Sustaining A Guarantee System: Issues, Challenges and Good Practices By: Wan Azhar Wan Ahmad Managing Director Credit Guarantee Corporation Malaysia Berhad

2 1.0 About Credit Guarantee Basic Guarantee Principles Stages of Credit Guarantee System 2.0Issues & Challenges 3.0 Best Practices Comprehensive Framework for Development of SMEs CGC’s Transformation Plan Key Success Factors 4.0 Conclusion ORDER OF PRESENTATION

3  To influence & direct flow of credit.  Funds are used to back loans granted by lending institutions.  Funds available are used to build up reserves.  “Risk-sharing” principle. 1.0About the Credit Guarantee Basic Guarantee Principles

4 Pre- Development Seed Growth Matured Identify Issue Access to financing for SMEs Solution: An intermediary between FIs and SMEs, i.e CGC Government support in terms of funding is essential Set-up & establish clear objectives of CGC Expanding Outreach Creating greater acceptance of the g’tee Encourage other Government bodies to leverage / subscribe to g’tee concept Repositioning G’tee system to be market driven Products to be commercially attractive Enhanced Risk Management Pricing based on risk Government’s funding reduced – efforts to build own reserve Sustainability Financial Sustainability as an agenda G’tee system is market driven and transparent Products & services are market driven SME sector more informed – SMEs in position to ‘shop around for the best deal’. 1.0About the Credit Guarantee Stages of Guarantee System Creating Need G’tee to enhance bankability of SMEs Simple g’tee scheme Automatic cover Objective claims processing Government to regulate banks to participate (incentives / penalties) Nurture

5 Pre- Develop -ment Seed Growth Matured As business advances, lending pattern become more sophisticated with expansion of credit facilities eg. OD, tradelines, etc Portions of the loans can be guaranteed as FIs & SMEs are more knowledgeable ____________ Max loan: USD167,000 Limited facility – Term Loan Repayment over a fixed tenure Enable SMEs to learn the art of managing a loan G’tee schemes not sophisticated All loans are placed under g’tee to ensure proper monitoring and supervision. ________________ Max loan: USD83,000 Nurture Products are developed jointly with FIs & feedback from SMEs to ensure relevance. Products are priced based on risk to benefit SMEs – better credit standing, hence lower cost of financing. ____________ Max loan: USD3.3 mil SMEs able to leverage on a hybrid of products to optimize benefits. Infrastructure are sophisticated – information are timely and enhances credibility of SMEs. SMEs have an “upper hand” in availing to the best suited products in the market. _______________ Max loan: USD3.3 mil 1.0 About the Credit Guarantee Evolution of Guarantee Based Lending Note :Throughout the timeline, risk sharing will vary from 30% to 100% depending on sector, target group & risk threshold

6 1.0 About Credit Guarantee Basic Guarantee Principles Stages of Credit Guarantee System 2.0Issues & Challenges 3.0 Best Practices Comprehensive Framework for Development of SMEs CGC’s Transformation Plan Key Success Factors 4.0 Conclusion ORDER OF PRESENTATION

7 Continuous Support from Stakeholders Risk Based Pricing of Products & Services Credit Bureau to address credit standing Of SMEs SUSTAINABLE GROWTH 2.0 Issues & Challenges Risk Management Can’t rely on explicit support - funding, grants, budgetary allocation More implicit support required without monetary reliance - e.g. endorsement of schemes, bureau support, counter g’tee, etc. Profit Oriented Not Profit Motivated To change “subsidy mentality “ to pricing based on risk Establishing a pricing model to commensurate with different risks of SMEs SMEs unaware of their credit standings New acts (CRA & PDP) which may impede development of Bureau’s data sharing/ exchange initiatives Inculcate “risk management culture” - High risk SMEs may not be able to avail to g’tee. Creating awareness of CGC’s changed role - Commercially Oriented whilst complementing Developmental Role CRA – Credit Reporting Agencies Act PDP – Personal Data Protection Act

8 1.0 About Credit Guarantee Basic Guarantee Principles Stages of Credit Guarantee System 2.0Issues & Challenges 3.0 Best Practices Comprehensive Framework for Development of SMEs CGC’s Transformation Plan Key Success Factors 4.0 Conclusion ORDER OF PRESENTATION

3.0 Best Practices Financing Landscape for SMEs 9 6 Pillars of the Framework for the Development of SMEs Venture Capital Credit Enhancement Training Marketing Advisory Financing BIs & DFIs VCs Institute for SMEs Trading Companies, MNCs,etc. National SME Advisory & Info Centre CGC

Product Segmentation Credit Information Services Business Consulting and Advisory Risk Adjusted Pricing for better returns from products & services Investment Strategy Tapping capital market for funds New CGC SME Outreach Through Broader Product Range Financially Sustainable 3.0Best Practices CGC Transformation Plan  Commercially driven  Financially sustainable  Complement Financial Institutions  Involvement in social development agenda tied to Government support 10

CGC Transformation Plan Product Segmentation Current Products available : 11 - Credit Enhancer Scheme - Enhancer Express Scheme - Small Business Express - Direct Access Guarantee Scheme - Flexi Guarantee Scheme - Portfolio Guarantee - Securitization Commercial - Attractive & flexible features - Generate returns Government-backed Schemes - High developmental content (Programme Lending) - Backed by Government via - Funding - Risk sharing - Green Technology Financing Scheme - SME Modernization Facility - SME Assistance Facility - SME Assistance Guarantee Fund - Franchise Financing Scheme - Tabung Projek Usahawan Bumiputera-i GUARANTEE PRODUCTS

12 -One stop centre for credit information and ratings on SMEs and micro-businesses. - A platform for SMEs and micro-businesses to build, maintain and enhance their track record & credit standing. -Promotion of sound credit culture amongst SMEs. Establishment of Credit Bureau -One stop centre for credit information and ratings on SMEs and micro-businesses. - A platform for SMEs and micro-businesses to build, maintain and enhance their track record & credit standing. -Promotion of sound credit culture amongst SMEs. CGC Transformation Plan Credit Information Service

13 Credit Bureau - Bridging the Credibility Gap CGC Transformation Plan Credit Information Service LACK OF COLLATERALINADEQUATE INFORMATION SMEs & Micro-businesses need to build a credit TRACK RECORD Credit Reports Financial Institutions can improve TIMELINESS & ACCESS TO FINANCING

Scope of Advisory Services:  Assist SMEs in preparation of loan documentation  To enhance viability and reduce default cost Challenges  Measuring the input & output  Quantifying strategic outcome  Lack proper infrastructure – as not core activity  No economies of scale  Advisory services not holistic – lack expertise Action Plan  Collaboration with Strategic Partners with proven track record. CGC Transformation Plan Business Consultant & Advisory 14

Support & from Government – Financial & non- financial Establishment of a Risk-Sharing Mechanism Credit Bureau to address credit standing Of SMEs KSF in line with best practice …. End-to-End handholding & advisory services 15 CGC Transformation Plan Key Success Factor 15

About Credit Guarantee Basic Guarantee Principles Stages of Credit Guarantee System 2.0Issues & Challenges 3.0 Best Practices Comprehensive Framework for Development of SMEs CGC’s Transformation Plan Key Success Factors 4.0 Conclusion ORDER OF PRESENTATION

Conclusion 17 SMEs are enablers of Government aspiration Policies & key thrust areas to be given focus Credit guarantee mechanism is of strategic importance to SMEs in ensuring access to financing SME SUCCESS