«The landscape of SME finance in Bangladesh An analysis of providers, products, requirements and constraints What is this resource? This report ...»
3. Access to finance in Bangladesh Accepting that the contribution made by SMEs is important to the Bangladesh economy, why is their potential dependent on access to finance, as the premise of this report? This has been the subject of much research, in Bangladesh and elsewhere.
The progress of the Bangladesh economy can be seen in the following table, including the growth of private credit (highlighted in yellow).
Table 1: Bangladesh Economic Indicators
Source: Bangladesh Bank Despite these advances, Bangladesh remains a developing country. The role that access to finance can play in changing the situation was summarised by one author as follows: “Access to a well-functioning financial system can economically and socially empower individuals, in particular poor people, allowing them to better integrate into the economy of their countries, actively contribute to their development and protect themselves against economic shocks”.
Financial inclusion can be assessed in a number of ways. One method is to look at specific indicators, such as the numbers of people with a bank account. Recent studies7 in Bangladesh assess this at between 25.5% and 43.8%. The second approach is to use a more holistic Index. One that considers banking penetration, availability of services and usage of services ranked Bangladesh at 43rd out of 55 countries. 8 CGAP (2010) Sarma, Mandira, Index of Financial Inclusion, Indian Council for Research on International Economic Relations.
June 2008 The most recent, and now best regarded, study is the World Bank Global Financial Index (FinDex)9. The following figure compares access to bank accounts in Bangladesh with neighbouring countries and the regions, showing that Bangladesh ranks well in South Asia but is behind East Asia & the Pacific and the Global figures.
Source: The World Bank Global Financial Index An earlier World Bank study examined access to finance specifically for SMEs, which ranked Bangladesh ahead of other South Asian countries, as shown below, in terms of both the amount of SME lending as a percentage of GDP and as a percentage of total lending.
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/EXTFINRES/EXTGLOBALFI N/0,,contentMDK:23147627~pagePK:64168176~piPK:64168140~theSitePK:8519639,00.html Figure 4: SME Access to Finance in South Asia Source: CGAP (2010) Conscious of the need for SMEs to receive finance, for the reasons set out above, the Bangladesh Government has, to their credit, taken various steps.
In 2009, BB initiated a move to set targets for commercial banks for financing SMEs, in order to expand formal credit for this sector. BB was seeking to replicate the success it had achieved from streamlining farm credit. In addition, BB set up a separate department for the SME sector, as had been done by the central banks of India and Pakistan to boost SME credit. The initial BB target for all banks and financial institutions was Tk240bn (US$3bn) in SME loans for 2010.
This was achieved and the target for calendar year 2012 is nearly two and half times the same amount at Tk590bn (US$7.37bn).
BB has also initiated subsidised programs for specific sectors, such as agriculture and women, with a target of Tk138bn (US$1.725bn) for the former in the financial year to 30 June 2012 and Tk10bn (US$125m) for women entrepreneurs in the upcoming year.
Notwithstanding all these arrangements for financing of SMEs, the actual delivery of institutional credit to the SME sector can be increased and improved upon. In following sections, the current supply of finance will be examined.
4. Providers of finance
4.1 Banks There are 47 scheduled banks in Bangladesh. They operate under the supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and
Bank Company Act, 1991. Scheduled banks are classified into the following four types:
State Owned Commercial Banks (SOCBs): There are 4 SOCBs which are fully or majority owned by the Government of Bangladesh Specialized Banks (SDBs): 4 specialized banks are operating having been established for specific objectives like agricultural or industrial development. These banks are also fully or majority owned by the Government Private Commercial Banks (PCBs): There are 30 private commercial banks which can
be categorized into two groups:
o Conventional PCBs: 23 conventional PCBs are now operating in the industry;
and o Islami Shariah based PCBs: There are 7 Islami Shariah based PCBs in Bangladesh and they execute banking activities according to Islami Shariah based principles i.e. profit and loss sharing between each bank and its customers Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of banks incorporated abroad The outstanding loans balances (OLB) for SME lending as at 31 March 2012 are set out below.
