Post on 17-Feb-2017
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Table of Contents
List of Acronyms and Abbreviations 4
1. Rationale for SMEs in the Economy 5
1.1. Types of support provided in other countries 5
1.2. What should determine interventions by policy
makers and central banks in promoting SME finance? 6
1.3. How and to what extent should this be done? 6
2. Market Infrastructure Development 7
2.1. Reach Enhancement 7
2.2. Mechanisms for Increasing Loan Supply 8
2.2.1. Credit Information Bureaus and Secured Transactions Registries 8
Credit Information Bureau 8
Secured Transactions Registry 8
2.2.2. Specialized Finance Companies 9
Credit Guarantee Institutions 9
Special Purpose Vehicles for Securitisation 10
2.2.3. SME Friendly Product Development 12
Leasing 12
Factoring 13
Warehouse Receipts Financing 13
2.2.4. Intermediary Organization Development 14
Incubators 15
3. Enhancing Availability of Credit Information 16
3.1. SME Database 16
3.2. Consumer Protection Law/Code of Conduct 17
3.3. CIB Role Enhancement 18
4. Swift, Safe and Secure Banking 19
4.1. Direct Support to SMEs 19
Financial Services Cost Reduction for SMEs 19
Problem Solving Centre for distressed SME loans 20
4.2. Mobile and Agent Banking 20
Mobile Banking 20
Agent Banking 22
4.3. Credit Guarantees 23
4.4. Standardized Loan Origination Procedures 24
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5. Funding Improvement for Borrowers 24
5.1. Soft Loans, Refinancing, On-lending of Government
and/or Donor Funds 24
5.2. Credit Ceilings 25
Women Entrepreneurs 25
Farmers 26
Sustainable Energy Finance 27
Geographic Limitation 27
5.3. Vehicles of Finance 28
Loans 28
Credit Guarantees 28
SME Equity and Venture Capital Funds 29
Mobile and Agent Banking 29
6. Recommended changes to current interventions 30
‘Quick Hits’ 31
Medium Term 31
Longer Term 33
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LIST OF ACRONYMS AND ABBREVIATIONS
ABS Asset Backed Security
AKPK Agensi Kaunseling dan Pengurusan Kredit (Credit Counselling and Debt Management Agency)
AML Anti-Money Laundering
Bank Negara Central Bank of Malaysia
BAS Bangladesh Accounting Standards
BB Bangladesh Bank
BBTA Bangladesh Bank Training Academy
BIBM Bangladesh Institute of Bank Management
BoE Bank of England
BSCIC Bangladesh Small and Cottage Industries Corporation
CGF Credit Guarantee Fund
CIB Credit Information Bureau
FLS Funding for Lending Scheme
KYC Know Your Customer
MFS Mobile Financial Services
MSME Micro, Small and Medium Enterprises
NBFI Non-bank Financial Institution
NID National Identification Number
NGO Non-Governmental Organisation
NSDC National SME Development Council
PSD Private Sector Development
RJSC Registrar of Joint Stock Companies & Firms
SDRS Small Debt Resolution Scheme
SEC Securities & Exchange Commission
SME Small & Medium Enterprises
SME Corp SME Corporation of Malaysia
SMEF SME Foundation
SPV Special Purpose Vehicle
STR Secured Transactions Registry
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The Role of the Policy Makers and Central Banks in Promoting SMEs’ Access to Finance – The Case of Bangladesh
1. Rationale for SMEs in the Economy
The value of SMEs to any economy is no longer in dispute. They are truly the engines
of growth due to their ability to create jobs. Even when one considers the fact that
large numbers of SMEs fail annually, this is impressive because even more SMEs start-
up annually. In Bangladesh, majority of the SMEs are labour intensive businesses and
therefore create large numbers of jobs and impacts even more people. As such, SME
friendly policies are a matter of national interest.
SMEs and start-ups are more likely to experience credit rationingdue to their under-
collateralisation, shorter credit history, lack of credit rating agencies - that have
access to credible information needed to perform meaningful analysis of these
businesses on which financial institutions can rely on -and shortage of verifiable
financial information with which banks can make credit allocation decisions.1
The success of the industrialization process in Japan, Taiwan and Korea were largely
due to the vast number of small firms operating flexibly and filling production
processes of intermediate goods for big companies.2
A comprehensive program needs to be developed for SMEs in Bangladesh that takes
into account all aspects of SME development and advocacy. Our focus in this paper is
on the area of access to finance. However, coordination among all stakeholders is
needed to achieve results in SME development that we have seen in countries in the
region such as Malaysia and Thailand.
1.1. Types of support provided in other countries
In all countries of the world, institutions take on well meaning programs intended
on helping SMEs at various stages in their development. Access to finance is
generally front and centre in interventions by all institutions.
In some cases, these may not be the most efficient use of their resources. Our
learning from countries that have been successful at efficiently addressing the
plight of SMEs is that each institution should play to their respective strengths.
There should be an over arching agency that coordinates activities such that all
necessary interventions are being taken care of. Moreover, committees are being
1Policy measures to improve access to credit for SMEs: a survey, Central Bank Quarterly Bulletin 4, October 2013, Central Bank of Ireland, pg. 95 2 Role of CB in Promoting Small and Medium Scale Enterprises in the SEACEN Countries, Dagva Boldbaatar, Pg. 48
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created for coordination of activities where multiple institutions are needed to
achieve success.
The National SME Development Council (NSDC) and the SME Corporation of
Malaysia (SME Corp) provide a holistic governmental approach to increasing
access to finance for SMEs through improved policy formulation, improved
statistical information and strengthened capacity and capability of stakeholders.
1.2. What should determine interventions by policy makers and central banks in
promoting SME finance?
Additionality should be the main factor on all policy level interventions by any
stakeholder involved in increasing access to finance to SMEs, i.e. in the absence of
the policy, lending would not have occurred to the extent it has. The challenge for
policy-makers involves designing the correct parameters and range of options
that are most appropriate in a country-specific financing environment.3
1.3. How and to what extent should this be done?
The ability of SMEs to grow depends highly on their potential to invest in
restructuring, innovation and qualification. All of these investments need capital
and therefore access to finance.4 There are both price and non-price barriers to
access to finance that need to be overcome.
Price related barriers are simpler to tackle as they relate to interest rates and fees.
These are generally market driven although governments often try to limit the
interest rates and fees that can be charged. This happens mainly for the businesses
that are unable to access finance. Incentives are provided, such as soft loans to
financial institutions on the condition that they will not lend onwards above a
certain rate of interest in order to reduce some of the pain for both the
entrepreneurs and the financial institutions.
However, these types of interventions may give rise to non-price barriers. For
example, due to the limits on interest rates and despite some incentive, a bank
may use non-price criteria to screen and ration the number of borrowers who can
access financing from them. The thought process being that if lending needs to be
done in this sector, despite the lower cost funds available for this purpose, loan
should be made to the strongest ones so that risk is minimized. Hence we often
3Policy measures to improve access to credit for SMEs: a survey, Central Bank Quarterly Bulletin 4, October 2013, Central Bank of Ireland, pg 108 4 Improving Access to Finance for SME: International Good Experiences and Lessons for Mongolia, IDE VRF Series No. 438, Bataa Ganbold/October 2008, Pg. 1
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hear the complaint from the financial sector, ‘we can’t find viable businesses to
lend to’.
