BANK NEGARA MALAYSIACENTRAL BANK OF MALAYSIA

Agriculture’s significance for the financial inclusion and stability agendaPerspectives from Malaysia

International Conference on "Revolutionising Finance for Agriculture Value Chain’’Nairobi, KenyaMuhammad bin Ibrahimmuhd@bnm.gov.my

16 July 2014

BANK NEGARA MALAYSIACENTRAL BANK OF MALAYSIA

Areas covered:-

• Evolution and structure of Malaysia’s agricultural sector

• Challenges in modernising the small holders sub-sector; journey towards year 2020

• Components of access to financing

• The Central Bank of Malaysia’s role in financial stability

• Development role of the Bank – an inclusive financial system

• Building the pre-requisite eco-system : A Malaysian perspective

• Risk management issues and the environment

Coverage of presentation

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• Malaysia is blessed with abundant natural resources that has allowed for the production of some of the most valuable agricultural commodities.

• Agriculture was once the backbone of Malaysia’s economy but has since been diversified - In the 60’s, contributed more than 50% of total GDP and key producer of

rubber. Now only 7.1% of GDP- But in terms of value has grown almost 16.5 times to RM56b (USD17.5b)

• Structure remains more or less unchanged since colonial times. The small holders sub-sector plays a key part- uplifting the rural communities’ economy- ensures national food security

Estate

sub-sector

Smallholder’s sub-sector

• Highly commercialised

• Owned by private companies

• Industrial crops e.g. palm oil, rubber & cocoa

• Less commercialised

• Owned by individual farmers

• Small scale food crop

The evolution and components of the Malaysian agriculture sector

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1970

1980

1990

2000

2006

2007

2008

2009

2010

2011

2012

2013

0

10

20

30

40

50

60

Agriculture Manufacturing Services Others

Percentage of GDP contribution (%)

GDP contribution by sector

• Contribution to GDP reduced dramatically over the course of 40 years

• Constitutes 7.1% of total GDP in 2013

• Significantly skewed toward commercial commodities - Global player in oil palm

• Moving towards resource-based industries and services to create higher value-added activities

• Projected overall growth of 2.1% in 2014.

Structural shift from an agricultural and commodity-based low-income economy into a services and manufacturing based economy…

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Notwithstanding its size, modernisation of the agriculture sector remains critically important…

1. The National Agriculture Policy (NAP)

2. Strengthen existing agencies focused on R&D, marketing, and training.

3. Refinements in financial support by improving subsidised and directed agricultural credit programs

By year 2020, we envisage to:- Transformation into

agribusiness, export capable with increased contribution to GDP

- At the same time sustain domestic food supply to ensure national food security

- Create greater job opportunities

- Through structured Government policies and enabling infrastructure. Small holder sub-sector given priority as the estate sub-sector is more mature and developed

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But the journey to year 2020 is challenging… - Transforming the agriculture sector requires a paradigm shift in the ecosystem including corresponding roles for the financial sector

transformation

Modernising enabler

institutions

Creating demand based

products

Effective risk based pricing

Refined assistance

programmes

Adopting sustainable

business model

• Past experience shows that subsidies or favourable lending rates may distort financing to the deserving target groups

• Emphasis to shift from dispersing cheap credit to creating sustainable financing for the agriculture sector

• Lacking in economies of scale

• Aging farming community

• Lacks market centricity• Poor market linkage

• Focus on low value products• Low R&D content, clinical studies

Financial sector participation required

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Government priority

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Access to financing for the Malaysia’s agriculture sector comprise three main components…

Banks

Credit products

Payments infrastructure

Advisory

Government and government owned

Banks

Grants

Subsidies

Incentives

Insurers

Insurance products

Agriculture sector

• Lending by banking system accounts for 90% of the sector’s financing source- Majority of financing is for commercial commodities

i.e. palm oil and rubber at 70%- A large financing gap exists for food production sub

sector

• Continued government support for the small holders is critical- Structured programmes under MoA covering

financing, innovation and market access totaling RM2.3b (USD766m). Includes SME schemes, microfinance schemes and agri-preneur programs

- The agriculture development bank (Government owned DFI) is one of the sector’s main lenders - 88% of total DFI lending to the sector

• Banking system continue to support Government’s socio-economic agenda- The financing to priority sectors continue to exceed

its target set for the past 8 years

• Insurance products includes general insurance for crops, plantations and equipment- Work currently in progress for a micro-insurance

schemes which can include cover for farmers

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The banking sector remains the biggest contributor to agriculture financing…

2

0

10

20

30

40

50

60

70Lending to the agriculture sector

DFIs

Banking system

RM bil

*April 2014

• Banking system’s lending to agriculture sector - Average growth at 9.3% (2005-2013)- Low impaired loan ratio of 2.7% (2014)

• Sectorial lending by banking system - Balanced composition between agriculture and agro-

based lending- Upward lending trend for agriculture with fluctuating

growth for agro-based sector since 2004

• SME financing by banking system- Services remain as the ‘preferred’ sector, representing

close to 60% of total SME financing

8

0

5

10

15

20

25

30

35Sectorial lending by banking system

Agriculture

Agro-based

RM bil

0

20

40

60

80

100

120

140SME financing by banking system

Primary Agriculture

Manufacturing

Construction

Services

RM bil

Manufacturing includes agro-based industries

BANK NEGARA MALAYSIACENTRAL BANK OF MALAYSIA

The Central Bank had issued two long term banking master plan aimed towards a strong, stable, competitive & inclusive financial system

Masterplan 2001-2010 Blueprint 2011-2020

…to develop a more resilient, competitive and dynamic financial system with best practices, that supports andcontributes positively to the growth of the economythroughout the economic cycle..

