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

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
muhd@bnm.gov.my
16 July 2014

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. 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. 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. 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. 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. 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. 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. 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.
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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. 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. 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. 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. 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)
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15. BANK NEGARA MALAYSIA
CENTRAL BANK OF MALAYSIA
15
Conclusions