This article first appeared in Digital Edge, The Edge Malaysia Weekly on January 22, 2024 - January 28, 2024

Microenterprise owners applying for a loan to expand their business would find it a near impossible task due to the lack of collateral and consistent cash flow as well as poor bookkeeping. With the help of financial technology, however, an alternative means of credit scoring would allow such enterprises to secure that loan simply by using their online transaction data.

This is the goal of the collaboration between the Malaysia Digital Economy Corporation (MDEC), Credit Guarantee Corporation Digital Sdn Bhd (CGC Digital) — the wholly-owned digital arm of Credit Guarantee Corporation Malaysia Bhd — and Payments Network Malaysia Sdn Bhd (PayNet), which was signed on Dec 18, as part of their objective to close the RM90 billion funding gap between large corporations and micro, small and medium enterprises (MSMEs) through alternative data for credit scoring and collateral.

Datuk Fadzli Wahid, head of digital industry development at MDEC, believes that this funding gap can address the disparity in the funding needs of MSMEs in the country through financing options provided by peer-to-peer (P2P) lending, equity crowdfunding and the financial institutions sector — provided that the setbacks are overcome.

But RM90 billion is a huge amount and the immediate question that comes to mind is: Where will this money come from?

CGC Digital’s answer is through banks and financiers, convincing them with guarantees to invest in MSMEs using innovative solutions, namely artificial intelligence (AI) and machine learning (ML), for insights and data from non-traditional sources such as transaction data, utility and assessment payments, rental payments and mobile payments that could potentially be used to assess MSMEs’ creditworthiness based on historical payment records.

“Fundamentally, because of the current way [banks] assess credit, it’s always based on financial track record and collateral,” says Yushida Husin, CEO of CGC Digital.

Ruslena Ramli, director of MDEC’s digital initiative — the Islamic Digital Economy — notes that among the problems the agency discovered when trying to find ways to help MSMEs with their funding was that “a lot of the MSMEs, [like] ‘Makcik Kiah’ [the average Malaysian, for example], do not have financial statements”.

“These are the people who we want to help grow because they don’t have access to financing,” Ruslena says.

While micro and small companies may not keep proper manual documentation, she notes that they have a surprising amount of transaction data that can be traced and utilised.

“[This] transaction data is extracted from PayNet, [since] PayNet is the backbone of the country’s digital highway,” she explains.

PayNet launched Malaysia’s national QR standard — an interoperable quick response (QR) code — known as DuitNow QR in July 2019. DuitNow QR was established under Bank Negara Malaysia’s Interoperable Credit Transfer Framework under which PayNet, as the country’s shared payment infrastructure provider, was mandated to implement the common QR standard that will work for all participating banks and e-wallets.

The use of DuitNow QR grew in prominence during the pandemic as it enabled contactless instant online transactions. The low-cost nature of DuitNow QR compared with card payments benefited MSMEs in providing them with contactless and convenient payment options.

With PayNet and its products like DuitNow QR, MSMEs have that transaction data stored digitally through e-transactions.

“PayNet plays a crucial role in this collaboration by sharing transactional data [that] we handle with the utmost care and [responsibility],” says Gary Yeoh, chief commercial officer of PayNet.

Examples of such transaction data include utility and assessment payments, rental payments, mobile payments and other data points, which can potentially be used to assess MSMEs’ creditworthiness based on historical payment records.

MDEC’s Fadzli sees potential in using technologies like AI, blockchain, ML and big data analytics to accomplish this.

“To ensure compliance and maintain customer trust, this data sharing will be conducted with explicit customer consent,” Yeoh clarifies. “By providing a more detailed and accurate view of a customer’s financial activities, we can help CGC Digital create a more nuanced and effective credit assessment tool.”

By using this online transactional data given by PayNet, CGC Digital is able to use its tools to provide banks the guarantee and creditworthiness for MSMEs that they would not have otherwise. This will attract investment from banks, and even beyond.

“While banks remain a primary source of funding, the enhanced credit scoring model could also potentially attract private credit providers,” says Yeoh.

This method of alternative credit scoring is not without precedent, with MDEC citing the UK as a success story. Japan and South Korea are other examples, with CGC Digital currently referencing and engaging with their models, with the end goal of developing its own.

