«The landscape of SME finance in Bangladesh An analysis of providers, products, requirements and constraints What is this resource? This report ...»
Some interest rates are still capped in Bangladesh, e.g. woman entrepreneurs (10%) and subsidised agriculture (13%), and this is referred to above. Otherwise, all caps on interest rates were “removed” by the Government in January 2012, for the stated reason of “putting a brake on soaring inflation”. BB had placed a cap on bank interest rates in April 2009 against the backdrop of the world economic crisis.
However, lending is subject to BB Circular 01/2012 which suggests that banks should lend at a “lower single digit” over cost of funds, except for “high risk loans and SME loans”. The meaning of the circular is not entirely clear, with some banks believing they can lend up to 9% over cost of funds. On the other hand, many banks still operate at a 5% margin for SMEs, with interest rates at 18-22%.
All banks require collateral for SMEs above a certain amount, below which personal guarantees are invariably needed. The cut off varies greatly between the banks, with some as low as Tk100,000 (US$1,250) and others not requiring collateral until the loan size reaches Tk2.5m (US$31,000).
The other key requirement is a business history of at least a year; for some banks, it is 3 years.
In any event, the only bank even willing to consider lending to start-up SME businesses was IBBL, which may explain its leading position in SME lending.
Each bank has a detailed list of requirements for prospective clients to make a loan application,
which may include some or all of the following:
Audited accounts, normally only for larger businesses;
Identification such as a Tax ID number A business licence A record of bank account transactions, and Business premises rental agreement In the case of a start-up business, for which only IBBL will accept loan applications, a business plan is also needed.
Section 4.2 mentioned some of the leasing products developed by NBFIs.
United Leasing Company ‘s 'Mousumee' product aims to meet the needs of light engineering firms that manufacture agricultural machinery and spare parts and whose cash flows are dependent on the harvest-related seasonality of their customers. Teams from IFC, ULC, and the Bangladesh Engineering Industries Owners Association worked closely to design the product, which has been launched in Bogra and Jessore, the two hubs for light engineering agricultural machinery and spare parts manufacturers.
However, leasing in Bangladesh is likely to remain less prevalent than in other South Asian countries, such as Sri Lanka. The Bangladesh government removed prior tax benefits that had encouraged the market for leasing, to the detriment of specialist leasing companies. As for banks, they remain generally reluctant to enter this sector, particularly in the area of equipment leasing. MFIs have also considered micro-leasing, but there was not a great take-up, due to issues such as asset ownership, and there is no appetite for the alternative of operating leases.
IFC is currently assisting ULC to develop a deposit product targeted at RMG workers, a majority of whom are women.
For more detail on available products and related requirements, SME businesses should contact the banks and NBFIs direct. Contact details and basic SME product information can be found on the SME Foundation website: www.smef.org.bd.
Credit services by MFIs can be categorized into six broad groups:
General microcredit for small-scale self-employment based activities Microenterprise loans Loans for the ultra poor Agricultural loans Seasonal loans; and Loans for disaster management 19 Interest rates vary from MFI to MFI but are capped at 27%. The normal (and now mandated) methodology is to calculate the rate based on the declining loan balance rather than the original loan amount (i.e. “flat”).
MFIs are not allowed to take deposits from the public. This means that only members/clients can receive this valuable service. It also limits the MFIs’ ability to intermediate.
However, many MFIs offer other services to its customers, such as micro-insurance and remittances, plus some non-financial assistance and advice, given their NGO base. The types of non-financial assistance include training on enterprise creation, business skills development, financial literacy and financial management training.
MRA (2011) 6. Access to advice and support for finance6.1 Financing
The Governor of BB, Dr Atiur Rahman, has emphasised the importance of investment in SMEs to make the country self-reliant and self-sufficient. He has noted that the contribution of the SME sector to employment generation is next only to agriculture. According to him, “Commercial banks have been playing a tremendous role in this regard through the timely guidelines from the BB (Daily Star, 24 April 2012).” It is true that the Government has provided much support over many years to SMEs in Bangladesh. As has been mentioned (see section 3), the BB agrees annual targets for SME lending with all the banks. It also does likewise with other sectors that may be relevant for SMEs, such as agriculture (for FY to 30 June 2012 the lending target is Tk138bn or US$1.725bn).
