Banks are bullish on Malaysian SMEs

Malaysian banks have a winner in the country’s growing legion of small and medium enterprises.

Analysts predict strong, double digit growth in banking loans to SMEs this year and more banks are expected to offer SMEs products and services that boost their earnings.

Bank Negara Malaysia, the central bank, said that loan applications by SMEs (including loans to individual businesses) grew annually at 25% in the third quarter of 2011 while loan approvals rose by 28% year-on-year.

In 2010, SME loan applications for the fourth quarter grew by 15% while loan approvals posted an annual growth of 14%. Loan approvals for the SMEs account for 19% out of total loan approvals for the third quarter of 2011.

Apart from loans provided under the Economic Transformation Programme , many banks expecting SME loans to be one of their key loan drivers for this year. Banks are putting more focus on growing this particular loan segment.

Interest margin for SME loans are mostly higher than mortgages and other retail loans although the default risk of SME loans might accelerate if Malaysia’s economy was slow unexpectedly.

SME loan growth will also be driven by strong domestic consumer spending, continued resilient intra-ASEAN regional trade and the gradual recovery of the U.S. economy.

Malaysian SMEs also have a huge demand for trade finance which is attractive to banks as it doesn’t greatly impact banks' capital ratios. Although SME loans are still relatively a small proportion of total bank loans, its contribution to banks' business is expected to rise due to its high growth.