Boosting CMSMEs

It is indeed welcome news that the World Bank Group has finalised a process to provide $300 million to the Bangladesh Bank’s credit guarantee scheme to facilitate access to finance for the cottage, micro, small and medium enterprises. A report published in this newspaper states that this project, which is intended to facilitate access to finance for the small and medium enterprises, will support the post-covid-19 recovery and growth of the CMSMEs. This scheme is likely to give a much-needed fillip to the sector hit hard by the pandemic. The effects on cottage, micro, and small enterprises quite severe because of higher levels of vulnerability and lower resilience because of their size. The report also says that Bangladesh Bank in July, 2020 launched its own partial credit guarantee scheme worth Tk2000 crore for the CMSMEs. The central bank’s move was prompted by lean loan disbursement to the CMSMEs. According to Bangladesh Bank data, Bangladesh Bank has established five-year revolving refinance Fund titled 'Start-up Fund' amounting Tk 5.0 billion for commercial banks for disburse loans to start-up entrepreneurs for innovative initiatives. This sector is promising for creating self-employment opportunities for youth and to create new entrepreneurs.

Economists say that credit markets for small and medium size enterprises are characterized by market failures and imperfections. Credit guarantee schemes are a common form of government intervention to unlock finance for small and medium enterprises. The credit guarantee scheme provides third-party credit risk mitigation to lenders through the absorption of a portion of the lender’s losses on the loans made to small and medium enterprises in case of default. 

In the recent years CMSMEs have emerged as a vital cog in the wheel of growth of Bangladesh. These enterprises hold the key to sustainable development based on appropriate technology, topped up by adaptability to modern techniques. CMSMEs are crucially important for a number of reasons. One of the main reasons is employment generation. It is generally estimated that SMEs create eight out of every 10 jobs. They are an integral part of the supply chains in the economic sector. The literacy rate is increasing steadily in Bangladesh but the rate of employment is not increasing in tandem. It should be remembered that all entrepreneurs do not have the ability to invest in heavy industries. So, the development of small and medium enterprises will not only increase the number of entrepreneurs, but also create jobs for the unemployed people. Naturally this will also help build a poverty-free Bangladesh. This country has one of the fastest growth rates in the world. Experts believe that there is a huge scope for SMEs to contribute much more to GDP growth of Bangladesh.

Already, a number of products of the sector have attained global standards. However, there is no room for complacency. The whole sector needs upgrading and diversification, in terms of investment, training and constant nurture.

One of the common reasons of CMSMEs having less access to formal financial institutions is their inability to provide collateral. The authorities concerned can think of making lending cash flow-based. At present, such form of lending is extended to large industries, which can easily provide collaterals. Besides, the default rate of the cottage and micro industries is much less than the large industries. The main thrust must come from the banks, as emphasised by the Bangladesh Bank. The banking sector, through its various initiatives can be the driving force behind this sector's rapid growth. As a matter of fact, there has been a demand for a separate SME bank. While the government has the BASIC Bank to lend to SMEs, its performance has been rather lacklustre. A CMSME bond would also help in channelling much-needed funding to the sector. The fund raised by the bond would be invested in SMEs. A digital marketplace for CMSMEs to market their products would also help the sector to thrive.

The authorities have taken policy initiatives for resolving multiple issues facing the sector to create a favourable regulatory framework and increase their access to formal finance. But many believe that the initiatives are yet to yield the desired results because of the lack of a focused approach. Future policies or efforts need to be backed at the highest level,