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«The landscape of SME finance in Bangladesh An analysis of providers, products, requirements and constraints What is this resource? This report ...»

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The landscape of SME finance in Bangladesh

An analysis of providers, products, requirements and


What is this resource?

This report depicts the landscape of financing options for small and medium-sized enterprises

(SMEs) in Bangladesh. It provides guidance on how policy makers, financiers and SME entrepreneurs

could enhance access to finance.

The report was written by Barclay O’Brien of Challenges Consulting, to help identify financing

options for inclusive businesses supported by the Business Innovation Facility. Many kinds of SME financing are reviewed: debt finance from commercial banks, development banks, MFIs and NBFIs;

equity finance from venture capital funds, sovereign funds and private equity funds; and concessional assistance from bilateral donors and development agencies.

Why is it interesting?

We believe this to be the first report of its type that provides an overview of the broad financial landscape, covering not only larger well established players, but also new players such as Impact Investors. The report goes beyond listing providers and volumes, to look at financial products, requirements, constraints and opportunities.

Who is it for?

The analysis will be invaluable for anyone operating in the financial sector in Bangladesh, or supporting SMEs to access finance. The Bangladesh example, where SME finance is a priority and yet constraints remain, will also be a useful contribution to international understanding of SME finance.

Others, including SME entrepreneurs, may find the four-page summary report a more useful overview of the main types of finance available. This can be found at: http://bit.ly/TJ1gWu.

Since the potential for renewable energy is substantial in Malawi, the case described here for GTC has great potential for replication with other businesses and sites.

Table of Contents Introduction

1. Definitions

2. The role of SMEs in Bangladesh

3. Access to finance in Bangladesh

4. Providers of finance

4.1 Banks

4.3 MFIs

4.4 Cooperatives and Associations

4.5 Impact Investors

5. Supply of products and requirements

5.1 Banks and NBFIs

5.2 MFIs

6. Access to advice and support for finance

6.1 Financing

6.2 Other Support

7. Common limitations for SMEs and providers

7.1 Clients

7.2 Suppliers

8. How SMEs can improve access to finance

8.1 Best Practices for SMES

8.2 Other Steps

9. Conclusion

9.1 How SMEs Should Proceed

9.2 Some Possible Changes




Introduction Business Innovation Facility (BIF) Bangladesh is a UKAID-funded project. BIF aims to support enterprises with Inclusive Business (IB) models in the development of least developed countries and currently operates in 5 countries: Bangladesh, India, Nigeria, Malawi and Zambia. BIF’s work can be viewed at the web site: www.businessinnovationfacility.org IB refers to a profitable core business activity that also tangibly expands opportunities for the

poor and disadvantaged in developing countries. The social benefits of IBs include:

 Increased employment opportunities for marginalised groups  The growth of markets for local smallholders and tradesmen  Potential food security improvements Pursuant to its objective, BIF has worked with several key local organizations, such as Rahimafrooz Superstores Limited, ACI Group Agri-business Division and CARE Bangladesh, to develop successful and sustainable IB solutions.

The concept of IBs is not widely known, especially amongst banks, Non-Bank Financial Institutions (NBFIs) and other finance providers. IBs can be compared to Small and Medium Enterprises (SMEs), as normally an IB will be of a similar size. Therefore, the research for this project has used “SMEs” as an alternative for “IBs” where the context required or it otherwise made sense to do so.

Challenges Consulting is part of the Challenges Worldwide group and works on behalf of BIF:

see www.challengesworldwide.com. Challenges were asked to conduct a survey of the financial landscape for access to finance for IBs in Bangladesh. Challenges used both quantitative and qualitative research methods in undertaking this supply side survey. Data was collected from both primary and secondary sources. In regard to the latter, Challenges conducted a review of available data and documents, in order to gain an overall view of the Bangladesh market, to ensure that the detailed research is based on a strong up to date factual foundation and to grasp the recent changes that have taken place and how those changes affect the supply of finance.

