Sustainability-Adjusted Credit Guarantee Pricing for Financing Micro, Small, and Medium-Sized Enterprises in Malaysia

As in many Asian economies, Malaysia’s micro, small, and medium-sized enterprises (MSMEs) account for the vast majority of firms and large shares of economic output and employment. Their significant carbon footprint makes them pivotal for achieving carbon neutrality. In bank-dominated financial systems such as Malaysia’s, credit guarantees help facilitate lending to MSMEs. This paper proposes a way to both ease MSME access to finance and incentivize decarbonization and sustainability. It develops a risk-based and sustainability-adjusted credit guarantee pricing framework that integrates an MSME’s financial health, environmental footprint, and the macroeconomic conditions it faces. Using financial data from 2,000 Malaysian MSMEs, principal component analysis is used to construct a financial health index, followed by K-means clustering to classify firms by risk. A countercyclical pricing model produces a firm‑level credit guarantee fee ranging from 1.08% for the healthiest firms during a recession to 2.58% for the riskiest firms during economic expansion. Firm-level sustainability survey data are used to build a composite performance score which reduces guarantee fees by an average of 0.13 percentage points, with a reduction up to 0.23 percentage points for top-performing firms.