MSME financing outlook to remain broadly stable

PETALING JAYA: Amid a period of subdued economic growth and increased caution among banks, the micro, small and medium enterprise (MSME) sector, with its diversified segments, has proven to be quite economically resilient over the years.

In a report, Maybank Investment Bank Research said MSMEs accounted for 18.5% of system loans, with a manageable gross impaired loans (GIL) ratio of 3% (excluding Development Financial Institutions or DFIs), which in its view lowers systemic risk.

“Accounting for 39.5% of gross domestic product, 14.3% of exports and 48.7% of total employment, MSMEs are critical to Malaysia’s economy.

“MSME loans account for 18.5% of total private non-finance sector loans and have outpaced overall industry loan growth by a factor of 1.5 times over the past three years.

“Their loan growth as of end of August 2025 was 7.9% against the industry’s 5.7%,” the research house said in a report.

It noted that four economic sectors contributed to 73% of MSME lending, namely manufacturing, wholesale/retail, real estate and construction.

Real estate and manufacturing loan growth was robust at 10.4% and 10.5% year-on-year (y-o-y) at the end of August 2025, while construction and wholesale/retail loans expanded 7.4% and 4.4% respectively.

According to the research house, asset quality had remained relatively stable with a GIL ratio in line with the four-year average of 3.6%.

That said, while micro and medium enterprises are seeing fairly stable asset quality, the stress appears to be among small enterprises.

Small and medium enterprises’ (SME) exposure varies across the banks currently.

“For banks in our universe, SME financing accounts for as low as 4% of BIMB Holdings Bhd’s gross financing and as high as 35% for Alliance Bank Malaysia Bhd (ABMB).

“Meanwhile, Malayan Banking Bhd, ABMB and AMMB Holdings Bhd have seen a double-digit five-year SME loan compounded annual growth rate (CAGR) of 12% to 14%.”

Of the research house’s top three picks, namely Hong Leong Bank Bhd (HLB), Public Bank Bhd and AMMB, it noted that HLB’s MSME lending has grown at a five-year CAGR of 12%, while its GIL ratio stood at 1.1% at the end of June 2025.

“Meanwhile, Public Bank’s lending to MSMEs largely takes the form of collateralised shophouse financing, which would explain the low GIL ratio of just 0.8%.

“AMMB’s retail SME division was recently merged with its business banking division for greater synergies – its GIL ratio has been stable at 2.01% as of the end of June 2025.”

The research house said MSME lending by commercial banks has been on an uptrend over the past three years, averaging 6.6% y-o-y as at end-August 2025.

Lending by Islamic banks remains robust, though it has moderated from growth of close to 20% in late 2023 and early 2024.

DFIs, on the other hand, have seen markedly slower lending to MSMEs, likely due to asset quality concerns.

Furthermore, commercial banks accounted for 58.6% of total MSME loans at the end of August 2025, while Islamic banks made up 35.4%.

DFIs contributed 5.5%, while investment banks had just a 0.4% market share.