Revisiting SME Financing in Bangladesh

Abstract

Small and Medium Enterprise (SME) Financing is a topic of significant research interest to academics and an issue of great importance to the policy makers around the world. Economic, as well as technical and social arguments warrant the promotion of SMEs, as they create large scale, low-cost employment opportunities, use locally available inputs and technologies, mobilize small and scattered private savings, develop entrepreneurship, and correct the regional imbalance in development that exists in developing countries. Despite all these potentials, SMEs are disappearing, abandoning the potential role they could have played in economic development. Several studies have identified the major obstacles that include, but not limited to, financing, infrastructure facilities, taxes and regulations and stability in policies. This paper focuses on the financial constraints in Bangladesh. In Bangladesh, among the formal sources, commercial banks are not interested because of the high risk and high supervision cost associated with this type of financing. Absence of sound collateral puts SMEs at a relative disadvantage. However, we have found that some of the commercial banks have some ‘innovative’ products or services targeting at SMEs only, while others have ‘repackaged’ some of their existing products as SME products. The contribution of commercial banks is meager except BASIC Bank Ltd. and BRAC Bank Ltd. It has been observed in the study that commercial banks disburse loans to this sector only when government introduces ‘credit guarantee scheme’ in different capacity. ‘Relationship lending technologies’ should be introduced in case of the existing ‘transaction lending technologies’.