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  • Funding Your Startup 101 – Part 2

    Funding Your Startup 101 – Part 2

    Funding is often the biggest constituent of a startup. Having a brilliant idea alone is insufficient unless you are well-equipped financially too. Startups inevitably need a source of fund to extend the business, but where can you get these funds? In this article, we will be introducing to you the funding channels from both the private and government sectors so that you get a clearer picture on how each of them can support you- financially and maybe even non-financially too.

    In the previous article, we focus on how to make your startup more fundable. If you have not read so, please do so at, Funding Your Startup 101 – Part 1!

    Private Funding Channels

    Instead of going through traditional channels, such as a bank-issued business loan or government grants, many entrepreneurs are turning to private lenders to fund their business or idea due to the lesser bureaucracy involved and hence lesser time lag in getting the approval.

    The possible alternative of private funding includes friends and family (F&F), Angel Investors, Equity Crowdfunding (ECF), Corporate Funding and Venture Capitalist. Without further ado, let us begin!

    Equity Crowdfunding
    Equity crowdfunding is, in status quo, one of the most famous routes to fund your ideas. It is a process for startups and Small & Medium Enterprises (SMEs) or Businesses to raise funds from the “crowd” (general public), a.k.a retail investors (MCSB, 2017). Since it is unlikely that your startup is able to attract angels investors or venture capitalists at the ideation stage, equity crowdfunding will be a better alternative for your startup to obtain capital. I bet you have heard about Indiegogo and Kickstarter before, but we will expose you to more in-depth and localised scene!

    The Securities Commission Malaysia (SC) approved 6 main equity crowdfunding operators, local and foreign platforms, in Malaysia that are eligible as an alternative funding platform for young businesses and entrepreneurs namely Alix Global, Ata Plus, Crowdonomic, Eureeca, PitchIN and Propellar Crowd+ (Lee, 2015).
    Pros:

    1. ECF can easily gain media attention which benefits your business’s media strategy.
    2. ECF platforms essentially act as your business’s investment advisor.
    3. ECF platforms provide your business with a greater reach to the potential investors.
    4. ECF does not require you to give up a substantial amount of your company’s equity.

    Cons:

    1.Intermediary platforms have a high risk of being hacked, causing a loss of data potential investment losses for crowdfunding investors.
    2. Crowdfunding investors might face difficulty in selling their shares in your company as these type of securities often have no secondary market (Abiolu, 2016).
    3. Equity Crowdfunding might make your project less flexible as there should not be significant changes to the offerings made after your project receive the funding required (    The Pros and Cons Of Crowdfunding Your New Business, n.d.).

    Angel Investors
    By the definition of Malaysian Business Angel Network (MBAN), angel investors are often High Net Worth Individuals (HNWI) or High-Income Earners (HIE) who invest their personal disposable income in start-ups or early stage businesses, usually in exchange for equity. Angel Investors can either choose to provide a one-time investment, focusing on helping your startup take your first step or to provide an ongoing injection of money to your business, focusing on growing and bringing your company through its difficult early stages.

    While angel investors do not baulk at making a bigger investment if they see potential in your startup, it usually comes with higher expectations as they are looking to invest in a business that will profit them.

    Friends and Family
    Friends and family financing are the easiest to complete. The whole funding process takes less than 2 months and it does not involve lengthy and complicated processes. National Entrepreneurship Center (NEC) endorses the idea of F&F financing but advises companies that utilize this funding channel to do it carefully because if it is done improperly, it will not only cost you your business but also risk destroying or losing those relationships (Kirksanderslaw, 2013). It is crucial for you to document every transaction and agreement made when using this funding channel to eliminate the possibility of a conflict arising in the future. As the business owner, you need to be absolutely transparent with the person loaning or investing in your business, informing them the exact plan of utilizing the money and plan to repay.

    Venture Capitalists

    The difference between angel investors and venture capitalists is that angel investors usually use their own money as capital while venture capitals typically take care of pooled money from other investors and place them in a strategically managed fund.

    Venture capitalists are investors who either provide capital to startup ventures or supports existing small companies that wish to expand but does not have access to the equities market. The main reason for VC to make an investment in your business is because they are able to earn a massive return on their investment should your company succeed in the future. They might also experience great losses when their pick fails, however, these investors are usually wealthy enough and can afford to accept the risks associated with funding new, young and unproven companies that appear to have innovative and creative ideas and have a management team that is passionate (Venture Capitalist, n.d.).

    Venture Capitalists can provide a valuable source of guidance and consultation as well as support in critical areas of your business, but they are likely expecting to be involved in decision making and day-to-day operation.

    Public Funding Channels

    Bank Loans
    Other than the options stated above, let’s not neglect the most common pathway to your funding– bank loans. Banking institutions are indeed one of the major sources of financing for startups. However, to much disappointment, we are here to realise that most commercial banks are reluctant to provide startups loans especially when your business is still on ideation period or is yet to break-even, which most likely you are in one of these circumstances too!
    Not to feel despair, SME Bank which is wholly owned by the Malaysian government, is here for you! It has cumulatively approved 84.3% of all the applications received. Does the probability of being one of the beneficiaries sound attractive to you?


    One of the finance opportunities available under SME Bank is Young Entrepreneur Fund (YEF) which targets youths ageing 18-30. They are here to help you with the first step of starting a business by providing you with working capital and purchasing assets necessary for business operations, up to a maximum of RM100, 000.

    However, here are the pros and cons of getting a bank loan in financing your business.

    Pros:
    1. The public is usually familiar with their banks after dealing with them for a number of years.
    2. Banks generally do not take part in the business operations, neither do they take shares in the company. Their sole concern is about repayment of loan principal together with the interest.
    3. Getting a bank loan for business financing includes a much lower interest rate than credit cards and some finance companies.
    4. You may enjoy tax benefits on business loan interests!

    Cons:
    1. Application for bank loans is cumbersome. It involves all kinds of documents and verifications which makes it somehow frustrating.
    2. Lengthy process – Some banks may take weeks to months in reviewing your application and evaluating your credit rating (do you pay back loans on time?), before making a decision on whether to approve the loan or not.

    Government Grants and Initiatives

    Malaysia Digital Hub

    Malaysia Digital Economy Corporation (MDEC) drives the digital economy sector in Malaysia. Last year, Malaysia Digital Hub (MDH) was launched under MDEC, incubating and connecting local startups to the ASEAN and global digital ecosystem. If you are wondering where these hubs are, they are very near to you, in fact, they are right here in the Klang Valley. The first four MDH are Co., APW in Bangsar, and Common Ground and Work in Damansara. After these four, Sunway iLabs is the most recent add-ons to the list.

    This is where all the growing startups, global tech companies, accelerators and talent builders and investors gather. Hence, this is where you can be connected with potential partners, be funded and subsequently achieve your dream. Being a startup, you will also be provided with some other supports in MDH, such as:

    • High-speed broadband and fibre optic connectivity
    • Intellectual Property (IP) Protection
    • Access to a Founder Network, with founders of over 20 nationalities

    Cradle Fund

    Cradle Fund Sdn Bhd, incorporated under Ministry of Finance with their credo – Creating Leading Startups has provided assistance to over 700 Malaysian tech start-ups in the past decade. For all businesses from pre-seed, seed to start-up and scale-up stages, Cradle has its product which suits you. Other than financial aid, it does also offer various value-added assistance to cater to the entrepreneur’s needs in the competitive world.

    Other than these, Malaysia Venture Capital Management Bhd (MAVCAP), Malaysian Industrial Development Finance Berhad (MIDF) and Malaysian Global Innovation and Creativity Centre (MAGIC) are also there for you and your startup.

    Conclusion

    There are a thousand and one channels out there where you can get your startup funded, regardless of private or government sector. All you need is to find the correct channel and of course bring them an impressive idea. However, before that, do ask yourself, how “fundable” your business idea is? If you are not well prepared, it’s definitely a “NO” to approach for funding, but it’s never too late to get started.

     

  • Social Enterprise to Queen’s Award

    Social Enterprise to Queen’s Award

    Calvin Woo shares his two cents on the working to make a difference, misconceptions of entrepreneurship and surviving the industry at a young age.

    At the age of 21, most people receive their key to freedom, but at the age of 21, Calvin was receiving the Queen’s Young Leaders Award. From previously being Head of Programmes at SASTRA Education Development, to being National Unity Youth Fellow at IDEAS and even co-founding a social enterprise, NexGen Impact (NGI), Calvin Woo seems to have done it all.

    He holds a strong voice for the youth, having shared about the youth of ASEAN and his hopes for the future at the ASEAN@50 Conference in 2017. At the same conference, the FLY Malaysia Journalism Team had a chance to meet and schedule an interview with the man with the golden CV.

    In a warm and inspiring session, Calvin shared fresh insights into the world of making a difference, doing it during one’s youth and common misconceptions surrounding entrepreneurship. It is this journalist’s pleasure to put some of that perspective to paper in this article.

    Getting to know Calvin

    Calvin has had a variety of sources of education over his years, beginning with his secondary school in Maktab Rendah Sains Mara (MRSM), Mersing, all the way to completing several modules in world class institutes such as the University of Connecticut and Cambridge. He is currently pursuing his Masters in Business Administration (MBA) with the Asia School of Business in collaboration with MIT-Sloan.

    Of course, there is more to a person than their educational background. A great lover of reading, Calvin takes the chance to indulge himself in books and tea in his spare time. He can often be found doing so accompanied by jazz and music by the likes of artists such as Frank Sinatra and Michael Bublé. A reflective person, he makes it a point to journal daily, asking himself the question: “What have I really done and what can I do better?” He is also a big fan of playing badminton and frequently keeps in shape by hitting the gym.

    Being a busy person who has a number of hobbies, the questions beg to be asked: Where and how do the forces of work and life find balance?

    That Elusive Work-life Balance

    Managing ambitious activities, family, friends, and daily wellbeing in general can be one of life’s toughest juggling acts. To maintain a sensible degree of sanity is nowhere near easy, and having co-founded a social enterprise, Calvin’s beginning days were more work than life.

    “When I first started my venture (NGI), I did not have a single day off. Every day, I worked for about 16 hours. As much as I have a lot of enthusiasm, I need to be able to rest. I have trouble taking a day off.”

