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Table of Contents

List of Acronyms and Abbreviations 4

1. Rationale for SMEs in the Economy 5

1.1. Types of support provided in other countries 5

1.2. What should determine interventions by policy

makers and central banks in promoting SME finance? 6

1.3. How and to what extent should this be done? 6

2. Market Infrastructure Development 7

2.1. Reach Enhancement 7

2.2. Mechanisms for Increasing Loan Supply 8

2.2.1. Credit Information Bureaus and Secured Transactions Registries 8

Credit Information Bureau 8

Secured Transactions Registry 8

2.2.2. Specialized Finance Companies 9

Credit Guarantee Institutions 9

Special Purpose Vehicles for Securitisation 10

2.2.3. SME Friendly Product Development 12

Leasing 12

Factoring 13

Warehouse Receipts Financing 13

2.2.4. Intermediary Organization Development 14

Incubators 15

3. Enhancing Availability of Credit Information 16

3.1. SME Database 16

3.2. Consumer Protection Law/Code of Conduct 17

3.3. CIB Role Enhancement 18

4. Swift, Safe and Secure Banking 19

4.1. Direct Support to SMEs 19

Financial Services Cost Reduction for SMEs 19

Problem Solving Centre for distressed SME loans 20

4.2. Mobile and Agent Banking 20

Mobile Banking 20

Agent Banking 22

4.3. Credit Guarantees 23

4.4. Standardized Loan Origination Procedures 24

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5. Funding Improvement for Borrowers 24

5.1. Soft Loans, Refinancing, On-lending of Government

and/or Donor Funds 24

5.2. Credit Ceilings 25

Women Entrepreneurs 25

Farmers 26

Sustainable Energy Finance 27

Geographic Limitation 27

5.3. Vehicles of Finance 28

Loans 28

Credit Guarantees 28

SME Equity and Venture Capital Funds 29

Mobile and Agent Banking 29

6. Recommended changes to current interventions 30

‘Quick Hits’ 31

Medium Term 31

Longer Term 33

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LIST OF ACRONYMS AND ABBREVIATIONS

ABS Asset Backed Security

AKPK Agensi Kaunseling dan Pengurusan Kredit (Credit Counselling and Debt Management Agency)

AML Anti-Money Laundering

Bank Negara Central Bank of Malaysia

BAS Bangladesh Accounting Standards

BB Bangladesh Bank

BBTA Bangladesh Bank Training Academy

BIBM Bangladesh Institute of Bank Management

BoE Bank of England

BSCIC Bangladesh Small and Cottage Industries Corporation

CGF Credit Guarantee Fund

CIB Credit Information Bureau

FLS Funding for Lending Scheme

KYC Know Your Customer

MFS Mobile Financial Services

MSME Micro, Small and Medium Enterprises

NBFI Non-bank Financial Institution

NID National Identification Number

NGO Non-Governmental Organisation

NSDC National SME Development Council

PSD Private Sector Development

RJSC Registrar of Joint Stock Companies & Firms

SDRS Small Debt Resolution Scheme

SEC Securities & Exchange Commission

SME Small & Medium Enterprises

SME Corp SME Corporation of Malaysia

SMEF SME Foundation

SPV Special Purpose Vehicle

STR Secured Transactions Registry

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The Role of the Policy Makers and Central Banks in Promoting SMEs’ Access to Finance – The Case of Bangladesh

1. Rationale for SMEs in the Economy

The value of SMEs to any economy is no longer in dispute. They are truly the engines

of growth due to their ability to create jobs. Even when one considers the fact that

large numbers of SMEs fail annually, this is impressive because even more SMEs start-

up annually. In Bangladesh, majority of the SMEs are labour intensive businesses and

therefore create large numbers of jobs and impacts even more people. As such, SME

friendly policies are a matter of national interest.

SMEs and start-ups are more likely to experience credit rationingdue to their under-

collateralisation, shorter credit history, lack of credit rating agencies - that have

access to credible information needed to perform meaningful analysis of these

businesses on which financial institutions can rely on -and shortage of verifiable

financial information with which banks can make credit allocation decisions.1

The success of the industrialization process in Japan, Taiwan and Korea were largely

due to the vast number of small firms operating flexibly and filling production

processes of intermediate goods for big companies.2

A comprehensive program needs to be developed for SMEs in Bangladesh that takes

into account all aspects of SME development and advocacy. Our focus in this paper is

on the area of access to finance. However, coordination among all stakeholders is

needed to achieve results in SME development that we have seen in countries in the

region such as Malaysia and Thailand.

1.1. Types of support provided in other countries

In all countries of the world, institutions take on well meaning programs intended

on helping SMEs at various stages in their development. Access to finance is

generally front and centre in interventions by all institutions.

In some cases, these may not be the most efficient use of their resources. Our

learning from countries that have been successful at efficiently addressing the

plight of SMEs is that each institution should play to their respective strengths.

There should be an over arching agency that coordinates activities such that all

necessary interventions are being taken care of. Moreover, committees are being

1Policy measures to improve access to credit for SMEs: a survey, Central Bank Quarterly Bulletin 4, October 2013, Central Bank of Ireland, pg. 95 2 Role of CB in Promoting Small and Medium Scale Enterprises in the SEACEN Countries, Dagva Boldbaatar, Pg. 48

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created for coordination of activities where multiple institutions are needed to

achieve success.

The National SME Development Council (NSDC) and the SME Corporation of

Malaysia (SME Corp) provide a holistic governmental approach to increasing

access to finance for SMEs through improved policy formulation, improved

statistical information and strengthened capacity and capability of stakeholders.

1.2. What should determine interventions by policy makers and central banks in

promoting SME finance?

Additionality should be the main factor on all policy level interventions by any

stakeholder involved in increasing access to finance to SMEs, i.e. in the absence of

the policy, lending would not have occurred to the extent it has. The challenge for

policy-makers involves designing the correct parameters and range of options

that are most appropriate in a country-specific financing environment.3

1.3. How and to what extent should this be done?

The ability of SMEs to grow depends highly on their potential to invest in

restructuring, innovation and qualification. All of these investments need capital

and therefore access to finance.4 There are both price and non-price barriers to

access to finance that need to be overcome.

Price related barriers are simpler to tackle as they relate to interest rates and fees.

These are generally market driven although governments often try to limit the

interest rates and fees that can be charged. This happens mainly for the businesses

that are unable to access finance. Incentives are provided, such as soft loans to

financial institutions on the condition that they will not lend onwards above a

certain rate of interest in order to reduce some of the pain for both the

entrepreneurs and the financial institutions.

However, these types of interventions may give rise to non-price barriers. For

example, due to the limits on interest rates and despite some incentive, a bank

may use non-price criteria to screen and ration the number of borrowers who can

access financing from them. The thought process being that if lending needs to be

done in this sector, despite the lower cost funds available for this purpose, loan

should be made to the strongest ones so that risk is minimized. Hence we often

3Policy measures to improve access to credit for SMEs: a survey, Central Bank Quarterly Bulletin 4, October 2013, Central Bank of Ireland, pg 108 4 Improving Access to Finance for SME: International Good Experiences and Lessons for Mongolia, IDE VRF Series No. 438, Bataa Ganbold/October 2008, Pg. 1

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hear the complaint from the financial sector, ‘we can’t find viable businesses to

lend to’.

