Since 1999, the Malaysian government has introduced several initiatives to modernise its procurement processes and enhance economic inclusivity. Among these is the e-Perolehan system, which translates to the e-Procurement system, also known as “eP”. Its purpose is to streamline transactions and encourage transparency in Malaysian government procurement. The system currently has more than 180,000 registered supplier companies and over 3,800 government agencies. 

The digital procurement system has positively impacted Malaysian small and medium-sized enterprises (SMEs) and factoring companies, enabling greater access to public sector projects and viable financing opportunities. 

But just how the payment or debt assignment system functions within the Malaysian government’s digital procurement framework is yet to be explained in detail.  Factoring companies and SMEs have benefitted from this closed-loop payment collection system working in favour of the financiers; understanding how financial institutions could leverage these mechanisms and processes paints a picture of creativity and inclusivity as key drivers of Malaysian national growth. 

Malaysia’s market

According to the Department of Statistics Malaysia, SMEs accounted for nearly 97% of overall establishments in Malaysia in 2023, contributing a substantial RM613.1 billion to the economy. These figures speak volumes, affirming their importance as the backbone of Malaysia’s economy. However, many SMEs often face cash flow challenges stemming from delayed payments: paymasters and traditional banking institutions close their doors to SMEs for financing, thereby inhibiting them from tapping into growth opportunities that may arise. 

By leveraging eP’s capabilities, factoring companies integrated with the Malaysian government’s digital electronic system are able to address these challenges by revolutionising financial practices through a transparent notification framework for three parties, being the paymaster (i.e., the Malaysian government), the borrower (i.e.,  the SME), and the financier (i.e., the factoring company).

An overview of the Malaysian government’s digital procurement system: e-Perolehan 

The eP system is Malaysia’s government digital electronic procurement system for the government and its agencies. It serves as a centralised hub for ministries such as the Ministry of Education, Ministry of Health, Ministry of Defence, and others, as well as vendors engaging in contract transactions. Malaysian government contracts typically span from one to three years, with payment terms generally ranging from 60 to 90 days.

The eP system supports procurement for:

• Tendering process of supply of goods and services across various ministries through competitive bidding of tendering, direct awards for specialised projects, or request for quotations process for specific small-scale procurements;
• Specialised services, including vendor registration and renewal of Malaysian Ministry of Finance certificates;
• Allowing direct payment to financier and factoring companies approved and registered on the system.

The system is intended for contracts related to the supply of goods and services, and does not cover infrastructure developments, building construction projects, and employee emoluments. Its benefits include transparency, efficiency, and equitability in the procurement process, but importantly, eP opens opportunities for SMEs to compete for government contracts and take advantage of factoring facilities made available to them.

Transaction verification and confirmation on eP

The digital electronic procurement system provides a comprehensive platform for government vendors to streamline their financial documentation process. Through this interface, vendors can securely upload critical documents such as factoring agreements, financier letters of offer, contract assignment documents, and supporting invoices.

Each submitted document undergoes rigorous verification and confirmation by government authorities. This systematic approach serves multiple critical functions: it establishes a transparent documentation trail, ensures regulatory compliance, and significantly mitigates the financial risks associated with potential double financing.

As a centralised, digitally-authenticated system, the platform introduces an additional layer of oversight that protects both the SMEs and financial institutions participating in the procurement ecosystem. The digital verification process acts as a robust mechanism to validate transaction authenticity and maintain the integrity of financial exchanges.

Vendors and financiers benefit from early detection of fraud and commercial disputes by engaging with the government through this system. Wider, it develops trust and strengthens relationships between the government entities and the transactional parties involved, promoting a collaborative environment.

Direct payment reduces collection risks

A notable feature of the eP system is its direct payment mechanism. Under this system, payments for factored invoices are made directly to the factoring company, without the SME having access to the monies. This innovative approach ensures: 

• Reduced payment collection risk: SMEs and factoring companies are safeguarded from the potential of payment default, as government agencies are dependable paymasters with established credibility and allocated funds from the government budget. 
• Boosted confidence among financiers: Factoring companies are more confident in extending favourable terms to support the SMES, notwithstanding uncertainties tied to the SME’s creditworthiness. 
• Empowering SMEs: With reduced concerns about cash flow interruptions, SMEs can shift their focus from financial stress to operational excellence, positioning them as more competitive and reliable vendors in the market. 
• Incentivising participation: Direct payment promotes greater liquidity in the industry and strengthens the financial ecosystem by diversifying the product features and financial providers to participate in this market. 

Shariah-compliant factoring – El Nuwr

Non-bank financial institutions (NBFIs) operating in the Malaysian financial services landscape can focus specifically on underserved market segments, developing specialised financing solutions targeting small and medium-sized enterprises (SMEs) across various economic sectors.

These institutions’ approaches centre on addressing financing gaps that traditional banking systems often overlook. As they aim to provide alternative funding mechanisms for businesses, NBFIs offer diverse financial services including trade financing, secured lending, consumer lending, corporate finance advisory, merchant financing, and invoice factoring.

For instance, Luminor Capital has developed a Shariah-compliant factoring platform called El Nuwr. The main principles of Islamic finance are that interest (riba), unlawful (haram) earnings and expenditures, and extreme uncertainty (gharar) are prohibited; traded goods, services, and activities must be acceptable (halal) to Shariah; and the obligations of trust (amanah) and covenants (uqud) must be adhered to. Shariah-compliant factoring is one such mechanism which targets the specific needs of underserved Malaysian businesses that many larger institutions overlook. 

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The assignment system for factoring companies within Malaysia’s eP framework has revolutionised the financial landscape for SME contractors in the country. By offering transparent, secure, and efficient processes, it bridges the gap between government contracts and SME financing needs. The integration of digital verification and direct payment mechanisms further enhances trust and reduces risks, making factoring a viable solution for cash flow management.

The direct payment mechanism is more than a feature; it is a transformative tool that modernises how government-related financial transactions are conducted, ensuring a fair, efficient, and risk-mitigated process for SMEs and their financiers.