This paper will look closely at the types of support being provided for SMEs’ access to
finance in Bangladesh and other countries. The paper will try to highlight some of the
innovative interventions that policy makers in Bangladesh have implemented. It will also
explore the possible benefits of new interventions and also areas of improvement in
current policies. The paper will also broach the subject of when and how policy level
interventions can be eased out.
An attempt will be made to divide the paper into distinct segments even though all areas
are interconnected. These segments are:
Market Infrastructure Development
Enhancing Availability of Credit Information
Swift, Safe and Secure Banking for Small Borrowers
Funding Enhancement for the Borrowers
2. Market Infrastructure Development
2.1. Reach Enhancement
Increasing access to financial services should be the goal rather than just access to
finance. An SME that can be brought into the financial net by introducing them to
deposit and/or insurance products will sooner or later be able to access finance.
Therefore, the numbers of businesses that can be contacted by financial
institutions need to be increased.
Increasing reach of the banks will necessarily increase access to financial services
by SMEs. Reach is directly related to the development of branch networks and
alternative distribution channels through which financial services can be
provided to underserved segments of the population.
Innovations and adaptation of technology and the implementation of cutting edge
policy initiatives have made it much easier and affordable for financial institutions
to enhance their branch networks. They make operations in remote locations
affordable and hence prudent but open-minded licensing strategy by policy
makers will lead to increased financial inclusion of SMEs.
Two products that will help financial institutions increase their reach are Mobile
Banking and Agent Banking. Detailed discussions on these two products are
presented below in section 4.2.
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2.2. Mechanisms for Increasing Loan Supply
2.2.1. Credit Information Bureaus and Secured Transactions Registries
Credit Information Bureau
A Credit Information Bureau (CIB) is a key source of information of
borrower history. Availability of detailed information on borrowers’ credit
history helps financial institutions to understand their repayment
behaviour. At their most basic, CIBs provide negative information. The
more detail that can be obtained prior to making a lending decision, the
more comfort the financial institution has in that decision. The CIB is
discussed in more detail later in section 3.2 and 3.3.
Secured Transactions Registry
A Secured Transactions Registry (STR) is another important financial
infrastructure that can be infinitely helpful in increasing loan supply to
SMEs. The more sophisticated the STR, the more types of collateral
(movable and immovable) that can be used to secure a financial
transaction. Given that SMEs have little collateral, increasing the variety of
collateral that can be accepted increases their ability to access finance.
There is no central STR in Bangladesh. The Registrar of Joint Stock
Companies and Firms (RJSC) is the closest thing to collateral registry where
financial institutions can file charge on assets pledged against loans.
However this is applicable only for companies that are registered with the
RJSC. Proprietorship concerns are not included. The BRTA registers all
forms of road vehicles and allows joint registration with the lender in cases
where the vehicle is procured with a loan. The Department of Land
Registration registers all forms of immovable property and issues
encumbrance certificates for lands used as collateral for loans.
An STR that caters to all and allows the registration of a variety of
collaterals pledged in financial transactions would help to increase the
supply of loans to SMEs. A robust STR can handle all types of movable
assets, tangible, intangible, present and future.5 Some examples include:
Vehicles, industrial machinery and equipment
Inventory
Accounts receivables
Agricultural products
Consumer goods
5Secured Transactions Systems and Collateral Registries, International Finance Corporation, 2010
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Commodities
Intellectual Property Rights
Negotiable instruments
Letters of Credit
Bank accounts and insurance policies, etc.
2.2.2. Specialized Finance Companies
In a country where there are already a significant number of financial
institutions, the question may be asked whether there is room for any
more. Bangladesh has a large number of financial institutions and new ones
are allowed license to operate from time to time.
Therefore the issue here is not the number of financial institutions but
rather the focus of these institutions. It appears that despite all intention of
government to encourage lending to MSMEs, financial institutions continue
to find large enterprises more comfortable to finance. This has led to
unhealthy competition among these institutions as they bid themselves
down in terms of interest rates and credit discipline in order to attract the
large customers.
The goal of the specialized companies suggested here should be solely to
improve access to finance to MSMEs. These licenses could be made
available for financial institutions that would have very specific purposes
vis-à-vis access to finance for MSMEs. These licenses should not allow for
scope creep. This means that their licenses will allow limited function and
remain so.
Credit Guarantee Institutions
Credit guarantees help lower the risk of lending. They have been set up in
all parts of the world to provide incentives to financial institutions to lend
to underserved markets. This is an appropriate tool to use for increasing
financing to SMEs as they are often denied credit due to a lack of sufficient
collateral or because the financial institution needs additional comfort to
lend to a particular sector or cluster.
One of the main advantages of using a credit guarantee to incentivize
lending to SMEs is that no money is actually paid out unless a loan goes bad.
Therefore, credit guarantee institutions are extremely efficient in that the
funds held with the institution generate interest income that pay for all
overhead expenses if they are managed prudently.
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Credit guarantee institutions are established for the sole purpose of
providing guarantees as a risk mitigation tool to be used by financial
institutions. They can be owned by the private sector, the government or
jointly as a public private partnership. As a separate entity there is urgency
for the institution to become sustainable as soon as possible.
The structure and success of credit guarantees schemes have been varied
but the benefit to the economy has been identical – underserved segments
have received financing. There have been significant lessons learned from
each of these funds. However, the financial goal of the fund is to break even.
In fact, if they are making money, then the fund is not underwriting enough
risk.
The Credit Guarantee Fund (CGF) that is being launched in collaboration
with Bangladesh Bank (BB), the Central Bank of Bangladesh, to provide
comfort to lenders in an effort to increase access to finance to micro and
small enterprises has been designed as a portfolio guarantee scheme.
There is a limit on what percentage of the total portfolio is covered by the
guarantee. This means that not only does the fund not have to assess every
credit individually but that the fund has limited its risk due to moral hazard
and adverse selection by the financial institution while providing coverage
to every loan that meets the eligibility criteria.
Under normal circumstances, the fund could generate sufficient income
from deposits and commission receipts to ensure its sustainability.
To ensure long-term sustainability it would be ideal to spin off the CGF into
a separate institution. The sole mandate should be to provide credit
guarantees to underserved market segments, not the segments that the
banks are already comfortable lending to. The definition of the
underserved market may be determined in conjunction with the various
stakeholders.
Special Purpose Vehicles for Securitisation
Financial sector liquidity is another tool that can be used to encourage
additional financing in the SME sector. Securitisation is the mechanism by
which individually illiquid financial assets such as loans are converted into
tradable capital market instruments 6 . Loan receivables are packaged
together into a pool of similar quality loans and sold to a Special Purpose
Vehicle (SPV). The SPV refinances the pool of assets using a debt
6Improving Access to Finance for SME: International Good Experiences and Lessons for Mongolia, IDE VRF Series No. 438, Bataa Ganbold/October 2008, Pg. 28
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instrument known as an Asset Backed Security (ABS). This is generally
done in the capital markets. Some are publicly traded while others are
privately placed. If provided a conducive environment, securitisation will
allow banks to obtain additional funding so that these can be used to lend
more to SMEs.