This paper will look closely at the types of support being provided for SMEs’ access to

finance in Bangladesh and other countries. The paper will try to highlight some of the

innovative interventions that policy makers in Bangladesh have implemented. It will also

explore the possible benefits of new interventions and also areas of improvement in

current policies. The paper will also broach the subject of when and how policy level

interventions can be eased out.

An attempt will be made to divide the paper into distinct segments even though all areas

are interconnected. These segments are:

Market Infrastructure Development

Enhancing Availability of Credit Information

Swift, Safe and Secure Banking for Small Borrowers

Funding Enhancement for the Borrowers

2. Market Infrastructure Development

2.1. Reach Enhancement

Increasing access to financial services should be the goal rather than just access to

finance. An SME that can be brought into the financial net by introducing them to

deposit and/or insurance products will sooner or later be able to access finance.

Therefore, the numbers of businesses that can be contacted by financial

institutions need to be increased.

Increasing reach of the banks will necessarily increase access to financial services

by SMEs. Reach is directly related to the development of branch networks and

alternative distribution channels through which financial services can be

provided to underserved segments of the population.

Innovations and adaptation of technology and the implementation of cutting edge

policy initiatives have made it much easier and affordable for financial institutions

to enhance their branch networks. They make operations in remote locations

affordable and hence prudent but open-minded licensing strategy by policy

makers will lead to increased financial inclusion of SMEs.

Two products that will help financial institutions increase their reach are Mobile

Banking and Agent Banking. Detailed discussions on these two products are

presented below in section 4.2.

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2.2. Mechanisms for Increasing Loan Supply

2.2.1. Credit Information Bureaus and Secured Transactions Registries

Credit Information Bureau

A Credit Information Bureau (CIB) is a key source of information of

borrower history. Availability of detailed information on borrowers’ credit

history helps financial institutions to understand their repayment

behaviour. At their most basic, CIBs provide negative information. The

more detail that can be obtained prior to making a lending decision, the

more comfort the financial institution has in that decision. The CIB is

discussed in more detail later in section 3.2 and 3.3.

Secured Transactions Registry

A Secured Transactions Registry (STR) is another important financial

infrastructure that can be infinitely helpful in increasing loan supply to

SMEs. The more sophisticated the STR, the more types of collateral

(movable and immovable) that can be used to secure a financial

transaction. Given that SMEs have little collateral, increasing the variety of

collateral that can be accepted increases their ability to access finance.

There is no central STR in Bangladesh. The Registrar of Joint Stock

Companies and Firms (RJSC) is the closest thing to collateral registry where

financial institutions can file charge on assets pledged against loans.

However this is applicable only for companies that are registered with the

RJSC. Proprietorship concerns are not included. The BRTA registers all

forms of road vehicles and allows joint registration with the lender in cases

where the vehicle is procured with a loan. The Department of Land

Registration registers all forms of immovable property and issues

encumbrance certificates for lands used as collateral for loans.

An STR that caters to all and allows the registration of a variety of

collaterals pledged in financial transactions would help to increase the

supply of loans to SMEs. A robust STR can handle all types of movable

assets, tangible, intangible, present and future.5 Some examples include:

Vehicles, industrial machinery and equipment

Inventory

Accounts receivables

Agricultural products

Consumer goods

5Secured Transactions Systems and Collateral Registries, International Finance Corporation, 2010

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Commodities

Intellectual Property Rights

Negotiable instruments

Letters of Credit

Bank accounts and insurance policies, etc.

2.2.2. Specialized Finance Companies

In a country where there are already a significant number of financial

institutions, the question may be asked whether there is room for any

more. Bangladesh has a large number of financial institutions and new ones

are allowed license to operate from time to time.

Therefore the issue here is not the number of financial institutions but

rather the focus of these institutions. It appears that despite all intention of

government to encourage lending to MSMEs, financial institutions continue

to find large enterprises more comfortable to finance. This has led to

unhealthy competition among these institutions as they bid themselves

down in terms of interest rates and credit discipline in order to attract the

large customers.

The goal of the specialized companies suggested here should be solely to

improve access to finance to MSMEs. These licenses could be made

available for financial institutions that would have very specific purposes

vis-à-vis access to finance for MSMEs. These licenses should not allow for

scope creep. This means that their licenses will allow limited function and

remain so.

Credit Guarantee Institutions

Credit guarantees help lower the risk of lending. They have been set up in

all parts of the world to provide incentives to financial institutions to lend

to underserved markets. This is an appropriate tool to use for increasing

financing to SMEs as they are often denied credit due to a lack of sufficient

collateral or because the financial institution needs additional comfort to

lend to a particular sector or cluster.

One of the main advantages of using a credit guarantee to incentivize

lending to SMEs is that no money is actually paid out unless a loan goes bad.

Therefore, credit guarantee institutions are extremely efficient in that the

funds held with the institution generate interest income that pay for all

overhead expenses if they are managed prudently.

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Credit guarantee institutions are established for the sole purpose of

providing guarantees as a risk mitigation tool to be used by financial

institutions. They can be owned by the private sector, the government or

jointly as a public private partnership. As a separate entity there is urgency

for the institution to become sustainable as soon as possible.

The structure and success of credit guarantees schemes have been varied

but the benefit to the economy has been identical – underserved segments

have received financing. There have been significant lessons learned from

each of these funds. However, the financial goal of the fund is to break even.

In fact, if they are making money, then the fund is not underwriting enough

risk.

The Credit Guarantee Fund (CGF) that is being launched in collaboration

with Bangladesh Bank (BB), the Central Bank of Bangladesh, to provide

comfort to lenders in an effort to increase access to finance to micro and

small enterprises has been designed as a portfolio guarantee scheme.

There is a limit on what percentage of the total portfolio is covered by the

guarantee. This means that not only does the fund not have to assess every

credit individually but that the fund has limited its risk due to moral hazard

and adverse selection by the financial institution while providing coverage

to every loan that meets the eligibility criteria.

Under normal circumstances, the fund could generate sufficient income

from deposits and commission receipts to ensure its sustainability.

To ensure long-term sustainability it would be ideal to spin off the CGF into

a separate institution. The sole mandate should be to provide credit

guarantees to underserved market segments, not the segments that the

banks are already comfortable lending to. The definition of the

underserved market may be determined in conjunction with the various

stakeholders.

Special Purpose Vehicles for Securitisation

Financial sector liquidity is another tool that can be used to encourage

additional financing in the SME sector. Securitisation is the mechanism by

which individually illiquid financial assets such as loans are converted into

tradable capital market instruments 6 . Loan receivables are packaged

together into a pool of similar quality loans and sold to a Special Purpose

Vehicle (SPV). The SPV refinances the pool of assets using a debt

6Improving Access to Finance for SME: International Good Experiences and Lessons for Mongolia, IDE VRF Series No. 438, Bataa Ganbold/October 2008, Pg. 28

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instrument known as an Asset Backed Security (ABS). This is generally

done in the capital markets. Some are publicly traded while others are

privately placed. If provided a conducive environment, securitisation will

allow banks to obtain additional funding so that these can be used to lend

more to SMEs.