In addition to providing credit scoring services, Fadzil says MDEC also aims to incorporate these MSMEs on a platform with fintech players that are on digital lending platforms to facilitate and expedite loan applications, approvals and disbursements for MSMEs, reducing bureaucratic hurdles.

The RM90 billion funding gap is not a new discovery, being first identified by the Securities Commission Malaysia (SC) in its Capital Market Masterplan 2021-2025. In the master plan, the SC stated that MSMEs contribute about 60% of the country’s gross domestic product (GDP), yet have limited financing options, hence leading to this gap.

As part of its Malaysia Digital initiative to harness technology to catalyse digital adoption and fuel economic growth, MDEC is actively involved in various initiatives to support MSMEs due to their large contribution to the country’s GDP — one of which is addressing the RM90 billion gap. This is evident when looking at some of the key factors that have led to this large financial gap and why alternative data and credit scoring is needed for smaller enterprises.

“Some MSMEs are registered with the local councils with no formal company licence [such as from the Companies Commission of Malaysia] and due to the lack of formal business registration, the MSME has no financial track record,” says Yeoh.

Therefore, financial institutions like banks perceive them as riskier and potentially more volatile, even compared to small and medium enterprises (SMEs), often citing their relatively-smaller cash flow and the industry they operate in, he adds.

This tripartite partnership between MDEC, CGC Digital and PayNet not only aims to push for financial inclusion, but also by extension of relying on the online transaction records, it pushes MSMEs to digitalise their business.

“Our aim is to assist MSMEs in recognising the importance and benefits of adopting digital solutions. By encouraging these enterprises to establish a robust digital footprint, we aim to facilitate better tracking and management of their businesses,” says Yeoh. “Such an advancement would not only facilitate more informed and equitable lending decisions but also encourage MSMEs to appreciate the benefits of digitalisation.”

The idea is that this shows how digital transformation is not just about the adoption of technology for innovation, but that it opens up a new avenue for MSMEs to present a more comprehensive and accurate financial profile to aid in securing finances.

“This approach aligns with MDEC’s broader initiatives, which focus on digital transformation, financial inclusion and fostering a conducive environment for MSMEs to thrive in Malaysia’s evolving digital economy,” says Fadzli.

All of this, coupled with CGC’s establishment of CGC Digital, a dedicated fintech arm in 2022, opened the door to provide guarantees to support the growth of MSMEs and SMEs, which is aligned with MDEC’s own goals in growing the micro and small enterprise market.

“MDEC’s mandate is to see how we can create global champions among Malaysian technology companies,” says Fadzli.

He sees where digitalisation can assist or expand the growth of the industry, as part of MDEC’s goal of having the digital economy contribute 25.5% of GDP by 2025. It contributed 23.5% of GDP as at January this year.

Growing the MSME space is important, as Fadzli says “there are many research reports that suggest MSMEs’ contributions can lead to higher GDP growth, more jobs and attract higher local and foreign investments”.

Currently, 97.4%, or about 1.173 million, of business establishments in Malaysia are MSMEs. They employ 7.59 million workers, accounting for 48.2% of total employment. With improved access to financing, there will be more business activity, job opportunities and overall economic expansion.

Filling the gap will have an impact on larger enterprises as well, as a robust MSME ecosystem will mean a more efficient supply chain, R&D collaboration with MSMEs and creating new market opportunities, according to Fadzli.

This initiative has garnered a positive response from the Small and Medium Enterprises Association (SAMENTA). Its national president Datuk William Ng commends the collaboration, especially on how it highlights the importance of digitisation.

“Many SMEs are still in the process of being digitalised, and we would encourage SME owners to do so the soonest. The benefit of being digitalised far outweighs the costs and steep learning curve,” says Ng.

However, he cautions the partners that not all MSMEs, even if they are eligible for financing, should borrow money.

“Many businesses are simply at a phase of their business where the challenge is getting the basics right,” Ng explains. “Getting financing too early in the lifespan of a business could be ultimately detrimental to the business if the objectives are not well thought out.”

“[The idea of this collaboration] was basically first mooted by MDEC along with CGC Digital and PayNet itself,” says Fadzli, adding that talks between the parties had been going on for about a year.

Fadzli describes MDEC’s role in the collaboration as one that includes the “onboarding of our Malaysia Digital thriving community of fintech companies as well as championing policies and frameworks that will lead to greater sharing of alternative data”.

As for the role of the partners, Yushida says, “PayNet is there to provide the payment and transaction data, then we (CGC Digital) work with other like-minded partners. We also extract other information to credit score and get the MSMEs’ support.

“So, MDEC sees us as the credit guarantee provider that can contribute to addressing this RM90 billion financing gap and us collaborating with their own fintech players and partners to narrow the funding gap,” says Yushida.

She notes that finding these like-minded partners, or financiers like banks, to come on board the programme and be open to working with this alternative data is one of their main priorities this year.

In terms of finding an alternative approach to assess the creditworthiness of MSMEs, this takes time, given the requirements of various financiers and unique business contexts of different sectors.

“This is where we need to look at what makes sense in terms of usage of alternative data and what sort of assessment will suit each segment.

“Our core business is credit guarantee, which can catalyse financiers to lend based on alternative credit assessment,” says Yushida. “As a guarantee cannot stand on its own, we will need to have financiers that are willing to explore. So the challenge is in finding the right like-minded partners to come on board with us and explore from there on.

“We need to identify the right data sets and ensure that data is managed in compliance with the regulations and cybersecurity is managed accordingly,” she adds.

In the financier space, CGC Digital looks into banks of various sizes: large, medium, small and commercial as different banks have different focus areas when it comes to MSMEs.

“Naturally, we need to find financiers that are willing to push the envelope in terms of working with alternative data for credit assessment to advance financial inclusion,” says Yushida.

“[This could be] the banks that are under Bank Negara, or P2P lending players under the SC, and the rest [of the credit community] under KPKT (Ministry of Housing and Local Government),” she explains.

CGC Digital has a few financiers that are on board, but is not at liberty to share details as yet.

“We [also] look at agencies, government agencies that can help us connect the different fintech companies, which is where MDEC comes in,” says Yushida.

MDEC as an agency has been looking out for partners of its own to join the programme, focusing on other fintech companies that help, support or offer microfinance to MSMEs.

“So, the onboarding and profiling of these technology companies to the likes of CGC Digital will open their eyes [that these are the] opportunities or pockets [of the people] that they can help facilitate because they will fall within that RM90 billion funding gap,” says Ruslena.

Similar to CGC Digital, MDEC is in discussions with fintech partners it is working with to join this ecosystem, with eight in the pipeline as well as Khazanah Nasional Bhd joining.

This is part of MDEC’s goal of catalysing and sparking pilot projects in its fintech space to encourage the sharing of information.

“But it [requires] a mind shift because the traditional banks do not want to share [information],” says Ruslena. “So, we can [start to] catalyse pilots among the fintech companies, and traditional banks [could then see that there] is an opportunity to share data.” She hopes that this could lead to further support of scaling alternative credit scoring.

Ruslena adds that “ultimately, the aim is to bring in the likes of telcos [like] Celcom, which is what other developed countries have already done for open banking, open finance [and] open data sharing”.

In finding these partners, Ruslena notes that they are “trying to see how we can look at collaborations, partnerships because most of the anchor industry peers are already within our ecosystem, so how can we leverage it”.

While the basics of how MDEC, CGC Digital and PayNet plan to close the financing gap are set, this collaboration is still in its very early stages, with a lot of work left undone.

“Last year, we basically looked at other countries that have done it before, in terms of how their credit guarantee also played a catalytic role in terms of data, providing insights and alternative credit scoring,” says Yushida.

She explains that for CGC Digital, “this year is all about planning and execution in terms of who our target partners are”.

PayNet will be playing a supportive role in all this, as Yeoh says it will be focusing on facilitating more pilot projects with interested fintech companies, financial institutions and ecosystem players.

This process of finding partners before proceeding mirrors the practice in MDEC, as Fadzli explains that “once we reach a sustainable pipeline of pilots, we hope to soft-launch this as a potential [catalyst for the digital economy]. The aim is trying to hit that by the end of the year”.

Yeoh assures that this project is for the long haul, as “under this memorandum of understanding, all parties have agreed to collaborate for years to come. This is to ensure that the alternative credit scoring initiative is fully implemented and elevated to a sustainable business model as well”.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.