Securitisation of loan portfolios are allowed by the SEC but there were
issues related to the NBR that prevented this from becoming a means of
accessing funding by non-bank financial institutions (NBFIs). Some
financial institutions sold their receivables to SPVs (usually the arranger)
and the SPV securitized the debt and refinanced it through the issuance of
zero coupon bonds. As a sweetener, these bonds had 10% tax at source
with no further tax to be payable on the income at maturity. The pricing of
the zero coupon bonds were based on this lower tax rate. This was
considered a lucrative option by institutional investors such as insurance
companies and banks. However this form of funding fell by the way side
because the NBR imposed the remainder of the corporate tax rate on the
interest income from the bonds.
As an incentive for financing SMEs, the NBR could offer a special tax rate
for these types of zero coupon bonds where the original loans were
provided to SMEs (very simple definition to be applied for ease of
transparency).
In addition to the NBR allowing a tax break, some legal and regulatory
obstacles may need to be addressed. SPVs could be allowed to be registered
to buy and sell debt of multiple financial institutions as long as the asset
quality was within a certain band. Each financial institution would continue
to follow up for collection of the accounts and have to retain a certain
percentage of the portfolio being sold.
The SEC could allow the SPV to access public funds on this type of
securitised asset. Asset management companies could function as SPVs
and/or use funds under their management to invest in these securities.
Transferability of collateral such as registered mortgage would also need
to be made easier so that the SPV would obtain a pro rata or pari-passu
charge on the securitised loan portfolio. This important policy level change
that can improve the access to finance to SMEs has significant financial
implications. Mortgaging property is very expensive and transfer of
mortgaged property is equally expensive. A quick win would be achieved
by easing the burden on transferring of mortgage from one lender to
another. The benefit to the SMEs would be a game changer.
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2.2.3. SME Friendly Product Development
Leasing
Leasing is a truly SME friendly product where the asset being purchased is
the collateral. It has had significant impact on the availability of credit for
SMEs.
In Bangladesh, all financial institution that offer this products are involved
in financial or capital leasing. This means that the entire value of the
equipment will be amortized over the life of the lease. Depending on the
price of the equipment and tenure of the lease, the lease payments may be
too high for smaller enterprises that are trying to expand their businesses.
Operating leasing is potentially a new product that may be considered
that will not only allow smaller enterprises to be able to comfortably
finance their expansion but it would also allow large companies to upgrade
to newer machines quicker.
For example, printing machines often need to be replaced due to clients’
requirements. Given the price of the machines, it is not possible to upgrade
as quickly as the client would prefer. If operating leasing was available, the
enterprise could lease the equipment for a certain number of years with
the expectation that they upgrade to a new model and hand over the old
machines to the lessor. The lessor would not need to amortize the full value
of the machine because they would be able to lease it out to smaller
printers on a capital or operating lease contract.
All parties would benefit – the large printer gets to use the machine for a
period of time at a lower cost than if they were buying or leasing on a
capital lease contract; the financial institution would be able to generate
additional revenue from leasing the machine out multiple times; the
smaller enterprise would get a slightly used machine that they would
otherwise not be able to.
Operating leasing will require recognition of the difference between
operating lease and capital lease by the NBR and Bangladesh Accounting
Standards (BAS) in order for a leasing company to embark on this venture.
Depreciation and/or accelerated depreciation need to be allowed for the
leasing company to charge.
Factoring
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Factoring is another SME friendly products as the collateral used against
advances is the assignment of receivables from a buyer. In a factoring
transaction, the factor advances a certain percentage of the receivables and
collects directly from the buyer. When the receivable is collected, the factor
realizes their interest on the advance. The risk to the financial institution
on account of the SME is minimal because the SME has already delivered
the product to the buyer.
Any factoring that is being done in Bangladesh is with recourse to the
supplier/receiver of the funds. This puts the risk squarely on the supplier.
The buyer who assigns the receivables to the financial institution has a
credit agreement with the supplier to pay within a specified time. If the
funds are not received within that time, the supplier incurs additional
interest expense. If the buyer defaults on the payment, the financial
institution asks the suppler to pay. If the suppler cannot pay, the financial
institution has claims against the supplier.
In order to protect the SME that supplies to a buyer, factoring without
recourse would be the answer. However, no financial institution will offer
a factoring product without recourse because there is no way to penalize a
buyer for non-payment.
In developed economies, the financial institution and the supplier could
report the delinquency of the buyer to the credit bureau. This would have
an adverse impact on the buyers’ credit rating and hence hurt them in the
long term.
Ideally, if the financial institutions would be able to report non-payment of
financial obligations by the buyer to the CIB even though the buyer had not
taken any advance from the financial institution, SMEs would be better
protected, as buyers would not default of the payments.
Warehouse Receipts Financing
Warehouse receipts are documents issued by warehouses to depositors
against commodities, such as rice, lentils, oil, etc., deposited in the
warehouses. These receipts are claims on the commodities that must be
delivered on presentation of the receipts. They are transferable and
therefore can act as collateral against bank loans. Warehouses are
registered institutions that have systems in place to maintain the products
in good condition and can ensure the security of the products while in the
warehouse.
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Imagine a farmer or an SME that is involved in the rice production. After
the harvest, the price of rice is at its lowest. Those who are financially
weaker will sell off large chunks of their harvest at very low prices in order
to make payments to creditors. If registered warehouses were available to
store their rice, they could use the receipts as collateral and take a loan to
pay off their creditors. When the price of rice increased, they would be able
to sell at their leisure as the prices increased. Agri-businesses that wanted
to expand or set up new processing plants would be able to use the receipts
as collateral as well.
An informal warehouse receipts business of sorts exists in Bangladesh. The
edible oil refineries that sell refined oil sell their products and issue
delivery notes. These notes need to be produced to take delivery.
Businesses often sell the receipts to other parties who ultimately take
possession of the refined oil. This has been working well based solely on
trust that the seller will not oversell the product. In case they did and the
refinery was unable to meet their delivery orders, the buyer would have
very little legal recourse.
Bangladesh does not have a warehouse receipts law and therefore this type
of financing and benefits are being missed out on for the most part. If the
law is established, warehouses that meet the conditions necessary to store
commodities will also need to be setup before warehouse receipts become
useable. A credible agency that monitors these warehouses will be able to
provide comfort to the banks and depositors.
2.2.4. Intermediary Organization Development
There are multitudes of intermediary organizations that can play a role in
increasing loan supply. The SME Foundation (SMEF) and Bangladesh Small
and Cottage Industries Corporation (BSCIC) are at the top of the list as they
are best positioned to provide capacity building programs for both the
entrepreneurs and bankers.