    An early discovery he made was that a break was neither a choice nor a want, but a need. When one gets wrapped up in turning dreams into reality, the idea of taking time off can sometimes seem impossible, especially if the work is of true passion.

    Calvin draws some inspiration from his love of nature, saying there is a lot to learn from applying some of its philosophy to life. Out in nature, the same scenery viewed from different locations gives light to a whole new image. There is a bigger picture, and looking at things from different angles allows it to be seen better.

    To help process the idea of taking breaks, Calvin does his best to always step back and look at things from the larger perspective: One day of not working will allow him 10 days of good working; his productivity increases.

    “I learned to take care of myself first before I can contribute better.”

    He also keeps the understanding that he can serve better with that rest and energy, an invaluable reminder that when putting the people first, the self must not be forgotten.

    Calvin also sets aside time for an occasional hometown visit back to Johor. He shares how once in a while he takes about a week off and heads home to spend time with his family. Full of nostalgia, he laughs about how his mother makes him put aside all his gadgets so he can fully enjoy his time away from the hustle and bustle.

    When it comes to having that rest, Calvin states “I need to be able to slow down, to go fast”, a quintessential display of going back to the basics of balance. As the saying goes, “Never get so busy making a living that you forget to live your life”.

    M.A.D World

    In this day and age, many strive to start their own organisations and enterprises with the goal of Making A Difference (MAD). With his experience in leadership in the field, Calvin shares some words of wisdom.

    Starting Up

    As with any venture, there are many things to consider and some thought processes to go through when starting up. Having a strong set of experiences in this field, Calvin believes that people tend to spend excessive time thinking about the how. There is a strong fixation on how they are going to do things, how they are going to make a difference.

    “It’s the value that should come before the method of delivery.”

    Everything solid comes from a strong basic foundation. When it comes to structural essences of giving back to society, there are two questions Calvin believes should be asked:

    1. Why should the people care?
    2. Why is it relevant to them?

    These basic questions serve as a reminder that even in the spirit of making a difference, it’s not just the importance of giving value, it’s giving the right value. Just as no business wants to sell ice to the Inuit, no organisation with a social mission should be dishing mismatched values.

    Democratising Opportunity

    A concern Calvin brings up is that very often when aiming to do good, the work done and the opportunities do not reach out to all. When it comes to really making an impact, one needs to consider how to democratize it and how to share the difference made with the many who need it, not just the few who are near. A simple example of how certain groups get left out is through language choice. He shares that many beneficial and informative events cater to those who speak English with higher fluency. Those who are more proficient in other languages are left in the dark.

    Delving deeper, Calvin brings to light another challenging part of the same status quo: There are many great opportunities and learning platforms today, but they are all in the biggest cities.

    “In KL we are always in our ivory towers. Many great organisations are in KL, but they are not in Johor, Kelantan or Pahang. Instead they are also in Germany, England, Singapore…”

    Many excellent organisations are already so heavily centralised in city centres. In order to make the most impact, Calvin suggests that every group or organisation should aim to consider its reach in its early phases. Planning how to extend a hand to the masses that need it early on will help bring about a more evenly-spread change.

    The Creed You Need

    Everything needs a set of fundamental beliefs and guiding principles. When it comes to starting one’s own venture, more than just considering business models and sustainability, one should also consider more personal aspects. Among these considerations are the building of a wealth of knowledge and the non-monetary costs of the pursuit.

    It is a well-established understanding that knowledge and wisdom is going to be a need no matter which walk of life. Calvin, however, addresses an approach that is popularly brushed off: formal and institutional education.

    “There is this popular notion that you don’t need a university education. There are many remarkable, successful people who did not get one, such as Richard Branson. However, in his book, he said if given the chance he would have gone back to school. That way, he wouldn’t have to bite so many unnecessary bullets.”

    Even after having done a few modules, his degree, as well as starting up a social enterprise, Calvin found himself in the need to learn more, thus pursuing his MBA. He found that aside from experience and learning on the  go, there was more technical knowledge that he needed.

    “If you find it adds value to what you’re doing you should consider it. There’s a need for instant gratification, a want to speed up everything, but sometimes it’s just a process.”

    He brings the classic analogy to the table: If a butterfly doesn’t squeeze itself out of the cocoon, it won’t be able to fly. Some processes cannot be skipped, and when it comes to the essential process of educating oneself, formal education should not be simply ruled out.

    An Error or Entrepreneur?

    The startup scene is more active than it has ever been. Be it for profit or not for profit, the thought of building something ground up lingers in the minds of many youths. An important question is: What thought processes should be considered before making the decision to execute?

    Drawing back to nature’s philosophy of different views, Calvin calls on an alternative viewpoint to keep in mind. Calvin challenges the common perception that buying a ticket on the entrepreneurship express is the train ride to liberty.  

    Having had firsthand experience, he shares:

    “Entrepreneurship has been over-glorified. A lot of people idolize it, saying you will be in control of your own time and achieve financial freedom. Truth is when you start your own venture you work 80 hours a week, not 40. For at least the first 2 years you have to bootstrap your way too.”

    There is a heavy price that some may suddenly realize they are not willing to pay. Work does not begin at 9 a.m. and close neatly at 5 p.m., the hours may be well longer and have hardly a fixed timing. “Entrepreneurship is not for everyone.”, Calvin emphasizes, gravely saying that failing to realize that could ultimately be a person’s biggest mistake.  

    “You need to have your endgame and your foundation. If you have a strong end goal in mind, then this gives you power because your plans can change, so long as they direct you to that one destination.”

    At the end of the day, Calvin once again draws it back to the why; it all comes back to your vision and your foundation (beliefs). Only with this can one thrive.  

    The Age-Old Problem

    “Age is just a number… Yeah, and jail is just a room” – Anonymous

    Everywhere many youths are eager to make their mark in society, being given many opportunities to work with many organisations of different backgrounds. However, when it comes to starting young, there is a challenge that has become more apparent: the ageism factor.

    Ageism is a type of discrimination that involves holding negative stereotypes about people of different ages. When the term ageism was first used it described the discrimination of older adults in the workforce. Today there is also discrimination towards the youth who are sometimes described as being “too young to think about making a difference.” The long-time belief that one must have eaten mountains of salt before striving to serve others still exists.

    Age is one of the things mankind is still unable to change, social media apps aside, and experience can take a very long time to attain. Nevertheless, there are still those who have found a way to not just navigate through it but to thrive despite it. Being one of those people, Calvin shares a solution.

    When things get difficult with people, it is known that having a strong support system of friends and family helps ease the pressures. When it comes to getting what you need, it is known that networking and building connections help you get to where you want to be. Calvin’s way of doing things is making the best of both worlds.

    When it comes to wooing your way through, a system must be in place. He calls it a support network. Instead of getting to know the head honchos and gaining their favour, Calvin suggests letting them get to know your vision. If people are onboard with the idea and mission, they will be ready not just to support, but to help. It is not about shotgunning the masses, but about getting to know individuals and letting them get to know what you envision.

    One by one, as more and more people believe in that vision, you will have a group standing by your side. When the time finally comes for you to share your idea, there are already people ready to provide backup should there be any unfair shoot downs.

    It’s about more than just getting people to like you; it’s about connecting with them on a personal level AND about connecting with them in vision.

    The Youth of Today

    There is an amazingly popular belief that this generation of the global population draws its powers from being born with an Apple product in hand, readily installed with all the latest apps. While it’s undeniable that the youth of today tote smart devices around like an extra limb, there is definitely more to it.

    “We (the current youth) are born in a world where there is abundant diversity and inclusiveness.”

    Today’s youth enter the world already exposed to the many little diversities of life. Unlike earlier generations, this generation has grown up already getting bits and pieces of other cultures, other types of people and other ways of life.

    Upon entering the workforce, culture shock is something almost inevitable and universal for the generations before. The youth of today are more in tune with the differences, be it due to increasing media exposure or increasing globalisation. This means that the time and energy that would have once been used to readjust can now be used for something else.

    In Calvin’s eyes, being a people who are more used to these differences allows us to immediately look past them and go to the core of making an impact in the lives of others. It is a head start that exists more so now than ever before and should be fully utilised.

    This, he believes, especially benefits Malaysians as the more focused we are on on making a difference, the faster we will progress. Being a true patriot, he concludes with this piece of wisdom, a question for those planning to migrate can reflect on:

    “Instead of thinking of reasons to leave, think of what you can stay for.”

    To him there is a bigger picture for youth in Malaysia: working with the neighbouring countries with Malaysia as home base.

    “If Malaysia is my home then ASEAN is my neighbourhood”

    Calvin suggests that in a highly globalised world, the country’s youth should consider driving change in not just their country, but in countries nearby to truly spread goodwill across national borders.

    Closing with Calvin

    When all is said and done, it is undeniable that the world has become an almost endless ocean of opportunities for the young. Sometimes one may be faced with so many choices that it becomes paralyzing. There may be many opportunities that although may be interesting, are not in line with the endgame you have in mind.

    Should that time come, it is essential to remember that the good is the enemy of the great; choosing the one thing that is great for you is better than choosing the many things that are just good.

    “When it’s time to say ‘no’ you need to say ‘no’. Many of us like to beat around the bush and dodge saying it. No matter how good something is , if it is not for you; it’s time to put your foot down. Many times we worry leaving a bad impression, but if your purpose is genuine and noble, people will understand.”

    In just one session, Calvin Woo has shared with us a little bit about himself, a little more about starting things young and a ton to reflect on navigating towards goals as a youth – a true chef of food for thought. Closing the interview over coffee and contemplation, Calvin’s two cents has left this journalist richer with hope in the world of starting young.

  • Funding Your Startup 101 – Part 1

    Funding Your Startup 101 – Part 1

    Recent years have been good years for Malaysia’s startup community as entrepreneurship is being more positively embraced. Just over the few years, the number of homegrown, homebrewed startups has increased exponentially. Now, here comes the figures! Based on MaGIC’s web database as of August 2016, e-commerce related startups occupies 21.5% of total startups in Malaysia; service and consulting is 19.1% and social enterprise forms 17.8% of the sector. What’s even better? Funding in Malaysia startup rose from $9.5m in 2013 to 47.9m in 2015!

    All successful startups start from humble, but deep-rooted basis that allows them to grow extensively. To build a strong basis, you need to keep in mind some of the most fundamental parts of a startup that makes it “fundable” before you even start your journey into startup world. If you are an aspiring entrepreneur, this article is for you!