Table 2: SME Lending by Banks
Source: Bangladesh Bank
There are four non-scheduled banks in Bangladesh comprising:
Ansar VDP Unnayan Bank, Karmashangosthan Bank, Probashi Kollyan Bank, and Jubilee Bank.
As of 31 March 2012, the total outstanding SME loans from all banks stood at Tk3,851bn (US$48bn). This is 22% of their total loans and advances and an increase of 20% from a year earlier, mainly because of private commercial banks' increased lending to SMEs.
In terms of disbursements, SMEs received 15% more in the first quarter (Q1) of 2012 than a year earlier. (This is still a positive result even allowing for inflation of 10.4% over the year to April 2012.) The latest data from BB shows that a total of Tk139bn (US$1.75bn) was disbursed during the January-March quarter.
Approximately 65% of SME loans disbursed in 2011 went into trading, 29% into manufacturing and the rest into the services sector, according to data from Bangladesh Bank.
The main bank lenders in the SME sector are shown in the following graph.
Figure 5: Largest bank lenders to SMEs Source: Bangladesh Bank The largest lender to SMEs by far is Islami Bank Bangladesh Limited (IBBL). At 31 May 2012, its OLB for SMEs was Tk159bn (US$2bn) - equal to approximately 42% of its assets. The number of SME clients was put at 83,000 plus an additional, 11,000 women entrepreneur clients. Of the national SME target for calendar year 2012 of Tk590bn (US$7.375bn) (see section 3), IBBL has committed to Tk125bn (US$1.562bn) (or 21%).
The second largest SME bank lender is BRAC Bank. Syed Mahbubur Rahman, managing director and chief executive officer of BRAC Bank, told The Daily Star in an interview (9 January 2012): “Set up in 2001, BRAC Bank is the largest SME bank in the country. Of its Tk 9,000 crore [US$1.125bn] loan portfolio, SMEs account for 50 percent10. Of the SME loans, 92 One crore equals 10 million. Although BRAC’s claim to be number one would be disputed by IBBL, 50% of Tk 9,000 crore equals Tk45bn which is approximately the same as the Tk43.9bn shown in Figure 5.
percent are without collateral with an average loan size of Tk 6-7 lakh11 [US$7,500-8,750]. It has 151 branches and 405 SME units across Bangladesh. In the last 10 years, the bank has lent over Tk 15,000 crore [US$1.875bn] to over 3.5 lakh [350,000] SMEs.”
Other bank lenders in Bangladesh with a focus on SMEs include:
Sonali Bank, with over 1,000 clients and total SME OLB of Tk59bn (US$738m) Eastern Bank, with 9,000 SME clients and OLB of Tk10.9bn (US$136m), through two dedicated small and medium enterprise departments, and Mutual Trust Bank (MTB), with 3,300 SME clients and an OLB of just Tk2.8bn (US$35m) but around 20% of its portfolio in SME lending One key point to note is the distinction between small SMEs and medium SMEs (defined in section 1). Of all SMEs in Bangladesh, it is estimated that 85% are small. In the past, most SME lending by banks has been to the larger end of the sector. However, this has been changing, as shown in the Chart below.
Chart 1: Sizes of SMEs receiving bank loans Source: Bangladesh Bank One lakh equals 100,000.
The proportion of lending to small SMEs (shown in the Chart to have increased to 54% of the total lending to SMEs) is still much less than the estimated 85% that such sized SMEs represent of the total, as noted above. BB is encouraging banks to lend to smaller SMEs. Whilst the proportion of bank lending going to the medium enterprises component is reducing, as shown in the Chart, small SME bank clients are believed to be less than 50,000 in number.
More details on these SME banks and their products are contained in section 5.
4.2 NBFIs Non Bank Financial Institutions (NBFIs) are regulated under the Financial Institution Act, 1993 and controlled by Bangladesh Bank. There are 31 NBFIs operating in Bangladesh of which two are fully government owned, one is the subsidiary of a SOCB, 13 were initiated by private investors and 15 are joint ventures.
Major sources of funding for NBFIs are Term Deposits, Bank Credit Facilities and At Call Money
as well as Bond and Securitization. Unlike banks, NBFIs cannot:
Issue cheques, pay-orders or demand drafts Receive demand deposits, or Conduct foreign exchange financing NBFIs can provide syndicated financing, bridge financing, lease financing, securitizations and private placements of equity. Lease financing has been shown in other countries to be an effective way to overcome issues for SMEs, such as collateral because the asset remains owned by the lender.