This report was prepared at the end of a field trip conducted by Barclay O’Brien over the period from 1 to 17 June 2012. The fieldwork comprised face to face interviews with pre-arranged respondents in the following categories: banks, NBFIs, microfinance institutions (MFIs), the central bank, government programs, donors, NGOs, equity providers and agro-enterprise companies.

As a result, consideration was given to many kinds of financing, such as debt finance from commercial banks, development banks, MFIs and NBFIs. Secondly, this survey also looks at the available forms of equity finance from venture capital funds, sovereign funds, and private equity funds. Thirdly, Challenges considered a range of financial assistance from bilateral donors and development agencies.

The above fieldwork involving direct interviews with institutions was supplemented with aggregate data obtained from Bangladesh Bank and other sources. As a result, a national picture was obtained. However, it was not possible to interview and/or obtain data from every finance provider in Bangladesh and, by omitting to mention other suppliers in this report, there is no intention to downplay the role and products of those organisations.

Meetings were also held in Singapore on 29 to 31 May 2012 with various impact investors and the Impact Investment Forum. The initial findings were presented by Barclay O’Brien at the ISCEA Agribusiness Supply Chain Conference held at the Radisson Blu Water Hotel in Dhaka on 17 June 2012.

1. Definitions A key issue for this Access to Finance study is how to define SMEs. SMEs are now normally defined in Bangladesh according to the definition used in the National Industry Policy of 2010,

as follows:

–  –  –

Fixed asset value is excluding the value of land and building (so that the SME’s choice of * whether to rent or own premises is not decisive).

The same definition has been adopted by Bangladesh Bank (BB), the regulator of the banking sector in Bangladesh. As covered in this report, banks are required to report their lending to SMEs to BB. However, whilst the above definition is now widely acceptable, other definitions still prevail with a variety of criteria used by different countries or even by different agencies within other countries. Apart from the number of employees or assets, others use the volume of sales or loan sizes to define SMEs. Therefore, as the World Bank Group has noted in recent reports, a major challenge in collecting cross-country comparable data on access to finance by SMEs is the lack of consensus across countries in how SMEs are defined2.

Furthermore, within each criterion, different cut-offs are used by different countries. For example in the World Bank’s Access to Finance Studies, 150 employees is applied as the maximum for a SME. Although the majority of countries use 250 employees as the maximum number for an SME, some have 50 employees as the cut-off3.

The second issue is that, currently, few international or multi-country data collection and compilation initiatives focus extensively on SMEs. In Bangladesh, the Bureau of Statistics (BBS) has responsibility for collecting this type of information and collects, on an annual basis, detailed production data from a sample of manufacturing enterprises that have 10 or more workers under its Survey of Manufacturing Industries (SMI). However, SMI data are not available by employment size group and the fixed assets data collected under the survey do not reflect current replacement costs. As a result, BBS data cannot be used to assess the output size and performance of any particular group of manufacturing enterprises.

The Daily Star newspaper noted (17 March, 2012) that the situation with respect to nonmanufacturing enterprises is even worse. Because the BBS does not collect flow data on these non-manufacturing enterprises on a regular basis, the available BBS data does not permit assessment of the size of output or productivity in particular sized group of manufacturing or non-manufacturing enterprises in Bangladesh. The paper concluded that the estimates of the There is a gap in the policy for service and trading business with between 25 and 50 employees. The consensus among the financiers and businesses is that such businesses with up to 49 employees are “small” CGAP and the IFC, 2011, Financial Access 2011: An Overview of the Supply-Side Data Landscape, Washington.

CGAP and the World Bank Group, 2010, Financial Access 2010: The State of Financial Inclusion through the Crisis, Washington.

size of SMEs in Bangladesh and their contributions to GDP that appears in the Government’s Poverty Reduction Strategy Paper (PRSP-II) and other documents are, as a result, “guesstimates based on micro surveys”: see Section 2 for more detail.