    Stages- Where are you now?

    There are 3 main stages in a startup, which is Pre-seed stage, Seed stage and Post Seed stage. Before making a decision on which funding channel your startup should utilize, it is crucial to first determine the stage that the startup is currently in as companies usually have different needs at different stages. The goal of the pre-seed is to demonstrate that your product fulfills a market need. In contrast, the seed round is raised for the purpose of proving product-market fit. (Swanson, 2016). By the end of the pre-seed fundraising round, your startup is expected to have in place 5 important elements including a functioning product, a relevantly skilled team, market, distribution, and traction. Seed stage is when your business needs funding, private or public, to carry out a solution and business model development, to prove that your new product or service is functional before attempting to sell to your target customers (Zwilling, 2015).

    Basic elements of a startup

    To extend on the 5 important elements, these are the basic forms of the important elements that you should have if you are at seed-funding stage:

    • Incorporation. Filing your startup with the state, be it as a Sole Proprietorship, Partnership, LLC, C-Corp, or S-Corp. Outlining ownership stakes and having legal protection from personal liability, at the funding stage, is essential.
    • Pitch Deck. Presentation of your business plan, using Powerpoint, Prezi or even Business Model Canvas and Lean Canvas. Anything to convey the full manifesto of your startup’s idea.
    • Online Bios. Publicizing biographies and resumes of you and your management team in online platforms, such as LinkedIn. Note that the investors are looking for capable people who can execute ideas, and not the other way round.
    • Website. (Optional) It depends on the nature of your startup.
    • Business Collateral. Logos, business cards, color schemes, and other images for your business so that people can envision your products.
    • Financial Documents. Budget plan, Revenue Projections, Operational Expenses, and Cash Flow Projections.

    How to make your startup more “fundable”?

    We all know, getting the dream cheque from investors ain’t easy.

    Often, early startup owners are easily distracted by reading venture capital blogs, but really, successful startups always keep their eyes aligned on building the basics of a “fundable” startup. We will share with you in this article, some of the essential characteristics of a startup that appeal to the investors. All of these characteristics are, however, more useful when the 5 important elements we mentioned before are solid enough.

    Business Blueprints

    First and foremost, a viable and inclusive business plan is necessary. A product description of your startup is good, but not sufficient to get you the six/seven figures infusion into your startup. A sufficient business plan should include clear ideas on your targeted customer segments, channels of publicity, revenue stream, key partners, and value propositions.

    Painkiller vs Vitamin

    In terms of value propositions, it is crucial that you don’t market your product as a “vitamin” but a “painkiller”. This is a regular jargon used between investors. A “vitamin” is an idea or product that is nice to have but no need to have, they are often just add-on features or functionalities and not platform, while on the other hand, a painkiller solves a “pain”- a problem in daily life, it is often a product or service that offers real, bottom-line value to a business: it is needed, not just wanted.

    Investors love “painkillers”, especially the addictive painkillers! That is because they know “painkillers” have strong market appeal. Even if your idea is not a “painkiller” initially, it is perfectly fine. Twitter, when launched in 2007, was never thought to be one either, but to the very least, you need to show how you are going to market it so that it becomes “essential”- yes, that is the key word.

    Importance of benchmarking in business plan

    Furthermore, although many people think it is important to accomplish some big achievements before getting funds (such as certain millions of sales), it is not necessarily so. Reasons are often investors are not investing on already-solid startups but the potentiality of startups to grow and give them the maximum yield of marginal profit. Hence, it is crucial for the business plan to include realistic milestones and to achieve some of it in the process (small ones are good to go). You can’t measure results unless you have a yardstick. Accomplished milestones show investors your capability as a startup to grow while written milestones act as a reassuring check and balance for the investors to have an idea on how your startup will progress.

    Financial Track Records

    Maintain a positive credit score

    You need to have a good credit score and financial records. Just as a good credit score demonstrates trustworthiness, a bad credit score can make investors question whether you are the best steward of their money. Take steps to maintain a good credit score, such as paying off debt, paying all loans on time, and keeping credit card balances low or non-existent. Also, pay bills and taxes on time, avoid non-sufficient funds charges in your bank account, and don’t overextend your credit. The reasons are, first, it leaves a better impression on the investors of your financial prudence and it also strengthens your reputation with financial institutions so that they are more likely to issue you a loan; second, disciplined financial habits also get your business to profitability sooner.

    Catered Financial Records

    Do your research and know what your investors or funders are looking for. Generally, a traditional financial institution funding your startup would want to see a more organized balance sheet, distinctively lining revenue and cost. Contrastingly, angel investors, venture capitalists or other seed investors focus more on profitability ratio such as gross profit margin, net profit margin and Return on Capital Employed (R.O.C.E). After all, they are more concerned with the Return On Investment (ROI) above all things.

    Read more on accounting ratios at, Financial Ratios before making an Investment.

    Focal point

    At the end, there is no a fixed answer or formula to follow for you to increase the “fundability” of your dream startup, but the tips above will give you a very good idea on where you can begin. Look critically at the core of your startup from the investors’ point of view and work inward to make it “fundable”!

    Last but not least…

    Thanks for reaching so far in the article! But, this is not the end, after noting how to make your startups more “fundable”, now it is time to explore the available channels to get your fund to roll off your business to the next level.

    Get more information on the Funding Channels in our continuation article, part 2!

    Written By: Goh Xie Loong, Chiaw Yee, Lee Bi Jun and Marlena

  • Special Sales – Buyers vs Sellers

    Special Sales – Buyers vs Sellers

    In a world engulfed in consumerism fuelled by capitalistic social and economic policies, the act of overbuying is not something quaint. Instead, a person who has never heard of it or of mediums that usually perpetuate such lavishness, an example being festive sales, is the real odd one out. In face of an ever-changing world, the expectation for humans to adapt to the current environment is evident. Adjustments and thus subsequent applications in better technologies, mechanics, education, policies, mediums and even ideologies that align with the current trend or better, upcoming trend, is the only way to survive. In the context of a modern global retail industry aiming to attract customers who are now exposed to more advancements in technology than ever before since the start of the 21st century, establishing a successful online platform for facilitating business is the key to monopolizing the competitive commerce sector. The foundation of a legitimately feasible online shopping website (or e-commerce website) includes the ability to redefine the virtuality of online shopping into attributes akin to brick-and-mortar shopping. One of the most prominent examples is online festive sales, in which its aim is no different from physical festive sales organised by retailers themselves: to stimulate limitless amounts of consumer spending. This article aims to provide an in-depth perspective of firms and consumers towards online festive sales, hence the actions of both entities amidst the event in the name of profit and consumerism will be explained. That being said, it is also important to define certain terminologies used in this article and understand the differences between both physical and online shopping beforehand, in the context of a user’s perception.   

    Physical vs Online

    Merriam-Webster defines e-commerce as “commerce conducted via the Internet”. Popular e-commerce platforms include giants such as Amazon, Taobao, eBay as well as Malaysia’s local platform, Mudah. When it comes to e-commerce, there are a lot of misconceptions towards the popularity among consumers and the blanket viability for businesses. In this section, we will assess the common notion that online shopping, or e-commerce, is widely preferred by consumers.

    With the boom that we are seeing in the business of online shopping platforms, it is not surprising that some people assume online platforms are favoured by consumers. However, this is not necessarily the case. A survey conducted by TimeTrade with a sample size of more than 1000 consumers resulted in some interesting findings. It is discovered that 70% of consumers are more willing to shop at a brick-and-mortar Amazon store rather than on Amazon.com. Why might this be? A number of factors can contribute to this specific consumer preference and one of them could be that customers want to have assurance of the goods’ physical quality. Besides that, receiving assistance from well-informed sales representatives can also be a contributing element. The survey had also revealed that 90% of consumers are more likely to buy a product when they are attended to by a knowledgeable sales associate and this supports the second possible contributing factor.

    There is a general mistrust by the public towards online platforms as online shopping possesses a higher risk in comparison to traditional shopping. The risks that exist in online shopping are definitely not absent in regular shopping but the element of risk is still greater. When shopping online, consumers may be skeptical of the quality of goods, thus resulting in a higher percentage of low end goods purchases made online rather than offline. In addition, another concern that should be taken into account is the span of accountability of the seller. As an example, there is a common perception that if there are complications with the use of a product or service acquired at a regular store, one can simply return to the store and request the seller for a refund or an exchange right there and then. Additionally, there are also risks associated with product shipments. Goods transported by all means could suffer physical damage or go missing during their shipment period. On top of the additional risks faced by consumers when shopping online, there is a higher amount of cost involved as well which includes shipping fees, transaction fees for online payment and opportunity cost. All the expenditures incurred are then totalled up into one large sum of money.

    Considering what had been described about consumer preferences and behaviors towards online and offline shopping, one should not have an unreasonably negative perception of online shopping. Online shopping platforms do have more to offer in variety compared to traditional shopping and it is clear that there is an opportunity to shop from millions of stores worldwide while only lying in bed. However, it all comes down to the shopping preference of each and every customer. No matter where people choose to shop for their needs and wants, everyone loves a good old shopping session, especially during the sales season. In accordance to that, it is also beneficial to explore the psychological factors contributing to consumer behavior during a sales event.

    Sellers’ Perspective

    With the advancement of Internet technology since the last decade, E-commerce had gained tremendous popularity across the globe and thus led to numerous companies venturing their business towards the online platform. As mentioned earlier, online festival sales and also physical festive sales are nothing more than a strategy to entice consumers into spending limitless amounts of money on items during that period. “Cyber Monday” and “11.11” are among the popular online festivals that were created as part of a marketing technique by e-commerce companies to boost online sales by giving consumers tempting and irresistible spending incentives. Among the approaches taken by these companies which influences consumers to spend money during the sales period include offering mass discounts, making announcements of the promotional period via advertisements as well as giving out free gifts upon achieving certain spending targets. The methods of approach taken by the e-commerce companies during the online festive sales are basically well-designed marketing strategies formed based on statistical data collected throughout a specific period. Information collected usually comes in distinct forms such as product recommendations according to customers’ preference and current level of price competition in the market. The approaches taken in order to make products appealing to consumers can clearly be seen in large established e-commerce companies such as Taobao, Tmall, Amazon and eBay, where their principal aim towards online festive sales is to maximize profit as well as to prolong their market standing by ensuring customer loyalty towards their product or service.

