Bring momentum in SME financing for inclusive growth
The aggregate increase in per capita income of a country does not necessarily ensure poverty reduction, particularly in a developing economy like Bangladesh.
According to the World Bank data, the per capita income in the Dominican Republic between 2000 and 2010 increased 3.62 percent and the poverty indices rose 2.07 percent. In Egypt, the per capita income rose 2.84 percent and the poverty indices increased 3.81 percent in the same period.
As a result, in place of aggregate growth, inclusive growth of the economy is being contemplated as a main driving force for reducing poverty and income inequality in many developing economies. With this realisation, Bangladesh has set 'Accelerating growth, Empowering Citizens' as the core theme in its 7th five-year plan (FY2016-FY2020).
The ongoing five-year plan encapsulates a strategy for inclusive growth, which empowers people by creating employment opportunities, fostering the scope for greater women labour force participation and supporting skill development in response to market demand.
Promoting small and medium enterprises (SMEs) is of foremost importance for implementing the strategies set in the five-year plan, as these sectors have a leading role worldwide to achieve inclusive growth.
SMEs are large in aggregate numbers and thus, have significant capacity for generating employment, promoting inter-sector linkages, raising exports and developing entrepreneurial skills. Their location-flexibility is also an advantage in achieving inclusive growth.
An uninterrupted flow of finance with less hassles matters for the growth of SMEs. The government, in collaboration with Bangladesh Bank, provides all-out support, making relatively cheaper finance available for the sector.
In a recent meeting of the Metropolitan Chamber of Commerce and Industry, Bangladesh Bank Governor Fazle Kabir urged banks to lend more to the SMEs to ensure the quality of credit operations.
Hence, the BB is guiding the facilitation and promotion of access to finance for SMEs with the help of banks, the private sector and the international development partners. As a result, the number of recipients of SME credit increased to 460,511 as of September 30, 2016, from only 8,000 in 2007-08.
The central bank has reserved 15 percent of all SME loans for women entrepreneurs at a maximum interest of 10 percent, in an attempt to enhance more female participation in the productive sector.
According to a study of the Bangladesh Institute of Bank Management (BIBM), SME financing has a significant contribution to job creation, household income, GDP growth, a rise in the share of the industrial and service sectors to GDP and reduction of poverty in rural and urban areas.
Empirical analysis also indicates that these types of enterprises have an instrumental role in decreasing poverty.
It is therefore necessary to give more thrust on SME financing across the country to achieve inclusive growth. The most important obstacle in expanding SME finance is an absence of financial literacy among entrepreneurs.
This is augmented by a heterogeneous academic discipline of bankers, their risk-averse mindset and a lack of proper training on SME finance. The situation is aggravated in sub-urban and rural areas.
Thus, financial literacy for SME entrepreneurs as well as bankers, particularly in sub-urban and rural areas, is crucial.
Another hurdle is collateral requirements, which, however, make sense from a banker's point of view for repayment assurance. However, entrepreneurs owning SMEs usually face a problem in fulfilling this requirement.
In this perspective, the central bank governor has suggested banks consider skills, training and education as intangible collateral for SME financing.
Additionally, psychometric tests, social security, credit guarantee schemes, the trend in cash flow in the borrower's account, future prospect of the business, and the experience of the borrower in that line of business can be alternative measures of collateral security.
Other issues such as expansion of quality banking systems through agent banking, developing appropriate financial products and services, bridging information asymmetry, adjusting interest rate and repayment period, and financing SMEs owned by ethnic minorities are also necessary to foster inclusive growth.
The writer is a professor and director at Bangladesh Institute of Bank Management.
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