«The landscape of SME finance in Bangladesh An analysis of providers, products, requirements and constraints What is this resource? This report ...»
Another point to understand is that there is a perception in Bangladesh that most of the laws under which the MFIs are operating seems to have fallen short in dealing with their institutional and operational aspects. As NGOs providing financial services, MFIs do not fall under the government regulations that are applied to banks and NBFIs. The absence of a single monitoring and supervising organization appropriate for the MFIs in Bangladesh has made it difficult to decide if they have been targeting the right people and for the right purpose14. Whilst the data collection by the MRA is amongst the best in the world for MFIs, the lack of uniformity means that it is harder for the BB or another government entity to direct the MFIs to lend to certain sectors, such as SMEs, in the same way they can with banks.
4.4 Cooperatives and Associations
In addition to the above formal financial institutions, there are a large number of informal and semiformal financial service providers. Apart from the usual informal financial service providers such as moneylenders and pawn brokers, there are various rotating savings and credit associations (ROSCAs) that operate in both urban and rural communities.
Cooperatives form a significant part of the financial sector in Bangladesh. They are governed and supervised by the Registrar of Cooperatives. Savings and credit cooperatives offer savings and micro loans for their member base15.
That said, cooperatives are unlikely to provide any significant capital to IBs or SMEs. The first limitation is that they are membership-based, obliging members to save before they can borrow.
As a result, they are highly capital constrained. The second issue is that in Bangladesh their reputation has been tainted, somewhat unfairly, by closures of a few cooperatives.
4.5 Impact Investors
The first point to make with respect to this potential source of funding for SMEs is that the transfer of equity to outside investors is not a concept widely accepted and/or understood in Bangladesh. There is generally some resistance to offering part ownership in an SME, with the idea prevailing that such businesses should be passed on to family members or the ‘next generation’.
Having said that, there are some avenues available to SMEs looking to finance their operations via equity rather than, or together with, debt. Amongst the most suitable are funds operated by a group called SEAF, of which there are three: (1) Business Development Ventures, (2) Venture Investment Partners, and (3) (recently launched) Bangladesh Agriculture Ventures. (Web site www.seaf.com).
Under (1), SEAF provides funds as small as US$10,000 up to US$500,000. With (2), the range is much lower: from US$5000 to 100,000, with most investments less than US$30,000. SEAF provides medium to long term loans as well as equity funds, of the unsecured mezzanine funding variety, to overcome the resistance to pure equity mentioned above.
SEAF supports businesses which have 2 to 3 years of operation, although for fund (2) it can be just one year and they will, in some cases, support a start-up. The investment requirements and other criteria are: a 1 to 3 year business track record; the quality of the key entrepreneur;
the location of the business performance; and the quality of the business book keeping. In addition, SEAF considers issues such as weather impact and diseases (for agriculture), potential policy changes within the industry, Board accountability, legal compliance, and lastly the exit risk.
Rahman (2010) Banking with the Poor, 2009, Microfinance Industry Report: Bangladesh
In addition to SEAF, some of the other providers are:
Tindercapital: This is a small facility funded by its founder. It has a real IB focus: they look for businesses with strong underlying profit but benefitting the poor. It will consider investments from US$20,000 to 200,000 but it has made just one investment (for US$100,000) to date.
(Web site www.tindercapital.com is under construction.) Frontier Private Equity Fund: Frontier has raised USD88m from development finance institutions and commercial investors. It will make long-term investments in privately owned, family companies in Bangladesh that are looking to expand and reach new markets. Its equity investments will range between USD2m and USD10m and target firms in the country's export, agriculture, health, education, IT and services sectors. Frontier is run by a first time fund manager, Brummer & Partners Asset Management (Bangladesh), and has raised capital from investors such as the World Bank’s IFC, CDC, Norfund and FMO. (Contact: Khalid Quadir, CEO, Brummer & Partners Asset Management (Bangladesh) Ltd.) Danida: This is the development cooperation arm of the Danish Ministry of Foreign Affairs and it provides loans for businesses in its partner countries (of which Bangladesh is one) and also operates a Business Cooperation facility, linking Danish businesses with local SMEs. (Web site, www.um.dk) SME Ventures: Bangladesh is the pilot country for IFC SME Ventures, which will identify SME investee companies. It is funded by IFC and other private equity funds and provides funding to early stage companies with Technical Assistance for building the capacity of investees or potential investees. IFC has set up a US$12m fund for the project and is in the process of raising an additional US$13m to compete its funding goal of US$25m. (Web site, http://ifcext.ifc.org/ifcext/southasia.nsf/Content/Bangladesh_Investments).