BSCIC created through an Act of Parliament in 1957 and last amended in
1992 is in the process another amendment. The Bangladesh Small and
Cottage Industries Corporation (Amendment) Bill, 2014 will allow it to set
up a 'Small, Micro and Cottage Industries Foundation'.
BSCIC has a countrywide institution network to provide direct services for
entrepreneurs at their premises. The focus of the organisation has always
been the establishment of manufacturing and processing industries.
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The new foundation will operate four completed projects under BSCIC for
generating new employments and skill development:
Women Industry Entrepreneur Development Programme
Self- employment Project through Small and Cottage Industries
Poverty Alleviating Project through Income Generating Activities
Boosting of Rural Economy Project through Development of Rural
Industries
Once this amendment has been passed, the organization will be well placed
to make a significant impact in poverty alleviation and national
development.
The SMEF, also under the Ministry of Industries, has been playing an
important role in the empowerment of the SMEs in Bangladesh. However,
it is important the roles and the responsibilities of the two bodies need to
be clarified.
Capacity building programs for SMEs (strengthening entrepreneurship)
should be developed and implemented in all aspects of SME business. A
major area for capacity building for SMEs is in record keeping.
Banks need training in assessing risks of industries that they have never
financed before. If the banks are provided this type of training, they will be
more comfortable in lending to these SMEs.
The Bangladesh Bank Training Academy (BBTA)/Bangladesh Institute of
Bank Management (BIBM) and other intermediaries such as private sector
training institutes may be provide technical training to bankers. Technical
skills enhancements will allow banks to be able to better assess clients.
The role of knowledge and experience sharing among bankers should also
be considered in increasing the supply of loans to the SME sector. These
types of experience sharing would enable banks to avoid mistakes made by
others and to learn through discussions of the good practices of other
banks.
Incubators
Incubators help develop businesses through a multitude of activities and
product offering. They can be both privately owned and operated or
government sponsored. They provide space and equipment, mentoring
and advisory support to fledgling enterprises for a fee or an equity stake.
Access to finance and access to markets are also areas where incubators
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provide assistance to SMEs. Therefore, they should be provided
encouragement as they help and create and develop small businesses.
Incubators provide training and mentoring on managing company finance
and how to obtain financing from potential financers.
The Government of India provides seed funding for technology start ups
that are being incubated at technology business incubators and science and
technology parks. The funds are routed through the incubators although
the incubators cannot use the funds for their own administrative expenses.
The funds help the start-ups to pay for space, expansion and avail services
offered by the incubators in addition. The terms of use are very precisely
defined to ensure that the funds are used as prescribed.
BB has a fund that is earmarked for providing seed capital for start-ups.
This is intended to be disbursed through commercial banks. Incubators
operating in Bangladesh may be involved in the process whereby financial
institutions can take comfort from the fact that the new entrepreneurs are
receiving training and mentoring from experienced business experts.
3. Enhancing Availability of Credit Information
3.1. SME Database
A robust database needs to be developed that can be used by the financial sector
in assessing needs and risks associated with SME financial services.
Easy access to positive and negative information by governmental agencies,
financial institutions and other entities such as credit rating agencies, credit
guarantee institutions, etc. would enable these institutions to make better-
informed and more effective strategic decisions.
Regulators, lenders, and borrowers should be encouraged to forge consensus
about how information can be simplified and packaged for greater understanding
and awareness among stakeholders in the agriculture sector who would benefit
from meaningful access to microfinance. 7
BB has been developing their SME Market Segmentation Database based that will
be the first of its kind anywhere in the world. The database will collect the entire
population of SMEs being financed by the formal financial sector in Bangladesh.
7 Access to Finance: Regional Agricultural Trade Environment Summary, USAID Feed the Future Program, Submitted by Nathan Associates Inc. Pg. 18
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This information will be updated on a quarterly basis and will therefore be able to
demonstrate trends over time, geographic concentrations, and business
performance by region, industry and numerous other indicators. The database has
undergone several iterations from being an excel-based design to a fully on-line
system and as such is just approaching finalization of new system and it is
expected that it will be launched this year.
Access to raw data, on an aggregated basis to ensure confidentiality of information
provided by each financial institution, will enable any stakeholder to dissect the
information in any way to make strategic and policy decisions. Financial
institutions will be able to get benchmark data on all thrust sector enterprises and
therefore will be able to use the information for better risk management and
understanding different types of businesses.
3.2. Consumer Protection Law/Code of Conduct
Facilitating bank-SME dialogue, and enforcing greater transparency of banks’
regulation will go a long way to ensure consumer protection. However, a
meaningful law that can be enforced through close monitoring by key stakeholder
is essential.
A CIB report is a confidential document that can only be shared by the CIB
department with a scheduled bank. However, there are sometimes cases where a
business or person is erroneously shown to have a classified loan. This can cause
tremendous stress and losses for that person. They have no way of checking which
bank has classified them as they cannot even get a copy of the report. There needs
to be a policy that will enable to SMEs to get quick resolution to these errors when
they occur.
Advertising of financial services products must provide all relevant information
clearly. A policy paper identifying and mandating the clarification of the relevant
information on financial products should be implemented.
There is also a need to provide small borrowers some protection from lenders
when they suffer business setbacks through a small debt resolution scheme
whereby defaulting or distressed SMEs would not be harassed or intimidated by
collections teams. This is dealt with in more detail in the section below on “Direct
Support for SMEs”.
Responsible finance is an important part and parcel of consumer protection and
code of conduct. An example of how lenders have taken advantage of the fact that
borrowers don’t have a clear understanding of an amortized loan is still quite
rampant in the financial sector. Taking over or topping up a two year amortized
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loan with a new loan, one year after it is disbursed, is an expensive proposition for
the borrower as they have paid the majority of the interest on the loan already.
The effective interest rate to the customer is almost double what they had agreed
to.
Similarly, responsible finance requires that the lenders assess the actual need of
the SMEs business. Often products are pushed to customers who may not be
financially literate enough to realize that they are overburdening themselves with
loans that they should not be taking.
3.3. CIB Role Enhancement
The CIB system that has been established in BB is a very powerful system. Only a
fraction of its capability is being used as a result of policy level issues. While it is
true that there are financial institutions that would struggle with providing
additional information to the CIB, the benefit to the entire financial sector should
be taken into account.
Currently only negative information is being collected as static information. A
more dynamic approach to credit information would add significant depth to the
financial institutions’ analysis of customers. An SME that pays their loan
instalments on time every month is a better risk than one that is sometimes late
and certainly better than one that is consistently late. Similarly, a dynamic system
would allow a bank to assess a potential customers’ credit history to see
improvements or deterioration in their performance.
Although there are additional hurdles to overcome to make it happen, this system
would become richer if other institutions, such as micro finance institutions and
utilities companies, were able to submit payment information, negative and
positive, about their customers. To do this, a unique number such as a National ID
number should be used for the purpose. However, the National ID authority has
not yet greed to guarantee the uniqueness of the numbers. This needs to be
addressed in the medium term.
