Some issues on SME finance |
Dr Salehuddin Ahmed
Financial services for the poor have proved to be a powerful instrument for poverty reduction enabling the poor to build assets, increase incomes and reduce the vulnerability to economic stress. Today, access to credit is recognised as a 'right' of people globally. Over the years, there has been phenomenal growth in activities of microcredit in many countries of the world and a transition in the paradigm and modalities of microcredit. Microcedit Summit Meeting first held in Washington DC, USA in February 1997 has launched a global movement to reach 100 million of the world's poorest families, especially the women of those families, with credit for self-employment and other financial and business services by the year 2005. The UN has declared 2005 as the "International Year of Microcredit"; now is the time to reflect on the experiences of Bangladesh, the birthplace of microfinance and the country with the biggest and most vibrant microfinance sector.
As the microcredit movement matures, we get a clearer idea of what its strengths are and what are its limitations. To move forward, we need to be more effective, and increase outreach, design products to include the poorest, and also provide finance for growth and employment oriented small and medium enterprises (SMEs) which are needed to spread the poverty alleviation net wider, so that significant decline in poverty takes place.
A significant number of people around the world are excluded from full participation in the financial sector. Although the unbanked has been an issue for some time, the subject is now receiving greater attention, helped by the fact that 2005 is the United Nations' Year of Micro-credit. Banking the unbanked is about bringing banking and financial services to those people who, up to now, have not had access. Although the unbanked is usually thought of in terms of individuals, it is an important issue for small firms as well.
Small and medium sized enterprises (SMEs) may not always have the same access to banks and financial institutions as big firms. Thus access of SMEs to the range of financial services is a key issue that needs to be considered in terms of banking the unbanked.
It is generally recognised that SMEs have a significant role in employment generation, poverty reduction and over all economic growth, specially for a developing economy like Bangladesh. SMEs are typically labour intensive industries with relatively low capital intensity. As such for a country like Bangladesh which is labour abundant and capital scarce, SMEs have a natural comparative advantage. In recognition of the strategic importance of the development of SMEs in promoting industrial growth, employment generation and poverty alleviation the SME sector has been declared as a priority sector in the Government's Industrial Policy 2005 and various measures have been initiated to help maximise the SMEs' growth potential.
Availability of finance is thought to be a major constraint to formation and growth of SMEs in Bangladesh. Banks are reluctant to expand their SME credit portfolio because they do not consider SME lending an attractive and profitable undertaking. This is so because SMEs are regarded as high risk borrowers because of their low capitalisation, insufficient assets and their inability to comply with collateral requirements of the banks. Administrative costs are also higher because close monitoring and supervision in the SME operation becomes necessary. Despite all these facts banks and financial institutions have been providing finance to the SME sector and the volume of finance is showing an increasing trend. Most importantly, the share of private sector banks in disbursement of credit to the SME sector has been increasing in recent years comparatively at a higher rate than the NCBs and state owned DFIs.
There is an issue of interest rate charged by banks and financial institutions for SME finance. Very often it is argued that the interest rate on SME loan is too high and needs to be lowered. In this regard it may be mentioned that following the interest rate liberalisation policy as a part of financial sector reforms, the responsibility to determine interest on loans and advances has been left to the lending banks and financial institutions. Under the liberalised interest rate regime central bank's intervention to reduce interest rate for a particular sector will not be in order and involve the risk of being construed as a retrograde policy. For entrepreneurs, though the supply of and access to finance is very important, the cost of fund is also a factor for their sustainability and expansion. The banks and financial institutions should consider the fact that if the rate of interest is too high, then the profitability of entrepreneurs, especially for those of the innovative projects will be adversely affected. Bangladesh Bank (BB) has also undertaken programmes to provide relatively cheaper funds to the banks and financial institutions which might encourage them for SME financing.
SME has been identified in the PRSP (Unlocking the Potential) as one of the seven critical sectors for pro-poor economic growth and special emphasis has been give on rapid growth and development of this sector. According to the PRSP the thrust of SME development should be on 'modern' SMEs that have higher growth potentials compared to the traditional SMEs. The policies towards SMEs should be based on a positive developmental attitude seeking to assist them by promoting efficiency, adaptation to new circumstances and technology, rather than protecting the sector through a distorted incentive structure.
In the PRSP the actions suggested for the development of SMEs in Bangladesh include (i) Adoption of an unambiguous definition of SME; (ii) Strengthening of BSCIC's capacity to provide market information; (iii) Simplification of regulatory procedures; (iv) Setting up an appropriate credit guarantee scheme for lending without real estate based collateral; (v) Enlarging the base of conduit lending institutions; (vi) Making BSCIC's industrial estate programme demand driven; (vii) Priority development of the road network and supply of gas and electricity; (viii) Extension of BOI's One-Stop Service to cover SMEs; (ix) Greater public-private cooperation for the design and implementation of effective business support service; (x) A differentiated and hassle-free indirect tax system for SME; (xi) Calibration of trade policy reform to support SME development.
Dr Salehuddin Ahmed is Governor, Bangladesh Bank.