Dr. Atiur Rahman, Governor, Bangladesh Bank :
Although central bank is the key policy makers for access to financial services but other policy making public institutions are also important in promoting and enhancing access to finance for SMEs’. Let me speak on the role of central bank first then I will highlight the role of other policy making bodies in supporting SMEs’ agenda. On a theoretical note if we look to the policy makers and central banks, there are two distinctive schools, namely what is popularly known as traditionalist and the neo-liberal approach to central banking.
Let me first to touch base on the so-called neo-liberal approach to central banking. The neo-liberal is currently dominant so-called ‘best practice’ approach to central banking in many developed countries. The neo-liberalism consists of the following: (1) central bank independence, (2) a focus on inflation control and (3) the use of indirect methods of monetary policy administration (that is, short-term interest rates as opposed to direct methods such as credit ceilings).
I view this neo-liberal approach as highly peculiar as a package, it is radically different from the historically dominant theory and practice of central banking, not only in the developing world, but, notably, in the now developed countries themselves. However, throughout the early and recent history of central banking in the US, Europe, and elsewhere, financing governments, managing exchange rates, and supporting economic sectors by using ‘direct methods’ of intervention have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. I am a strong believers of this school of thought and I am one step ahead of this; I see central banks not only as an agent of development rather it is central to achieving inclusive and sustainable economic growth of a country.
Virtually throughout their history, central banks have financed governments, used credit allocation methods and subsidies to engage in ‘Sectoral development policy’ and have attempted to manage the foreign exchanges, often with capital and exchange controls of various kinds. The traditionalist view, therefore, argues that an active public sector involvement in mobilizing and allocating financial resources is needed to broaden access to credit, as private markets fail to expand access to broader general public. The question, then, is not whether policy makers and central banks have or should pursue developmental policy, but rather; what kind of developmental policy should they conduct? Here history also gives some guidance. Central banks have been most effective in helping to foster development, especially in ‘late developers’, where they have been part of the governmental apparatus of industrial policy implementation.
Throughout the history, a continuing tension has been existed between the developmental roles of central banks and the stabilizing roles. Yet there is little evidence that the optimal solution to this tension is to abandon the developmental role entirely. We have been able to strike a balance in achieving the role of developmental central banking and financial stability
On a broader scale government has the bigger role in developmental policy making and implementation and apart from central bank there are other operators who should also be engaged in creating a pro-development ecosystem and in making sure the ‘open market’ operates on an open and fair basis.
Now I would like to dwell on the case of Bangladesh in promoting access to finance for SMEs’. The present government has rightly identified SMEs as the priority sector for transforming Bangladesh into a middle-income country by 2021. In line with government’s thrust, Bangladesh Bank has been instrumental in designing and implementing SME sector development initiatives as part of its development financing agenda. Broadening financial access to cottage, micro and small enterprises and in particular women entrepreneurs has been in the fore front of Bangladesh Bank’s policy intervention and inclusive growth promotion agenda.
Bangladesh Bank has shown the world that a central bank can successfully manage its traditional role of monetary authority while playing the complementary role of development driver. Bangladesh Bank has already become the role model in SME financing in the international arena within a span of only five years. Its initiatives are being studied by other central banks of the world. Bangladesh Bank is regularly receiving delegates from other central banks who are looking at the country’s success stories, and I would like to highlight some of the important initiatives that Bangladesh Bank has taken in recent years:
The banking sector has been equipped with guidelines and prudential regulation to help them in doing business in the MSMEs’ segment.
Banks and NBFIs are being provided SME banking capacity development support so that banks and NBFIs are capable of serving the MSME sector more prudently.
Incentives and disincentives are in place for the banks and NBFIs to motivate them for broadening their MSME lending portfolio. Multi stakeholder engagement in the way of joint promotion and capacity development initiatives.
A credit guarantee scheme is currently being under development, and I trust that once implemented, additional MSEs and women entrepreneurs will be able get access to finance compared to the current situation where some of the SMEs are not deemed credit worthy;
A SME market segmentation database is being developed, and is planned to be completed within this year. Information from the database will – as examples -provide valuable contributions to financial institutions’ strategy including in which segments to focus on, both from a risk management perspective as well as from a marketing perspective. The database is unique, and Bangladesh is the only country in the world where it is being implemented;
A number of soft loan schemes – credit lines – are available through Bangladesh Bank for financial institutions for on lending to SMEs at a capped interest rate.
For women entrepreneurs promotion tailored policy intervention including earmarking of 15% low cost fund for Women entrepreneurs, clean lending limits up to 2.5 million BDT, priority in loan processing, engagement of women business chambers/associations in client sourcing, mentoring and capacity building support are being encouraged.
SME and women entrepreneurs Help desk at each bank level has been operational.