The second major Government activity is in providing funding to the banks in order to extend
credit to SMEs. There are three main funds:
The SME Refinancing Fund: In an effort to increase formal credit facilities to SMEs, Bangladesh Bank introduced the refinance scheme for SMEs in May 2004, with initial funding of Tk1bn (US$12.5m). In the 2008-09 fiscal year, the fund was increased to Tk5bn (US$62.5m). A total of Tk23bn (US$287m) had been funnelled through this facility by April 2012, with 15% of the funds going to women.
ADB Fund: The project encompasses provision of medium- to long-term credit to nonurban and rural SMEs, the so-called “missing middle”, by providing a credit line. The World Bank also joined this revolving fund. Under the fund, Tk19bn (US$237m) has been lent so far. The SME Development Project (SMEDP), with the current tranche dating from September 2009, provides a soft loan at 1% to BB, which is on-lent to banks at 5%, for commercial SME lending.
JICA SME Fund: Most recently, on 11 June 2012 BB opened a Tk5bn (US$62.5m) fund to provide financing facilities to SMEs, funded by the Japan International Cooperation Agency (JICA). The fund will be disbursed to 22 participatory banks and 19 NBFIs at a maximum interest rate of 5% for medium (2-year) and long term (8-year) periods. The banks and NBFIs may charge market rates to the borrowers.
All three facilities provide subsidised funds to banks. However, this has been the source of much criticism: whilst the banks get funds at the Bank Rate (around 5%) from Bangladesh Bank, their lending rates are much higher, varying over time between 14% and 24% for different banks.20 On the other hand, a number of the banks indicated that their ability to lend to SMEs at a risk adjusted rate has, in the past at least, been constrained by interest rate caps.
Partly in response, BB has taken steps under its refinancing scheme to assist entrepreneurs with loans at lower interest rates. Banks and financial institutions are providing loans to women entrepreneurs at a 10% interest rate. As for interest rates in general, BB has established a website comparing interest rates being charged by banks: see www.bb.org.bd/econdata/index.php. The site also includes charts on the SME sector.
Similar criticisms were made of the EEF (see section 4). Although most of the enterprises which utilised the EEF were SMEs, total disbursements showed a declining trend in the last years, mainly due to low demand by participating banks and financial institutions.21 Rikta, N.N., December 2007, Institutional Lending and Financing Policy for SMEs in Bangladesh, Policy Note PN 0804, Policy Analysis Unit, Bangladesh Bank Islam, M.E., M.M. Rahman and N.N. Rikta, June 2008, A Note on the Contribution of Small and Medium Enterprises to GDP in Bangladesh, Policy Paper No. 0806, Policy Analysis Unit, Bangladesh Bank Finally, Palli Karma-Sahayak Foundation (PKSF) operates as an Apex Fund mainly for MFIs. In the 1990s, PKSF was established as the promoted wholesaler financier with government and World Bank funds. NGOs providing financial services had the benefit of this relatively low cost financing, along with technical assistance to enhance their institutional infrastructure and to reduce dependence on grant funds.22 Partly as a result, NGO-MFIs also provide certain services to SMEs, such as business development services.
The SMEDP is currently preparing an analysis of the above and other credit schemes but there is no date for release of this report.
6.2 Other Support Other related support by the Government includes the promulgation of “Thrust sectors” for SME investment, e.g. agro-processing. This was outlined in the Government’s Industrial Policy 2009.
Thrust sectors were stated to include industries that require preferential policy support to harness their high growth potential and may include industries that currently occupy a dominant position in the economy or industries which have high growth potential but are currently nonexistent or are in a nascent stage in the economy. An initial list was annexed to the policy and is updated from time to time (it is currently 32) by the government in consultation with all stakeholders and on the basis of information collected on various industries, their growth potentials and likely positive impact on the economy.
