Author: Shahriar Rabab
Bangladesh has had a robust growth in the SME sector over the last decade. The sector currently accounts for over 25% share in the GDP (Rahman, 2022). A total of 7.5 million SMEs including CMSMEs accounts for almost 97% of all enterprises in Bangladesh (Hossain, 2021). The sector also employs over 24 million people, making up a huge demographic of the existing workforce.
While women make up about 42% of the entire workforce of Bangladesh, their participation in the CMSME is a little over 17% with around 7.2% being at the helm of affairs (AFI Global, 2018). The disproportionate engagement of the female demographic is a sign of a greater problem prevailing in the sector. One of them is access to finance at the CMSME level for women entrepreneurs.
Financial Accessibility: Bank Loans, Micro Credit and DFS
Access to finance for women entrepreneurs has been an elusive process. While there are existing incentives and special provisions for financing and loans for female entrepreneurs at the bottom of the pyramid, there are also challenges that prevent them from accessing them (Markedium, 2022).
Bangladesh Bank formed the Women Entrepreneur Development Unit as part of a growing initiative for the financial inclusivity of female entrepreneurs. Banks are being subjected to a 15% CMSME loan portfolio exclusively for women entrepreneurs by 2024. BB has also worked to introduce SME refinance scheme of up to 10,000 crores BDT at a flat 4% interest rate for CMSME entrepreneurs. For each term loan, BB has directives for 3 to 6 months of grace period especially for female entrepreneurs. Home-based female entrepreneurs can also avail of individual loans of up to 10,000 BDT or a group loan of up to 50,000 BDT at the aforementioned flat rate.
Digital Financial Services have also been contributing to the growth of female-led CMSMEs. Among the total 181 million registered bKash users, 81 million are women. 56% of these women are based in rural areas. A study conducted by BIDS found a positive correlation between root-level access to bKash and female entrepreneur development.
Other services like Bijoy by Bangladesh Finance, Swosti, and The Asia Foundation all have microfinance schemes as part of their DFS for women entrepreneurs at the CMSME level. However, the question is, are these initiatives penetrating as an economic changemaker at the root level?
Source: Bangladesh Bank SME Data
The graph shows the high disparity of loan recipients over the last decade in the SME and CMSME sector of Bangladesh. Even though there are policies and initiatives to facilitate women entrepreneurs at the root level, it is not translating beyond paper (Development Asia, 2023).
There is an inherent bias against MSME funding by the stakeholders even though there are policies in place to support the same. Several key factors play a deterrent in this regard.
The most common issue is the greater risk profile associated with MSMEs, especially in the case of developing nations like Bangladesh. The low valuation of the currency as well as the volatile economic conditions only aggravates the risk. Another factor is the lack of digitization in the services of the MSMEs. Most MSMEs rely on traditional service procedures which incur a high operational cost, creating disutility for the investment.
However, the main issue lies not in the trade finance or working capital alone. There is also the effective risk assessment for the MSMEs which are often not accurate because of the mentioned bias. Banks often demand high collateral which is mostly unmanageable for MSMEs leading to increased rejections. Lack of documentation and marketing ventures also limits the exposure of the MSME to venture capital and private equities. This entire scenario can be attributed to the existing knowledge gap of the MSMEs on how funding opportunities work, requirements, and how to best approach funding (Shoma, 2019).
The bias of the banking system isn’t entirely unfounded. The outstanding NPL of MSMEs aggregates to about 12%, the second highest in Bangladesh after the shipbuilding and shipbreaking industry. But much of this outstanding loan isn’t due to the lack of transparency, rather most of the borrowers lack growth opportunities and fluctuating economic condition of the country only negates the repayment options.
The situation is bit different in case of microfinance opportunities for the MSMEs. Of the 700 registered MFIs in Bangladesh, the top 10 makes up the largest share of savings and loan disbursement cases. Grameen Bank, which is not regulated by the MRA, accounts for over 87% of the total savings in the sector as well as 81% of all the outstanding debts. However, the problem lies elsewhere. Looking at the MFI funding strucure, it reveals that the majority of the funding is accounted by accumulated surplus and member bonds (Microentrepreneursasia.com, 2016). Beyond that bank loans make up a part of the MFI fundings but rests are negligible.