Securitisation of loan portfolios are allowed by the SEC but there were

issues related to the NBR that prevented this from becoming a means of

accessing funding by non-bank financial institutions (NBFIs). Some

financial institutions sold their receivables to SPVs (usually the arranger)

and the SPV securitized the debt and refinanced it through the issuance of

zero coupon bonds. As a sweetener, these bonds had 10% tax at source

with no further tax to be payable on the income at maturity. The pricing of

the zero coupon bonds were based on this lower tax rate. This was

considered a lucrative option by institutional investors such as insurance

companies and banks. However this form of funding fell by the way side

because the NBR imposed the remainder of the corporate tax rate on the

interest income from the bonds.

As an incentive for financing SMEs, the NBR could offer a special tax rate

for these types of zero coupon bonds where the original loans were

provided to SMEs (very simple definition to be applied for ease of

transparency).

In addition to the NBR allowing a tax break, some legal and regulatory

obstacles may need to be addressed. SPVs could be allowed to be registered

to buy and sell debt of multiple financial institutions as long as the asset

quality was within a certain band. Each financial institution would continue

to follow up for collection of the accounts and have to retain a certain

percentage of the portfolio being sold.

The SEC could allow the SPV to access public funds on this type of

securitised asset. Asset management companies could function as SPVs

and/or use funds under their management to invest in these securities.

Transferability of collateral such as registered mortgage would also need

to be made easier so that the SPV would obtain a pro rata or pari-passu

charge on the securitised loan portfolio. This important policy level change

that can improve the access to finance to SMEs has significant financial

implications. Mortgaging property is very expensive and transfer of

mortgaged property is equally expensive. A quick win would be achieved

by easing the burden on transferring of mortgage from one lender to

another. The benefit to the SMEs would be a game changer.

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2.2.3. SME Friendly Product Development

Leasing

Leasing is a truly SME friendly product where the asset being purchased is

the collateral. It has had significant impact on the availability of credit for

SMEs.

In Bangladesh, all financial institution that offer this products are involved

in financial or capital leasing. This means that the entire value of the

equipment will be amortized over the life of the lease. Depending on the

price of the equipment and tenure of the lease, the lease payments may be

too high for smaller enterprises that are trying to expand their businesses.

Operating leasing is potentially a new product that may be considered

that will not only allow smaller enterprises to be able to comfortably

finance their expansion but it would also allow large companies to upgrade

to newer machines quicker.

For example, printing machines often need to be replaced due to clients’

requirements. Given the price of the machines, it is not possible to upgrade

as quickly as the client would prefer. If operating leasing was available, the

enterprise could lease the equipment for a certain number of years with

the expectation that they upgrade to a new model and hand over the old

machines to the lessor. The lessor would not need to amortize the full value

of the machine because they would be able to lease it out to smaller

printers on a capital or operating lease contract.

All parties would benefit – the large printer gets to use the machine for a

period of time at a lower cost than if they were buying or leasing on a

capital lease contract; the financial institution would be able to generate

additional revenue from leasing the machine out multiple times; the

smaller enterprise would get a slightly used machine that they would

otherwise not be able to.

Operating leasing will require recognition of the difference between

operating lease and capital lease by the NBR and Bangladesh Accounting

Standards (BAS) in order for a leasing company to embark on this venture.

Depreciation and/or accelerated depreciation need to be allowed for the

leasing company to charge.

Factoring

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Factoring is another SME friendly products as the collateral used against

advances is the assignment of receivables from a buyer. In a factoring

transaction, the factor advances a certain percentage of the receivables and

collects directly from the buyer. When the receivable is collected, the factor

realizes their interest on the advance. The risk to the financial institution

on account of the SME is minimal because the SME has already delivered

the product to the buyer.

Any factoring that is being done in Bangladesh is with recourse to the

supplier/receiver of the funds. This puts the risk squarely on the supplier.

The buyer who assigns the receivables to the financial institution has a

credit agreement with the supplier to pay within a specified time. If the

funds are not received within that time, the supplier incurs additional

interest expense. If the buyer defaults on the payment, the financial

institution asks the suppler to pay. If the suppler cannot pay, the financial

institution has claims against the supplier.

In order to protect the SME that supplies to a buyer, factoring without

recourse would be the answer. However, no financial institution will offer

a factoring product without recourse because there is no way to penalize a

buyer for non-payment.

In developed economies, the financial institution and the supplier could

report the delinquency of the buyer to the credit bureau. This would have

an adverse impact on the buyers’ credit rating and hence hurt them in the

long term.

Ideally, if the financial institutions would be able to report non-payment of

financial obligations by the buyer to the CIB even though the buyer had not

taken any advance from the financial institution, SMEs would be better

protected, as buyers would not default of the payments.

Warehouse Receipts Financing

Warehouse receipts are documents issued by warehouses to depositors

against commodities, such as rice, lentils, oil, etc., deposited in the

warehouses. These receipts are claims on the commodities that must be

delivered on presentation of the receipts. They are transferable and

therefore can act as collateral against bank loans. Warehouses are

registered institutions that have systems in place to maintain the products

in good condition and can ensure the security of the products while in the

warehouse.

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Imagine a farmer or an SME that is involved in the rice production. After

the harvest, the price of rice is at its lowest. Those who are financially

weaker will sell off large chunks of their harvest at very low prices in order

to make payments to creditors. If registered warehouses were available to

store their rice, they could use the receipts as collateral and take a loan to

pay off their creditors. When the price of rice increased, they would be able

to sell at their leisure as the prices increased. Agri-businesses that wanted

to expand or set up new processing plants would be able to use the receipts

as collateral as well.

An informal warehouse receipts business of sorts exists in Bangladesh. The

edible oil refineries that sell refined oil sell their products and issue

delivery notes. These notes need to be produced to take delivery.

Businesses often sell the receipts to other parties who ultimately take

possession of the refined oil. This has been working well based solely on

trust that the seller will not oversell the product. In case they did and the

refinery was unable to meet their delivery orders, the buyer would have

very little legal recourse.

Bangladesh does not have a warehouse receipts law and therefore this type

of financing and benefits are being missed out on for the most part. If the

law is established, warehouses that meet the conditions necessary to store

commodities will also need to be setup before warehouse receipts become

useable. A credible agency that monitors these warehouses will be able to

provide comfort to the banks and depositors.

2.2.4. Intermediary Organization Development

There are multitudes of intermediary organizations that can play a role in

increasing loan supply. The SME Foundation (SMEF) and Bangladesh Small

and Cottage Industries Corporation (BSCIC) are at the top of the list as they

are best positioned to provide capacity building programs for both the

entrepreneurs and bankers.

