Can Sukuk and the Capital Market Become the Next Funding Channel for SMEs in Malaysia?

From Bank Financing to the Capital Market: A Financing Journey for Growing Businesses

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For most Malaysian SMEs, the financing journey begins with a bank.

According to Bank Negara Malaysia (BNM), banking institutions provide more than 90% of total SME financing in Malaysia. As at end-February 2026, outstanding SME financing stood at RM440.5 billion, representing about 51% of total business financing.

For many businesses, this works well. Bank facilities can support working capital, equipment purchases and business expansion. However, as a company grows, its financing needs may become larger and more complex.

Imagine an SME that has operated successfully for ten years. It now wants to build a new factory, automate its operations, expand overseas or invest in renewable energy. The business may require larger amounts of capital and longer-term financing than it did during its earlier years.

At this stage, the question is no longer simply whether the business can obtain financing. The more important question is whether bank financing alone remains sufficient for its next phase of growth.

This is where the capital market can become part of the journey.

Moving Up the Funding Escalator

Malaysia has been developing what policymakers describe as a funding escalator for micro, small and medium enterprises (MSMEs) and mid-tier companies.

The concept is straightforward: as businesses grow, they should be able to access a wider range of financing options that match their size, maturity and funding requirements.

A business may begin with personal savings and bank financing. As it grows, it may consider Equity Crowdfunding (ECF) or Peer-to-Peer (P2P) financing. Companies with greater scale may move towards venture capital, private equity or private debt, while more established businesses may consider the LEAP Market or ACE Market.

Further along the journey, larger SMEs and mid-tier companies may eventually consider bonds and sukuk.

The Securities Commission Malaysia (SC), through its capital-market development initiatives, has emphasised the importance of broadening funding options for MSMEs and mid-tier companies so that businesses are not dependent on a single financing channel.

The key point is that sukuk is generally not the starting point for an SME.

It becomes more relevant when a business has reached sufficient scale, developed stronger governance, established a financial track record and generated more predictable cash flows.

In that sense, sukuk is part of a wider financing evolution rather than a replacement for bank financing.

Why Look Beyond Bank Financing?

Malaysia already has a sizeable capital market.

According to the Securities Commission Malaysia, Malaysia's capital market reached RM4.3 trillion in 2025. Meanwhile, based on BIX Malaysia's August 2026 Monthly Fixed Income Report, outstanding Malaysian ringgit bonds and sukuk stood at approximately RM2.388 trillion.

For a growing company, access to the capital market can provide an additional source of funding alongside existing banking relationships.

This can help businesses diversify their funding sources, access a wider pool of investors and obtain financing structures that may better match longer-term investment needs.

Consider a manufacturing SME seeking RM30 million to expand production capacity and improve energy efficiency.

The company may still use bank financing for part of the investment. However, if the business has grown sufficiently, a capital-market instrument could provide another source of longer-term funding to complement its existing bank facilities.

The objective is therefore not to choose between banks and the capital market.

It is to give growing businesses access to more than one financing channel.

Where Could Sukuk Fit?

For suitable businesses, sukuk can represent one route into the debt capital market.

Sukuk are financing instruments structured in accordance with Shariah principles. Depending on the nature of the transaction, structures such as Murabahah or Wakalah may be used.

From the perspective of a business owner, however, the more practical question is not necessarily how the structure works.

The more important question is: what can sukuk do for the company?

For an appropriate issuer, sukuk may help diversify funding channels, provide access to a wider investor base, support longer-term financing needs and help establish a capital-market track record.

Sukuk may also be relevant for businesses undertaking sustainability-related projects such as renewable energy, energy-efficiency improvements or other eligible green and social initiatives.

Malaysia already has an established Sustainable and Responsible Investment Sukuk Framework under the Securities Commission Malaysia, which provides a framework for eligible sustainable financing activities.

For growing businesses with suitable projects, this means sukuk could potentially serve both a financing purpose and a sustainability objective.

When Is an SME Ready for Sukuk?

Not every SME is ready to enter the debt capital market.

Investors need confidence that an issuer can meet its financial obligations. Companies considering bonds or sukuk therefore generally need reliable financial reporting, sound corporate governance, a clear business strategy, predictable cash flows and credible management.

Scale is also important.

Issuing bonds or sukuk involves legal, advisory, regulatory and documentation requirements. These costs can be significant for smaller companies, particularly when the amount of financing required is relatively small.

For example, the economics of raising RM10 million or RM20 million through the capital market may be very different from a much larger issuance.

This helps explain why traditional bank financing is likely to remain more practical for many smaller businesses.

The challenge is therefore not to make sukuk suitable for every SME.

The challenge is to create a practical pathway for businesses that have grown large enough and become sufficiently capital-market ready.

Making the Capital Market More Accessible

Several developments could help more businesses move further along this financing journey.

Greater standardisation of documentation and more streamlined issuance processes could help reduce transaction costs. Credit guarantees and other forms of credit enhancement could also strengthen investor confidence and potentially make financing more accessible for qualifying issuers.

Another possibility is pooled or aggregated financing, where the funding requirements of several businesses are combined into a larger structure. This could help address the challenge of individual SMEs being too small to attract institutional investors on their own.

Public-private collaboration can also play a role.

Under the New Industrial Master Plan 2030 Strategic Co-Investment Fund, or NIMP CoSIF, the Securities Commission Malaysia reported that RM221.23 million in public-private fundraising had been facilitated for 42 Malaysian companies through ECF and P2P platforms as at end-July 2026.

Although this initiative does not directly involve sukuk, it demonstrates how public and private capital can work together to support growing businesses.

Data is another important part of the process.

In March 2026, the Securities Commission Malaysia and the Companies Commission of Malaysia entered into a data-sharing collaboration aimed at identifying MSMEs with strong growth potential and connecting them with more suitable financing opportunities.

Together, better data, stronger issuer readiness, appropriate credit support and more efficient market processes could help more companies move from traditional financing towards capital-market funding.

A RM40 Billion Opportunity

Malaysia's policy direction already points towards greater capital-market participation by MSMEs and mid-tier companies.

Under the Securities Commission Malaysia's Catalysing MSME and MTC Access to the Capital Market: 5-Year Roadmap (2024–2028), the aim is to increase MSME and mid-tier company fundraising through the capital market from RM6.3 billion in 2023 to RM40 billion by 2028.

The same roadmap estimated that Malaysia faced an MSME financing gap of RM290 billion in 2022 and indicated that up to 20% of financing could potentially come from capital-market sources.

These figures highlight the potential role that market-based financing can play in complementing Malaysia's banking system.

Bank financing will continue to remain central to the SME ecosystem. However, if more Malaysian SMEs are to become larger companies, exporters and eventually corporate issuers, they may need access to a broader financing toolkit as they grow.

From SMEs to Tomorrow's Sukuk Issuers

Malaysia already has many of the foundations needed to support this transition.
The country has a sizeable bond and sukuk market, sophisticated institutional investors, an established Islamic capital-market ecosystem and a growing range of alternative-financing platforms.

The next step is to connect these funding channels more clearly.

A company may begin with bank financing, then move into ECF or P2P financing, private capital or the equity market as it grows. Once it has sufficient scale, stronger governance, predictable cash flows and a proven financial track record, bonds or sukuk may become another financing option.

Not every SME will eventually issue sukuk, and many will continue to rely primarily on banks.

But for mature SMEs and mid-tier companies that are ready to access investors directly, sukuk could become the next stage of their financing journey.

Malaysia has already established itself as a major sukuk market. The opportunity now is to create a clearer pathway for some of today's growing SMEs to become tomorrow's capital-market issuers.

Sukuk does not need to replace bank financing. For the right business, it can become the next step after it.

Sources and References:
Bank Negara Malaysia (BNM) — SME Financing information and statistics.
Securities Commission Malaysia (SC) — Catalysing MSME and MTC Access to the Capital Market: 5-Year Roadmap (2024–2028).
Securities Commission Malaysia (SC) — Malaysian capital market statistics and MSME/MTC financing initiatives.
Securities Commission Malaysia (SC) — Sustainable and Responsible Investment Sukuk Framework.
Securities Commission Malaysia (SC) — NIMP Strategic Co-Investment Fund updates and SC–SSM data-sharing collaboration.
BIX Malaysia — Monthly Fixed Income Report, August 2026.

 

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