEs in manufacturing and services.

Government targets forecast economic contributions from SMEs will reach 41% by 2020, compared to 32% in 2012. To achieve this, it is encouraging SMEs to become stronger entities through mergers and acquisitions. Under one programme, merged businesses will enjoy a flat rate of 20% on all taxable income for a period of five years, and will also be exempted from stamp duty on the merger document.

GROW LOCAL: Financial service providers are keen to nurture growth, with the Export-Import Bank of Malaysia, CGC and Alliance Bank focused on developing products for SMEs. As of end-September 2014, banking institutions had extended RM216bn ($65.71bn) in financing to 617,000 of the country’s SMEs, according to officials at the country’s central bank, Bank Negara Malaysia (BNM), with banking institutions providing 94% of financing to SMEs. Of the total, SMEs in Sarawak and Sabah secured financing of more than RM30bn ($9.13bn), or almost 14% of all SME financing by financial institutions.

These figures were cited by the assistant BNM governor, Abu Hassan Alshari Yahaya, during a December 2014 microfinancing event organised by the central bank. Prior to the event, Abu Hassan announced that SMEs in Sabah and Sarawak would be given assistance through technical support and skills training, in addition to financial encouragement, to improve their competitiveness.

“We will continue to engage with the business community here to ensure that their capacity building and market access is enhanced with the cooperation of SME Corporation Malaysia and CGC,” Abu Hassan said, adding that SME financing was up 12% year-on-year. The assistant governor also said that as of the end of the third quarter of 2014, RM3bn ($913m) worth of loans from the BNM’s Special Funds were still at the disposal of SMEs, at interest rates ranging from 3.75% to 6.0% per year.

TEAMWORK: To further support SME development in the state, CGC is holding entrepreneur clinics in Sarawak on a monthly basis, while Alliance Bank has business centres in each of its five branches in the state. CGC has also announced plans to provide RM400m ($121.7m) to the country’s SMEs under a wholesale guarantee for unsecured business financing in 2014. The guarantee is aimed at boosting lending capacity, mitigating risks and assisting in the development of SMEs by encouraging more banks in the country to offer unsecured financing.

The first bank to take up the challenge was OCBC Al Amin Bank, the Islamic arm of OCBC Bank, which formalised a tie-up with CGC to provide SME financing for five years, at a 50:50 split of the associated risks. The wholesale guarantee scheme will provide around RM250m ($76.1m) in SME financing. These kinds of schemes will be crucial if the country is to meet the new goals laid out by the Ministry of International Trade and Industry (MITI). Under the “SME Master Plan 2012-20”, MITI has increased its targets for annual SME market growth from 6.3% to 9.3%.

According to the MITI’s minister, Mustapa Mohamed, the country’s budget for 2015 included a proposal for 18 SME development programmes that will see around RM14.3bn ($4.35bn) allocated to SMEs across a wide variety of recipients and sectors, including recent graduates, women, trade associations and the services sector more broadly.

These public and private sector incentives are helping create a greater variety of start-ups, such as laksa paste manufacturer MUSC Food Industries and carbonated soft drink manufacturer Cinqasa. Some Sarawakian SMEs have even achieved success at the national level. The Kitchen Food, a maker of kampua noodles, is up for a RM250,000 ($76,050) prize in an entrepreneur challenge organised by one of Malaysia’s top banks, while Tanoti, a maker of high-quality hand-woven fabric, is in the running for the SME Innovation Challenge 2014 sponsored by Alliance Bank.

NEXT STEPS: Despite the positive outlook, SMEs continue to face other obstacles. A large portion of SMEs in Sarawak are confronted with infrastructure-related challenges, including that of communications, as many firms are located in rural areas where connectivity and IT infrastructure is lagging. Under the 2014 state budget, RM1.5bn ($456.3m) was allocated to build an additional 1000 telecoms towers, while RM850m ($258.6m) was set aside for laying underwater cables in Sarawak and Sabah (see Telecoms & IT chapter).

Another challenge is increasing productivity and innovation. The Malaysia External Trade Development Corporation is developing a nationwide e-Trade programme. “Our target is to register 2625 members this year, but unfortunately the response was a bit poor, not only in Sarawak and Sabah, but also in Peninsular Malaysia,” Nurdiana Abdullah, a senior manager, said.