BSCIC created through an Act of Parliament in 1957 and last amended in

1992 is in the process another amendment. The Bangladesh Small and

Cottage Industries Corporation (Amendment) Bill, 2014 will allow it to set

up a 'Small, Micro and Cottage Industries Foundation'.

BSCIC has a countrywide institution network to provide direct services for

entrepreneurs at their premises. The focus of the organisation has always

been the establishment of manufacturing and processing industries.

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The new foundation will operate four completed projects under BSCIC for

generating new employments and skill development:

Women Industry Entrepreneur Development Programme

Self- employment Project through Small and Cottage Industries

Poverty Alleviating Project through Income Generating Activities

Boosting of Rural Economy Project through Development of Rural

Industries

Once this amendment has been passed, the organization will be well placed

to make a significant impact in poverty alleviation and national

development.

The SMEF, also under the Ministry of Industries, has been playing an

important role in the empowerment of the SMEs in Bangladesh. However,

it is important the roles and the responsibilities of the two bodies need to

be clarified.

Capacity building programs for SMEs (strengthening entrepreneurship)

should be developed and implemented in all aspects of SME business. A

major area for capacity building for SMEs is in record keeping.

Banks need training in assessing risks of industries that they have never

financed before. If the banks are provided this type of training, they will be

more comfortable in lending to these SMEs.

The Bangladesh Bank Training Academy (BBTA)/Bangladesh Institute of

Bank Management (BIBM) and other intermediaries such as private sector

training institutes may be provide technical training to bankers. Technical

skills enhancements will allow banks to be able to better assess clients.

The role of knowledge and experience sharing among bankers should also

be considered in increasing the supply of loans to the SME sector. These

types of experience sharing would enable banks to avoid mistakes made by

others and to learn through discussions of the good practices of other

banks.

Incubators

Incubators help develop businesses through a multitude of activities and

product offering. They can be both privately owned and operated or

government sponsored. They provide space and equipment, mentoring

and advisory support to fledgling enterprises for a fee or an equity stake.

Access to finance and access to markets are also areas where incubators

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provide assistance to SMEs. Therefore, they should be provided

encouragement as they help and create and develop small businesses.

Incubators provide training and mentoring on managing company finance

and how to obtain financing from potential financers.

The Government of India provides seed funding for technology start ups

that are being incubated at technology business incubators and science and

technology parks. The funds are routed through the incubators although

the incubators cannot use the funds for their own administrative expenses.

The funds help the start-ups to pay for space, expansion and avail services

offered by the incubators in addition. The terms of use are very precisely

defined to ensure that the funds are used as prescribed.

BB has a fund that is earmarked for providing seed capital for start-ups.

This is intended to be disbursed through commercial banks. Incubators

operating in Bangladesh may be involved in the process whereby financial

institutions can take comfort from the fact that the new entrepreneurs are

receiving training and mentoring from experienced business experts.

3. Enhancing Availability of Credit Information

3.1. SME Database

A robust database needs to be developed that can be used by the financial sector

in assessing needs and risks associated with SME financial services.

Easy access to positive and negative information by governmental agencies,

financial institutions and other entities such as credit rating agencies, credit

guarantee institutions, etc. would enable these institutions to make better-

informed and more effective strategic decisions.

Regulators, lenders, and borrowers should be encouraged to forge consensus

about how information can be simplified and packaged for greater understanding

and awareness among stakeholders in the agriculture sector who would benefit

from meaningful access to microfinance. 7

BB has been developing their SME Market Segmentation Database based that will

be the first of its kind anywhere in the world. The database will collect the entire

population of SMEs being financed by the formal financial sector in Bangladesh.

7 Access to Finance: Regional Agricultural Trade Environment Summary, USAID Feed the Future Program, Submitted by Nathan Associates Inc. Pg. 18

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This information will be updated on a quarterly basis and will therefore be able to

demonstrate trends over time, geographic concentrations, and business

performance by region, industry and numerous other indicators. The database has

undergone several iterations from being an excel-based design to a fully on-line

system and as such is just approaching finalization of new system and it is

expected that it will be launched this year.

Access to raw data, on an aggregated basis to ensure confidentiality of information

provided by each financial institution, will enable any stakeholder to dissect the

information in any way to make strategic and policy decisions. Financial

institutions will be able to get benchmark data on all thrust sector enterprises and

therefore will be able to use the information for better risk management and

understanding different types of businesses.

3.2. Consumer Protection Law/Code of Conduct

Facilitating bank-SME dialogue, and enforcing greater transparency of banks’

regulation will go a long way to ensure consumer protection. However, a

meaningful law that can be enforced through close monitoring by key stakeholder

is essential.

A CIB report is a confidential document that can only be shared by the CIB

department with a scheduled bank. However, there are sometimes cases where a

business or person is erroneously shown to have a classified loan. This can cause

tremendous stress and losses for that person. They have no way of checking which

bank has classified them as they cannot even get a copy of the report. There needs

to be a policy that will enable to SMEs to get quick resolution to these errors when

they occur.

Advertising of financial services products must provide all relevant information

clearly. A policy paper identifying and mandating the clarification of the relevant

information on financial products should be implemented.

There is also a need to provide small borrowers some protection from lenders

when they suffer business setbacks through a small debt resolution scheme

whereby defaulting or distressed SMEs would not be harassed or intimidated by

collections teams. This is dealt with in more detail in the section below on “Direct

Support for SMEs”.

Responsible finance is an important part and parcel of consumer protection and

code of conduct. An example of how lenders have taken advantage of the fact that

borrowers don’t have a clear understanding of an amortized loan is still quite

rampant in the financial sector. Taking over or topping up a two year amortized

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loan with a new loan, one year after it is disbursed, is an expensive proposition for

the borrower as they have paid the majority of the interest on the loan already.

The effective interest rate to the customer is almost double what they had agreed

to.

Similarly, responsible finance requires that the lenders assess the actual need of

the SMEs business. Often products are pushed to customers who may not be

financially literate enough to realize that they are overburdening themselves with

loans that they should not be taking.

3.3. CIB Role Enhancement

The CIB system that has been established in BB is a very powerful system. Only a

fraction of its capability is being used as a result of policy level issues. While it is

true that there are financial institutions that would struggle with providing

additional information to the CIB, the benefit to the entire financial sector should

be taken into account.

Currently only negative information is being collected as static information. A

more dynamic approach to credit information would add significant depth to the

financial institutions’ analysis of customers. An SME that pays their loan

instalments on time every month is a better risk than one that is sometimes late

and certainly better than one that is consistently late. Similarly, a dynamic system

would allow a bank to assess a potential customers’ credit history to see

improvements or deterioration in their performance.

Although there are additional hurdles to overcome to make it happen, this system

would become richer if other institutions, such as micro finance institutions and

utilities companies, were able to submit payment information, negative and

positive, about their customers. To do this, a unique number such as a National ID

number should be used for the purpose. However, the National ID authority has

not yet greed to guarantee the uniqueness of the numbers. This needs to be

addressed in the medium term.