Access to CIB information by rating agencies would enable more robust analysis
to be conducted when assigning ratings. Authority must be given to the institution
or person whose CIB report would be accessed.
Financial institutions would have access to even more information that could feed
into their credit scoring systems. This would in turn reduce the need for collateral
and speed up the time for SMEs to access financing.
4. Swift, Safe and Secure Banking
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Financing is one of the most important factors in SME start-up and survival. Being
able to meet the cash flow is the biggest challenge once the business is in operation.
Access to financing is therefore a critical issue for most SMEs.
4.1. Direct Support to SMEs
Assistance to SME in the area of access to finance would include providing
information and guidance on accessing financial services. The SME Corporation of
Malaysia has a ‘One Referral Centre’ that disseminates information on
Government funds and incentives for SMEs and provides business advisory
services to help the SMEs grow. This is a role that the SMEF and BSCIC can play
very well given that they have direct access to the SMEs.
A one-stop information centre would help SMEs navigate the financial sectors’
requirements and the types of support that are available to them from all
stakeholders such as access to finance.
Financial Services Cost Reduction for SMEs
A quick win policy intervention relates to excise duty of deposit accounts that
prevent many micro and small SMEs from opening a bank account. When the
amount of the deposit in the account is low, an excise duty can be a deterrent to
opening that account. In line with the Tk.10 account that were allowed to farmers,
a similar account for SMEs where there is no excise duty or a percentage of the
average deposit amount would go a long way in convincing more SMEs to open
bank accounts that can later help them to secure loans.
Similarly, excise duty of each loan disbursed is a burden for most SMEs,
particularly if a multitude of demand loans need to be disbursed annually.
Most banks provide what is known as a ‘working capital term’ to the smaller SMEs
because they often have several loan cycles. Therefore, rather than applying for a
loan for each cycle, the banks provide loans, say for one year, covering the
expected capital needs for all loan cycles. After one year, the capital needs of the
SME are then reviewed again. The excess burden on SMEs as a result of this excise
duty is somewhat limited.
Following international best practice, which would reduce the risk to the financial
institutions, the loan facility should be structured as a revolving demand loan
limit. However, the excise duty would place excessive burden on the SMEs.
Excluding excise duty for loans to small enterprises may be worth considering,
both from the perspective of helping small enterprises financially as well as for
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encouraging banks to follow global best practices, even when it comes to small
players. Small enterprises do need to get into the discipline so that they are used
to this by the time they become larger enterprises.
Problem Solving Centre for distressed SME loans
When an SME runs into financial problems, they usually do not have the ability to
negotiate with their bankers. The financial difficulty often arises not because the
SME is not making a profit but because they are having cash flow issues. This is
one of the main reason SMEs go out of business.
Bank Negara of Malaysia has set up a separate agency, The Credit Counselling and
Debt Management Agency, or commonly known as Agensi Kaunseling dan
Pengurusan Kredit (AKPK) to help individual borrowers and potential borrowers
take control of their financial situation. Although not directly working with SMEs,
the owners of SMEs do get assistance. The agency offers preventative solutions
such as financial literacy as well as structured debt management services for those
who have distressed loans. The program works with individuals to develop
personalised debt repayment plans through negotiations with financial service
providers. These plans help individuals repay their debts and regain financial
control.
The SME Corporation of Malaysia has an established Small Debt Resolution
Scheme (SDRS) to facilitate restructuring or rescheduling and new financing for
SMEs that are constrained by non-performing loans or distressed SMEs with
performing loans.
BB and the SMEF/BSCIC can play similar roles in creating a more conducive
environment for debt resolution for small borrowers to help more SMEs survive
business downturns and the ensuing financial hardship. The replication of these
two models need not be exact but rather can be modified or combined to form a
service that assists SMEs on loan work out with financial institutions.
4.2. Mobile and Agent Banking
Mobile Banking
One can intuitively understand the amazing reach that the ubiquitous mobile
phone can achieve in providing financial services to the remotest of locations.
Heralded as the most important development in financial services, mobile banking
has significant potentials but may be a little ahead of our needs. If we consider the
fact that literacy level is low and financial literacy is even lower, the uptake of
mobile banking for all types of banking services is likely to be slow. Currently, the
use of the mobile banking product is growing as an efficient and dependable fund
transfer mechanism.
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Bangladesh follows a bank led model where ‘mobile accounts’ must be under the
direct control of the bank and made available on the customers’ mobile device.
These accounts are currently limited purpose accounts. Although the transaction
limits are quite stringent, they are prudent. These limits may be revisited when
there is more comfort with mobile transactions on part of both the regulator and
the financial institution.
The current regulations require compliance with the Anti-Money Laundering
(AML) requirements and provide flexibility to the banks to get the documents
related to Know Your Customer (KYC) from customers through agents. This allows
for faster account opening. The agents collect the following three documents when
opening a Mobile Financial Services (MFS) account:8
Copy of National ID Card
Copy of Citizenship Certificate
Copy of Driving License/Passport
Where mobile banking can be immediately useful for SMEs is in ensuring the
security of financial transactions. As more and more businesses sign up for mobile
banking and if mobile banking services offer transfer from bank accounts between
banks, all types of transactions can be digitized.
As mobile banking experience increases, the maximum transaction number and
amount limits per day and per month may also need to be reassessed to allow even
more transactions. A robust mobile banking policy that allows these types of
transfers while ensuring adherence to anti-money laundering practices will be
necessary to ensure the sustainability of the system.
An area that may need to be re-examined is the bank led model as it increases
the cost of doing mobile banking for each bank. The sharing of a bank-led
platform by the banks poses a perception problem, if not a real one. The mobile
accounts need to be maintained at the bank that owns the mobile banking
service provider. Therefore, other banks have been reluctant, and may continue
to be reluctant, to use these services for fear of their customer information
falling into the hands of a competitor bank.
A Bangladesh Bank licensed, stand-alone mobile banking service provider
operating each banks’ information on separate or partitioned servers would
8Bangladesh Bank DCMPS (PSD) Circular Letter no.11dated December 20, 2011, amending Guidelines on Mobile Financial Services (MFS) for the Banks.
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provide comfort to the banks while reducing their costs. This lowered cost would
enable the banks to offer the service at lower cost to their customers. Of course,
banks that want their own operations would still be able to do so.
Agent Banking
Agent banking means providing limited scale banking and financial services to the
underserved population through engaged agents under a valid agency agreement,
rather than a teller/ cashier. It is the owner of an outlet who conducts banking
transactions on behalf of a bank.9
In a country where financial literacy is making great strides but require
significantly more development, Agent Banking is potentially the answer. An agent
represents a financial institution through the establishment of smaller premises
that are not as intimidating to SMEs and other excluded segments of the
population. Once through the door, a proactive, well-trained agent can educate
their customers in all aspects of financial literacy.
Physical presence of a bank and direct interaction with customers will allow
financial institutions to gain trust and loyalty of their customers. There is a need
to explore agent banking in more depth because it offers financial institutions such
physical presence in remote locations that will in turn allow them to offer a variety
of financial services.
