Malaysia’s development banks told to plug lending gap for MSMEs

Productive sectors need more capital to stimulate the slowing economy.

Malaysia’s development banks should step up loans to small businesses in the face of a global trade war that puts economic growth, jobs and wages at risk.

These loans will come in handy as private banks turn cautious during the “economic turmoil,” said Mohd Prasad Hanif, secretary general of the Association of Development Finance Institutions Malaysia (ADFIM).

“Most private commercial entities will be reluctant to lend out [to these sectors],” he told the Asian Banking & Finance and Insurance Asia Summit Malaysia 2025 in Kuala Lumpur. “This riskier segment will still have to pay back the financing.”

S&P Global Ratings has cut its growth forecast for Malaysia by 40 basis points to 4.5%, citing a weaker outlook on global trade and higher US tariffs on semiconductors. Growth slowed to 4.4% in the first quarter from 5% a quarter earlier.

Development banks are mandated to lend to micro, small, and medium enterprises (MSME) and productive sectors such as agriculture and exporters.

They are expected to help fill the more than $21.5b in the MSME funding gap in Malaysia, based on 2024 data from the SME Finance Forum. These financial institutions increased lending to target sectors by 5.8% in the second half of last year from a year earlier.

US President Donald Trump has announced sweeping reciprocal tariffs on its trade partners, notably 125% on China. Malaysia faced a 24% reciprocal tariff before Trump delayed the duties for 90 days in mid-April. 

The Malaysian Institute of Defense and Security said the US tariffs could lower the Southeast Asian nation’s export growth by 1.3 to 5.8 percentage points.

Hanif said the main challenge for development banks is keeping their bad loans low whilst still being profitable, and lending at rates at par or lower than private bank loans. 

MIDF Malaysia, one of its dozen development banks, has kept its bad loan ratio at less than 1%, whilst giving out loans to the manufacturing sector at 2% interest, Hanif said.

He said the government should ease bureaucratic red tape in loan approvals and make these banks, which are managed by the central bank, independent enough.

“[The government] has to allow development financial institutions to be able to make decisions fast — perhaps as fast as the private commercial sector — so that they are able to adapt in these turbulent times as well,” he said.

Otherwise, these banks won’t be able to perform their mandate, which is to provide specialized financial services crucial for the country's socioeconomic and development goals, he added.