Another inherent growth deterrent is that about 55% of the MFI borrowers are classified under “extra large” who borrows more than 500,000 BDT. The second largest group is made up of the “large” group who borrows between 100,000 BDT to 500,000 BDT. These MSMEs qualifies for standard bank loans with their portfolio. But the lack of access through traditional financing puts these MSMEs into “credit traps” where the cost of funding from MFIs are significantly higher than traditional means (Shrader, n.d.). It also deters funding for the CMSMEs as MFIs grossly considers MSMEs as “secure lending” option.
Factors Affecting Women Entrepreneur’s Adoption of DFS
The existing bank loan system requires at least 13 visits to the bank and about 137 days for loan disbursement. DFS can be a potential game-changer considering the increased geographical reach, cost-effectiveness, reduced documentation, and increased flexibility. But it also has its challenges.
- Lack of digital literacy and access to smartphones at the root level
- Inherent disinterest to adopt DFS
- Socio cultural barrier
- Connectivity and affordability
- Digital gender divide (35% female adopters compared to 65% male)
In retrospect, accessing DFS requires a learning curve and much of the bank loan structure is still under a bureaucratic nightmare (Shakhawat, 2023). While Bangladesh has championed microcredit financing with the Grameen Bank and later initiatives, it is not enough to cater to the full potential of the MSME in Bangladesh. And that drives the point of alternative financing beyond bank and local DFS.
Cross Border Financing: Untapped Opportunity for the MSMEs
There is an observable trend in ideation, marketing, implementation, and scaling plans in city-based startups which attracts the majority of the venture capital and private equity capital in Bangladesh.
But from a global perspective, there is a huge trade finance deficit. According to the International Finance Corporation report of 2018, there is an existing 1.5 trillion USD trade finance gap with around 1 trillion cash in hand looking for investment opportunities. The global scenario is representative of Bangladesh as well. According to a World Bank report, there is a cumulative need of about 2.8 billion USD in Bangladesh’s MSME sector for operational and growth opportunities. With constrained local funding opportunities, cross-border financing can be a strong alternative and in some specialized MSMEs, a leading source of funding.
Cross-border financing can open up foreign investment opportunities for MSMEs. Much of the FDI that comes in Bangladesh is in the form of sector-specific EPZ and other specialized ventures, not the MSMEs. Allowing cross-border financing will open up the MSMEs to more investment opportunities like FDI, venture capital, private equity, and trade finance from foreign investors. In essence, the MSMEs won’t have to be reliant on bank loans and micro credits alone with global financing opportunities.
Another important benefit of globalized funding is the security against economic fluctuations. MSMEs can utilize letters of credit and export credit insurance to safeguard against payment defaults. Allowing FDI will open up the partnership and networking opportunities for the MSMEs, which in turn will help them to utilize connections to approach new markets beyond local ones (Sattar, 2023). Building partnerships with established businesses will secure MSMEs against market failure and market penetration risks.
But cross-border financing also poses its challenges which brings us back to square one, the knowledge gap that exists between the funding opportunities and the MSMEs.
Overcoming the Challenges: The Way Forward
There comes a stringent regulatory and bureaucratic system with cross-border financing accessibility. The regulatory framework needs to be simplified to provide access to the MSMEs to global financing opportunities. Beyond that, the government should take initiatives to expedite foreign market penetration of the MSMEs in the likeness of EPZs. The likes of export promotion schemes, providing financial incentives, supporting participation in international trade fairs and exhibitions, and negotiating favorable trade agreements can be important stepping stones (UNESCAP, 2021).
The existing financial system for the MSMEs needs to be overhauled to provide cross-border financing hand in hand with the existing funding opportunities. But perhaps the most important aspect would be the skill development and capacity building needs. Policy reforms should prioritize skill development and capacity-building programs for MSMEs. Training initiatives can focus on enhancing financial literacy, improving managerial and technical skills, and providing knowledge of international trade practices.
Cross-border financing will open up a host of opportunities for MSMEs. But there are a lot of hurdles in the process that starts with the local regulatory landscape reformation. A step-by-step approach to integrating the largest non-farm sector of Bangladesh into international funding opportunities will only work to alleviate the overall growth of the sector.
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