Agriculture’s significance for the financial inclusion and stability agenda: Perspectives from Malaysia


Published on

Nairobi, 16th July, 2014. Presentation by Muhammad bin Ibrahim (Bangladesh Bank) on Day 2 of the Fin4Ag conference

Published in: Technology
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Agriculture’s significance for the financial inclusion and stability agenda: Perspectives from Malaysia

  1. 1. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA Agriculture’s significance for the financial inclusion and stability agenda Perspectives from Malaysia International Conference on "Revolutionising Finance for Agriculture Value Chain’’ Nairobi, Kenya Muhammad bin Ibrahim 16 July 2014
  2. 2. BANK NEGARA MALAYSIA CENTRAL 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 2
  3. 3. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA • 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 3
  4. 4. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA 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… 4
  5. 5. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA 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 5
  6. 6. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA 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 • 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 6 Government priority
  7. 7. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA 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 • 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 7
  8. 8. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA The banking sector remains the biggest contributor to agriculture financing… 0 10 20 30 40 50 60 70 Lending 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 35 Sectorial lending by banking system Agriculture Agro-based RM bil 0 20 40 60 80 100 120 140 SME financing by banking system Primary Agriculture Manufacturing Construction Services RM bil Manufacturing includes agro-based industries
  9. 9. BANK NEGARA MALAYSIA CENTRAL 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 and contributes positively to the growth of the economy throughout 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. 9
  10. 10. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA 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 10
  11. 11. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA % of served sub-districts Transactions by Agents Number of Agents by 3 FIs 4,834 460 492 16 0 1,000 2,000 3,000 4,000 5,000 Sole proprietors Post offices Petrol stations Felcra agents 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 11
  12. 12. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA 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 nationwide End-period Micro enterprises have quick access to Pembiayaan Mikro Average Processing Time in Dec 2013 (No. of days) 4 6 4 2 Approval Time Disbursement Time Government’s Target 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 12
  13. 13. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA Emphasis given on developing an appropriate ecosystem National SME Development Council (NSDC) • 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 13
  14. 14. BANK NEGARA MALAYSIA CENTRAL BANK OF MALAYSIA 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) 14