However, the outstanding loan balances for SME lending by NBFIs as at 31 March 2012 was just Tk22bn. This is still a relative small proportion of the total SME lending.
Taking banks and NFIs together, the chart below shows lending by banks and NBFIs as a percentage of the total SME OLB as at 31 March of Tk4,067bn.
Figure 6: Bank and NBFI contributions to SME lending
Figure 7: SME Lending as a proportion Bank and NBFI loans Figure 7 indicates that SOCBs, such as Sonali, devote the largest percentage of their lending to SMEs, with foreign banks providing the smallest amount at less than 10%.
Whilst NBFIs do not contribute greatly to SME lending under either measure, one exception appears to be United Leasing Corporation (ULC). It has 13 hubs across the country to access clients outside the large cities and has partnered with the IFC to provide leasing services to SMEs. Together the two have developed 'Mousumee' (Bangla for “seasonal”), the country's first working capital loan product with a flexible repayment scheme. This is part of IFC’s work through the SouthAsia Enterprise Development Facility (SEDF) to strengthen the performance of SMEs in a few sectors such as light engineering and agribusiness.
The Bangladesh microfinance sector is mature and its assets constituted around 3% of GDP in
2011. There are over 1,000 NGO-MFIs in Bangladesh of which 599 MFIs were licensed as of October 2011 by the Microfinance Regulatory Authority (MRA). (The best know ‘MFI’ Grameen is now a Bank operating under its own Act.) The total outstanding loans for this sector (including only licensed MFIs) increased by 20% from Tk145bn (US$1.812bn) in June 2010 to Tk174bn (US$2.175bn) in June 2011 disbursed among
20.7 million poor people.12 The figure below shows the ratio of MFI borrowers to the poor, with some areas at over 100%, indicating the high penetration of microfinance in Bangladesh.
Microfinance Regulatory Authority, 2010 Report, Dhaka Figure 8: Microfinance Clients and Poor People in Bangladesh The strong national coverage of MFIs means that they are very accessible as a lending source across the country. In addition, as the market has matured, some MFIs have been moving upmarket, to larger sized clients, such as SMEs. The two factors together suggest that MFIs may be a suitable and convenient source of finance for SMEs.
The total savings has also increased by 23% to Tk63bn (US$787m) in the year to June 2011, with 26.1 million savings clients, over 93% of whom are women.
More detailed operating data for MFIs in Bangladesh is set out in the table on the following page.
Table 2: Basic Statistics of NGO-MFIs in Bangladesh (for four years to 30 June 2011)
The 10 large MFIs and Grameen Bank represent 87% of total savings of the sector and 81% of total outstanding microfinance lending.
Currently, the major sources of loan funds for Bangladesh MFIs are member savings, interest income and service charges from the loans, and loans from financial institutions including PKSF and commercial banks. Over the years, reliance on grant funds from external sources has reduced substantially: from 30.4% in 1997 to 7.9% of funding. 13 The next table shows lending to agriculture, enterprises and to SMEs only.
Banking with the Poor, 2009, Microfinance Industry Report: Bangladesh Table 3: Funding scenario of top NGO-MFIs in some priority sectors
Source: MRA 2011 Annual Report As indicated, SME lending for all but one of the large MFIs represents 10% or less of each MFI’s OLB. The outlier in terms of SME focus is TMSS. Thengamara Mohila Sabuj Sangha has 700,000 clients in total and is based in Dhaka with 4,000 employees, of whom 90% are in branch offices across the country. More than 5,000 of its clients have borrowed over Tk100,000 (US$1,250) each.
Other MFIs active in the SME sector are BRAC, ASA, BURO and the Jagorani Chakra Foundation. However, it is important to note that, for most MFIs, SME clients are long standing clients “graduating” to larger loans. Generally, this occurs after a certain number of loans cycles, where the borrower has repaid the loan on time. The norm is three or four successful loans, each larger than the prior one, after which the client qualifies for an individual “enterprise” or “business” loan.