    Although maximizing profit may seem to be the main objective for most companies during online festive sales, other companies of different industries or smaller-sized companies may not have a similar ways of approach or objective as to that of large established companies. A smaller-sized company such as a startup company may view the online festive sales period as a golden opportunity for them to promote their product or brand and to raise their position in the market. For example, Lazada Group – a privately-owned German e-commerce company founded in 2011 with their e-commerce business mainly focusing on Southeast Asia – has been able to establish itself as one of the largest e-commerce businesses in Southeast Asia today. Lazada Group’s secret to success is by offering competitive prices for its products throughout the years, especially during the season of online festive sales in which the company have been actively participating in. Just by forming partnerships with various companies in their respective regions, Lazada is able to secure the lowest possible cost and subsequently, the prices of the products they offer. Lazada Group’s marketing strategy for business expansion proved to be a success due to its tremendous growth over the years, overtaking local leading online retailers such as Lelong. The company’s impressive market performance as of year 2017 had even influenced the world’s leading online retailer, Alibaba to increase its investment in Lazada Group totaling up to $2 billion to aid in its future growth and further development.   

    Buyers’ Perspective

    Next, we shall now delve into the perspective of consumers towards spending amidst online festive sales. At this current modern age of time, it is not surprising that most people are willing to spend a significant portion of their hard-earned income for such occasions. This fact is especially proven during the 11.11 global shopping festival launched by Alibaba Group in 2017 through the e-commerce website TaoBao, where it is reported that Alibaba had earned an approximate 25.3 billion USD in gross market value on that single day alone, with a record of 325,000 transaction orders per second at peak (Alizila, 2017). Further data on this event indicated that consumers do not fundamentally care about the shopping service’s origins but rather the resulting shopping satisfaction, as stated that the shopping festival has provided service spanning across 225 countries, with countries like Japan, United States, Australia, Germany, Russia, Hong Kong and South Korea as the festival’s biggest buyers and sellers (Alizila, 2017). Within our national borders, Lazada Malaysia has broken a new sales record on 11.11 amidst its one month-long Online Revolution campaign, with sales generating more than RM100 million of gross merchandise value (The Star Online, 2017). The supposed epitome of the campaign’s 11.11 success was later exceeded by its 12.12 grand finale sale, with sales of over RM 1 billion (Bernama, 2017). Its Chief Executive Officer, Hans-Peter Ressel (2017) said that such record-breaking performances showcase “the growing trust and relevancy of e-commerce in Malaysia.”

    Though it is evident that online festive sales drive the consumerism craze out of customers, it is also imperative to know why and how such special occasions are highly effective in doing so. One big key to the answers lies within the psychology of consumers themselves. Most consumers will always have the “I must get something but at the least cost because I deserve it” mindset that when conceptualised in the context of e-shopping, results in people rushing into e-commerce websites securing endless transactions of goods during festive sales because again, why not? It is very hard to negate the alluring bargain that one could get the same product or service at half or even less than the price than it is supposedly valued to be. Consumers are also inevitably the subjects of the illusion that the more undervalued goods they buy, the more worthy their actions are without realising that they never needed them in the first place. Social psychology also plays a significant role in the craze of overspending, where one follows the actions of a crowd upon listening to friends, relatives and even parents echoing just how well-off they were from buying undervalued goods. This social phenomenon creates an environmental cue that makes consumers feel that they are getting a good deal out of it (Pappas, 2010).

    Speaking of environmental cues, it is important to understand that consumers are significantly vulnerable to its manipulation and how it influences the perception of attractiveness towards online festive sales. One example being the physical attractiveness of e-commerce websites at first glance. By nature, online shopping environments have vast exploration potential with interactive, vivid and large amounts of information provided in both verbal and sensory form (Demangeot & Broderick, 2007). This is displayed through the visual attractiveness of website pages such as icons, festive oriented layouts as well as high definition photos and videos of products which convey the true feeling of shopping. Moreover, most customers are engrossed in exploring the interesting and “feel good” features of e-commerce websites like user-generated reviews, special offers, free giveaways, frequently asked questions, advanced payment options, hyperlinks to additional product information, etc. This creates a sense of shopping satisfaction among consumers because there is the perceived ability of e-commerce websites in facilitating consumer orientation, navigation and task accomplishment. (Demangeot & Broderick, 2007) Another environmental cue is the “limited-time-only” or discount quota nature of online-shopping websites that triggers an innate fear of scarcity which further drives people to keep buying (Pappas, 2010). Under such conditions, it is difficult to not buy a single thing before finally exiting a website ahead of coming across another website that having its own festive sale.

    Conclusion

    There are various factors influencing both sellers’ and buyers’ behavior during festive sales events be it online or offline. Sellers can view festive sales as an opportunity to offload the maximum amount goods and/or view them as an opportunity for rebranding. Consumers, in this scenario, are the less informed ones, the victims of market targeting. They are subject to carefully devised psychological cues that trigger unreasonable shopping behavior. Often, consumers are driven by fear of losing out on the opportunity of shopping during sales, resulting in them buying goods they do not necessarily need in the first place. However, this does not mean that participating in festive sales is bad for you and that you should avoid them at all costs. It simply means that you should hold on to your main objective during sales. The key to refrain yourself from being highly influenced by marketing strategies is to first be aware of them. Ask yourself if you really need a particular product and if you would really buy it even if it is not on sale. Happy shopping!

     

    [tw-toggle title=”References”]

    Demangeot, C and Broderick, A J (2007) “Conceptualising Consumer Behaviour in Online Shopping Environments”, International Journal of Retail & Distribution Management , Vol.35 No 11, pp. 878-894

    ALIZILIA. (2017). BY THE NUMBERS: 2017 11.11 GLOBAL SHOPPING FESTIVAL. [online] Available at:

    http://www.alizila.com/infographic-2017-11-11-global-shopping-festival-numbers/ [Accessed 14 Jan. 2018].

    Mahpar, H. (2017). Lazada Malaysia smashes sales record on Nov 11. [online] The Star Online. Available at:

    https://www.thestar.com.my/business/business-news/2017/11/13/lazada-malaysia-smashes-sales-record-on-nov-11/ [Accessed 14 Jan. 2018].

    NST Online. (2017). Lazada’s 12.12 sales rakes in US$250m. [online] Available at:

    https://www.nst.com.my/business/2017/12/316142/lazadas-1212-sales-rakes-us250m [Accessed 14 Jan. 2018].

    Pappas, S. (2010). Black Friday Psychology: Why We Go Mad for Deals. [online] LIVE SCIENCE. Available at:

    https://www.livescience.com/10290-black-friday-psychology-mad-deals.html [Accessed 14 Jan. 2018].

    Timetrade (2017). Study: 85% of Consumers Prefer to Shop at Physical Stores vs. Online. [online]. Available at:

    https://www.timetrade.com/about/news-events/news-item/study-85-of-consumers-prefer-to-shop-at-physical-stores-vs-online/Contributors:

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  • Big Data: The Next Big Thing in Banking

    Big Data: The Next Big Thing in Banking

    What is big data?

    Imagine, you are browsing through the Internet as usual for, perhaps, finding your next vacation stop, such as Langkawi, and as you log into your Facebook or Instagram the next day, you see numbers of advertisements pop up in your notification, to your surprise, offering cool traveling packages to Langkawi Island!

    Amazing huh?

    That’s only a part of the magnificent feats pulled out using Big data.

    So what big data really is?

    Literally, Big data are extremely large data sets, containing both structured and unstructured data. Unstructured data comes from what traditionally known as database: customers name, age, address, contacts, gender and even the record number of customer purchases. Nothing much we can derive from the unstructured data, but on the other hand, structured data is a variety of data that can be collected from the interactions between human and computer (such as web browsing log and social networks). What you buy online or via mobile payments, what you read or watch online every day, and even where you move using Uber or Grab, all these data will be automatically collected by the computer so that it processes the data and interpret your patterns of interest and preference, and hence your behavior. The process of examining those large sets of data is called Big Data Analytics. In contrary to what “big” data sounds like, its impact is not necessarily dependence on the mere size, rather, most of the time, it is about how effectively business is able to organize, sort, clean and mung data for its full capacity (of course, the more the merrier too!)

    Why do we need to know about Big data?

    Undeniably, Big data has assisted businesses and enterprises as it analyses the customers’ behavior more effectively and faster than conventional ways, which enhances the whole level of customer experience and efficiency in business administration. Businesses using big data has striven in their respective market, and are likely to continue to edge over those without the support of Big data. Thus, guess what, ignorance is not a bliss! (not to mention even if you are a mere consumer, you are likely to be benefited too with the knowledge) In this article, we will particularly focus our scope on the usage of Big data on banking industry, given that it is the industry that is likely to make the greatest impact using Big data towards both the consumers and the entrepreneurs as a money lender and investor.

    Big data and banking industry

    In the midst of the 4th Industrial Revolution, financial institutions and banks are nevertheless the ones pioneering in using Big data. Naturally, banks have tons of data, be it regarding their clients’ personal data or transaction history, it is a big jewel to the data analysis, which the banks uses such information for several purposes. By monitoring the client’s transaction and spending behavior from time to time, it allows them to have an in-depth understanding of the clients’ needs and hence it can promote the most fitting financial packages to each segmented groups of customers. Besides, by tracking customers’ credit card, loan limits, and etc, banks ensure that they resort appropriately at times so that the chance of customers overdrafting is low.

    Investment through Big Data

    One of the most prominent roles of big data in financial institutions is indeed on leveraging the investment decision in stock market.

    Using the Big data from shares price and its dividends, the performance of the company could be speculated. According to Osman Ali (2016), Portfolio Manager of Goldman Sachs Asset Management, he stated that the company is dedicated in creating data-driven investment models that can objectively evaluate public companies globally through fundamentally-based and economically motivated investment themes.The models use large sets of analysed historical data of companies such as public financial statements and market data like prices, returns, volumes, etc. In addition to that, companies are also evaluated based on investment themes such as momentum, value, profitability and sentiment through applications of Big data analysis as shown below:

    THE QUANTITATIVE INVESTMENT STRATEGIES APPROACH TO IDENTIFYING INVESTMENT OPPORTUNITIES

    To know more details, please click here!