Access to CIB information by rating agencies would enable more robust analysis

to be conducted when assigning ratings. Authority must be given to the institution

or person whose CIB report would be accessed.

Financial institutions would have access to even more information that could feed

into their credit scoring systems. This would in turn reduce the need for collateral

and speed up the time for SMEs to access financing.

4. Swift, Safe and Secure Banking

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Financing is one of the most important factors in SME start-up and survival. Being

able to meet the cash flow is the biggest challenge once the business is in operation.

Access to financing is therefore a critical issue for most SMEs.

4.1. Direct Support to SMEs

Assistance to SME in the area of access to finance would include providing

information and guidance on accessing financial services. The SME Corporation of

Malaysia has a ‘One Referral Centre’ that disseminates information on

Government funds and incentives for SMEs and provides business advisory

services to help the SMEs grow. This is a role that the SMEF and BSCIC can play

very well given that they have direct access to the SMEs.

A one-stop information centre would help SMEs navigate the financial sectors’

requirements and the types of support that are available to them from all

stakeholders such as access to finance.

Financial Services Cost Reduction for SMEs

A quick win policy intervention relates to excise duty of deposit accounts that

prevent many micro and small SMEs from opening a bank account. When the

amount of the deposit in the account is low, an excise duty can be a deterrent to

opening that account. In line with the Tk.10 account that were allowed to farmers,

a similar account for SMEs where there is no excise duty or a percentage of the

average deposit amount would go a long way in convincing more SMEs to open

bank accounts that can later help them to secure loans.

Similarly, excise duty of each loan disbursed is a burden for most SMEs,

particularly if a multitude of demand loans need to be disbursed annually.

Most banks provide what is known as a ‘working capital term’ to the smaller SMEs

because they often have several loan cycles. Therefore, rather than applying for a

loan for each cycle, the banks provide loans, say for one year, covering the

expected capital needs for all loan cycles. After one year, the capital needs of the

SME are then reviewed again. The excess burden on SMEs as a result of this excise

duty is somewhat limited.

Following international best practice, which would reduce the risk to the financial

institutions, the loan facility should be structured as a revolving demand loan

limit. However, the excise duty would place excessive burden on the SMEs.

Excluding excise duty for loans to small enterprises may be worth considering,

both from the perspective of helping small enterprises financially as well as for

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encouraging banks to follow global best practices, even when it comes to small

players. Small enterprises do need to get into the discipline so that they are used

to this by the time they become larger enterprises.

Problem Solving Centre for distressed SME loans

When an SME runs into financial problems, they usually do not have the ability to

negotiate with their bankers. The financial difficulty often arises not because the

SME is not making a profit but because they are having cash flow issues. This is

one of the main reason SMEs go out of business.

Bank Negara of Malaysia has set up a separate agency, The Credit Counselling and

Debt Management Agency, or commonly known as Agensi Kaunseling dan

Pengurusan Kredit (AKPK) to help individual borrowers and potential borrowers

take control of their financial situation. Although not directly working with SMEs,

the owners of SMEs do get assistance. The agency offers preventative solutions

such as financial literacy as well as structured debt management services for those

who have distressed loans. The program works with individuals to develop

personalised debt repayment plans through negotiations with financial service

providers. These plans help individuals repay their debts and regain financial

control.

The SME Corporation of Malaysia has an established Small Debt Resolution

Scheme (SDRS) to facilitate restructuring or rescheduling and new financing for

SMEs that are constrained by non-performing loans or distressed SMEs with

performing loans.

BB and the SMEF/BSCIC can play similar roles in creating a more conducive

environment for debt resolution for small borrowers to help more SMEs survive

business downturns and the ensuing financial hardship. The replication of these

two models need not be exact but rather can be modified or combined to form a

service that assists SMEs on loan work out with financial institutions.

4.2. Mobile and Agent Banking

Mobile Banking

One can intuitively understand the amazing reach that the ubiquitous mobile

phone can achieve in providing financial services to the remotest of locations.

Heralded as the most important development in financial services, mobile banking

has significant potentials but may be a little ahead of our needs. If we consider the

fact that literacy level is low and financial literacy is even lower, the uptake of

mobile banking for all types of banking services is likely to be slow. Currently, the

use of the mobile banking product is growing as an efficient and dependable fund

transfer mechanism.

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Bangladesh follows a bank led model where ‘mobile accounts’ must be under the

direct control of the bank and made available on the customers’ mobile device.

These accounts are currently limited purpose accounts. Although the transaction

limits are quite stringent, they are prudent. These limits may be revisited when

there is more comfort with mobile transactions on part of both the regulator and

the financial institution.

The current regulations require compliance with the Anti-Money Laundering

(AML) requirements and provide flexibility to the banks to get the documents

related to Know Your Customer (KYC) from customers through agents. This allows

for faster account opening. The agents collect the following three documents when

opening a Mobile Financial Services (MFS) account:8

Copy of National ID Card

Copy of Citizenship Certificate

Copy of Driving License/Passport

Where mobile banking can be immediately useful for SMEs is in ensuring the

security of financial transactions. As more and more businesses sign up for mobile

banking and if mobile banking services offer transfer from bank accounts between

banks, all types of transactions can be digitized.

As mobile banking experience increases, the maximum transaction number and

amount limits per day and per month may also need to be reassessed to allow even

more transactions. A robust mobile banking policy that allows these types of

transfers while ensuring adherence to anti-money laundering practices will be

necessary to ensure the sustainability of the system.

An area that may need to be re-examined is the bank led model as it increases

the cost of doing mobile banking for each bank. The sharing of a bank-led

platform by the banks poses a perception problem, if not a real one. The mobile

accounts need to be maintained at the bank that owns the mobile banking

service provider. Therefore, other banks have been reluctant, and may continue

to be reluctant, to use these services for fear of their customer information

falling into the hands of a competitor bank.

A Bangladesh Bank licensed, stand-alone mobile banking service provider

operating each banks’ information on separate or partitioned servers would

8Bangladesh Bank DCMPS (PSD) Circular Letter no.11dated December 20, 2011, amending Guidelines on Mobile Financial Services (MFS) for the Banks.

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provide comfort to the banks while reducing their costs. This lowered cost would

enable the banks to offer the service at lower cost to their customers. Of course,

banks that want their own operations would still be able to do so.

Agent Banking

Agent banking means providing limited scale banking and financial services to the

underserved population through engaged agents under a valid agency agreement,

rather than a teller/ cashier. It is the owner of an outlet who conducts banking

transactions on behalf of a bank.9

In a country where financial literacy is making great strides but require

significantly more development, Agent Banking is potentially the answer. An agent

represents a financial institution through the establishment of smaller premises

that are not as intimidating to SMEs and other excluded segments of the

population. Once through the door, a proactive, well-trained agent can educate

their customers in all aspects of financial literacy.

Physical presence of a bank and direct interaction with customers will allow

financial institutions to gain trust and loyalty of their customers. There is a need

to explore agent banking in more depth because it offers financial institutions such

physical presence in remote locations that will in turn allow them to offer a variety

of financial services.

Bangladesh Bank has provided agents significant authority to the banks’ agents.

