This article first appeared in Digital Edge, The Edge Malaysia Weekly on February 26, 2024 - March 3, 2024

An impressive 1.15 million small and medium enterprises (SMEs) dot Malaysia’s economic landscape. They are the unsung heroes that form the backbone of the nation’s economy, making up 97% of all businesses and contributing to roughly 38% of gross domestic product and employment. 

However, the path for these businesses is riddled with challenges, and navigating these hurdles has become more intricate in recent times. Lacking substantial funds, the high cost of doing business remains a persistent obstacle. 

The relentless rise in inflation has significantly impacted operational expenses, escalating the cost of goods and services. According to research by Grant Thornton, the key input costs of businesses in the country have gone up by 19% on average, caused by the hike in costs of raw materials of up to 22% in 2022. 

To make matters worse, bank and interest costs have surged 19% and taxes have risen by 17%. These inflationary pressures compound the financial burden on SMEs, necessitating a thorough reassessment of financial strategies to navigate this economic landscape. 

To respond to these inflationary pressures, the majority (82%) of businesses have resorted to raising their prices to stay afloat. However, this approach inevitably results in the transfer of the increased costs of essential goods and services to their customers. 

This trend is anticipated to persist, potentially leading to a loss of customers for businesses unwilling to accommodate the rising prices. As we emerge from the pandemic, approximately 15% of SMEs have already ceased operations. For those choosing to absorb these costs, their long-term profit margins are bound to be negatively affected. 

Further exacerbating these financial challenges are the ripple effects of international market shifts. The recent surge in interest rates in the US, combined with Malaysia’s overnight policy rate (OPR) rate hike, has triggered a chain reaction, leading to the devaluation of the ringgit against the US dollar, marking its lowest value in 25 years. 

This exchange rate disparity amplifies the costliness of doing business, particularly for SMEs engaged in international trade, import and export. The challenge is daunting as these businesses grapple with balancing their financial statements. 

Another critical issue that SMEs face is the need for more cash flow. The age-old adage “cash is king” has never rung truer. With the economy in a recessionary phase, the need for sufficient cash reserves has become paramount for sustaining day-to-day operations. 

SMEs, often needing access to significant cash reserves, find themselves in a tight spot, facing challenges in meeting their financial obligations, paying employees and investing in growth opportunities. 

In such trying times, the necessity for interest-free credit to bolster cash flow has become more pronounced than ever before. Regrettably, due to the increase in the OPR, business loan interest rates have risen, leading to a decrease in approval rates. 

Amid these challenges, the competitive market landscape adds another layer of complexity. The global economy is rapidly evolving, spurred by technological advancements such as artificial intelligence. 

SMEs, while striving to innovate and remain competitive, face a David-and-Goliath-like scenario. The combination of limited cash flow, high cost of doing business (exacerbated by the ringgit’s devaluation) and the emergence of technological disruptions places these smaller players at a significant disadvantage. 

Meanwhile, larger corporations with substantial cash reserves continue to wield considerable market dominance. 

However, amid these hurdles, payment solutions have emerged as crucial strategic allies, aiding SMEs in their expansion and development. 

Fintech solutions have become instrumental in the growth of SMEs, offering streamlined and cost-effective alternatives to traditional banking. 

These solutions empower SMEs to navigate the complexities of international transactions, opening new avenues for global expansion. With services spanning globally, SMEs can tap into a broader market and explore targeted growth opportunities. 

They also offer cost-effective and secure international transfers. The exchange rates provided often outperform those of traditional banks, making transactions cheaper. The efficiency of these platforms ensures that SMEs can conduct business globally with confidence, and eliminates the complexities associated with establishing local bank accounts in various countries, providing SMEs with accessibility and efficiency in cross-border trade. 

Lastly, by reducing costs and expediting fund transfers, fintech solutions enable SMEs to allocate more resources and time towards business expansion. This shift from excessive transaction expenses to strategic financial management enhances the financial health and resilience of SMEs in a competitive market. 

The road ahead for SMEs in Malaysia might be challenging. Still, the synergy between businesses and payment solutions is a testament to the resilience and adaptability of these enterprises. The potential for growth and empowerment seems within reach, offering a promising outlook for the SME sector in Malaysia. 

The groundwork has been laid for SMEs not just to weather the storm but also to emerge as stronger and more resourceful entities, ready to embrace the changing economic landscape. The journey towards a resilient and empowered SME ecosystem in Malaysia is underway. 

Yogesh Sangle is head of Instarem, a Singapore-headquartered cross-border payments company

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