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:
- Acting as a guarantor to SMEs that seek loan financing.
- 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!
Researchers – Koh Su Yen, Ahmad Haikal bin Ahmad Mochtar
Editor – Kingsley Goh
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