Bangladesh Bank has provided agents significant authority to the banks’ agents.
Currently, these are the relevant functions as they apply to SMEs:
Agents are allowed to process small value cash deposits and cash
withdrawals, including inward remittances.
They can receive clearing cheques and insurance premiums.
They can accept utility bill payment and facilitate fund transfer.
Agents can collect and process forms/documents in relation to account
opening, loan application, credit and debit card applications but cannot
approve them.
Agents can also facilitate small value loan disbursement and recovery of
loan instalments.
They have the authority for post sanction monitoring of loans and advances
and following up of loan recovery.10
9Bangladesh Bank GBCSRD Circular No. 02 dated June 3, 2014, Guidelines on Agent Banking for the Banks, Bangladesh Bank.
10Bangladesh Bank GBCSRD Circular No. 02 dated June 3, 2014, Guidelines on Agent Banking for the Banks, Bangladesh Bank.
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Agents are not allowed to dealing with loan/financial appraisal. This means that
although they can collect loan proposals, they cannot appraise them. Some clarity
needs to be given as to whether agents will be able to guide their clients on filling
in the application forms and whether they will be able to provide trainings to SMEs
and other clients in areas of financial literacy. It would enable the banks to truly
capitalize on the reach that agents afford them. It should be considered by BB and
other stakeholders whether this should be mandatory for agents to perform such
tasks.
The reach of the bank can be expanded significantly as SMEs see the benefit of
banking through the agent. As an agent of a bank, they are well positioned to
provide numerous types of training programs to SME customers in remote
locations. Financial literacy programs can be run from these locations to educate
more and more people. These same premises can be used to train SMEs on
business management, marketing, accounting and finance topics.
Agent compensation is an issue that needs to be clarified. They are SMEs that will
require sufficient income to ensure sustainability. The banks are aware that there
will be quite a bit of savings for the banks in addition to incremental income from
operating through agents. Clarity on how fees and interest income may be shared
with agents should be explored both from the banks’ perspective and from the
regulators’ perspective of trying to keep the cost to the customers down.
4.3. Credit Guarantees
As mentioned earlier in more detail in section 3.3, availability of credit guarantees
provide a means for SMEs to overcome the issue of collateral. The credit
guarantees are not meant to function as a crutch for the financial institutions but
rather as a stepping-stone for becoming comfortable with lending to a market
segment they were previously uncomfortable with.
The credit guarantee availability needs to be monitored closely for all segments.
Once the financial sector is comfortable with a segment, the guarantees should be
made available for other underserved segments. For example, one needs to
consider whether there is a need for the credit guarantee scheme to include ‘light
engineering clusters’ in Bogra and Dhaka since financial institutions are
continuously searching for more of these types of businesses to finance. There
could be light engineering clusters in other parts of Bangladesh that are facing
issues accessing finance. The credit guarantee scheme could be extended to allow
those clusters into the scheme.
4.4. Standardized Loan Origination Procedures
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This has been a longstanding recommendation to the financial sector from
numerous quarters. Standardized procedures will make it significantly easier for
SMEs to access finance. This is not a difficult issue to resolve although it is true
that each financial institution has different procedures. Instead of relying on the
banks to agree on these procedures, the SMEF/BSCIC could put together a list of
the common procedures that all financial institutions follow as part of their loan
origination procedures.
The SMEF/BSCIC would then provide training and support to SMEs in preparing
for these procedures. If the SMEs are ready with all documentation and answers
related to these procedures, the speed with which the banks will be able to
complete their loan approval process could be significantly lowered.
This would also have the added benefit of demystifying the procedures for the
SMEs and provide comfort to the banks as they find the SMEs better prepared.
SMEs can easily move to another bank for financing should their first application
to the first bank not be approved due to the banks’ credit policies.
5. Funding Improvement for Borrowers
5.1. Soft Loans, Refinancing, On-lending of Government and/or Donor Funds
Policy makers need to approach incentives to financial institutions as a dynamic
tool that need to be tweaked from time to time to achieve the required results. The
development of a robust database (mentioned above) would be instrumental in
ensuring more efficient and timely decision-making vis-à-vis incentives provided
to financial institutions.
The thrust sectors that have been identified may need to be reassessed to include
new potential sectors and exclude those that may not need further support.
Refinance and ‘pre-finance’ schemes can have limits based on sectors. It should be
possible to reset the limits in case limits to some of the sectors are reached quicker
than others. Exactly the same way that women enterprise financing is encouraged
by putting pressure on financial institutions to include refinance requests for
women enterprise loans along with the other refinance requests, a ratio can be set
for each sector based on the potential for utilization of the lines based on such
ratios.
5.2. Credit Ceilings
Central banks can also pursue targeted funding operations, which can either be
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linked to loan developments to a certain sectoror to types of collateral. An
example of the former is the Bank of England’s (BoE) Funding for Lending Scheme
(FLS), which involves a “collateral swap” in which BoE lends out UK treasury bills
in return for loans to households and firms. This swap takes place for a fixed
period of time, so the risk of the loan remains with the originating bank, but the
amount of funds that can be accessed is directly linkedto the amount of lending
to the real economy. The programme was extended in 2013 and the criteria were
altered to make lending to SMEs more attractive, after they recorded a less
favourable performance relative to households and larger companies.11
BB and the SMEF are both engaged in providing financial institutions with soft
loans to target specific business sectors. An assessment to establish who is better
placed to manage this type of intervention so that there is consistency in the way
incentives are provided or at the minimum allow stakeholders to assess how to
coordinate better vis-à-vis these incentives.
Similarly, underserved clusters/sectors need to be identified. Upon identification
of these clusters, plans should be put in place on how to address the issue of access
to finance to these clusters/sectors.
There should be caps by thrust sectors so that a sector receiving sufficient
financing to reach the cap, triggers investigation to assess whether incentive is
still required to convince lenders to target that sector.
Women Entrepreneurs
Entrepreneurship is about adding value. No one challenges the fact that women
entrepreneurs do the same things that male entrepreneurs do – they create jobs
and contribute to the gross national product of a country.
In fact, they do more than their male counterparts. Our own experiences in
microfinance have shown that women nearly always repay their loans and are
more likely to reinvest their profits in education, family and community. There is
growing evidence from around the world that women tend to be more loyal to a
chosen brand or financial institution, and women tend be better depositors into
bank savings accounts.
It is estimated that there are almost one million SMEs in various industries out of
which only around 8% are owned by women. This is staggeringly low and it
11Policy measures to improve access to credit for SMEs: a survey, Central Bank Quarterly Bulletin 4, October 2013, Central Bank of Ireland, pg 106
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becomes evident that the true economic development potential of the nation is not
being achieved given that almost 50% of the total population are female.
Women entrepreneurs have to overcome many challenges such as accessing
financial services including bank accounts and bank loans, necessary training for
conducting their businesses and marketing their products. Often attitude toward
women within their families and society are impediments to developing
themselves as entrepreneurs. However, most women-owned businesses rank
access to finance as their biggest impediment to their growth. Therefore, it is
important to seek out viable businesses run by women entrepreneurs and provide
them with the necessary tools for success. Various trainings and business
education, such as accounting and finance, marketing and packaging, and
operations and human resources management have been identified as areas of
improvement for women entrepreneurs.
