Micro-enterprises can help us combat the economic downturn
The current Covid-19 pandemic has resulted in huge suffering and devastation for humanity, with almost five million people infected worldwide and experts fearing a deep global recession. The economy of Bangladesh is set to face serious setbacks during the pandemic. Although Bangladesh had achieved lower middle income country status in 2015 and fulfilled all three eligibility criteria for graduation from the UN's Least Developed Countries (LDC) list by 2024, 20.5 percent of its population was still living in poverty in 2019. This is a huge number given the total population of Bangladesh, and the impact of the pandemic may make this poverty rate increase further. The 8.15 percent GDP growth achieved in Fiscal Year (FY) 2018-19 will dive below three percent in FY20 and two percent in the next FY, according to the World Bank. South Asian Network on Economic Modeling (SANEM) revealed that Bangladesh's poverty rate may rise to 40.9 percent due to the pandemic.
One of the important ways to handle the possible economic downturn will be to appropriately mobilise the millions of micro-enterprises (ME) scattered all over the country by addressing their financing requirements. MEs are powerful job creators, agents of inclusive growth and drivers of productivity. MEs' economic activities begin with small amounts of capital investment, often financed by Microfinance Institutions (MFIs). The Bangladesh Industrial Policy 2016 defines micro-enterprises as small businesses having fixed asset values between half a million to five million Taka and 10-24 workers. Bangladesh Bank defines ME as a firm/business which is not a public limited company; they may be service or business ME with fixed assets of Tk 50,000 to 50 lakh (25 employees), or industrial ME having fixed assets of Tk 50,000 to 1.5 crore and maximum 50 employees. The return on investment is higher in micro-enterprises than in small, medium and large enterprises. The employment share of micro-enterprises is greater in developing countries compared to the developed world. Ethiopia's MEs contribute more than 95 percent of the country's total employment, compared to about 35 percent for Vietnam. According to the Bangladesh Bureau of Statistics (BBS) Census 2013, 89 percent of Bangladesh's 7.8 million economic establishments are micro-enterprises (including the cottage industry). These MEs employ 13.76 million people, which represent around 56 percent of total employment in all enterprises of the country.
Micro-enterprises employ significant numbers of women and can adapt very quickly to evolving market demand and supply situations; showing flexibility and dynamism in diversifying economic activities and contributing to the country's economic growth by promoting competition, resilience, entrepreneurial talent etc. Our transition to middle income country status after the current pandemic will significantly depend on promoting inclusive growth. MEs can contribute towards such growth and the achievements of some of the Sustainable Development Goals (SDG) by leaving no one behind.
Access to formal finance for micro-enterprises is a fundamental challenge. Most of the MEs are in rural areas, informal in nature and employ family members in productive activities. Access to finance in Bangladesh is relatively limited compared to other South Asian countries. A study (2016) by the Institute for Inclusive Finance and Development suggests that in most cases, formal financial institutions do not extend loans because of lack of bankable collateral, and lack of confidence in such small business ventures. Most MEs depend on MFIs for loans, which are generally individual-based instead of group-based (unlike traditional microcredit). The study estimates that there is an excess demand of Tk 437 billion—which is about one and a half times higher than current disbursement. A recent report published by the World Bank and PRI shows that micro-enterprise financing gap (cottage and micro) is around Tk 237 billion (USD 2.8 billion). Estimating the actual demand for credit of MEs is difficult due to data constraints. Higher interest rates of MFI loans is an obstacle to growth potential. Given that MEs have significant production and consumption linkages, MFIs can work as intermediaries to create links between credit and savings for ME financing.
A number of ME business clusters of different activities have grown in various geographical locations of Bangladesh. Palli Karma-Sahayak Foundation (PKSF) has identified more than 6,700 business clusters of 77 economic activities in agriculture, livestock, fisheries, manufacturing etc. Micro-enterprises consist of value chain components for forward and backward linkages. Interventions are often necessary to address the problems that may be faced at different sub-sectors of the value chains. A number of ME development projects have been funded by the World Bank, ADB, IFAD and DFID in Bangladesh. BRAC also provides loans to the micro-enterprises through its Progoti programme.
The World Bank's Doing Business Survey 2018 ranks Bangladesh at 159 (out of 190 countries) for the "getting credit" criterion. It is a measure of credit information sharing and the legal rights of the borrowers and lenders. The Microcredit Regulatory Authority (MRA) is going to establish a credit information bureau with the support of DFID for the microcredit borrowers. Movable collateral is not yet accepted for secured lending. The enactment of a secured transaction law is considered essential for the inclusion of movable collateral. A small claims court could also ensure faster adjudication for cases relating to MEs. Operationalisation of mediation via money loan courts and the establishment of alternative dispute resolution mechanisms for commercial dispute settlements are also considered appropriate. Alternative and innovative financing options need to be explored, including warehouse receipt finance, risk sharing facilities, start-up capital etc. Digital financial services should be expanded through increased use of technology for reducing transaction costs.
Apart from financial constraints, MEs suffer from low productivity and lack of marketing facilities of their products. Product diversification, quality improvement, technological innovation, knowledge transfer, skill and capacity development of MEs are essential to ensure future growth. MRA and Bangladesh Bank should issue appropriate instructions to commercial banks to relax conditions of collateral and personal guarantee while sanctioning ME loans. Women entrepreneurs should be given loans at lower rates of interest and for longer periods. The Prime Minister's Tk 20,000 crore special credit/ investment package in response to Covid-19 will be of immediate relief for cottage, micro, small and medium entrepreneurs (CMSME).
The pandemic has threatened millions of livelihoods in Bangladesh. The RMG sector has already received work order cancellations of nearly USD 3 billion. Foreign remittance will come down from USD 20 million and foreign exchange reserves will be affected. At the moment, more than one crore people are without jobs. Government borrowing has soared to Tk 57,900 crore in 10 months. The financing gap of USD 1 trillion, calculated earlier for SDG implementation, will increase significantly. Prime Minister Sheikh Hasina has announced a total of 18 packages worth around Tk 1 lakh crore, equivalent to about 3.3 percent of GDP, to salvage economic sectors. The rescue package for the CMSME sector is timely and necessary, but not sufficient. Further support is essential to combat the pandemic's impact on our economy. By leveraging their creativity and ingenuity to harness market opportunities, the micro-enterprises of Bangladesh can help achieve economic prosperity, which can ultimately lead the way towards achieving the 2030 Agenda for Sustainable Development.
Md Abdul Karim is Former Principal Secretary to the Prime Minister.