MyClimate Insights
The Missing Middle: Unlocking Finance for Malaysia’s Green Entrepreneurs
Malaysia is on a mission to build a low-carbon, climate-resilient economy. At the heart of this transition are the nation’s Micro, Small, and Medium-sized Enterprises (MSMEs), which are crucial for developing innovative climate solutions. However, many of these vital businesses are stuck in the “Missing Middle”—too large for microfinance but considered too small or risky for traditional investment.
A recent report by the United Nations Development Programme (UNDP), “The Missing Middle: Barriers to Scaling Climate-focused MSMEs and the Role of Blended Finance,” dives into this challenge. Based on a survey of 100 climate-focused MSMEs in Malaysia, the report sheds light on the financial hurdles these businesses face and proposes a path forward.
The Funding Gap in Numbers
A significant 59.7% of climate-focused MSMEs need financing in the “Missing Middle” range of RM100,000 to RM3 million.
The most common funding need is between RM100,000 and RM500,000 (21.8% of businesses).
Despite this need, 68% of entrepreneurs report facing moderate to high difficulty in securing any capital.
Why is This Happening? The Core Barriers
The study identified several key obstacles from the perspectives of both the businesses seeking funds and the investors providing them.
Challenges for Climate Businesses
Entrepreneurs report a frustrating journey when trying to secure financing. The application process itself is a major hurdle.
%
cited lengthy approval times and stringent eligibility criteria as major challenges.
%
felt there was a simply lack of available funding for businesses like theirs.
%
pointed to a lack of investor interest.
%
were hindered by an insufficient track record.
Persistent structural and informational gaps continue to restrict MSMEs’ ability to secure investment which needs to be addressed in the ecosystem. Traditional lending assessments often prioritise fixed-asset collateral and historical financial performance. These criteria fail to capture the viability or future revenue potential of many climate-focused MSMEs operating service-based or technology-enabled business models.
This has led to a strong preference for non-debt financing. Grants are the most preferred instrument (18.9%), followed by equity impact funds (13.4%). Many businesses show a clear “debt aversion,” with 45% maintaining a low debt ratio of less than 30%. They are cautious about traditional loans with rigid repayment schedules that don’t match their project-based or seasonal revenue streams.
“We do not avoid loans completely. But we avoid debt structures that assume fixed monthly repayments while our revenue is project-based, tranche-based, or seasonal. That’s why we often prefer grants, guarantees, or milestone-based funding -or even facilities where repayment timing matches delivery cycles.”
The Investor Perspective
On the other side of the table, investors have capital ready to deploy but are hesitant for several reasons.
%
of financial institutions cited a lack of viable/bankable projects as their top concern.
%
pointed to insufficient data and information to make sound investment decisions.
%
were worried about inadequate returns or profitability.
This shows the problem isn’t a lack of capital but a mismatch between what investors are looking for and how climate projects are currently structured.
A Path Forward: The Power of Blended Finance
The report argues that blended finance is a key solution.
What is it? Blended finance is the strategic use of public or philanthropic funds (catalytic capital) to de-risk investments and attract private capital into projects that have a positive impact but are not yet considered commercially bankable.
This approach can help by:
-
Absorbing initial risks that deter private investors.
-
Supporting project preparation to create a pipeline of bankable projects.
-
Signaling commercial viability to the broader market.
The goal isn’t to create a permanent subsidy but to bridge a temporary gap, allowing innovative climate businesses to scale and prove their models.
Key Recommendations for Unlocking Capital
The report concludes with clear, actionable recommendations:
Design Instruments for the 'Missing Middle'
Create financial products with appropriate ticket sizes (RM100k – RM3M), flexible repayment terms, and eligibility criteria that fit climate business models (e.g., focusing on project viability over fixed assets).
Improve Risk Assessment and Efficiency
Develop new frameworks to properly assess unfamiliar technologies and business models. Aggregating smaller projects into a larger portfolio can also reduce transaction costs for investors.
Use Catalytic Capital Strategically
Deploy grants and concessional loans to unlock commercial investment, but with clear exit strategies to ensure private capital eventually takes over.
Conclusion: It’s About Alignment, Not Absence
The challenge facing Malaysia’s climate-focused MSMEs is not a lack of capital in the system but a lack of alignment between the financing available and the needs of these businesses.
By refining financial instruments, improving risk assessment, and strategically using catalytic capital, Malaysia can bridge this gap. Supporting these enterprises is not just about helping small businesses—it is essential for achieving the nation’s climate goals and building a resilient, sustainable economy.
UNDP Malaysia is committed to this agenda and is open to collaboration.