Currently, these are the relevant functions as they apply to SMEs:

Agents are allowed to process small value cash deposits and cash

withdrawals, including inward remittances.

They can receive clearing cheques and insurance premiums.

They can accept utility bill payment and facilitate fund transfer.

Agents can collect and process forms/documents in relation to account

opening, loan application, credit and debit card applications but cannot

approve them.

Agents can also facilitate small value loan disbursement and recovery of

loan instalments.

They have the authority for post sanction monitoring of loans and advances

and following up of loan recovery.10

9Bangladesh Bank GBCSRD Circular No. 02 dated June 3, 2014, Guidelines on Agent Banking for the Banks, Bangladesh Bank.

10Bangladesh Bank GBCSRD Circular No. 02 dated June 3, 2014, Guidelines on Agent Banking for the Banks, Bangladesh Bank.

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Agents are not allowed to dealing with loan/financial appraisal. This means that

although they can collect loan proposals, they cannot appraise them. Some clarity

needs to be given as to whether agents will be able to guide their clients on filling

in the application forms and whether they will be able to provide trainings to SMEs

and other clients in areas of financial literacy. It would enable the banks to truly

capitalize on the reach that agents afford them. It should be considered by BB and

other stakeholders whether this should be mandatory for agents to perform such

tasks.

The reach of the bank can be expanded significantly as SMEs see the benefit of

banking through the agent. As an agent of a bank, they are well positioned to

provide numerous types of training programs to SME customers in remote

locations. Financial literacy programs can be run from these locations to educate

more and more people. These same premises can be used to train SMEs on

business management, marketing, accounting and finance topics.

Agent compensation is an issue that needs to be clarified. They are SMEs that will

require sufficient income to ensure sustainability. The banks are aware that there

will be quite a bit of savings for the banks in addition to incremental income from

operating through agents. Clarity on how fees and interest income may be shared

with agents should be explored both from the banks’ perspective and from the

regulators’ perspective of trying to keep the cost to the customers down.

4.3. Credit Guarantees

As mentioned earlier in more detail in section 3.3, availability of credit guarantees

provide a means for SMEs to overcome the issue of collateral. The credit

guarantees are not meant to function as a crutch for the financial institutions but

rather as a stepping-stone for becoming comfortable with lending to a market

segment they were previously uncomfortable with.

The credit guarantee availability needs to be monitored closely for all segments.

Once the financial sector is comfortable with a segment, the guarantees should be

made available for other underserved segments. For example, one needs to

consider whether there is a need for the credit guarantee scheme to include ‘light

engineering clusters’ in Bogra and Dhaka since financial institutions are

continuously searching for more of these types of businesses to finance. There

could be light engineering clusters in other parts of Bangladesh that are facing

issues accessing finance. The credit guarantee scheme could be extended to allow

those clusters into the scheme.

4.4. Standardized Loan Origination Procedures

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This has been a longstanding recommendation to the financial sector from

numerous quarters. Standardized procedures will make it significantly easier for

SMEs to access finance. This is not a difficult issue to resolve although it is true

that each financial institution has different procedures. Instead of relying on the

banks to agree on these procedures, the SMEF/BSCIC could put together a list of

the common procedures that all financial institutions follow as part of their loan

origination procedures.

The SMEF/BSCIC would then provide training and support to SMEs in preparing

for these procedures. If the SMEs are ready with all documentation and answers

related to these procedures, the speed with which the banks will be able to

complete their loan approval process could be significantly lowered.

This would also have the added benefit of demystifying the procedures for the

SMEs and provide comfort to the banks as they find the SMEs better prepared.

SMEs can easily move to another bank for financing should their first application

to the first bank not be approved due to the banks’ credit policies.

5. Funding Improvement for Borrowers

5.1. Soft Loans, Refinancing, On-lending of Government and/or Donor Funds

Policy makers need to approach incentives to financial institutions as a dynamic

tool that need to be tweaked from time to time to achieve the required results. The

development of a robust database (mentioned above) would be instrumental in

ensuring more efficient and timely decision-making vis-à-vis incentives provided

to financial institutions.

The thrust sectors that have been identified may need to be reassessed to include

new potential sectors and exclude those that may not need further support.

Refinance and ‘pre-finance’ schemes can have limits based on sectors. It should be

possible to reset the limits in case limits to some of the sectors are reached quicker

than others. Exactly the same way that women enterprise financing is encouraged

by putting pressure on financial institutions to include refinance requests for

women enterprise loans along with the other refinance requests, a ratio can be set

for each sector based on the potential for utilization of the lines based on such

ratios.

5.2. Credit Ceilings

Central banks can also pursue targeted funding operations, which can either be

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linked to loan developments to a certain sectoror to types of collateral. An

example of the former is the Bank of England’s (BoE) Funding for Lending Scheme

(FLS), which involves a “collateral swap” in which BoE lends out UK treasury bills

in return for loans to households and firms. This swap takes place for a fixed

period of time, so the risk of the loan remains with the originating bank, but the

amount of funds that can be accessed is directly linkedto the amount of lending

to the real economy. The programme was extended in 2013 and the criteria were

altered to make lending to SMEs more attractive, after they recorded a less

favourable performance relative to households and larger companies.11

BB and the SMEF are both engaged in providing financial institutions with soft

loans to target specific business sectors. An assessment to establish who is better

placed to manage this type of intervention so that there is consistency in the way

incentives are provided or at the minimum allow stakeholders to assess how to

coordinate better vis-à-vis these incentives.

Similarly, underserved clusters/sectors need to be identified. Upon identification

of these clusters, plans should be put in place on how to address the issue of access

to finance to these clusters/sectors.

There should be caps by thrust sectors so that a sector receiving sufficient

financing to reach the cap, triggers investigation to assess whether incentive is

still required to convince lenders to target that sector.

Women Entrepreneurs

Entrepreneurship is about adding value. No one challenges the fact that women

entrepreneurs do the same things that male entrepreneurs do – they create jobs

and contribute to the gross national product of a country.

In fact, they do more than their male counterparts. Our own experiences in

microfinance have shown that women nearly always repay their loans and are

more likely to reinvest their profits in education, family and community. There is

growing evidence from around the world that women tend to be more loyal to a

chosen brand or financial institution, and women tend be better depositors into

bank savings accounts.

It is estimated that there are almost one million SMEs in various industries out of

which only around 8% are owned by women. This is staggeringly low and it

11Policy measures to improve access to credit for SMEs: a survey, Central Bank Quarterly Bulletin 4, October 2013, Central Bank of Ireland, pg 106

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becomes evident that the true economic development potential of the nation is not

being achieved given that almost 50% of the total population are female.

Women entrepreneurs have to overcome many challenges such as accessing

financial services including bank accounts and bank loans, necessary training for

conducting their businesses and marketing their products. Often attitude toward

women within their families and society are impediments to developing

themselves as entrepreneurs. However, most women-owned businesses rank

access to finance as their biggest impediment to their growth. Therefore, it is

important to seek out viable businesses run by women entrepreneurs and provide

them with the necessary tools for success. Various trainings and business

education, such as accounting and finance, marketing and packaging, and

operations and human resources management have been identified as areas of

improvement for women entrepreneurs.