BB has established a Women Entrepreneurs Development Unit in SME and Special Programmes Department and each of its regional offices.
Bangladesh Bank has a fund earmarked for providing seed capital for start-ups; and finally.
Recently, requirements to financial institutions to lend minimum amounts out to women entrepreneurs.
Other initiatives supportive to the specific MSME development initiatives among others are:
Mobile banking has developed very fast, and is of utmost importance, particularly for financial inclusion in rural areas;
Agent banking is progressing well, and is very suitable for financial institutions with a limited branch network in rural areas. Through agent banking, outreach can be considerably enhanced, and if planned and implemented intelligently, agent banking may be very profitable for the financial institutions as well;
Customer interest protection has been given utmost importance and a guideline on customer interest protection and grievance redressal procedures has been published. Multi window complaints submission facility is in place for the banking customers.
A credit information bureau is in place, and although there is always room for improvements, the bureau provide a very important tool for lenders in their risk assessment of the borrowers; the bureau has been digitized and further upgrading of credit information is planned by developing MFI CIB and integrating that with the current CIB.
Although a number of initiatives have been implemented or are being implemented, there is still a long way to go before financial inclusion can be characterized as fully satisfactory in Bangladesh. A lot of initiatives have been taken in both developed and developing countries. Policy interventions, products and initiatives need to be tailored to the conditions prevailing in the jurisdiction so as such replication of best practices sometimes may not provide the best results. However knowledge sharing and mutual learning would facilitate more informed decision making. A vibrant MSME sector would demand private sector friendly and specially MSME friendly business environment, proper government support in the public goods for entrepreneurship development, innovation management and promotion and I suggest the following areas should be given high priority by the policy makers and central bank for promoting broader access to finance for the SMEs’ in the short and medium term:
1. Comprehensive review of MSME promotion framework of the country and identify the gaps and restructuring the MSME development framework with specific roles and responsibility assigned to each stakeholders.
2. Crafting a Separate MSME development policy which would provide strategic direction for the stakeholders. Based on the Strategic direction time bound specific output driven action plan should be taken.
3. Coordination mechanism among the various stakeholders should be formulated so that synergy is achieved.
4. Broadening financial access for cottage micro and small entrepreneurs should be the supplemented by government action in the way of capacity building for the entrepreneurs, reducing collateral requirement, amending relevant rules and regulation and by provisioning financial support for the innovative, export oriented, import substitute and key domestic demand supporting industries by way of credit guarantee scheme, business development services etc.
5. BB would create a policy and regulatory framework that is supportive for MSME banking and create a banking environment that is supportive and friendly to the cottage, micro, small and medium enterprise with particular focus in women entrepreneurship.
6. Currently at lending banks level in many cases SME lending is not profitable due to the lack of appropriate processes and low technological level. If the lending is not profitable, the banks will not proactively increase portfolio in the MSME segment. Therefore, banks should revisit their MSME Banking model to identify pitfalls and undertake Business Process Reengineering (BPR) in order to make MSME banking profitable, less risky, and more consumers friendly.
7. Consumer protection aiming at greater transparency should be ensured, so that SME customers are able to compare terms of different loans offered by financial institutions. This will in turn increase competition, and lower the margins for the creditors; and closely connected to that
8. Development of a standardized loan application package for use in all financial institutions in Bangladesh;
9. Establishing of a Problem Solving Centre for distressed SME loans. It is not an exaggeration to state, that financial institutions in general are not very good at handling non-performing loans. A Problem Solving Centre may assist the SMEs, in case of default, in operational improvements and in financial restructuring, and the Centre will cooperate with the financial institutions. The ultimate goal is to support SMEs so that they may regain their financial health;
10. Requirements to financial institutions to redesign their approach to servicing women entrepreneurs in relation to organization, processes and procedures, product offered including development of non-financial products, and finally development of a strategy for outreach to the segment.
In conclusion, Policy makers and central banks should streamline their initiatives and come up with a comprehensive MSME development master plan. Banks and non-banking financial institutions need to have a tailored and explicit strategy for SME banking in order to build a solid banking policy to facilitate sound growth and profitability in SME banking, as well as having better credit evaluation mechanisms, product design, marketing skills, and knowledge of customer and product profitability.
Moreover, in Bangladesh, we need to encourage the adoption of modern technology in MSMEs so that their products can compete with those of the competitors. Bangladesh needs to maximise the benefits derived from the MSME sector, as this sector plays a pivotal role in promoting and sustaining the industrial as well as overall economic growth.
In making extraordinary progress in the field of improving SMEs access to banking, we all need to share knowledge with each other, cooperate, and realize what are the individual organizations’ strength and weaknesses. In other words, our mind-set could be, how should the additional initiatives be designed, and by whom, in order to optimize the end result, i.e. further sound development for the MSME sector, and thus for Bangladesh as a whole.
