Capital crunch plagues MSMEs

|     Hakim Hayat     |


LOCAL micro, small and medium enterprises (MSMEs) continue to face lack of access to capital for growth, and this challenge is further overshadowed by a reduction in government expenditure due to the fiscal deficit in the last few years, said Dr Haji Kamaruddin bin Dato Seri Paduka Haji Talib, President of the Brunei Malay Chamber of Commerce and Industry (DPPMB).

Speaking during a panel discussion on ‘SME Financing: Industry Experience and Challenges’ during the recently-concluded International Banking Conference 2017 (IBC2017) at The Empire Hotel & Country Club in Jerudong, the DPPMB president also urged all stakeholders in the business community and finance industry to work together to find solutions in addressing the challenges faced by small business owners.

On the planned establishment of the government-led Syariah-compliant SME Bank to help local business start-ups and expansion, Dr Haji Kamaruddin said that DPPMB and National Chamber of Commerce and Industry welcome the initiative, but advised that there is a need to form a group of financial experts to review and recommend its establishment. “The formation of this small body could look into different options to help guide and nurture these kinds of businesses,” he said.

Dr Haji Kamaruddin also said that this body should comprise those from the financial institutions as well as those from the business community with business experience. “Ground and hands-on experience is critical towards making the right decisions. It should also be the responsibility of this small body to continuously monitor the progress of these businesses. Proper selection and continuous support will ensure the healthy growth of these businesses.

“In the long run, this effort will not just boost the growth of MSMEs but also contribute towards import substitution if not towards export. With selective support and good guidance, we could quickly help many Bruneians increase their participation in the business world and improve the local economy,” he added.

Dr Haji Kamaruddin bin Dato Seri Paduka Haji Talib, President of DPPMB  (4R) with other panellists at the event. - CIBFM
Dr Haji Kamaruddin bin Dato Seri Paduka Haji Talib, President of DPPMB (4R) with other panellists at the event. – CIBFM

With MSMEs constituting over 90 per cent of all the companies in Brunei Darussalam, and being small, Dr Haji Kamaruddin said that much of them are over-dependent on government expenditure over the years – normally as suppliers and contractors.

“Under the current scenario of depressed world oil prices, this has impacted not only on the government’s total revenue, but Brunei has experienced a fiscal budget deficit resulting in reduced government expenditure, which impacts businesses because a few approved projects either had to be postponed or redesigned to suit the lower budget – including the annual and maintenance budget – which had a negative impact in slowing down the activities of our SMEs,” he said, adding, “Very few new projects are being introduced resulting in more intense competition for works among businesses.”

He also mentioned that the Brunei Government’s calls for more Public Private Partnership (PPP) projects, as an alternative to the government’s injection, have yet to make the desired effect on local MSMEs.

Despite the current situation, Dr Haji Kamaruddin assured that the future is far from bleak, with the Brunei Government making conscious efforts to offset the slow economic growth. “His Majesty Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah ibni Al-Marhum Sultan Haji Omar ‘Ali Saifuddien Sa’adul Khairi Waddien, Sultan and Yang Di-Pertuan of Brunei Darussalam at the recent Legislative Council meeting consented to the establishment of a Free Trade Zone (FTZ) and the SME Bank and these are two examples for which we, the SMEs, can put our collective efforts to ensure these will not just remain as a wish list,” he said.

These collective efforts required, he said, are consistent with the call for the ‘whole nation approach’ and ‘inclusivity’ that His Majesty’s Government has been striving for.

He also revealed that the DPPMB has initiated its World Café conference, where issues are discussed among members and business communities. The discussion points are presented to the relevant stakeholders, and a recommendation sent to the highest authorities in the Prime Minister’s Office.

Results from a survey conducted in early 2016 shows five major issues faced by MSMEs in Brunei Darussalam: SME financing; foreign direct investments (FDIs); the participation and involvement of the local SMEs in national development projects; SME development; and export-oriented foreign market penetration.

Although these issues are inter-related, Dr Haji Kamaruddin said that one pertinent issue which remains is access to financing.

He also explained that MSMEs in Brunei Darussalam are generally defined as businesses with less than 100 employees where micro enterprises range from one to five employees, small enterprises from six to 50 employees, and medium enterprises from 51 to 100 employees.

“Brunei’s business community is mainly made up of micro and small enterprises. Hence, there is a need to address their needs for financing for further expansion,” he said.

With various levels of capacity and generally limited by the ability to access resources such as finance, technology, skilled resources and market, MSME owners are overcoming these challenges by raising awareness through available programmes, specifically in increasing their business acumen and the readiness to tap into opportunities that avail themselves of these resources.

“Admittedly this is a work in progress where Brunei has more businesses still in the learning stage, than we do in the advanced stage of awareness,” said Dr Haji Kamaruddin.

Then there are MSMEs which are ready at either start-up or operational level to apply for a loan; those with business ideas with potential to meet the needs of a targeted market, or are already operational and looking for further expansion.

These examples can be found in the service industry, including oil and gas, tourism, and retail, but he said that there has been more failure than successes in applying for business loans.

“Either way, these businesses encounter challenges that resulted in just a few successful applications,” he added.

Bearing these challenges in mind, he said that this indicates the need for financial institutions to be more aware of the needs of MSMEs, which are not well-suited to loan application prerequisites and terms for large enterprises.

Dr Haji Kamaruddin said that banking officers who process loans are mainly sales executives with neither business experience nor a good understanding of how businesses are run. “Businesses need the financial institutions to be their financial partner, to provide the needed guidance and mentorship that would enable them to successfully meet their obligations to the financial institutions,” he explained.

He also said that the applicants’ personal background and track record of their personal accounts also affects their ability to easily access business loans.

“To a certain extent, guarantors are also required to support their applications, especially guarantors who are deemed to have a stable employment in the government or at Brunei Shell Petroleum Co Sdn Bhd (BSP). This in itself is debilitating, as not all applicants have the required personal background and track record required, or the connections, which is deemed a bad practice that should not be encouraged.”

High loan interest rates that range from five per cent to greater than nine per cent is also another factor, which makes it impossible for a SME to successfully service their debt, he said, adding that this has posed a main challenge since 2015, when Brunei’s GDP growth rate experienced a downturn, and the country may not see increased growth until 2018 onwards as projected by credible regional institutions.

He believes, however, that there is an opportunity to work with the banking industry through the Brunei Association of Banks (BAB) and the Autoriti Monetari Brunei Darussalam (AMBD) to find a better way forward for MSMEs, specifically on the issue of securing access to finance and the experiences or challenges that the business community is experiencing.

Dr Haji Kamaruddin said that he believes that dialogue is the way forward. “It contributes to a better understanding of our business community and the chamber’s ability as the voice of the business community to communicate issues and recommendations to the relevant agencies, albeit the government agencies and/or institutions. In this case, it is between the National Chamber of Commerce and Industry Brunei Darussalam (NCCIBD) and AMBD; and the NCCIBD and BAB.

“Thus we believe that a continual closed-door dialogue with AMBD, and separately with BAB, would contribute towards finding a better solution in assisting MSMEs and their financing needs, and would be the foundation of a collaborative effort being established,” he added.

The IBC 2017, organised by the Centre for Islamic Banking, Finance and Management (CIBFM) in association with the BAB and AMBD carried the theme ‘Future Development of SMEs – Unlocking the Potential’. It is intended as a platform for local SMEs and financial institutions to share their experiences and provide new perspectives – especially from the standpoint of SME development in the Asean region, and also to promote Brunei as a prominent knowledge hub.