Alternative financing methods on the rise

PETALING JAYA: While the banking sector continues to be the predominant provider of financing, there has also been a gradual expansion in alternative finance.

In recent years, Malaysian businesses, including small medium enterprises (SMEs), have increasingly adopted information and communication technology (ICT) in their operations.

“Start-ups are also increasingly opportunity-driven, and as such, are more likely to adopt and deploy innovation to capitalise on new trends,” Bank Negara said in its report.

This, the central bank said, has led to the emergence of the sharing economy and e-marketplaces.

“Alternative finance models are also increasingly leveraged on digital platforms, further increasing their efficiency and potential to address financing gaps in the economy. Data points suggest that the utilisation of alternative financing methods, though relatively small compared to traditional bank lending, have increased,” it said.

Recently, six registered market operators have been licensed by the Securities Commission to operate equity crowdfunding platforms. The platforms raised a total of RM6.2mil in funding for start-ups in 10 months.

Public awareness on alternative financing avenues has also trended upwards and businesses have increasingly reported using alternative financing methods , supported by the growth in non-bank financial intermediation.

There remains significant room to support the development of alternative finance in Malaysia. In 2015, key outstanding alternative financing, which encompasses venture capital, leasing and factoring, and crowdfunding, amounted to RM3.3bil compared against RM25.1bil in total SME financing applications that were rejected by banks. This suggests an estimated financing gap of RM21.8bil that could potentially be met by alternative finance.

Banking institutions themselves have had a role in encouraging the development of alternative finance in Malaysia. “This is most evident in the Islamic banking sector, with the application of investment intermediation and value-based banking practices underpinned by syariah contracts contributing to the growth of alternative finance,” the central bank noted.

It added that to further develop alternative finance as an important source of early-stage financing, it would be vital to strengthen institutional arrangements to coordinate, align and drive developmental policies for alternative finance.

“Promoting the development of open application programme interfaces that enable third-party developers to leverage on the database of financial institutions to deliver faster, cheaper and customised solutions is equally important as with stepping up public engagement and education initiatives to raise awareness among SMEs on available alternative financing avenues,” it said.