More women are getting more educated and interested in establishing their own

businesses. The governments’ policies and incentives regarding business set up

and bank related regulation favouring women entrepreneurs, to equalize the

playing field with regard to the additional issues they overcome, have indeed been

working.

These issues along with the lack of data supporting the true depth of the under-

tapped women entrepreneurs market have prevented the financial institutions

from recognizing the business opportunity presented. Encouragement and

incentives for lending to women-owned enterprises therefore need to continue. It

further needs to be explored how refinancing for loans to women owned SMEs can

be used to encourage more sectoral and geographical coverage and depth.

Farmers

Agri-sector is an important area where financial institutions need to be

incentivized to offer financial services. The Tk. 10 account was an important

exercise that created awareness about the issues facing farmers with regard to

financial inclusion.

Financial institutions have been investing significantly in rural finance through

non-governmental organisations (NGOs). This type of wholesale lending fulfils the

requirements set by the central bank but it does not necessarily help the farmers.

This is because farmers have to turn to NGOs who charge much higher interest

rates than financial institutions and because borrowing from NGOs limit their

ability to enter the formal financial sector.

It may be wise to place a ceiling on the amount of money that can be lent on

wholesale basis. This would force the financial institutions to go into the market

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and lend to farmers directly, i.e. through their agent-banking network. Allowing

the credit guarantee fund to cover the risk of lending to farmers would be a good

incentive to provide.

Direct lending to farmer by financial institutions would be excluded from any cap.

Sustainable Energy Finance

This is an area where progress has been slow. One of the main reasons is that the

business case of sustainable energy for SMEs is difficult to make. For example, an

SME that does not pay utility bills is unlikely to make an investment that reduces

energy usage.

If climate change is to be addressed at the grass roots level, enforcement of the

law will need to be strengthened, i.e. only when the SME pays for utility will they

feel the need to invest in technology that will reduce their costs.

In the mean time, loans in the area of sustainable energy finance may be excluded

from any sectoral or geographical cap given that not many loans are being booked

under this anyway.

Geographic Limitation

It is evident that locating of bank branches in urban areas and its immediate

outskirts mean that financial institutions will have to seek out SMEs to provide

financial services to from these areas.

Increased effort should be directed at increasing access to finance in rural areas.

This may be done by limiting loans refinancing provided to SMEs in urban areas

vis-à-vis those in rural areas. Financial institutions will be both forced and

encouraged to turn to their agent banking to increase financial literacy and

increase financing to underserved areas.

A balance must be struck so that urban SMEs are not adversely impacted by this

while encouraging financial institutions to increase their lending in rural

communities through agents. This may be achieved by imposing additional

requirements for refinancing urban SME loans should each financial institution

reach the cap based on location (urban/rural). The urban caps will be lower and

therefore will be reached fairly quickly. They will then feel encouraged to move to

rural Bangladesh. A semi-urban cap may also be considered.

5.3. Vehicles of Finance

Increasing the vehicles of finance should have a favourable impact on increase the

access to finance by SMEs without any adverse effect on credit quality because

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each type instrument will play a different role and have different criteria for

extending funds.

Loans

Loans are traditional sources of funding that continue to play an important role.

However, financial institutions are getting more sophisticated in the way loans are

structured and applications are assessed.

Mentioned earlier, assessment of loans can be standardized even with the varying

credit policies of each financial institution. The basic requirements are the same.

Dissemination of the common criteria and assisting with preparation of the

necessary documentation and ability to demonstrate financial capability will ease

the crises felt by SMEs when seeking financing. The SMEF/BSCIC as well as the

staff and agents of financial institutions have a major role to play in making this

happen.

A focussed approach to working directly with SMEs and providing them the

necessary training will begin to show significant progress in the numbers of SMEs

that receive finance.

Policy makers and other stakeholders must coordinate their efforts to provide the

necessary assistance to SMEs. Duplication of effort is creating inefficiencies in the

system through wasted resources.

Credit Guarantees

Detailed in section 2.2.2 in this document already, credit guarantees are integral

to providing access to finance to marginalised enterprises in particular.

Loans for expansion of business often require additional collateral. Credit

guarantees extended for deserving business will enable the enterprise to expand

quicker and achieve greater momentum in job creation and growth.

SME Equity and Venture Capital Funds

Venture capital can play an important in providing access to finance SMEs.

Generally speaking venture capital funds will look only fund business with high

growth potential in the hopes of capitalising on capital gains when the business is

sold, either privately or through a public offering on the stock market.

These businesses serve an important role in enabling more business to start up

and/or grow. Equity infusion in any business means that there is no burden to

repay a loan every month. This equity is taken generally in the form of preferred

stock that yields an annual dividend that must be paid before the common stock

holders can receive any dividend.

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The nature of their business is that they take equity risk at a time when no one

else will. There needs to be some protection that the funds get in exchange for this

beneficial service. It is necessary for policy level decision makers to recognise that

a preferred stock holder is not a decision maker in the company and not involved

in the day-to-day operations of the company. Therefore, if the business takes a

loan for expansion at a later date and then defaults, the preferred stock holder

should not be held liable and not be subject to adverse CIB reporting.

An SME Stock Exchange or an SME class within the existing stock exchange would

enable more venture capital funds to be established, as there would be a quicker

exit after the business becomes sustainable.

Dialogue among stakeholders needs to started regarding these ideas. The issue of

moral hazard on part of the SME and the venture capital fund needs to be

mitigated.

Mobile and Agent Banking

Mobile and agent banking, discussed in section 4.4, has immensely increased the

ability to reach more SMEs. A robust methodology designed in compliance with

existing regulations is the start. However, once the comfort level of the enterprises

and the financial institutions have been increased vis-à-vis financial transactions,

SME loans and their repayments may be administered through the use of mobile

and agent banking.

In particular, to increase the sustainability of agent banking, a share of the net

interest income will be necessary. Similarly, as an agent of a bank, assisting SMEs

with loan application and receiving a portion of the application fee may also be

explored.

Current limits on the transaction size are prudent given that this is a new area.

However, it may need to be revisited after other stakeholders have caught up with

the idea of agent banking. For example, insurance companies may develop

products that will insure agents, security companies that will provide cash

movement in remote locations.

6. Recommended changes to current interventions

Each institution should play to their respective strengths and work with other

institutions to achieve synergies in the helping with the growth and development of

SMEs and their access to finance. To achieve these types of synergies, an over arching

agency needs to coordinate the activities. The roles and responsibilities vis-à-vis

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access to finance related interventions of various stakeholders, such as SMEF, BSCIC,

BB, etc. needs to be clarified.

‘Quick Hits’

1. Standardized loan application procedures are an intervention that can happen

immediately. Most banks require the same information when assessing a credit.

