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Finance and more for SME

Published : Tuesday, 31 December, 2019 at 12:00 AM  Count : 479

Industrialization is historically the driver of economic development and industrialization generally supports other sectors of the economy. Again, industrialization starts with Small and Medium Enterprise (SME). It creates base for high tech and high production industrialization.

Finance, especially medium to long-term finance, is topmost obstacle to growth and investment of SME apart from technology. Finance has been identified in many business surveys as the most important factor determining the survival and growth of SMEs in both developing and developed countries. This obstacle comes at both macroeconomic and microeconomic levels. These two environments pose challenges: unstable economic condition and volatile unstable exchange rates and legal, regulatory and administrative environment poses major obstacles to access of SMEs to financing.

SME is regarded as high-risk borrowers because of insufficient assets and low capital, vulnerability to market fluctuations and high rates of failure of business. The information asymmetry arising from SMEs' informal business plan, lack of accounting records, inadequate financial statements makes it difficult for FIs to assess the creditworthiness of potential SME proposals.  The high administrative and transaction costs of lending or investing small amounts as well as monitoring of loan operation do not make SME financing a profitable business. FIs are generally biased towards large corporate borrowers, which provide better business plans, more reliable financial information, better chances of success and higher profitability for the banks and have credit ratings.
Lack of credit and collateral legislation may not allow certain assets that SMEs commonly have access as collateral for loans. The absence of registries for mortgages and pledges may increase risks to FIs, contract enforcement and asset liquidation may be hampered due to weaknesses in legislation and lengthy judicial process of settlement of litigation. FIs also reluctant to accept other collaterals such as supply order, receivables, future acquired property etc.

The state policy always favours SMEs and Central Banks usually instruct FIs to finance SMEs and even at a lower interest rate but in contrast FIs do lend to SMEs, they tend to charge them a premium for assuming risk and apply tougher screening measures, thus driving up costs on all sides. They usually keep the interest rate same but impose very high service charges to cover up additional expenses.

It is more interesting those FIs in developing countries and often prefers to lend to the government and thus the public sector crowds out the private sector. Lastly, there is also the problem of insider lending and/or cronyism, which diverts finance away from SMEs. To encourage commercial banks to lend to SMEs Central banks and designated financial service and play a proactive role. Government and the central bank set out a policy framework for channelling adequate funds to the SME sector.

The government intervention to assist SMEs is based on the fact that numerous market failures prevent domestic enterprises from building capabilities because they cannot access finance, information, technology and markets. Specific policies, programs and appropriate institutional frameworks are needed to help SMEs overcome these failures.
Bangladesh Bank has given top priority for development of SMEs and a new department namely 'SME and Special Program Department' has been established in Bangladesh Bank recently has given sole responsibility for policy formulation, facilitating fund, monitoring and development of entrepreneurship in the SME sector. According to policy FIs will disburse loan following the 'Area Approach Method' banks/financial institutions will try to attain their indicative targets separately by dividing it as branch wise, region wise & sector wise. Priority shall be given to small entrepreneurs and woman Entrepreneurs.  Each FIs shall establish a separate 'Women Entrepreneurs' Dedicated Desk' with necessary and suitable manpower, provide them training on SME financing and suitably appoint a lady officer as chief of dedicated desk.

It is noted that, banks must set aside for SMEs 20 per cent of the loans they give out in 2017 and raise it to 25 per cent by 2021. Of that for SMEs, at least 50 per cent has to be kept for cottage, micro and small enterprises. It is clearly specifying the right direction of Central Bank to develop SMEs in Bangladesh in line with proven successful policy of other countries. FIs are not very keen to abide by the direction and demand of the market. The policy and market mechanism are not successful in case of development of SME.

These policy supports are not sufficient as post cases FIs don't provide loan to SMEs and other new and inexperienced entrepreneurs. Government may also look into other areas of supports. These are legal and regulatory frameworks, governance issues, such as bureaucracy and corruption, access to finance and property rights. Interventions on all fronts are required.

For example, in the 1980s and the 1990s, enterprise policy in European countries focused on employment creation, and initiatives supporting new business creation were prominent. Then, emphasis changed to one of achieving international competitiveness and programs encouraging business growth, support for technology based businesses and creation of an enterprise culture within the society started to gain in importance.  

The assessment of creditworthiness and monitoring may be overcome by FIs themselves with certain policies and improvement of human capital through identifying potential clients, ascertain their creditworthiness, disseminate adequate financial and accounting techniques, pre-screen project proposals, monitor repayment, exert peer pressure, and maintain one-to-one contacts during the entire payback period.

Policy makers may take pragmatic policy to overcome other limitation of the entrepreneurs.  At present manufacturing has become extremely complex and knowledge-intensive as all the sectors need support of R&D, software, design, engineering, training, marketing and management come to play a greater role in the production of goods and services. These updated services use to lead the development of a competitive national production capacity in many first tier and second tier newly industrialized economies (NIEs). In a liberalized and open economy, competitiveness increasingly depends on the ability to incorporate new technology and management practices.

NIEs are successful examples of export-led growth based on traditional industries. Initially focused on the manufacturing of clothing and textiles, leather and footwear, plastics and toys, they have switched to the "low-technology side of the high-technology industries", and some are now leading exporters of technology in the Information and Communication technology (ICT).

Bangladesh is successful in garments sector primarily without policy support but government came with some policy support such as Bonded warehouse and Back to Back Letter of credit for import of raw materials from other countries. The growth of export of garment is allowing down as Bangladesh only produce low cost garment and "experts" suggesting entrepreneurs to go for high value garment without policy support.

Bangladesh needs technology and development of own brands for overseas market. The overseas investment is the better process or excess to technology but local entrepreneur are against the overseas investment in garment sector. Again in order to develop own brands, entrepreneurs need overseas investment but overseas investment is restricted. Both policy and decision of government and entrepreneurs are not really in favour of further development of high value garments industries.

Government still is not very keen to provide such bond facility to other sectors due to limitation of progressive ideas. All the possible sectors should be supported with bond facilities until the customs duty bring down to a tolerable level or sign free trade agreement with different countries.

The two major problems of SEMs--lack of technology and finance--should be immediately addressed in pragmatic and customized methods.

The writer is legal economist













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