More women are getting more educated and interested in establishing their own
businesses. The governments’ policies and incentives regarding business set up
and bank related regulation favouring women entrepreneurs, to equalize the
playing field with regard to the additional issues they overcome, have indeed been
working.
These issues along with the lack of data supporting the true depth of the under-
tapped women entrepreneurs market have prevented the financial institutions
from recognizing the business opportunity presented. Encouragement and
incentives for lending to women-owned enterprises therefore need to continue. It
further needs to be explored how refinancing for loans to women owned SMEs can
be used to encourage more sectoral and geographical coverage and depth.
Farmers
Agri-sector is an important area where financial institutions need to be
incentivized to offer financial services. The Tk. 10 account was an important
exercise that created awareness about the issues facing farmers with regard to
financial inclusion.
Financial institutions have been investing significantly in rural finance through
non-governmental organisations (NGOs). This type of wholesale lending fulfils the
requirements set by the central bank but it does not necessarily help the farmers.
This is because farmers have to turn to NGOs who charge much higher interest
rates than financial institutions and because borrowing from NGOs limit their
ability to enter the formal financial sector.
It may be wise to place a ceiling on the amount of money that can be lent on
wholesale basis. This would force the financial institutions to go into the market
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and lend to farmers directly, i.e. through their agent-banking network. Allowing
the credit guarantee fund to cover the risk of lending to farmers would be a good
incentive to provide.
Direct lending to farmer by financial institutions would be excluded from any cap.
Sustainable Energy Finance
This is an area where progress has been slow. One of the main reasons is that the
business case of sustainable energy for SMEs is difficult to make. For example, an
SME that does not pay utility bills is unlikely to make an investment that reduces
energy usage.
If climate change is to be addressed at the grass roots level, enforcement of the
law will need to be strengthened, i.e. only when the SME pays for utility will they
feel the need to invest in technology that will reduce their costs.
In the mean time, loans in the area of sustainable energy finance may be excluded
from any sectoral or geographical cap given that not many loans are being booked
under this anyway.
Geographic Limitation
It is evident that locating of bank branches in urban areas and its immediate
outskirts mean that financial institutions will have to seek out SMEs to provide
financial services to from these areas.
Increased effort should be directed at increasing access to finance in rural areas.
This may be done by limiting loans refinancing provided to SMEs in urban areas
vis-à-vis those in rural areas. Financial institutions will be both forced and
encouraged to turn to their agent banking to increase financial literacy and
increase financing to underserved areas.
A balance must be struck so that urban SMEs are not adversely impacted by this
while encouraging financial institutions to increase their lending in rural
communities through agents. This may be achieved by imposing additional
requirements for refinancing urban SME loans should each financial institution
reach the cap based on location (urban/rural). The urban caps will be lower and
therefore will be reached fairly quickly. They will then feel encouraged to move to
rural Bangladesh. A semi-urban cap may also be considered.
5.3. Vehicles of Finance
Increasing the vehicles of finance should have a favourable impact on increase the
access to finance by SMEs without any adverse effect on credit quality because
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each type instrument will play a different role and have different criteria for
extending funds.
Loans
Loans are traditional sources of funding that continue to play an important role.
However, financial institutions are getting more sophisticated in the way loans are
structured and applications are assessed.
Mentioned earlier, assessment of loans can be standardized even with the varying
credit policies of each financial institution. The basic requirements are the same.
Dissemination of the common criteria and assisting with preparation of the
necessary documentation and ability to demonstrate financial capability will ease
the crises felt by SMEs when seeking financing. The SMEF/BSCIC as well as the
staff and agents of financial institutions have a major role to play in making this
happen.
A focussed approach to working directly with SMEs and providing them the
necessary training will begin to show significant progress in the numbers of SMEs
that receive finance.
Policy makers and other stakeholders must coordinate their efforts to provide the
necessary assistance to SMEs. Duplication of effort is creating inefficiencies in the
system through wasted resources.
Credit Guarantees
Detailed in section 2.2.2 in this document already, credit guarantees are integral
to providing access to finance to marginalised enterprises in particular.
Loans for expansion of business often require additional collateral. Credit
guarantees extended for deserving business will enable the enterprise to expand
quicker and achieve greater momentum in job creation and growth.
SME Equity and Venture Capital Funds
Venture capital can play an important in providing access to finance SMEs.
Generally speaking venture capital funds will look only fund business with high
growth potential in the hopes of capitalising on capital gains when the business is
sold, either privately or through a public offering on the stock market.
These businesses serve an important role in enabling more business to start up
and/or grow. Equity infusion in any business means that there is no burden to
repay a loan every month. This equity is taken generally in the form of preferred
stock that yields an annual dividend that must be paid before the common stock
holders can receive any dividend.
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The nature of their business is that they take equity risk at a time when no one
else will. There needs to be some protection that the funds get in exchange for this
beneficial service. It is necessary for policy level decision makers to recognise that
a preferred stock holder is not a decision maker in the company and not involved
in the day-to-day operations of the company. Therefore, if the business takes a
loan for expansion at a later date and then defaults, the preferred stock holder
should not be held liable and not be subject to adverse CIB reporting.
An SME Stock Exchange or an SME class within the existing stock exchange would
enable more venture capital funds to be established, as there would be a quicker
exit after the business becomes sustainable.
Dialogue among stakeholders needs to started regarding these ideas. The issue of
moral hazard on part of the SME and the venture capital fund needs to be
mitigated.
Mobile and Agent Banking
Mobile and agent banking, discussed in section 4.4, has immensely increased the
ability to reach more SMEs. A robust methodology designed in compliance with
existing regulations is the start. However, once the comfort level of the enterprises
and the financial institutions have been increased vis-à-vis financial transactions,
SME loans and their repayments may be administered through the use of mobile
and agent banking.
In particular, to increase the sustainability of agent banking, a share of the net
interest income will be necessary. Similarly, as an agent of a bank, assisting SMEs
with loan application and receiving a portion of the application fee may also be
explored.
Current limits on the transaction size are prudent given that this is a new area.
However, it may need to be revisited after other stakeholders have caught up with
the idea of agent banking. For example, insurance companies may develop
products that will insure agents, security companies that will provide cash
movement in remote locations.
6. Recommended changes to current interventions
Each institution should play to their respective strengths and work with other
institutions to achieve synergies in the helping with the growth and development of
SMEs and their access to finance. To achieve these types of synergies, an over arching
agency needs to coordinate the activities. The roles and responsibilities vis-à-vis
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access to finance related interventions of various stakeholders, such as SMEF, BSCIC,
BB, etc. needs to be clarified.
‘Quick Hits’
1. Standardized loan application procedures are an intervention that can happen
immediately. Most banks require the same information when assessing a credit.
