SMEs for better access to finance

Small and medium sized enterprises (SMEs) are playing increasingly important role as engines of economic growth in many countries, including ours. SMEs provide low cost employment opportunities and render flexibility to the economy. Many of the SMEs are engaged in export activities suggesting that they are internationally competitive. Considering the importance of SME sector in the economy of Bangladesh and understanding the constraints under which such enterprises operate, it is evident that policies to support the development and growth of SMEs are necessary. In the policy strategies, smooth and sustainable development of SMEs all over the country will be considered as one of the vehicles for poverty alleviation and generation of more employment.

The Bangladesh Government declared Vision-2021 which is the golden jubilee of the achievement of independence of Bangladesh. Vision-2021 is the first document of its kind in Bangladesh which presents a roadmap for the country's economic development. It projects that contribution of the industrial sector to the Gross Domestic Product (GDP) would increase from 28 per cent (2008) to 40 per cent, contribution of the agriculture and service sectors would fall from 22 per cent and 50 per cent (in 2008) to 15 per cent and 45 per cent respectively by 2021. That means emphasis would be put on local industrialization and rehabilitating the surplus labor force of the agriculture sector in the industrial sector.

To implement Vision-2021, the Planning Commission has drawn up the Perspective Plan of Bangladesh (2010-21). Perspective Plan target of achieving the annual GDP (gross domestic product) growth rate of 10 per cent by 2021 is premised on a competitive manufacturing sector growing at or nearly a double-digit rate during the 2010-21 decade. Consequently, the broad industrial sector will continue to account for a much larger share of GDP, approaching 37 per cent by 2021, compensating for the decline in the share of the agricultural sector, which will fall to 15 per cent. Vision 2021 stipulates the middle income status for Bangladesh by 2021 with the achievement of an annual GDP growth rate of 10 per cent by that year and averaging 9.2 per cent for the period of 2011-21.

Fulfillment of this vision requires good performance of the manufacturing sector to take its share in the GDP to 27 per cent by 2021 and that of the industrial sector to 37 per cent. The small and medium enterprises (SMEs) sector is given priority in the National Industrial Policy-2010. It has considered the SMEs as the thrust sector, given the planned and balanced development of these labor-intensive industries as the engine of growth.

Although financing of SMEs are largely dependent on equity financing from personal and family savings, from friends and relatives, at present banks and financial institutions are also coming forward to provide finance to this sector. Different initiatives have already been taken by the financial institutions in order to facilitate the SME financing such as: separate SME division, SME units/centers and dedicated desk; separate SME dedicated desk for women entrepreneurs; Separate monitoring team for SME; separate team for selling loan and collecting deposit through SME products; special credit risk management team for SME banking; different trainings for SME officials as well as for entrepreneurs; commission/incentives based on the performances of direct sales team; dedicated collection team for SME loan; customized products and services for SME; establishment of SME/Krishi branch; delegate loan authority to the branch managers and head of SME up to a certain limit for quicker decision; 24 hours call center and doorstep banking; organizing SME service fortnight in every years; develop clusters under area approach etc. Islamic Bank Bangladesh Limited (IBBL) has disbursed the highest amount of SME loans among the top SME financier banks. IBBL being the shariah based bank has given more importance on small and medium enterprise development banking.

There are a number of steps that can be taken for SMEs to overcome SMEs problems and improve their prospects for obtaining funding for their business, based on the analysis of what banks often require. The keys to success revolve around three main initiatives: seeking the best financing product; putting "the best foot forward" in the application process; and changing the business operation for the better.

Looking for the most suitable financial products
The first step is to consider what type of product is needed. This requires the SME to have a full understanding of its future financing needs which, in turn, will require it to develop some sort of a business plan, with details on its operation, products, employees, marketing and processes. It is then a matter of determining what type of product and what quantum of funding best meets the SME's financing needs.

Having agreed with the appropriate product or products, the SME should then look for the lender and/or provider most aligned with its interests. Considering the product terms, understanding and comparing interest rates is important and fees that banks charge on top of the stated interest rate must also be considered.

Finally, other terms can be just as crucial as the interest rate. There may be steps that the borrower must take which are time-consuming or expensive, e.g. registration of title or formal business licenses. If the required reporting regime is too burdensome, this adds to the effective cost of the loan. In addition, the borrower should ensure that the repayment terms of the loan align with its expected cash flows.

Increasing capacity of SME
Some creditors should consider better in advance that some of the key components include: (1) Approval property for the compilation (2) If the parallel cannot be provided, the ability to provide resources such as Liens, Guarantee, Post-Dated Check (3) Loans' Minimum Client criteria, especially the ability to meet the business year (4) Loan application by bank branch or lending officer (5) inspection The ability to prepare some form of fault complexity of the bank's debt as part of the monitoring necessary for the preparation of a detailed report.

It is generally accepted that SMEs, including customized financial products, will ensure different forms. SME especially needs long-term assets. In order to increase the financial benefits of the country's SME sector, the Bangladesh Bank has promoted some options. In addition, banks and financial institutions can be encouraged to provide more new financial products such as factoring, venture capital.

However, SME entrepreneurs as well as financial equipment providers should be well-known with such products. Academics and experts, repeatedly, demand for capital, with the liberal terms of long-term, low-interest funds for a dedicated new financial institution for SMEs.

Bangladesh Bank (BB) has taken strong initiatives for SME sector development. BB's Policy regime has skewed in favor of the financially excluded and unbanked mass of the country, specially, towards the SME entrepreneurs with particular emphasis given to small entrepreneurs and women entrepreneurs. It has also given more emphasis on manufacturing and service sector that are more capable of generating employment equitable and enhanced economic development; and traditionally developed industry clusters.


Taslim Ahammad is Assistant Professor of Management Studies in Bangabandhu Sheikh Mujibur Rahman Science and Technology University, Gopalgonj. Md. Julker Naim is a banker and M.Phil Fellow of Bangladesh University of Professionals