The government also determines specific policy support to be provided to these industries on the basis of the identification of constraints faced and past performances of the industries. 23 Notably, the Government has entrusted the SME Foundation with the responsibility to implement the SME Policy, Strategy and Guidelines, a key element of which is Access to Finance for SMEs.
Secondly, the BB has expanded the operation of the Credit Information Bureau (CIB) to ensure the availability of credit histories for all SMEs. A 16-month grant project funded by DFID and managed by the IFC’s SouthAsia Enterprise Development Facility (SEDF) was completed in
2010. This was aimed at providing coverage of all SME borrowers in order to help the banks shift from purely collateral-based lending to cashflow-based lending that emphasizes greater reliance on character. However, it appears that this has not yet produced such a shift in banks’ understanding of the business operations of SMEs to allow them to relax. One solution to this issue may be to drop the minimum loan amount (currently Tk50,000 or US$625)24 above which banks must report borrower details to the CIB. However, the minimum amount is already quite low and the benefits in terms of greater lender certainty may be offset by the higher reporting costs.
SEDF also provides support to partner financial institutions through a combination of technical assistance and policy related works, with the aim that the banks are better able to make financing readily available for SMEs.
The state-owned Bangladesh Small Industries and Commerce Bank (BASIC Bank) provides loans to cottage industries and small enterprises. As at the end of the 2011 financial year, BASIC’s outstanding loans were Tk54bn (US$675m)25. The Memorandum and Articles of BASIC provides that at least 50% of its loanable funds should be invested in small scale industries. The bank also offers below market interest rates on lending compared to most other banks. However, the ADB has opined that BASIC has been ineffective in seeking out potential SME clients.26 BWTP (2009) Ministry of Industries, Industrial Policy 2009, Dhaka, September 2008, page 8 http://www.bangladesh-bank.org/aboutus/dept/dept_details.php?dept_id=11 http://www.basicbanklimited.com/Balance_Sheet.php?contacts=1 ADB (2009) The most recent step by Government was taken on 28 February 2012 with the aim of simplifying and standardising the municipal business regulation of SMEs. Under the initiative, the Public Administration Ministry and Bangladesh Investment Climate Fund, managed by IFC in partnership with DFID and the European Union, will design and implement pilot programmes in three municipalities.
An institution set up specifically to provide advice to SMEs is the SME Foundation. The Foundation was established in 2007 with an endowment of Tk2bn (US$25m) from the central bank. SMEs can approach it for advice on matters relating to SME and entrepreneur capacity building, in areas such as: promotion and market expansion of SME products; linkages between buyers and sellers; advice and guidelines with information support for new business development; SME business manuals; and SME product fairs.27 The SME Foundation is credited with having played a major role in modifying the sector via extensive research and fundamental support.
The SME Foundation also provides collateral-free loans at a rate of 4% to banks, from whom an entrepreneur is entitled to a 9% lending rate, the lowest in the country, to help promote SMEs.
Initially, it provided funds to Micro Industries Development Assistance and Service (Midas) and MTB, but the program has been extended to others such as Eastern Bank. However, the SME Foundation does not lend direct to SMEs and it does not appear greatly focussed on advising SMEs on their most appropriate funding options, other than by publishing on its website (www.smef.org.bd) contact details for banks and NBFIs, the basic terms of SME loans and a loan search engine (that unfortunately does not work).
Other donor agencies working in the field of advice and assistance to SMEs include KfW/DEG, USAID, the Swiss development agency and the Gates Foundation. International development agencies such as Action Aid UK, CARE and Oxfam have also made substantial contributions to the sector, in terms of grants, technical assistance, and financing research and documentation.
However, as with the SME Foundation, there is no real avenue for individual SMEs to seek assistance from these donors or aid agencies.
7. Common limitations for SMEs and providers
7.1 Clients The field trip to conduct research for this report did not involve any discussions with clients.
However, issues confronted by IBs/SMEs have been well documented. A recent survey (May
2011) suggests that the main challenges from the SMEs perspective are: