Malaysia Urges Development Banks to Boost Lending to Small Businesses Amid Trade Pressures
Malaysia’s development banks have been called upon to ramp up lending to micro, small, and medium enterprises (MSMEs) as global trade tensions threaten the nation’s economic growth, employment, and income levels.
Amid growing caution from private banks during ongoing “economic turmoil,” development finance institutions must step in to bridge the funding gap, said Mohd Prasad Hanif, Secretary General of the Association of Development Finance Institutions Malaysia (ADFIM).
“Most private commercial banks are hesitant to lend to these higher-risk segments,” Hanif noted during the Asian Banking & Finance and Insurance Asia Summit Malaysia 2025 in Kuala Lumpur. “Yet these sectors are still required to repay their financing, regardless of the risk.”
S&P Global Ratings recently lowered Malaysia’s 2025 growth forecast by 40 basis points to 4.5%, citing weaker global trade prospects and rising U.S. tariffs on semiconductors. Malaysia’s GDP growth slowed to 4.4% in Q1, down from 5% in the previous quarter.
Development banks, mandated to support MSMEs and key productive sectors such as agriculture and export-oriented industries, are expected to address the estimated $21.5 billion MSME financing shortfall, based on 2024 figures from the SME Finance Forum. These institutions increased their lending to target sectors by 5.8% year-on-year in the second half of last year.
The escalating trade dispute, marked by former U.S. President Donald Trump’s announcement of sweeping reciprocal tariffs—such as a 125% tariff on Chinese goods—has heightened risks for Malaysia. The country was hit with a 24% tariff before a 90-day delay was granted in mid-April. According to the Malaysian Institute of Defense and Security, these tariffs could slash Malaysia’s export growth by 1.3 to 5.8 percentage points.
Hanif emphasized that development banks face a balancing act: maintaining profitability and low non-performing loan (NPL) ratios while offering competitive interest rates. He cited MIDF Malaysia as an example, which maintained an NPL ratio below 1% while issuing loans to the manufacturing sector at rates as low as 2%.
To enhance the effectiveness of these banks, Hanif urged the government to reduce bureaucratic hurdles in loan approvals and grant development banks greater operational independence, despite being overseen by the central bank.
“The government must empower development financial institutions to make timely decisions—ideally as quickly as the private sector—so they can respond effectively to current economic challenges,” he said.
Failing to do so, he warned, could hinder these institutions from fulfilling their core mandate: delivering specialized financial services essential to Malaysia’s broader socioeconomic and development objectives.
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