Partly to combat this issue, on 23 November 2011, the South Asia Enterprise Development Facility (SEDF), managed by International Finance Corporation (IFC) in partnership with the UK Department for International Development (DFID) and the Norwegian Agency for Development Cooperation, launched the “SME database”, with the stated aim of helping financial institutions to streamline their appraisal and prioritisation of SMEs and more efficiently identify the lending potential by region. No reports have been made available by the IFC in this area to date, as the database system is being fine-tuned. However, some broader level information (from the pilot project) is available on the BB website.

2. The role of SMEs in Bangladesh

There is now well established recognition of the role Small & Medium Sized Enterprises (SMEs) play in developing nations economies. SMEs provide output gains and a broadening of employment opportunities that in combination helps improve wealth distribution. In addition, the SME sector provides a stepping-stone for more ambitious micro-enterprises owners, local supply chain engagement for more established companies and in some important instances will act as an incubator for larger enterprises to flourish.

Empirical studies show that where developing counties have healthy SME sectors then the distribution income for both labour and capital is improved underpinning more balanced growth models. Generally, SMEs will employ intermediate technologies and tend to generate significant employment opportunities with modest capital inputs. They will often also exhibit (i) greater business flexibility, (ii) a tendency to apply technological advances and, (iii) drive general production and distribution efficiencies.

Although governments recognise the benefits of a healthy, growing SME sector their policies are not always best aligned to provide optimum support. These fundamental support

ingredients include:

 Tax policies that should be neutral, or slightly in favour of SMEs; recognising their needs but at the same time avoiding micro-management  Labour policies that help ensure that micro and small-enterprises are not faced with (i) any barriers to adding to employment or, (ii) adding burdensome administrative requirements on firms with limited management resources  Developing a suitable infrastructure framework, including workforce education thus improving inputs to the SME sector  Additionally, access to appropriate finance in the form of debt, equity and selective grant aid is a vital element in the pace of SME development.

Business owners require knowledge of:

 Sources of finance and what is most suitable for the needs of their businesses.

(including where they can obtain information and advice)  What is expected of them when applying to lenders and / or providers of equity finance and their ongoing obligations to suppliers of finance

The finance sector should display:

 Top down policy-making encouraging development of SME finance on a sustainable basis  Appropriate bank lending frameworks that incorporate staff development and better understanding of SME business model analysis Specifically, in the Poverty Reduction Strategy Paper (PRSP)-II, which is currently in force, the development of SMEs has been identified by the Bangladesh Government as a critical element of pro-poor growth. Poverty rates have been decreasing in Bangladesh but still remain high by regional and global standards.

Figure 1: Poverty Rates (Upper Limit, i.e. US$2 per day) in Bangladesh Source: Government of Bangladesh SMEs can make a significant contribution to reducing poverty because of the importance of SMEs to the Bangladesh economy. The estimated number of SMEs in Bangladesh varies from 6m (an estimate from the ADB4) to the 3.3m registered SMEs in the country. SMEs make up 25% of the total labour force, 80% of industry employment, and 90% of all enterprises in Bangladesh.5 Their total contribution to export earnings varies between 75% and 80%, according to a recent economic census. In terms of GDP, SMEs contribute a quarter in Bangladesh.6 The contribution by each business sector is shown below. The contribution of agriculture to GDP is similar to that made by SMEs, with some overlap, as shown. However, many of the agriculture enterprises are smaller, being either micro-entrepreneurs or subsistence farmers.

Figure 2:

–  –  –

Asian Development Bank, 2009, Bangladesh Financial Sector: An Agenda for Further Reforms, Manila Giesen and Lincing, 2006, Enterprise Structure in Bangladesh MIDAS, 2009, Women Entrepreneurs in SMEs: Bangladesh Perspective, SME Foundation

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