Tackling CMSME hurdles to empower entrepreneurs

The cottage, micro, small, and medium enterprise (CMSME) sector is one of the core drivers of the economy in Bangladesh. Contributing approximately 25% to the national GDP and employing nearly a third of the workforce, CMSMEs drive innovation, foster rural industrialisation, and support millions of livelihoods.

Yet, despite their resilience and potential, these enterprises remain severely underfinanced and underserved. A persistent credit gap of nearly USD 2.8 billion stifles their growth, with only around 36% of enterprises having access to formal financing, according to Sheikh Mohammad Maroof, Managing Director and CEO of Dhaka Bank.

A sector with promise, hindered by old barriers

As Bangladesh aims for inclusive and sustainable economic development, transforming the CMSME financing landscape has become urgent, as many challenges continue to hinder the sector's full potential. "Despite potential, the sector remains underutilised due to informality, limited access to finance, and structural constraints," said M. Khurshed Alam, Additional Managing Director, NCC Bank.

Many enterprises, especially those in micro and cottage industries operate informally, maintain limited documentation and are unable to provide traditional collateral, making them ineligible for most bank loans.

"Since SMEs lack collateral, most banks usually feel discouraged from providing them with financing support in view of the risks involved in unsecured credit," mentioned Tareq Refat Ullah Khan, Managing Director & CEO, BRAC Bank.

Ali Reza Iftekhar, Managing Director and CEO of Eastern Bank echoed similar concern, "There are still gaps in capital requirements and the loan provisions of banks, thus hindering the ability of the sector to expand and invest."

Additionally, entrepreneurs in this sector often lack the financial literacy to navigate formal loan application processes and manage financial documentation. Relatively high costs of borrowing also become a barrier to seeking formal finance.

"MSMEs are often run by people who understand their business inside out but may not have the financial literacy to navigate complex banking procedures," commented Ahsan Zaman Chowdhury, Managing Director & CEO, Trust Bank.

Documentation-heavy processes, strict eligibility criteria, and slow turnaround times discourage many from applying for credit. The absence of verifiable credit records also makes it difficult for banks to assess risk, reducing loan approvals.

Since many CMSMEs operate outside the formal economy, they lack proper bookkeeping or structured business plans. They also lack data and insights on market demand, supply chain dynamics, and competitive positioning, affecting their creditworthiness.

Moreover, traditional banking products often do not match the cash flow cycles or operational realities of CMSMEs, and conventional evaluation methods often overlook alternative data such as mobile money use or supplier history, further limiting loan accessibility. Remote areas and certain sectors also remain underserved due to limited physical banking infrastructure and customised solutions.

"Limited access to formal credit channels, inadequate bookkeeping practices, insufficient collateral, and a lack of market intelligence are major challenges in the micro and cottage industry segments," added Alam from NCC Bank.

Building an entrepreneur-friendly ecosystem

To combat the persistent challenges faced by CMSMEs in Bangladesh, banking leaders have proposed a range of practical, solutions focused on financing, formalisation, digitisation, and capacity building.

A key priority should be strengthening the Credit Guarantee Scheme (CGS) to include a broader range of micro and cottage enterprises, particularly women-led businesses. "A more robust and well-funded CGS, covering a wider range of MSMEs, would encourage banks to lend confidently without being overly reliant on traditional collateral," commented Mohd. Rafat Ullah Khan, Managing Director (CC) at Al-Arafah Islami Bank.

Md. Ahsan-uz Zaman, MD & CEO of Midland Bank, also emphasised the importance of expanding credit guarantee programmes with shared risk models to encourage banks to lend to new and small borrowers.

Simplifying regulatory compliance is another crucial aspect. A ceiling-based documentation system for CMSME loans and the immediate rollout of e-KYC for sole proprietorships will ease the onboarding process for small businesses, according to Khan from BRAC Bank.

More customised digital banking solutions will also play a central role in improving entrepreneurs' access to finance. Leading banks in the country have already adopted digital loan issuance and app-based services to facilitate convenient B2B transactions.

"We've simplified loan processing, expanded agent banking, and adopted digital platforms to streamline credit approvals. Special refinancing and credit guarantee schemes are in place to support women entrepreneurs and agro-processing businesses," mentioned Sohail R. K. Hussain, Managing Director, Bank Asia.

Such initiatives should be expanded and made more accessible to entrepreneurs to reduce manual interventions and make banking services faster, cheaper, and more inclusive. Agent banking coverage must extend to remote areas, and simplified loan processing should be prioritised to better serve CMSMEs. To support these digital initiatives, banking leaders emphasise the need for government investment.

"Continuous government investment in rural internet and digital infrastructure is fundamental. It will empower banks to leverage technology effectively for MSME outreach," remarked Kamrul Mehedi, DMD & Head of Small, Microfinance and Agent Banking, City Bank.

Digital issuance of trade licenses with extended validity and API integration will also enable banks to verify documents instantly, making loan approvals faster. "Bangladesh Bank's Credit Information Bureau (CIB) records should be open for instant access to banks through API connectivity, along with the establishment of a Credit Bureau for the MFI customer base," added Khan from BRAC Bank.

Policy reforms must also incentivise SME formalisation. Tax rebates for businesses using banking channels, separate tax slabs for CMSMEs, and financial incentives for digital transactions have been suggested to encourage small businesses to register and operate formally. Leaders also propose recognising alternative forms of collateral, such as intellectual property and movable assets, through legal reforms to further broaden access to secured credit.

To enhance the long-term sustainability of SMEs, capacity development is crucial. "Joint capacity-building programmes must scale up financial literacy and entrepreneurship development, focusing on youth and rural women," suggested M. Nazeem A. Choudhury, Deputy Managing Director, Prime Bank.

Innovative financing models, such as co-financing and blended finance involving banks, development finance institutions, and fintechs, are required to mobilise concessional funds for high-potential sectors. Banks also suggest regulatory support for paperless banking practices, such as accepting digital signatures and treating electronic fund transfer (EFT) instructions as negotiable instruments. These measures would further reduce friction and boost operational efficiency.

With a growing convergence between banking innovation and development priorities, Bangladesh may be approaching a turning point for its MSME sector. As banks increasingly view MSMEs not just as borrowers, but as long-term partners in nation-building, the groundwork is being laid for more inclusive and resilient economic growth. The success of this sector, and by extension, of the economy will depend on how effectively we connect ambition with opportunity and policy with practice. With the right support, MSMEs could very well become the powerhouse of a new era of growth.