Stakeholders that work directly with the SMEs such as SMEF/BSCIC can assist

SMEs to prepare their documents and answers related to these procedures in an

effort to speed up access to finance. This will mean that the SMEs are equally

prepared regardless of which bank they choose to visit. This also means that if one

bank turns them down, they can quickly approach another because they are

prepared with all the necessary documentation and explanations.

2. Caps on refinancing that will be allowed by Bangladesh Bank need to be

established by thrust sectors. This will ensure that the sectors that are less

popular with financial institution also receive some attention, especially after

sectoral caps have been reached on the popular ones. These may be on monthly

caps to try to encourage lending in some of the less traditional thrust sectors.

3. Advertising of financial products must provide accurate, relevant and clear

information that will make it easy for consumers to compare the benefits and costs

of each product. False or misleading advertising needs to be dealt with sanctions

and fines. Just one financial institution beginning this practice will force all others.

However, in the medium term there should be regulations introduced regarding

advertising of financial products.

4. Financial institutions should be encouraged to practice responsible finance as part

of their code of conduct. To this end it is important for financial institutions to be

careful to not offer more money than what the customer needs just so that they

can book a new business.

Although a code of conduct law may be early and difficult to enforce, there may be

awards for banks that adopt best practice code of conduct and demonstrate

adherence to them. The awareness creation itself will go a long way in ensuring

better conduct.

5. Support should be provided to distressed SMEs in the form of assistance in

restructuring and rescheduling non-performing loans or loans in danger of

becoming non-performing. This support can help many SME to survive instead of

shutting down.

6. The SME database that is expected to be operation in 2015 should share raw data

with all stakeholders on an aggregated basis so that each stakeholder can perform

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their own analysis to make strategic and lending decisions. Relevant stakeholders

may also use the data and publish their analysis to assist other business make

better decisions.

7. Set up a credit guarantee institution targeted at mitigating the perceived risk of

lending to MSMEs particularly those that do not have adequate collateral. As a

separate entity, prudence becomes the driving force in ensuring sustainability as

the management team becomes directly accountable.

8. Transfer of collateral could be made easier and cheaper to allow for the ease of

transfer of collateral to the SPVs that purchase asset backed securities.

9. Easing of the cost of mortgaging property and transferring of mortgage from one

financial institution to another could also help SMEs to negotiate better terms with

their existing bankers and/or get better priced loans from other financial

institutions.

10. Transaction size and numbers may need to be revisited for both mobile and agent

banking after comfort level in managing these types of products have been

achieved by the regulator and the financial institutions.

11. Incubators may be involved in the process of providing seed capital to start-ups.

The incubators would provide business advice and mentoring to businesses who

would then receive the funds from government sources.

Medium Term

1. The consumer or business must be allowed to access their own CIB reports. There

need to be a simplified process by which the consumer will be able to rectify any

errors in the report. This may require some changes in the CIB regulations.

2. The CIB should begin to collect positive information in addition to the negative

that is being collected. This will allow stakeholders to better develop their own

credit scoring models that will speed up access to credit and provide additional

comfort to financial institutions about borrowers.

3. Ratings agencies should be allowed access to the CIB information so that they can

develop more in-depth reports on the borrowers. This access would only be

provided with consent from the borrower on whom the report is being prepared.

4. Other stakeholders such as utilities companies and microfinance lenders should

be allowed and obliged to report payment behaviour of the individuals and

institutions into the CIB. However, to do this a unique number must be issued to

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each person. The quickest way to do that would be for the government to ensure

that the National Identification Numbers (NID) are unique.

5. The NBR as part of their effort to help the development and growth of SMEs may

consider allowing tax break for investing in asset backed securities, e.g. zero

coupon bonds, that are securitised instalment receivables against loans to SMEs.

This will enable financial institutions to share their risk with other investors and

therefore feel more comfortable in lending more to SMEs.

6. The NBR and BAS could also recognize the difference between operating lease and

financial lease transactions. Tax and depreciation advantage could be allowed to

operating lease transactions that would help companies to access better

equipment as a result of more affordable monthly rentals on equipment.

7. The NBR needs to revisit the issue of excise duty on loans to SMEs as well as excise

duty on deposit accounts held by small depositors such as micro and small

enterprises. Lowering this duty will bring more depositors into the formal

financial sector and therefore will be able to access finance more easily.

8. In a factoring transaction, when an assignment is provided by a buyer to the bank

against goods delivered to them by a seller, the financial institution usually retains

recourse on the seller even though the bank has taken a risk on the buyer. If the

assignment could be legally binding whereby the financial institution could report

the non-payment of the buyers obligation to the CIB, they would be more likely to

waive recourse to the seller. This would reduce the sellers’ risk and reduce their

collection efforts.

9. Warehouse receipts law needs to be enacted so that agri-finance can be facilitated.

An entire supply chain of business will benefit from the use of warehouse receipts

as a form of collateral. State of the art warehouses would be developed;

management and monitoring companies would come into operation to support

these types of transactions. Banks would be able to liquidate the collateral to

recover their loans and as such would gain comfort in lending to the agri-business

sector.

10. It is recommended that the bank-led model for mobile banking should be revisited

as it increases the cost of offering mobile financial services for the customers. A

bank offering their mobile banking platform to other banks are not considered to

be very attractive because of the regulation that requires mobile accounts to be

under the control of the bank that owns the mobile services platform. This poses

a potential confidentiality issue. A way around this is for BB to allow mobile

banking licenses to a service provider that will be regulated by BB.

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11. Agents of banks, who are likely to be SMEs themselves, are required to make

significant investments to operate as an agent. They need to be made sustainable

and therefore their income needs to be ensured by the banks. As they will be able

to provide the outreach that banks are unlikely to be able to do on their own, the

regulator should also get involved in this.

12. An SME stock exchange or SME class may be introduced in the capital markets to

encourage more venture capital firms to enter the SME space.

13. Preferred shares owned by venture capital companies should receive special

treatment. For example, in the reporting to the CIB, there might be a special

annotation that will preclude the venture capital firm from any negative reporting

since they would not be involved in the day-to-day operations of the companies

they invest in. This consideration would be in light of their taking risks on

institutions that other stakeholders would not have taken.

Longer Term

There needs to be a more coordinated effort across all ministries vis-à-vis SME

development. To this end a separate SME Ministry may be considered. The function

of this ministry would be governed by an SME Development Act and an SME Master

Plan. This will require very high-level engagement and private sector engagement.

The Ministry would be involved in ensuring the Industrial Development Plan includes

the requisite focus on SME development. Similarly an Entrepreneurship Development

Plan should be put in place to create more businesses.

The Ministry would also be the focal point for any SME related policies and act as the

coordinator. Significant efficiencies can be gained through having an institution

directly responsible for coordination. The coordination function would include the

following activities conducted across all governmental agencies:

Problem identification

Resource identification

Resource allocation

Implementation

Monitoring and evaluation to ensure proper implementation of the plans agreed to.

The various chambers of commerce, business associations, think tanks and

researchers, BB and the financial sector, NBR, SEC, BSCIC and SMEF would need to

be involved in order to achieve the success in the area of SME development and in

particular SME access to finance.

34

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