Channel more financing to SMEs

At least half of all credits disbursed by banks and other financial institutions in Bangladesh should go to small and medium enterprises (SMEs) since a significant of them still don't have access to the formal credit system despite recent improvements, said a noted economist.

Momtaz Uddin Ahmed, a former professor of the economics department at the University of Dhaka, said about 45 per cent of SMEs are now getting bank credit but the rest don't have any access to banks.

"This may vary from sector to sector, but the average will be 45 per cent. It should be 50 per cent at least," he told The Daily Star during an interview on Thursday.

There are nearly 78 lakh SME units in Bangladesh, contributing about 25 per cent to the country's GDP and employing around 30 per cent of the workforce.

Access to financing for them has increased in the past one decade, thanks to initiatives from the government and the Bangladesh Bank.

The central bank has set up a separate SME department while banks have opened dedicated SME desks and branches.

Currently, lending to micro, small and medium enterprises (MSMEs) must account for 25 per cent of financial institutions' loan portfolios. 

"The setting of the quota on lending has been a big help for the MSME sector," said Prof Ahmed.

He spent his entire academic life studying, researching, and teaching SMEs and is the first PhD-holder among the Bangladeshis in the area.

When the government set up the SME Foundation in 2007, he was one of the directors of the board of the agency working to promote the enterprises in the sector.

Despite recent developments, MSMEs have always faced challenges in Bangladesh, owing to inadequate access to finance, absence of collaterals needed to secure a loan, and lack of marketing, among other factors.

The coronavirus pandemic dealt a massive blow to them as lockdowns and other restrictions forced them to close completely at the peak of the health crisis.

Prof Ahmed said the SMEs that continued their operations saw their market shrink and sales revenue, cash flow and profitability drop.

"They were on the verge of going out of business. Fortunately, MSMEs did not see any serious damage from the pandemic-related crisis. I think they have survived and prospered after successfully navigating through the temporary difficulties."

He also said the current wave of higher inflation, driven by external and internal factors, came as a fresh blow for MSMEs as their sales have declined as people tightened their belts amid a considerable erosion of the purchasing power of consumers.

Prof Ahmed, a former research director of the Centre for Integrated Rural Development in Asia and the Pacific, said the government unveiled a stimulus package for the MSME sector.

"It has been a positive step in the right direction."

The BB has formed a refinance scheme of Tk 25,000 crore for the CMSME sector.

The former member of the planning commission thinks SME financing is a perennial problem and will never go.

SMEs will continue to be financially constrained all over the world, not just in Bangladesh for two factors, according to Prof Ahmed, who was chairman of state-run Rupali Bank in 2001-2003.

One of the factors is the low motivation in the financial sector.

"In the first instance, banks and other financial institutions think that SMEs are not strong, they are less profitable and those which are profitable see fluctuation in their earnings. They think a lot of SMEs will shut prematurely."

As a result, when an SME goes to a bank or any kind of lender, he or she does not receive the same level of attention a large borrower gets.

"I think MSMEs are more efficient than large because they are careful, industrious and dedicated." 

He said there are some products that can be produced by SMEs more economically and profitably.

He cited the example of fashion boutique shops that produce quality products but may not like to go for large-scale production. 

Prof Ahmed thinks cottage industries should not be included in the MSME sector.

His argument is MSMEs are more organised, dynamic, promising, and profitable, and have better chances of growth and survival.

"The government and the central bank can extend as much support as they want to cottage industries but they should be treated separately from the MSME sector."