Role of private sector in Resource mobilization and SME financing in Bangladesh

Presented byMd. Mustafizur Rahman

Joint Chief

General Economics Division (GED)Planning Commission

Government of the People’s Republic of Bangladesh

Perspective Plan of Bangladesh (2010‐2021): Making Vision 2021 Reality

“Bangladesh will be a middle income country through simultaneous fulfillment of economic and social rights of the people alongside civil 

and political rights”

Financing of Seventh Five Year Plan(FY2016-FY2020) Investment (FY 2016 prices)

Total investment under the Plan will amount to Tk. 31.9 trillion in constant 2015-16prices; 90.4% of which will be financed from domestic resources and 9.6% from theexternal resources.

Item (in US $ Billions) Total Public PrivateTotal Investment 409.01 92.98

(22.73%) 316.03

(77.27%)

Domestic Resources 369.88(90.43%)

81.85(22.13%)

288.03(77.87%)

External Resources 39.12(9.56%)

11.12 (28.43%)

28.00(71.57%)

1US$ = BDT 78

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SDGs Financing Strategy: Bangladesh Perspective

GED: Making Growth Work for the Poor

To assess the cost of implementation ofSDGs, estimated goal-wise annualadditional resource requirements andexplore the financing strategy to bridgethe resource gap

In Bangladesh, around 928.48 BillionUS$ additional funding would berequired from 2017 to 2030 to fullyimplement the SDGs (2015-16 constantprices).

Annual average cost would be 66.32billion US$

It would be 19.75% of the accumulatedGDP under 7th FYP extended growthscenario during the period FY2017-FY2030 4

Source of financing

Private Sector 42.09%

Public Sector 35.50%

PPP 5.59%

External 14.89%

NGO 3.93%

Of External Financing 14.89%, FDI ‐ 9.95%, Foreign Aid and Grants ‐ 4.94%

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Role of private sector in financing

Private sector is estimated to contribute 42 percent of total financing.

In the 7th FYP, private sector is expected to finance 77.3% of the total outlays.

The largest portion of SDGs implementation resource gap would come from the private sector

Private sector must cooperate the government by avoiding tax evasion.

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Challenges of financing

Improvement in implementation of projects and programmes

Improving tax‐effort by 9 percentage points over the next 13 years 

Implementation of PPP: Lack of PPP related competent professional and project management staff and capacity in the  ministries

Access to climate funds critically depends on our capacity to negotiate with DPs

Role of SMEs in the implementation of SDGs

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Importance of SME in BangladeshSME is considered a “driving force for Industrialization” in Bangladesh. SME is very important in Bangladesh for following reasons:• SME remains the engine of inclusive economic growth and considering the population of Bangladesh.

• SME offers large scale employment and income generating opportunities at relatively lowcost.

• It strengthens efforts to achieve high and sustainable growth, which is a prerequisite for anexit from widespread poverty and socio‐ economic deficit.

• SME enhances women empowerment. Because in SME, women entrepreneurship plays apivotal role.

• SME requires comparatively low amount of investment.

Relationship between per capita GDP and contribution of SMEs to GDP

10Source: Ayyagari, M Beck, T. &. Demirgüç‐Kunt, A.  (2007)

Scenario of SME Financing in Bangladesh

Bangladesh Bank has strong directive for opening branches, separate provision for loans & many other positive policies but, financing system for SMEs has not been improved up to the desired level.The following three broad fragmented sectors available forfinancing SMEs:a) Formal sectorsb) Semi‐formal sectorsc) Informal sectors

Continueda) Formal sectors:The formal sectors include all regulated institutions like banks, non‐bank financial institutions, insurance company, micro finance institutions etc.b) Semi- Formal SectorsThe semi formal sector includes those institutions which are regulated otherwise but don’t fall under the jurisdiction of Central Bank, some of these are; Insurance Authority, Securities and Exchange Commission or any other enacted financial regulator. These sectors mainly represented by Specialized Financial Institutions like House Building Finance Corporation(HBFC), Palli Karma SahayakFoundation (PKSF), Samabay Bank, Grameen Bank etc., Non Governmental Organizations (NGOs) and discrete government programs.c) Informal SectorsThe informal sector includes private intermediaries which are completely unregulated and unregistered in most of the cases.