In addition, Leopard Capital will launch a competitor to the Frontier PE Fund in 2012, which will operate along similar lines. It aims to grow its Bangladesh fund to $50 million in the first half of this year. (Web site, www.leopardasia.com) There are many impact investment funds active in the region, for example, see the sample that
attended and spoke at the Asia IIX Forum meeting in Singapore in June 2012:
These impact investors break down into two main categories, Development Finance Institutions (DFI’s) and Private Equity/Venture Capital Funds.
4.5.1 Development Finance Institutions
DFI’s are “Government-controlled institutions that invest in sustainable private sector projects with the twofold objective of spurring development in developing countries while themselves remaining financially viable”.16 They are either multilateral institutions such as the International Finance Corporation or the Asia Development Bank (ADB), or bilateral institutions such as CDC (UK), OPIC (USA) or FMO (Netherlands). ADB is owned by 67 member countries, including 48 from the region. ADB envisages an Asia and Pacific region free of poverty and pursues this vision through the promotion of inclusive economic growth, environmentally sustainable growth, and regional integration. ADB’s long-term strategy includes support for the development of the region’s private sector by increasing the combined share of private sector development and private sector operations in ADB’s annual operations to 50% by 202017.
Dalberg (2010), The Growing Role of the Development Finance Institutions in International Development, Dalberg Global Development Advisors, Copenhagen, 2010 IFC (2011), International Finance Institutions and Development Through the Private Sector, International Finance Corporation, Washington DC, 2011 As an example of one of the larger bilateral DFI’s, CDC supports the building of businesses in the poorest parts of Africa and South Asia, creating jobs and making a lasting difference to people’s lives. Owned by the UK government’s Department for International Development, CDC is the world’s oldest development finance institution and has been investing in businesses in the developing world for over 60 years. CDC’s investments focus is on regions and sectors of need where capital is scarce. CDC is also expanding its range of investment instruments. As well as investing in private equity funds, CDC will now invest directly – through co-investing in the early stages of implementing the new plan – as well as through debt and guarantees.
(web site www.cdcgroup.com).
OPIC is the U.S. Government’s development finance institution. It mobilizes private capital to help solve critical development challenges and, in so doing, advances U.S. foreign policy. OPIC works with the U.S. private sector, helping U.S. businesses gain footholds in emerging markets, which in turn catalyzes revenues, jobs, and growth opportunities both in the United States and abroad. OPIC achieves its mission by providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds. (Web site www.opic.gov) FMO is the Dutch development bank. It is committed to growing a healthy private sector in developing countries. FMO offers a full range of financial instruments for the benefit of private companies and financial institutions in developing economies. To meet the needs of individual projects, a mix of funding can be provided including loans (such as syndicated loans), equity, mezzanine, guarantees and capital markets. (Web site, www.fmo.nl ) Full details of all the European DFIs are to be found on the website www.edfi.be.
4.5.2 Private Equity / Venture Capital Funds Outside Bangladesh there are hundreds of private equity (PE) and venture capital (VC) funds based internationally which invest in inclusive businesses and aim to achieve a financial return on their investments as well as achieving social and environmental benefits for the communities in which they are based. These impact investors vary on a continuum from “hard” investors with very clear and demanding targets for a financial return to somewhat “softer” investors who are prepared to accept slightly less rigorous standards of commercial performance provided that the social and/or environmental benefits contribute to a strong “triple bottom line” 18.
