Mohammad Alim, a resident of Natore and supplies agro based products to a mega industrial conglomerate that produces packaged food. His business is seasonally skewed and requires huge working capital during peak season that lasts for forty to fifty days. Mohammad Kalim brother of Alim resides in Dhaka and earns his livelihood through supplying stationary items to the same corporation and others at their Dhaka Head offices. However, both brothers (Small entrepreneurs) are facing the same challenge of working capital conversion cycle for which they have contractual arrangements of 21-45 days credit to the corporations.
The latest available statistics (BBS, Economic Enterprise Census 2013) suggest that there are some 7.82 million economic enterprises in Bangladesh out of which 88.80per cent falls in the CMSME category i.e. 6.94 million enterprises providing employment to 20.3 million Bangladeshi workers. Contributing 25-35 percent to the country’s GDP, MSMEs play a crucial role in employment generation and resource utilization. According to the Economic Census, 2013 conducted by World Bank and Enterprise Survey, 2013 conducted by Bangladesh Bureau of Statistics (BBS) some 99 per cent of all non-farm enterprises fall into the micro and small enterprises categories.
Out of these 6.94 million units around 20per cent-30per cent are working as backward linkage of different big manufacturing industries that produces everything and anything that we consume and use in our daily lives. Working capital management is one of the biggest challenges that these cottage, micro, small, and medium enterprises (CMSME) face on account of delayed payments, stuck inventory, debts, etc.
In the conventional (read brick and mortar model) banking domain, there is a considerable portion of these 6.94 million enterprises are unbanked and under banked. However according to Financial Stability Report-2022 produced by BB net outstanding investment in the CMSME sector of the Bank’s and NBFI’s stood to BDT 2,093.92 billion as of June 2021 against total outstanding advances of BDT 11,514.71 billion. This signifies 18.18per cent of the total outstanding financing is extended by Banks and NBFIs flows to CMSME sectors.
Thanks to re/pre finance schemes of BB and other fiscal and monetary policy supports. However, these domestic CMSME financing facilities to thousands of entrepreneurs are characterized by numerous hurdles in their conventional banking journey. These includes a slow and paper-intensive account setup process, complex loan/financing application procedures with extensive documentation needs, as well as burdensome annual account renewals.
Most critically, the vast majority of individuals feel that cottage, micro, small and medium enterprises (CMSMEs) within the country struggle to secure credit through the existing traditional banking system.
Central bank on 15 June 2023 issued Digital Bank Guidelines citing this part of its preparedness for forth Industrial Revolution (4IR) by pondering an alternative of traditional brick and mortar model of banking. BB further emphasized that DB will drive greater efficiency in the delivery of financial products & Services and provide low coast access to finance for unserved and underserved segment of the market. Back in 2022 (18 January 2022) BB issued Guidelines for Local Factoring/Receivable Financing through Digital Platform - Pilot Phase. This process at its simplest form can be described as different techniques a business can use to raise funds against the amounts owed to it by its customers in outstanding accepted invoices, also known as its trade receivables or accounts receivable.
Now, coming back to Alim sitting under a banyan tree (where he used to sit with his grandparents during his childhood) at a northern district of Bangladesh with required legal documents and an internet connection to his already in hand smart phone can make the banking journey as pleasant as taking a nap under that tree on a hot summer day.
The journey may cover both asset (invoice financing/factoring) and liability (account setup) side of the Digital Bank, if offered concurrently. Alim & Kalim can supply the items to the corporations and get instant financing from the DB/crowd by securitizing the accepted invoices of the corporations. Thus, lifeline of the CMSME i.e. cash conversion cycle is reduced and greater efficiency is achieved. It brings further facilities like financing package customized to the CMSME requirements, Minimal balance sheet disruptions, and competitive funding options with multiple digital invoice discounting platforms.
Though traditionally invoice financing/factoring platforms are managed by independent companies (ThinkBig Solutions Ltd are approved by BB to operate in pilot phase) and Banks/FIs are actor of that platform. Introduction of DB, invoice factoring guideline by BB and combination of these two by obtaining required approval from competent authorities may usher the smoothness in CMSME financing that all stakeholders are seeking for long.
Simple (offsite) account opening with no loan/investment processing application and no annual renewal obligation. Only plug and play model of CMSME financing that if not all but surely will address significant chunk of the issues at hand. And if we look to ASEAN countries, we see their digital lending and investments stood at 33 billion dollars in 2019 which is expected to reach 185 billion by 2025 according to a study conducted by global big tech firm Google and Singapore’s national investment company Temasek. Smooth CMSME financing -increases distributed development-ensure social justice through financing interventions.
The writer is a banking professional (FAVP, AIBL). He can be contacted at [email protected]