ContinuedAlmost all  study reports have same findings regarding SME finance in Bangladesh: • Around forty percent of the SMEs do not approach banks for loans. • In Bangladesh, SMEs are largely financed by own funds.• Equity fund through capital market is not a widely used source for small and medium entrepreneurs.

• SMEs specially small entrepreneurs have limited access to bank financing• Two‐third of the SMEs do not approach banks for loans

Continued• Most of the SMEs approached banks for working capital loans.• It takes about two months on an average to get loan sanctioned.• Access of the small enterprises to credit has not improved over the past 30 year – access to finance is still a dominating constraint for SME development.

Challenges of SME Financing in Bangladesh:

1. Lack of adequate access to finance:Banks do not have the requisite information and systems in place to quantify risk and differentiate between SMEs. This has resulted in tightened credit terms and in the inefficient allocation of resources. 2. High cost of finance:The high cost of finance is a common problem for SMEs. The underlying perception is that loan repayments are not borrower‐friendly.3. Large collateral requirements:Many banks have revealed that they insist on large collateral as a safeguard to losses from risk exposure.

Continued

4. Cumbersome documentation process:Borrowers face difficulties in comprehending documentation processes stipulated by lenders, many of which have been found to be exhaustive and too complex.5. Borrowers are less Skilled:Most of the borrowers are less skilled. They don’t properly use their loan money. Several studies shows that most of rural areas borrower utilized their money unproductive sector.

STRATEGIES OF SME DEVELOPMENT

1. Identifying Areas of Comparative AdvantageIdentifying niches where small and medium enterprises have comparative advantage and higher growth potential is essential element of a strategy for the development of the SME sector.2. Creating an enabling environment for private investmentAn assessment of the overall enabling environment pertaining to private investment in the economy reveals that the constraints leading to a weak enabling environment fall under three headings: i) policy induced constraints, ii) structural constraints, and iii) constraints arising out of poor business support services and week governance.3. Easier access to imported inputsOne of the key factors that engender rapid growth of a number of small and medium industries was access to imported inputs at lower cost due to reduction of import duty.

Continued4. Targeting public expenditure towards augmenting demandOne important factor affecting the growth of SMEs has been the trend in domestic demand. Thus, the rapid growth of the construction sector seems to have contributed to the expansion of SMEs producing nonmetallic mineral products, particularly bricks, structural clay and cement products.5. Access to financing facilities• Availability of credit is one of the most important factors for SME development. The comprehensive credit policy for SMEs developed by the Bangladesh Bank constituted a key element of the Plan measures. Under this policy, the commercial banks and other financial institutions are required to disburse SME credit according to the target set by Bangladesh Bank and send disbursement report to Bangladesh Bank. 

• Training of bank officials and setting up of SME cells for identifying potential borrowers, loan disbursement, monitoring use of credit and collection of loan.

• PKSF will continue to wholesale credit to its partner NGO‐MFIs for small and micro enterprises.

• SME Foundation will continue providing loans at single digit interest rates to local SMEs through its credit wholesaling programmes.

Continued6. Cluster based SME Development programmeClustering is a critical concern for rapid industrialization in general and development of SMEs in particular. Growth of SMEs also depends on successful integration, both vertical and horizontal. SMEs alone cannot move further without mutual support from other SMEs or large‐scale enterprises.7. Women Entrepreneurship Development ProgrammeSME Foundation has been working to bring women entrepreneurs into mainstream development process. Facilitating them for women empowerment is one of the prioritized activities of SME.8. Human resource developmentThe system of technical and vocational education in the country needs to be revamped for the development of manpower in the SME sector.

Category wise distribution of SME credit by banks and NBFIs

20Source: Bangladesh Bank Annual Report 2016

Disbursement of SME credit by banks and NBFIs to women (% of total SME credit)

21Source: Bangladesh Bank Annual Report 2016

THANK YOU ALL

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