Examples of some of the funds which are active in this field in the South Asia region include Actis (www.act.is), Acumen Fund (www.acumenfund.org), E+Co (www.eandco.net), Grassroots Business Fund (www.gbfund.org), Navis Capital Partners (www.naviscapital.net/), responsAbility (www.responsAbility.com) etc. There are significant information resources regarding impact investing available on the Global Impact Investing Network online hub (www.thegiin.org).
The type of funding available varies between funds (debt, equity, mezzanine, guarantees). The funding criteria can also vary greatly with regard to minimum and maximum amounts, preferred sectors, eligible geographies, exit requirements, interest rates payable, percentage of equity required etc. The Business Innovation Facility (BIF) has built up extensive knowledge of the variations in this market and provides specific guidance to the inclusive businesses which it assists on all aspects of their business plans and investability as well as on the application procedures for funding.
As part of the field work for this study, meetings were held in Singapore with various impact investors and the Impact Investment Forum. These meetings confirmed that the funds with a focus on IBs in Bangladesh are limited. Those interviewed in Singapore raised some of the same issues as have been identified by others in this report, e.g. lack of transparency in SMEs, poor entrepreneurial skills and the small ‘ticket size’.
JP Morgan and the Rockefeller Foundation (2010) ‘Impact Investments: An Emerging Asset Class’, New York, In addition, there are issues for foreign investors going into Bangladesh. Whilst foreign investment laws are not particularly stringent, repatriating dividends and capital is very difficult.
As an alternative exit mechanism, the Bangladesh stock exchange has been greatly discredited by its drastic overheating in 2010/11.
Secondly, Bangladesh suffers in comparison with virtually every other country in the region, not necessarily due to its intrinsic characteristics, but more because other countries are more in focus at present. However, this may change as investors appreciate the size of the Bangladesh market and the opportunities that reside there.
In the past there were funds such as the Equity Enterprise Fund (EEF) managed by SNV. EEF was established in 2000 by Bangladesh Bank and funded to Tk 2 billion (US$25m), to provide equity to SMEs in agro-based industry and the ICT sector through commercial banks. In FY08, the EEF was split into two funds, namely, the Agriculture Equity Entrepreneurship Fund and IT Equity Entrepreneurship Fund, with an allocation of Tk 1 billion for each fund.
Whilst EEF has come to an end, the ADB and the German Development Bank, KfW, are currently examining possible social entrepreneurship / IB funds, which may be launched in the next 12 months.
5. Supply of products and requirements
5.1 Banks and NBFIs Banks provide a range of working capital loans, term loans and overdrafts, together with limited non-lending services. A typical suite of products is shown below, taken from product literature marketed by Mutual Trust Bank.
Typical Bank SME Products MTB Gunabati: Designed to finance the women led SMEs engaged in only manufacturing business that is 100% pre-financed by SME Foundation. We apply single digit rate of interest, i.e. @ 9% p.a. under the MTB Gunabati Loan scheme.
MTB Mousumi: Designed to finance the SMEs who are engaged in seasonal business.
MTB Krishi: The loan scheme to finance in the Agri-Sector and its sub-sectors.
MTB Bhgyabati: This product designed for the women entrepreneurs which is 100% re-financed by Bangladesh Bank.
MTB Small Business: This product designed for all types of small business requirements.
MTB Revolving: The loan product designed to meet working capital requirements to support their continuous growth. It is a CC (H) & revolving type loan.
MTB Microfinance: This product is designed for the NGOs (MF-NGOs) to supply wholesale credit for onward lending their beneficiary members in the form of micro credit.
MTB Diggon: This product designed on the basis of FDR [Fixed Deposit Receipt, a deposit of money that pays higher interest than a savings account but imposes conditions on the amount, frequency and/or period of withdrawals].
Information on the SME Foundation and the role of Bangladesh Bank (referred to above) are contained elsewhere in this report.