…strategic plan that charts the future direction of the financial system as Malaysia transitions towards becoming a high value-added, high-income economy…

Financial system’s support to the agriculture sector is crucial in supporting government’s National Agriculture Policy 3 (NAP) introduced in 1999:• Private sector participation which requires more

private sector investment.

• Enhancing the operations and efficiency of Agriculture Bank in providing credit to agriculture sector

Few recommendations proposed includes:

• Develop structured and systematic training programme for borrowers

• Establish a risk-distribution mechanism

• Provide financial assistance to the deserving agriculture community

• Grant tax exemptions

Economic sectors moving to higher value-added economic activities, where knowledge, innovation and productivity are central to value creation. Usage of an advanced electronics as well as green and resource-based industries.

Promoting the full range of financing by DFIs to targeted strategic sectors, particularly in the agriculture, cooperative and SME sectors.

The agriculture related development initiatives identified to be driven by the banking sector includes:• Development of expertise to support new growth areas

such as green technology and the adoption of socially and environmentally sustainable financing practices which are consistent with international standards.

• Agent banking; and• Microfinance.

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Green technology can help unlock opportunities for new economic growth and a viable solution to address global climate change issue

• Producer of GT - To finance investments in production of green technologies• User of GT – To finance investments in utilisation of green technologies

• Producer of GT – Max: RM50 m per company (up to 15 years)• User of GT – Max: RM10 m per company (up to 10 years)

Purpose of Financing

Financing size & tenure

Achievements

• Interest / Profit rebate of 2% p.a. • Government guarantee 60% of financing approved

Government Incentive

• Issued 290 GT certificates with project value totaling RM5b (USD16.5b)• 120 companies have been approved RM1.6 b financing• Approval rate: 71% in terms of no. of companies; 60% in terms of amount

approved• FIs including MDV offer GT financing (Conventional & Islamic products)

- Malaysia’s initiative in bringing the financial sector onto the green technology arena. Applicable as well to the agriculture sector which applies Green Technology (GT) methods

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% of served sub-districts

Transactions by Agents

Number of Agents by 3 FIs

4,834

460 49216

0

1,000

2,000

3,000

4,000

5,000

Soleproprietors

Post offices Petrolstations

Felcraagents

5,802 banking agents nationwide

20.7 mil transactions totaling RM2.3 bil (USD760m)

From 46% (end-2011) to 92.6% - exceeded target to achieve 90% by

end-2014

Agent Banking by Type of Agent

% of served local constituencies

From 72.9% (end-2011) to 100%

As at end-May 2014

% of served districts

100% served by mid-2011

Since its inception in 2011, the Agent Bank initiative has proven successful in bringing rural economies into the mainstream…

- With rural farming communities benefiting

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Source: Bank Negara Malaysia

Financing outstanding stood at RM857 m (USD285m) RM million, end-period

887

More than 68,000 outstanding accounts‘000, end-period

71.5

More than 2,400 access points nationwideEnd-period

Micro enterprises have quick access to Pembiayaan MikroAverage Processing Time in Dec 2013 (No. of days)

4

6 4

2

Approval Time

DisbursementTime

Government’sTarget

Participating Financial

Institutions’ Performance

776 68.8

68.4

10.22006

2012

2013

2,229

2,479

913

2,433

2006

2010

2011

2012

870

857

842006

2012

2013

Microfinance initiatives continue to bring fast credit to small businesses including the agri-preneurs

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Emphasis given on developing an appropriate ecosystem

National SME Development Council (NSDC)

Strengthening Enabling Infrastructure

Enhancing Access to Financing

Building Capacity

and Capability

• Entrepreneur Development• Human Capital

Development• Advisory Services• Product Development• Technology Enhancement• Marketing and Promotion• Awareness and Outreach

• Physical Infrastructure• Regulatory Infrastructure• Information Infrastructure

• Start-Ups• Business Expansion• Rehabilitation

High level champion to formulate broad policies and strategies for comprehensive development of SMEs across all sectors

- Both the agriculture sector and SME sector, share similar building blocks with the Country’s leadership helming the policy making body

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In turn, the Central Bank plays a key role in the financing eco-system for the SME sector

SME Financing Ecosystem

Outreach & Awareness

Programmes

Debt Resolution & Management

Avenues to Seek Information &

Redress

Financing & Guarantee Schemes

Financial Infrastructure

• Microfinance Institutional Framework

• Strengthening the Development Financial Institutions

• Central Credit Reference Information System (CCRIS)

• BNM’s SME Funds • Venture Capital • Financing for new growth

areas• CGC Guarantee Schemes• Green Technology Financing

Scheme

• BNMLINK, BNMTELELINK, MOBILELINK• Financing Help Desks at SME Business

Associations• ABMConnect• Bankinginfo & SMEinfo• Complaint & SME Advisory Units at FIs

• Small Debt Resolution Scheme

• Credit Counselling & Credit Management

• SME events• Media promotions• Distribution of promotional

materials through local authorities

• Credit Guarantee Corporation Credit Bureau Malaysia

• SME Financing Facilitation (ABM-PARTNER)

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Conclusions