Stakeholders that work directly with the SMEs such as SMEF/BSCIC can assist
SMEs to prepare their documents and answers related to these procedures in an
effort to speed up access to finance. This will mean that the SMEs are equally
prepared regardless of which bank they choose to visit. This also means that if one
bank turns them down, they can quickly approach another because they are
prepared with all the necessary documentation and explanations.
2. Caps on refinancing that will be allowed by Bangladesh Bank need to be
established by thrust sectors. This will ensure that the sectors that are less
popular with financial institution also receive some attention, especially after
sectoral caps have been reached on the popular ones. These may be on monthly
caps to try to encourage lending in some of the less traditional thrust sectors.
3. Advertising of financial products must provide accurate, relevant and clear
information that will make it easy for consumers to compare the benefits and costs
of each product. False or misleading advertising needs to be dealt with sanctions
and fines. Just one financial institution beginning this practice will force all others.
However, in the medium term there should be regulations introduced regarding
advertising of financial products.
4. Financial institutions should be encouraged to practice responsible finance as part
of their code of conduct. To this end it is important for financial institutions to be
careful to not offer more money than what the customer needs just so that they
can book a new business.
Although a code of conduct law may be early and difficult to enforce, there may be
awards for banks that adopt best practice code of conduct and demonstrate
adherence to them. The awareness creation itself will go a long way in ensuring
better conduct.
5. Support should be provided to distressed SMEs in the form of assistance in
restructuring and rescheduling non-performing loans or loans in danger of
becoming non-performing. This support can help many SME to survive instead of
shutting down.
6. The SME database that is expected to be operation in 2015 should share raw data
with all stakeholders on an aggregated basis so that each stakeholder can perform
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their own analysis to make strategic and lending decisions. Relevant stakeholders
may also use the data and publish their analysis to assist other business make
better decisions.
7. Set up a credit guarantee institution targeted at mitigating the perceived risk of
lending to MSMEs particularly those that do not have adequate collateral. As a
separate entity, prudence becomes the driving force in ensuring sustainability as
the management team becomes directly accountable.
8. Transfer of collateral could be made easier and cheaper to allow for the ease of
transfer of collateral to the SPVs that purchase asset backed securities.
9. Easing of the cost of mortgaging property and transferring of mortgage from one
financial institution to another could also help SMEs to negotiate better terms with
their existing bankers and/or get better priced loans from other financial
institutions.
10. Transaction size and numbers may need to be revisited for both mobile and agent
banking after comfort level in managing these types of products have been
achieved by the regulator and the financial institutions.
11. Incubators may be involved in the process of providing seed capital to start-ups.
The incubators would provide business advice and mentoring to businesses who
would then receive the funds from government sources.
Medium Term
1. The consumer or business must be allowed to access their own CIB reports. There
need to be a simplified process by which the consumer will be able to rectify any
errors in the report. This may require some changes in the CIB regulations.
2. The CIB should begin to collect positive information in addition to the negative
that is being collected. This will allow stakeholders to better develop their own
credit scoring models that will speed up access to credit and provide additional
comfort to financial institutions about borrowers.
3. Ratings agencies should be allowed access to the CIB information so that they can
develop more in-depth reports on the borrowers. This access would only be
provided with consent from the borrower on whom the report is being prepared.
4. Other stakeholders such as utilities companies and microfinance lenders should
be allowed and obliged to report payment behaviour of the individuals and
institutions into the CIB. However, to do this a unique number must be issued to
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each person. The quickest way to do that would be for the government to ensure
that the National Identification Numbers (NID) are unique.
5. The NBR as part of their effort to help the development and growth of SMEs may
consider allowing tax break for investing in asset backed securities, e.g. zero
coupon bonds, that are securitised instalment receivables against loans to SMEs.
This will enable financial institutions to share their risk with other investors and
therefore feel more comfortable in lending more to SMEs.
6. The NBR and BAS could also recognize the difference between operating lease and
financial lease transactions. Tax and depreciation advantage could be allowed to
operating lease transactions that would help companies to access better
equipment as a result of more affordable monthly rentals on equipment.
7. The NBR needs to revisit the issue of excise duty on loans to SMEs as well as excise
duty on deposit accounts held by small depositors such as micro and small
enterprises. Lowering this duty will bring more depositors into the formal
financial sector and therefore will be able to access finance more easily.
8. In a factoring transaction, when an assignment is provided by a buyer to the bank
against goods delivered to them by a seller, the financial institution usually retains
recourse on the seller even though the bank has taken a risk on the buyer. If the
assignment could be legally binding whereby the financial institution could report
the non-payment of the buyers obligation to the CIB, they would be more likely to
waive recourse to the seller. This would reduce the sellers’ risk and reduce their
collection efforts.
9. Warehouse receipts law needs to be enacted so that agri-finance can be facilitated.
An entire supply chain of business will benefit from the use of warehouse receipts
as a form of collateral. State of the art warehouses would be developed;
management and monitoring companies would come into operation to support
these types of transactions. Banks would be able to liquidate the collateral to
recover their loans and as such would gain comfort in lending to the agri-business
sector.
10. It is recommended that the bank-led model for mobile banking should be revisited
as it increases the cost of offering mobile financial services for the customers. A
bank offering their mobile banking platform to other banks are not considered to
be very attractive because of the regulation that requires mobile accounts to be
under the control of the bank that owns the mobile services platform. This poses
a potential confidentiality issue. A way around this is for BB to allow mobile
banking licenses to a service provider that will be regulated by BB.
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11. Agents of banks, who are likely to be SMEs themselves, are required to make
significant investments to operate as an agent. They need to be made sustainable
and therefore their income needs to be ensured by the banks. As they will be able
to provide the outreach that banks are unlikely to be able to do on their own, the
regulator should also get involved in this.
12. An SME stock exchange or SME class may be introduced in the capital markets to
encourage more venture capital firms to enter the SME space.
13. Preferred shares owned by venture capital companies should receive special
treatment. For example, in the reporting to the CIB, there might be a special
annotation that will preclude the venture capital firm from any negative reporting
since they would not be involved in the day-to-day operations of the companies
they invest in. This consideration would be in light of their taking risks on
institutions that other stakeholders would not have taken.
Longer Term
There needs to be a more coordinated effort across all ministries vis-à-vis SME
development. To this end a separate SME Ministry may be considered. The function
of this ministry would be governed by an SME Development Act and an SME Master
Plan. This will require very high-level engagement and private sector engagement.
The Ministry would be involved in ensuring the Industrial Development Plan includes
the requisite focus on SME development. Similarly an Entrepreneurship Development
Plan should be put in place to create more businesses.
The Ministry would also be the focal point for any SME related policies and act as the
coordinator. Significant efficiencies can be gained through having an institution
directly responsible for coordination. The coordination function would include the
following activities conducted across all governmental agencies:
Problem identification
Resource identification
Resource allocation
Implementation
Monitoring and evaluation to ensure proper implementation of the plans agreed to.
The various chambers of commerce, business associations, think tanks and
researchers, BB and the financial sector, NBR, SEC, BSCIC and SMEF would need to
be involved in order to achieve the success in the area of SME development and in
particular SME access to finance.
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