    Future of big data for banks and financial institutions in Malaysia

    The benefits brought by the effective investment through the application of Big data analytics are swiftly spanning across the banking industry, therefore, confidently, the future of big data in banking industry will be phenomenal.

    According to the NewStraitsTimes (2017), Ambank Group Bhd is said to be in the midst of incorporating the usage of Big Data analytics into its operations, aiming to strengthen its customer satisfaction and conduct better risk management through a more accurate identification of potential non-performing SMEs (Small Medium Enterprises) that apply for loan.

    In terms of customer satisfaction, at today’s standard, meeting customers’ demand is cumbersome and is extremely hard to distinguish. However, with the deep insights provided by Big Data into customer spending habits and patterns, it simplifies the whole tonnes of tasks in ascertaining the specialised needs and wants of individuals. Thus, all banks will soon be able to effectively segmentise customers and meet the satisfactions productively in the guide of Big data.

    Moreover, the future of Big data in banks also lies on the ability and possibility to conduct a more comprehensive and yet exponentially faster loaning process to individuals and businesses. The conventional way of lending, as we observed in Malaysia, is still primarily on hasty paperworks which tend to consume enormous amounts of time and effort from both the businesses or individuals and banks. Not to mention, this process also incurs the extra charges for face-to-face discussions with loan officers and the extra miles and times spent for in-and-out visits to the bank. But, with Big data, the future of such mundane processes are less appalling. Besides assessing the credit score of borrowers to determine how risky lending money to this person is, now using Big data, together with machine learning, enables the bank to statistically derive multifaceted analysis of such likelihood through channels as trivial as it may be seen in infancy, such as the time of the day the borrowers ask for a loan, the amount of email he/she sends out in a day, the numbers of Facebook friends and etc (Delgado, 2016). Consolidating all such trivial matters together, it becomes meaningful in speculating a pattern used to be undetectable by humans, and renders a valuable decision factor in the context of loan acquiring legitimacy- and such can only be derived through big data!

    Big data also plays an important role in Bank Negara Malaysia (central bank) and in a greater extent, the whole nation at a macroeconomic level. In an interview with Ben Wicks, the Head of Research Innovation in Schroders- a British multinational asset management company, he stated that the company has achieved a remarkable achievement in the application of Big data analytics where their groups of specialists managed to analyse a big pool of data and conclude that, the assumption of the deterioration of consumers’ confidence and expenditures in certain parts of UK as a result of the Brexit referendum is (surprisingly) invalid. This is achieved by analysing the expenditure patterns from hundreds of thousands of recorded consumer data. Thus, it is not far-fetched to say that there is a possible future when Bank Negara will be able to analyse and “predict” current and upcoming economic cycles at near perfect precision, be it amidst the influence of certain economic events or not. Let’s hypothetically say,  Malaysia rages an economic tug of war against Singapore (for whatever reasons). Bank Negara can analyse the degree of influence by the event towards the general optimism of Malaysians towards the economic certainty and from there it can initiate appropriate policies to do check and balances to the economy to minimise any form of deterioration due to such event. Of course, such hypothesis can only be assumed given that there is the certainty of Malaysia adopting data analytics at modern standards in the future, which ironically, many challenges are still faced by organisations at policy level (which means Malaysians are still not yet readied for Big data and its applications!)

    (Read more on how a country’s central bank adopts policies to keep the economy running in FLY’s article on Central Bank)

    Potential problems and threats

    Internally, for banks to implement big data analytics, there will be setbacks too. First of all, lack of expertise would require them to construct a new department to handle and run the big data analytics or else they would need to seek solutions through partnership with third parties specializing in big data. Both options would cost the bank a huge amount of opportunity cost to implement it. Furthermore, most banks are not equipped with the infrastructure that is capable of handling constant influx and traffic of data. Therefore, banks will need to upgrade their infrastructures with computer hardwares that are likely to take away significant amount of their property space due to its rather bulky size. Plus, acquiring such supercomputer to organize and store tons of information that the banks hold is going to cost them a lot. Last but not least, despite all the enormous benefits of big data analytics we mentioned, there is also a huge resistance, coming from users and executives, in implementing such system, mainly because of the two main concerns regarding the big data, which are threat to privacy and employment. Even though there is existing law to protect the consumers’ privacy, but the huge wave of data collected by banks and financial institutions has made them more vulnerable than ever in the aspect of privacy, especially such information is often being shared among other subsidiary organisations. Quoting from Surya Suharman, Corporate Communications of Sedania Innovator Bhd, who argues that no breach of customer privacy in using big data analytics as it only uses data that is provided with the knowledge and approval of the customer. However, we all know, most of the time, the customers (we) are not aware of the level of being tracked by these organisations which includes things as extensive as our activities, preferences, interests and behavior. To make the situation worse, there is huge grey area in law worldwide to regulate the usage of customer information through big data analytics. While we are exciting on embarking the journey of big data, it is widely accepted that technology revolution like it will disrupt the labour market by eliminating low qualified jobs. We can see in previous years how banks in Malaysia like Maybank closed some of the branches to cut the operation cost and to fully utilize online banking, it will somehow affect the economy.

    Big data and other industries

    Once we consider the importance of informative data in driving rational business decisions, as well as the very nature of big data itself in terms of its complexity, it is of no surprise that Big data analytics can bring significant advantage to any business that adopts it better than any of its competitors in the same industry. On a logical standpoint, any company regardless of sectors and nature will not be exempt from the benefits of big data as long as the company requires information from data sets to initiate and power its business decisions. The universality of BDA usage in industries is of notable prevalence, perpetuated by the seemingly wide-range of companies involved in acquiring data to gain a unparalleled competitive edge. These companies include Amazon, American Express, General Electric, Netflix, Starbucks, and etc, where the motive of such technological acquisition is to explore the advertising algorithms, customer relations and behaviour, sensor data from machineries, consumption patterns and many more . In Malaysia, manufacturing companies, such as Top Glove tap into the functions of Big data analysis by executing a pilot programme which utilises sensors to monitor the mixture in the production of rubber, thus automating what was previously a manually-driven process (Mahmood, 2017). In the ride hailing industry, Grab, together with Malaysia Digital Economy Corporation Sdn.Bhd (MDEC) and World Bank Group launched the OpenTraffic initiative which provides traffic data from Grab’s GPS data streams to address traffic congestion and improve road safety in major Malaysian cities (Grab, 2017). This initiative allows access to an open dataset among Malaysia’s traffic management agencies and city planners to better manage traffic flow and make investment decisions on local transport infrastructure. This can only be accomplished through the analysis of traffic congestion peak patterns and travel times, which are valuable data. Though there are many more applications of Big data analysis yet exposed and explored by the public, we are still assured that big data will be the “next big thing” encircling the world!

     

    [tw-toggle title=”References”]

    Cameron, N. (2016). How iflix used consumer intent data to gain 1 million subscribers in six months. [online] CMO FROM IDG. Available at: https://www.cmo.com.au/article/611097/how-iflix-used-consumer-intent-data-gain-1-million-subscribers-six-months/

     

    Chong, J. (2017). MDEC to spearhead bigger push for big data adoption in Malaysia. [online] Digital News Asia: Your Eye on the Tech Ecosystem. Available at: https://www.digitalnewsasia.com/digital-economy/mdec-spearhead-bigger-push-big-data-adoption-malaysia

     

    Delgado, R. (2016). How Big Data Will Transform the Lending Industry. [online] Data Informed : Big Data and Analytics in the Enterprise. Available at: http://data-informed.com/how-big-data-will-transform-the-lending-industry/

     

    Grab. (2018). Grab and MDEC together with the World Bank Group Launch OpenTraffic Platform in Malaysia to Combat Local Traffic Woes. [online] Available at: https://www.grab.com/my/press/business/grab-mdec-together-world-bank-group-launch-opentraffic-platform-malaysia-combat-local-traffic-woes/

     

    O’Neill, E. (2016). 10 companies that are using big data. [online] ICAS The professional body of CAs. Available at: https://www.icas.com/ca-today-news/10-companies-using-big-data

     

    Osman, A., Suwabe, T. and Walsh, D. (2016). The Role of Big Data in Investing.

     

    Rosli, L. (2017). Banking on big data analytics. [online] New Straits Times. Available at: https://www.nst.com.my/business/2017/10/294117/banking-big-data-analytics

     

    Schroders (2017). How ‘big data’ can improve investment decisions – three examples.Available at: http://www.schroders.com/en/hk/wealth-management/insights/strategy-and-economics/how-big-data-can-improve-investment-decisions–three-examples/

     

    Arthur, L. (2013). What Is Big Data?. [online] Forbes- CMO Network. Available at: https://www.forbes.com/sites/lisaarthur/2013/08/15/what-is-big-data/#4bfe0dae5c85

     

    Big Data Made Simple. (2016). The role of big data in the banking industry. [online] Available at: http://bigdata-madesimple.com/role-big-data-banking-industry/

     

    Buttler, P. (2017). 10 CHALLENGES TO BIG DATA SECURITY AND PRIVACY. [online] Dataconomy. Available at: http://dataconomy.com/2017/07/10-challenges-big-data-security-privacy/

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  • Funding Your Education

    Funding Your Education

    Introduction

    Source: Life Vest Inside

    Education is universally recognised as one of the most important investments in human capital. An educated individual can potentially contribute to the socioeconomic development of the individual and the society as a whole, culminating to improvements in personal development and being more efficient in work (Tan and Mingat, 1992). Due to the vast benefits being portrayed by getting education, parents are eager to let their children experience the best possible choices in their education journey.

    However, with the rising cost of goods and services, paired with a nearly stagnant real wage growth rate, as low as less than 1% in some communities (Zahiid, 2016), Malaysians are left with lesser disposable income as the years passed. This poses a significant problem for low and middle class families as they might not be able to save enough to fund the tertiary education expenses of their children. A counter-argument to this would be to send their children to local public universities, which costs a lot lesser than private or overseas universities. In reality, competition is intense for places in public universities. Not everyone is qualified enough to pursue their desired course there, which leads to the drastic increase in enrolment of private and overseas universities.

    Fortunately, with the combined forces of both the public and private sectors, solutions are laid out to ease the burden financing a student’s education.

    2.0 Loans

    Loans, the act of borrowing from a source for a specific period of time, should only be used to finance a short term need, or when the benefits outweigh the costs of borrowing.

    Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN)

    Source: PTPTN

              PTPTN, also known as the National Higher Education Fund Corporation, is mainly responsible for issuing and recollecting loans for tertiary education purposes. It is a no-brainer for families due to the extremely low financing cost of as low as 1% interest rate per annum for PTPTN’s loan. This is mainly for students who are pursuing their tertiary education in Malaysia, whether it is a public or private university.

    For students who have achieved a first class honours in their courses, PTPTN offers them a chance to convert the full amount of their loans into a scholarship, subjected to terms and conditions as listed by the PTPTN. Other than being a golden opportunity for a high achiever to pounce on, some students have exploited it to gain some extra cash for their future needs.

    It is also essential to know that if, unfortunately, the student failed to meet the requirements for a scholarship conversion, he or she must start to finance their loans 6 months after graduating from their course or face serious repercussions. According to The Star (2016), a staggering 97% of university graduates who took study loans between years 2014 and 2016 failed to repay their study loans and now have their names listed in the Central Credit Reference Information System (CCRIS). If your name is found in CCRIS, you will instantly lose credibility on any loan applications due to your poor credit record in the past. Trust me, you would not want that to happen due to a naïve mistake.

    Personal Loans

    Of course, loans can be obtained from banks as well. While you are given more flexibility on the choices of universities (personal loans does not pose restrictions on your usage anyway), the financing costs of these loans will be off the roof, with interest rates ranging from 7-12% per annum (iMoney, 2016). Unless you are confident that the monetary returns arising from the course you read can the full amount of your personal loan, this method is highly unadvisable. You might end up defaulting your personal loan and eventually find your name in CCRIS, making your life harder.

    Scholarships

    Scholarships are awarded when a student achieves above average results, often paired with active extra-curricular activities, which persuades an institution to fund their studies.

    Public Sector

    Jabatan Perkhidmatan Awam (JPA) is sole scholarship provider from the public sector. Its scholarships ranges from catering the needy students (Program Dermasiswa B40), to sponsoring students who are top achievers in the public examination (Program Penajaan Nasional). However, it is sad to see the KPM Bursary being scraped off as it is one of the most lucrative scholarships available offered by the public sector.

    Private Sector

    Source: Maybank

               If you are unable to find or secure a suitable scholarship from the public sector, you are always welcomed to try out scholarships offered by the private sector. Banks and large corporations in particular have offered scholarships for a wide range of purposes with the intention to fulfil their social responsibilities, further promote their brand name, and potentially benefit from a tax shield.

    You will most likely be able to find a scholarship that suits you here. But bear in mind that the competition will be intense, and you will need to be the crème de la crème of all the applicants to impress the evaluator and get the scholarship. Moreover, scholarships that are offered in large amounts by the private sector usually comes with a bond to the company, which may be risky for you as you are unsure if the working environment suits you. On the bright side, you need not worry about employment post-graduation as you need to serve your sponsor.

    Colleges and Universities

    There are also scholarships offered by the education institution itself. From awarding academic merits to commending outstanding achievements, the institution is ready to keep the brightest talents to itself and provide the best education experience possible for the student. Furthermore, it also helps to promote the education institution itself as high achievers can potentially get achievements while bearing the name of the institution.

    Working part-time

    If you are still a little short of the amount required to pursue tertiary education, you might want to consider working part time to finance the remaining bits. Sales and promoting jobs are readily available for various entities, especially during weekends as they are eager to promote their products to a larger crowd compared to weekdays. It would be a plus point if these jobs have commission clauses upon reaching a certain sales threshold. You will not only be able to earn your fees, working hours will not affect your school hours as well, and you can also gain valuable real life working experience, effectively killing 3 birds with 1 stone.

    Conclusion

    Financing your education may sound tedious, but with the various options available, nothing is impossible. Of course, you can still rely on your parents’ funding, but it is not advisable for them to spend too much on your education if you can find ways to reduce their burden. It is also important to choose a path that is most appealing to you before enrolling into any course to avoid any unnecessary wastage of both time and money. Malaysians from various sectors are willing to invest in the education field for the goodwill of the next generation, hence we, as students, should grab every opportunity available and transform them into bright futures.

    Prepared by:
    Researcher – Lee Hou Yin

     

    Download The Report Here:
    [download id=”2770″]

     

    [tw-toggle title =”References:”]

    Tan, J. and Mingat, A. (1992). Education in Asia: A Comparative Study of Cost and Financing. 1st ed. p.1.

    Zahiid, S. (2016). Feeling the pinch? It’s not just because of higher cost of living. The Malay Mail. [online] Available at: http://www.themalaymailonline.com/malaysia/article/feeling-the-pinch-its-not-just-because-of-higher-cost-of-living [Accessed 17 Nov. 2016].

    iMoney, (2016). Personal Loans. [online] Available at: https://www.imoney.my/personal-loan [Accessed 18 Nov. 2016].

    The Star, (2016). 97% of grads listed in CCRIS for failing to repay PTPTN loans. [online] Available at: http://www.thestar.com.my/news/nation/2016/11/04/yap-97-of-grads-listed-in-ccris-for-failing-to-repay-ptptn-loans/ [Accessed 18 Nov. 2016].

    Maybank (2016). Scholarships. [online] Available at: http://www.maybank.com/en/careers/students/scholarship.page [Accessed 18 Nov. 2016]

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  • Malaysian Healthcare – A Major Economy Driver

    Malaysian Healthcare – A Major Economy Driver

    Traditionally, healthcare has been seen as a burden on various economies. However, in recent times, Malaysian healthcare has defied this belief by showing tremendous economic potential via a rapid expansion and promotion of medical tourism. This growth is largely attributed to the cheap, yet high-quality care that many private medical institutions in Malaysia offers.

    Malaysian healthcare has long existed as an interesting and relatively successful industry. In essence, there is both a public and private healthcare sector, where public healthcare still holds a majority in the sector. In recent years however, the private sector has rapidly grown.

    Healthcare is also a prioritised sector in Malaysia due to the rise of an ageing population and increases in non-communicable diseases within society. As a result, in 2016, the government spent 10% of its annual budget (approximately RM 23.5bn) solely on healthcare. This investment also came with reasonable returns, seen in 2016 where healthcare contributed RM 1bn, with an expected 33% increase in return this year (MOH , 2016).

    Potential for economic growth is huge in Malaysia. According to Ministry of Health (MoH), they have shown that healthcare was the fastest growing industry from 2000-2009. The establishment of the 2010 Economic Transformation Programme to help Malaysia achieve high-income status had also identified healthcare as 1 of 12 National Key Economic Areas (NKEA), thus enabling this sector to receive substantial government support and funding. The focus also stresses on increased collaboration between public-private sectors alongside attracting investment in key manufacturing and service industries. (Global Risk Insights, 2017)

    Clearly, healthcare is an integral part towards the government’s long-term vision for the nation. Nevertheless, doubts have been cast over the feasibility of heavily-subsidised treatment, leading to mounting pressure to restructure the healthcare system and allow private facilities to play a greater role (ISEAS, 2015). Current trends are aligning with this need, which is great for investors who will benefit from the progression of the system.

    Medical Tourism

    As a result of the ETP, medical tourism has began to flourish. Unlike traditional tourism sectors, medical tourism distinguished itself as the act of travelling to a foreign country to receive medical care, whether it is due to cheaper medical expenses or the availability of medical technology in the designated country which is unavailable in the origin country. Noted by the Economic Intelligence Unit (EIU), within the tourism sector (Malaysia’s fifth largest sector), the medical tourism subsector had increased by over 20% a year from 2011-2014. Revenues from 2010 totalled to RM 380m, and is projected to grow annually by 10% up to 2020 (though current figures are closer to 30%). (Global Risk Insights, 2017)

    Recent scandals such as the 1MDB scandal however, had impacted the progression of the business in 2015 and 2016. In 2016, Malaysia only received 886,000 tourists; well below numbers seen in 2014. Nevertheless, the government has set high hopes for 2017 by targeting 1 million healthcare travellers (Global Risk Insights, 2017). Clearly, the vision for medical tourism is seen to be healthy irrespective of external circumstances.

    Originally, Singapore was the leading medical tourism leader in Southeast Asia; nonetheless, due to rising medical costs and hikes, demands there have dropped. In terms of patient numbers, Thailand would be the main threat to Malaysia, seeing their significantly larger (2.81m foreign patients in 2015) share of the market (MOH, 2016). However, this situation is soon to change due to the depreciation of the national currency, which makes Malaysia an even more attractive medical tourism destination.  

    Opportunities for Growth

    As part of the NKEA, Malaysia has implemented a number of plans to simultaneously improve the economy while furthering medical development. One such plan, is to pursue generics export opportunities. This essentially means to become a major pharmaceutical export towards OIC (The Islamic Conference) countries, as understandably, Malaysia cannot be cost-competitive in relation to larger, more economically prosperous countries such as China and India (MOH, 2016).

    This is an exceptionally great plan, as this takes advantage of the credibility and quality Malaysian pharmaceutical holds within the OIC. For instance, Malaysia is the only country holding the highly credible PIC/S (Pharmaceutical Inspection Convention and Pharmaceutical Inspection Co-operation Scheme) membership while holding a credible halal platform (MOH, 2016). Through this, alongside local agreements and mutual recognition agreements, Malaysia will undoubtedly be able to enter and be successful in a large market.

    In addition, healthcare services are also another sector that is likely to be explored through the scheme. The 11th Malaysia Plan (the development plan for Malaysia from 2016-2020) had designated key areas, namely Melaka, Penang and Johor, to be host core healthcare services targeted at medical tourists. They would also provide strong markets for many pharmaceutical companies as international patients tend to spend more on healthcare compared to locals (ISEAS, 2015).

    Amongst the more interesting regions would be Johor. Seeing how it had failed to meet expectations for economic plans, the government decided to try to change its luck through renovating it as a medical hub and hopefully attract different companies there. So far, a number of big companies have shown interest, namely Biocon, Ramsay Sime Darby Healthcare and KPJ Healthcare (Global Risk Insights, 2017).

    The Future

    In light of all the scandals and economic downfalls that had befallen Malaysia, the fact that the medical industry is still growing is quite a success. Economic potential in this sector is extremely promising, and should Malaysia capitalise on their advantages in the region and their position in the IOC, it has a potential to become a truly successful medical hub and a great source of economic strength.

     

    Download The Report Here:

    [download id=”2759″]

     

    [tw-toggle title=”References:”]

    Etp.pemandu.gov.my. (2017). Healthcare. [online] Available at: http://etp.pemandu.gov.my/Healthcare-@-Healthcare.aspx [Accessed 7 Aug. 2017]

    Macleod, A. (2017). Special Report: Malaysia’s healthcare sector provides a catalyst for growth. [online] Newcastle University: Global Risk Insights. Available at: http://globalriskinsights.com/2017/04/malaysia-healthcare-sector/ [Accessed 4 Aug. 2017].

    Ministry of Health, Malaysia (2017). NKEA Penjagaan Kesihatan. Putrajaya: Ministry of Health, Malaysia, pp.553-587.

    Poh Onn, L. (2015). What Lies Ahead for Malaysian Healthcare?. ISEAS Economics Paper, [online] pp.3-5. Available at: https://www.iseas.edu.sg/images/pdf/ISEAS_Economics_Working_Paper_2015-04-01.pdf [Accessed 8 Aug. 2017].

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    Researched by – Luanne Lai

  • Travelling Tips 101

    Travelling Tips 101

    Discover How To Get Your Finances In Order For Your Travels

    Malaysians love to travel, with 90% travelling domestically and two thirds travelling abroad each year. However, travel is expensive and for most people, a trip abroad requires careful budgeting. Depending on your income, you can save up for a round the world trip with careful spending and a strong commitment to saving. When you eventually step on that plane, though, how do you know you are financially secure? Read on to find out how to keep your money safe and be ready for emergencies.

    Keeping Money Safe

    Many people who travel abroad will bring enough cash to last them the trip. This can cause problems. Cash can easily be lost or stolen, especially if kept all together in one place. When you leave the hotel room, aim to only take with you the cash you need for the day, leaving the rest in the hotel safe.

    If you have to carry all your cash with you, divide it up. Put the amount you need in wallet, then the rest in secret pockets on your bags or clothes or in your socks, underwear or shoes. That way, you will still have plenty of backup cash if your wallet is stolen.

    You can also opt for a prepaid travel card. These are often accepted globally and can be loaded up with the local currency for a fraction of the price of a traditional bureau de change. Since this requires PIN entry, a thief is far less interested in a card than a wad of cash.

    Protecting Your Identity

    Once your holiday finances are in order, you need to make sure that no one can pose as you, and use your prepaid travel card. This means avoiding identity theft. Take care to shred any unneeded documents containing sensitive information. For paperwork you do need to carry with you, keep it in a locked compartment of your bag, perhaps where your laptop is.

    Try not to share too many details of your trip online. If you do, check the privacy settings are such that only trusted friends can see your posts. Never share any private financial or identity information, such as a photo with your passport or credit card in the background. Be wary of any phishing emails and keep your antivirus software up to date.

    Emergency Funds

    So you’ve got your money divided up, some cash, some on a card. However, are you certain you have enough if something goes wrong? Unfortunately there can be incidents on the road, which cost more than and average traveller was expecting.

    Whether its medical bills from an accident, replacement for a stolen phone, a written off car or legal issues, there are a whole range of travel emergencies that could occur. Just like you’d have a buffer set aside for these things at home, you should aim to have a savings account dedicated to holiday emergencies.

    Travelling abroad is a usually safe and rewarding experience. However, it requires you to be extra cautious with your money. Scam artists target tourists, who tend carry lots of cash and are unaware of local dangers. When it comes to saving, consider how you will store your money securely, how you will protect you identity and whether you have enough for unforeseeable emergencies.

  • CGC and Other Credit Lending Companies

    CGC and Other Credit Lending Companies

    If you have been flipping through the news for the past few months, you might have come across some news headlines with the acronym ‘CGC’ appearing along with central bank- Bank Negara Malaysia (BNM), for example in the recent news on the funding aids given to businesses affected by Penang flood. As everyone might have known what a central bank is, you might be wondering what is Credit Guarantee Corporation (CGC) and how it is an important driving force in facilitating the current economic situation.

    Two important terms to take note beforehand, (1) credit and (2) guarantee scheme.

    Let’s discuss about the term ‘credit’ before we introduce one of the significant financial institutions in Malaysia – Credit Guarantee Corporation.

    At this point of the article, it could be intuitive for you to relate the term ‘credit’ to the conventional ‘credit cards’ that are being used in the daily lives. The concept of ‘credit’ basically refers to the ability of paying something of value now with your future money- money that you agree to repay at some date after. For example, if your parents are using credit card to pay for one box of chocolate at RM30, this simply mean that you are ought to pay RM30 and often some interest charges when it falls due in the future. At this instance, RM 30 is your current obligation. Moreover, ‘credit’ is also a measurement banks and other financial institutions use to assess individual’s ability to pay up the owings, and it applies to the business corporations too. When bankers predict your credit rating to be excellent, it would mean that you are always on time in paying up your owings to the bank, and therefore banks are more likely to provide you with more future credits as you will be less likely to default your payments.

    What if the possibility of defaulting is high? This is when we would like to introduce another financial term to you, “guarantee scheme”. CGC is one of the government agencies which aims to help small and medium scale enterprises (SMEs), particularly those without collateral or with inadequate collateral track record, to obtain financing from financial institutions.

     

    Functions of CGC

    Most credit institutions are lenders. In other words, these institutions lend money to anyone with the projected ability to repay the debt in the future. A simple example would be CIMB Bank. It is a credit institution that lends money to businesses after assessing and determining that the debtors could repay in the future without any risk of default.

    However, Credit Guarantee Corporation is slightly unique compared to the typical credit institutions. Being true to its name, Credit Guarantee Corporation, it is a corporation that doesn’t just give out loans to businesses (especially SMEs), but also acts as a guarantor to businesses that wishes to borrow fund from credit institutions.

    Let’s give a simple example to illustrate this. There is a business, called A Sendirian Berhad (Sdn Bhd) that is growing. It is classified as a small and medium enterprise (SME). The management of A Sdn Bhd decides to borrow money from credit institutions to spend for capital expenditure purposes (to acquire assets for future business income, for example).

    But, as the management team of A Sdn Bhd read through the terms and conditions of financing, there is a problem. Some of the loan products offered by credit institutions like Maybank for SMEs such as SME Clean Loan/ Financing-i require a corporate guarantor. In other words, a company must vouch for A Sdn Bhd’s loan application. For a subsidiary company, this is not such a big issue since the parent or holding company can afford to be the guarantor for the subsidiary. Unfortunately, A Sdn Bhd is an independent business. Thus, it must find for a corporation that can vouch for it as a guarantor in the case of the business failing.

    This is when Credit Guarantee Corporation steps in as a bridge between SMEs and credit institutions. It plays the role of a company that guarantees the loans made by SMEs should the debtor fails and is rendered unable to repay the debt to the credit institutions. Thus, credit institutions feel secured to give out loans to SMEs and SMEs are able to obtain financing to expand or enhance its business operations.

     

    Besides acting as a guarantor to SMEs, CGC is also a credit institution. In other words, it gives out loans to SMEs directly through 4 schemes. However, it primarily acts as a guarantor to SMEs that are securing financing from other credit institutions.

    Services and Products of CGC

    As discussed earlier, CGC has two main functions:

    1. Acting as a guarantor to SMEs that seek loan financing.
    2. Gives loan to SMEs.

    Thus, the services and products catered by CGC would serve either one of its functions.

    The services provided by CGC are:

    Guarantee schemes: These are the schemes that provide guarantee services to customers. The schemes are divided to 3 types to tailor the type of financing opted by SMEs. They are conventional schemes, Islamic schemes and government-funded schemes.

    Direct financing: This service is a credit service just like other lending services provided by credit institutions. Under this service, there are four products offered by CGC to tailor different types of SMEs.

    Generally, the main differentiating factor that separates the products in each scheme is the loan amount and the usage of money to be borrowed.

    Relationship between CGC, BNM, SME(s) and lending institutions

    To understand the structure of CGC, it is important for us to point out to you that the major shareholder of this particular government agency is Bank Negara Malaysia. BNM holds approximately more than three quarters ( >75% ) of the total ownership in CGC.

    As mentioned above, the functions of CGC include guarantee loans and granting loans. The loans guaranteed by CGC are loans granted by lending institutions, such as the conventional banks and other credit lending companies. Meanwhile, CGC also grants loans with the funds from BNM to borrowers, specifically to SME(s). Also, BNM monitors the operations of CGC. With that, CGC is required to report to BNM on the lending and loan guarantee activities performed. Furthermore, the lending institutions are required to report the lending activities to BNM on a monthly basis. Hence, this would create a healthy check and balance in the financial lending ecosystem. In conclusion, this relationship of the four parties involved is illustrated in the 2nd image.

    CGC and the Public – Important or Not?

    For ordinary people who are not involved in running any businesses, CGC might seem as an irrelevant body that has little significance in our lives because of its subtle impact to our daily runnings. While being notably ignored by most people, in fact, CGC plays an important role in facilitating our economy. According to the World Bank, 97% of Malaysian businesses are SMEs which means that the Malaysian economy could be safely deemed to depend on SMEs to thrive (36% of the Malaysian GDP is contributed by SMEs). Apparently, in order for SMEs to thrive, SMEs need additional cash flow to grow and expand, and often they face difficulties in doing so with conventional financial institutions, thus CGC is the pivotal bridge that allows SMEs to secure such finances by acting as a guarantor. In addition to that, SMEs account for 65% of Malaysia’s employment. In other words, most people in Malaysia (including you!) are likely to be employed in SMEs rather than large conglomerates or multinational company. Hence, by ensuring the capability of SMEs to grow and employ more people, CGC actually helps to combat unemployment indirectly in the Malaysian workforce. In conclusion, no matter if you are an aspiring entrepreneur who plan to run a business in the future or a student moving into workforce, CGC is definitely a term which you want to recognise and understand so that you are able to be prepared for any related opportunities ahead!

     

    Contributors:

    Researchers – Koh Su Yen, Ahmad Haikal bin Ahmad Mochtar

    Editor – Kingsley Goh

    Download The Report Here:

    [download id=”2722″]

     

  • Central Bank: The Mother of Financial Institutions

    Central Bank: The Mother of Financial Institutions

    Introduction

    A central bank is the heart of a country’s monetary policy and its actions exert considerable influence on every aspect of the national economy. Being an independent authority on conducting monetary policy in most countries, it is also responsible for regulating banks, providing financial services, as well as publishing economic research. Having said that, the central bank is typically free from political influence in its day-to-day operations.. The main goals of this important institution is to stabilize the domestic currency, control inflation, and keep unemployment rates at a targeting bandwidth – all of which serves to promote economic growth (Kimberly Amadeo, 2017).

    In most countries, this institution is governed independently by an elected board whose head director is appointed by the country’s chief. The primary purpose of having it as an independent body is to ensure that monetary policy is free from interference from the federal government.

    The most established central bank would be the one in the United States, which is The Federal Reserve System (Fed). Being the most powerful institution controlling the U.S. economy, and thus the world, it is said that it is the main controller of the world’s money. The Federal Reserve System is a two-part structure consisting of a central authority known as the Board of Governors in Washington, D.C., followed by a decentralized network of 12 Federal Reserve Banks situated throughout the nation (Federal Reserve, 2017).The monetary policy, one of the most important policy to the U.S. economy, is regulated by the Federal Open Market Committee (FOMC), which includes members of the Board of Governors and presidents of the respective Reserve Banks.

    Structure of the Federal Reserve System

    Roles of Central Bank

    Issue of Currency

    The central bank is the only institution that is authorized to issue currency legally. Having said that, it is also bound by a specific set of rules and regulations in order to prevent the excessive creation of currency and credit in a country. One of the main conditions that must be fulfilled before the issuance of a currency is that the particular central bank is required to deposit an equivalent amount of reserves in the form of gold and foreign securities as an exchange (Samiksha S, 2014).

    If a market lacks sufficient money supply, the economy might achieve a stagnation as businesses cannot expand their limits with the limited monetary circulation. The conventional way is to print new money. However, this is rarely a viable measure because printing more money will devalue the currency and lead to a higher inflation rate. Money becomes cheaper when the quantity increases. Therefore, consumers would require more money than before to acquire the same amount of goods.  

    Alternatively, the central bank can control the money circulation through the open market operation process. This refers to the buying and selling of government securities by the central bank. To increase money supply, this institution will purchase the securities from commercial financial institutions. Once it does this, the number of deposits in banks will increase, hence raising the loanable funds for banks. On the other hand, under a contractionary monetary policy, it will sell off the securities on hand to reduce the quantity of money circulating in the market.

    Supervising Domestic Banking System

    The central bank oversees all sorts of banks in the country. For instance, the Fed supervises roughly 5,000 bank-holding companies, 850 state bank members of the Federal Reserve Banking System, and any foreign banks operating in the United States. In this case, it acts as the regulator and supervisor of these banks to ensure their proper functioning. In most countries, this institution requires its subsidiary banks (which are all other banks) to deposit a minimum amount of cash reserve in it in order to regulate the number of funds available for borrowings. Similar to other commercial banks, this institution also acts as a lender to its subsidiary banks during times of fund shortages.

    To spur economic activities, large funds are required for investment purposes. The central bank will reduce the reserve requirement by lowering the cash deposit it requires of its subsidiary banks. In 2016, Bank Negara Malaysia has lowered the statutory reserve requirement rate from 4.00% to 3.50% (Joseph Chin, Jan 2016) so as to increase the liquidity in the domestic financial market. This provided more funds to be lent out by the financial institutions in helping to finance the private sector and boosting economic growth.

    Maintaining a Stable Financial System

    The financial intermediation process occurs when banks take in funds from a depositor and lend them out to a borrowing. And only financial stability can guarantee that this process operate smoothly with confidence in the operations of key financial institutions and domestic markets. To put it simply, financial stability is crucial to a country as it allows the financial intermediation process to facilitate the flow of funds between investors and borrowers. The ultimate aim of promoting economic growth and development can be achieved by allocating financial resources efficiently.

    It is, therefore, the main goal of every central government and the central bank of a country to implement a sound, stable and healthy financial system in order to regulate an efficient resource allocation and distribution of risks across the economy. Working closely with the government’s treasury department, the institution plays a huge role in stabilizing the national financial system. The Fed, for example, worked closely with the Treasury Department of the U.S. to prevent global financial collapse during the financial crisis of2008. During that time, many new tools were created including the Term Auction Facility, the Money Market Investor Lending Facility, and Quantitative Easing.

    After the 2008 Financial Crisis, Quantitative Easing (QE) was introduced as a tool to generate money supply electronically (BBC, August 2016). QE refers to the buying and selling of government bonds by central banks. Through the purchasing, the central bank can inject money into the domestic market. Besides improving the circulation in the market, QE acts as a psychological strategy for regaining the confidence of investors and consumers. Through QE, this financial institution can strengthen its confidence and maintain a positive outlook towards the local markets.

    Exchange Control

    An external value of a currency is the purchasing power of one currency over another. Also known as the exchange rate, an external value of a currency is determined by its market forces of demand and supply. The central bank is also responsible for ensuring that the external value of a currency is maintained. The Reserve Bank of India (RBI), for instance, takes several measures to ensure the external value of the rupee. The most common measure used is the exchange rate control system, whereby every citizen of India is required to deposit all foreign currency that is received, and the demand for foreign currency by the citizens has to be applied from the RBI. In this context, the RBI can easily take count and regulate the circulation of domestic and foreign currency inflow and outflow in order to maintain its floating rate.

    Intervention in the foreign exchange market is needed if the value of currency is too volatile. To limit the appreciation of currency, central bank will stockpile the foreign exchange reserve, normally in US Dollar. Selling of local currency to buy US Dollars will increase the supply of local currency in the foreign exchange market. Another approach is by lowering the interest rate. When the local market is no longer giving a return more lucrative than its competitors, foreign investors will withdraw from the domestic market and reinvest in other markets with a higher return. The value will depreciate when the supply of local currency is increasing in foreign exchange markets. Depreciation of currency will benefit the exporters, as the exports are cheaper, boosting trade and economic growth.

    To mitigate the depreciation, it will either sell off the foreign exchange reserve and buy local currency, or raise the interest rate. Both methods are used to increase the demand for local currency and appreciate its value. With a higher interest rate, the local market seems to offer a higher return for the investors. Therefore, an inflow of capital is expected as it drives the demand higher. The beneficiaries of appreciation are the importers, local tourists to overseas, and student studying abroad as things are getting cheaper. They can enjoy more goods and services for every dollar spent.

    Managing Inflation Rate

    The central bank manages the largest component of money supply -credit – for it needs to control inflation. The tool used in controlling inflation is adjusting the interest rate. By doing so, it can affect the cost of borrowing which further influence the productivity of an economy (Investopedia, 2015).

    To curb inflation, it would implement contractionary monetary policy by raising the interest rate. As a result, credit is said to be more expensive as the cost of borrowing has risen. When credit reduces, the money supply circulating in the market will also reduce, which in turn suppresses the expansion of inflation. This is essential because an increase in money supply over a country’s real output would cause inflation, a general sustained rise in the price levels of goods and services. While a low level of inflation is favorable to promote economic growth, an accelerating rate of inflation will destroy any benefits of growth.

     On the contrary, when the risk of inflation is low, this institution lowers interest rate to encourage borrowings in order to boost business growth and money circulation. Cheaper borrowing costs fuels private investment and expansion in an economy. When the economy is growing and businesses are expanding, the rate of unemployment would in turn reduce. This situation is desirable to the central bank as it fulfills its goals of achieving low inflation and unemployment rate. To lower interest rates, an expansionary monetary policy is used by expanding credits and liquidity to boost economic growth and create job opportunities.

    Government’s Banker

    Although the central bank in most countries works closely with the government’s treasury department, it is an independent institution that deals with the government under separate legal entities of a banker (the central bank) and client (government) relationship. In most cases, the government deposits their cash balances with the current account in it and it is then authorized to manage the receipts and payments on behalf of the government. Therefore, this institution is often known as the government banker.

    That being the case, the central government is authorized to borrow money from the central bank in most countries. For instance, when government expenditure exceeds that of its revenue, the central government of India will borrow from the Reserve Bank of India (RBI).  In this case, deficit financing, also known as monetization of debt takes place where the RBI will create new currency notes to buy the Treasury Bill from the government and the government will, in turn, spend this money in the domestic market either for infrastructure or economic development.

    Conclusion

    As the master player in a country’s finance, the central bank is bestowed with a crucial role to regulate the financial stability of a country. Making use of its influence and authority, it is hoping to keep inflation and unemployment at a healthy rate, as well as promote the favourable economic stability to drive consumptions and investments. All these are essential to achieving its ultimate goal of cultivating sustainable economic growth and development in the country.

    Contributors:

    Researchers: Chong Ker Sun & Wong Vyleen

    Editor: Lim Shu Ni

     

    Download The Report Here:

    [download id=”2705″]

    [tw-toggle title=”References”]

    Joseph Chin, January 2016, BNM lowers statutory reserve requirement for banks to 3.5%, The Star Online.   

    https://www.thestar.com.my/business/business-news/2016/01/21/bnm-lowers-statutory-reserve-requirement-for-banks/

    Kimberly Amadeo, 9th November 2017, Federal Reserve System: Its 4 Functions    and How It Works, The Balance.

    https://www.thebalance.com/the-federal-reserve-system-and-its-function-3306001

    Federal Reserve, 3rd March 2017, Structure of the Federal Reserve System, Board of Governors of the Federal Reserve System.

    https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

    Samiksha S, 2nd May 2014, The Role of Central Bank in a Developing Economy of a Country, Your Article Library.

    http://www.yourarticlelibrary.com/banking/the-role-of-central-bank-in-a-developing-economy-of-a-country/11138

    Central Bank, 8th May 2017, The Function and Role of Central Bank, Centrale Bank van Curaçao en Sint Maarten.

    http://www.centralbank.cw/about/function

    BBC, August 2016, “What is Quantitative Easing?”. http://www.bbc.com/news/business-15198789

    5Investopedia, 2015, How do central banks impact interest rates in the economy? https://www.investopedia.com/ask/answers/031115/how-do-central-banks-impact-interest-rates-economy.asp

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