Transforming SME Lending Landscape in Bangladesh

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January 17, 2022

Bangladesh has close to 7.9 million small and medium enterprises. The sector makes up approximately 25 percent of the country’s economy. SMEs combinedly generate 40 percent of the overall employment, are responsible for 11% of the industrial establishments, and 40% of the total industrial output in Bangladesh. However, the sector is far from realizing its full potential. 

SME entrepreneurs face a multitude of challenges, including access to finance, lack of skilled manpower, poor training support, poor infrastructure, bureaucratic procedures, etc. Of the approximate 7.9 million SMEs of the country, 60% of women SMEs don’t have access to formal financing. According to a 2013 study, over 40% of SMEs lack access to formal credit, and even those that do have access to credit face a substantial credit gap and unmet demand for formal credit. According to the World Bank, the SME sector in Bangladesh has a financing gap of $2.8 billion. In Bangladesh, the biggest barriers to SME growth are the cost of finance and access to finance. 

It is a complex problem. On one hand, SME loan has become a widespread phenomenon over the past few decades on the back of excellent policy initiatives and private sector efforts. At the same time, it remains out of reach for a large number of SME entrepreneurs for various reasons. 

These SME entrepreneurs rely on microfinance institutions, traders, loan sharks, and friends and family for finance. Loans that come at prohibitively high-interest rates — as high as 30-40% — according to some estimates

SME financing challenge — looking beneath the surface

SME loans are a challenging terrain, which is one of the reasons behind SME loans being relatively smaller in the portfolios of most banks, despite an excellent growth of the sector.

When it comes to access to finance from formal channels such as banks, SME entrepreneurs face many challenges that we usually overlook because they are intuitive and contextual. 

First, the majority of SMEs are small which makes them inconspicuous for SME loans. The design of these businesses — that is: they are built and run by the owners — does not allow them to grow beyond a certain size. Many SME entrepreneurs have a limited understanding of the overall management system, others struggle to give up control. These limitations negatively affect their growth and the prospect in the eyes of financial institutions as potential borrowers. 

Second, there are other aspects to it. Many SME entrepreneurs feel shy, discouraged, and even intimidated to go to banks because of the structured ambiance of bank branches. To many of these entrepreneurs, banks look unapproachable and out of reach. 

A snapshot of IDLC Purnota Fair, an annual for IDLC’s women entrepreneurs. The company could not host one last year due to the pandemic

Third, since SME entrepreneurs run their business themselves, they usually are not able to dedicate enough time to other pursuits. Securing loans takes time — you need to go to banks, meet people, prepare files, maintain communication, and so on. Most SME entrepreneurs do not have time for this after attending business full time.  

Finally, many SME entrepreneurs lack basic documents such as trade licenses, TIN Certificates, and financial statements necessary to secure loans from banks. Lack of awareness regarding how formal channel lending works is a reason behind this, but banks cannot assess an SME without proper documents and financial accounts. 

While there are other important reasons why a large percentage of SMEs — almost 95% — do not have access to formal channel loans, these are the most common reasons why many large and healthy SMEs don’t get loans from banks. 

Solving for SMEs

IDLC Finance Limited, the largest NBFI in Bangladesh, has done highly impactful work in the SME sector over the years. The company is one of the largest SME lenders and has designed products and solutions that take into consideration the nature of the challenges SME entrepreneurs face. 

For instance, to ensure accessibility, the company follows a concept of door-to-door service for SMEs. This directly addresses the inertia and time constraint most SME entrepreneurs face in seeking formal channel financing. 

Using a relationship model, IDLC’s SME sales team directly goes to the market, meets entrepreneurs at their workplaces, explains details about how to get loans, and collects the necessary documents from entrepreneurs to process a loan. 

If you are an SME entrepreneur, you can fill up necessary forms for a loan sitting at your office and give the documents to IDLC SME officers. In many instances, IDLC sales officers help/advise SMEs on how to obtain regulatory documents necessary for getting loans. Once the documents are ready, IDLC SME officers bring your documents to the branch for further processing. 

IDLC has made SME loans so convenient for entrepreneurs that in many instances entrepreneurs get the loan without ever visiting an IDLC branch. “We have sanctioned loans for SME customers without the customer visiting our branch once,” says Arifur Rahman, Head of Products and Business Management, SME Division at IDLC Finance. “SME entrepreneurs are time-starved. Our sales officers mitigate this challenge by going to them instead.” 

To ensure post-disbursement services, IDLC has an assigned relationship manager for each customer. Being cognizant of the challenges of SMEs has helped IDLC to grow its SME business. 

Simplifying SME loan

IDLC has not only identified real challenges SME entrepreneurs face when it comes to access to finance but also taken initiatives to simplify SME loans.   

Accessing IDLC SME loans is simple. If you are an SME entrepreneur and want a loan, you can call the IDLC helpline number or a branch manager or visit a branch and express your interest in taking a loan. The next day, an IDLC officer from the nearest branch will check your eligibility for an SME loan over the phone and then visit you at your office.

IDLC follows a few basic eligibility rules for SME loans that were prepared based on guidelines set by the Bangladesh Bank. One, the business should be in operation for at least two years and the entrepreneur should have minimum two years of experience running the business. 

These rules help reduce risk. “If a business is only a month or two old, it does not tell much about the sustainability of the business. Market experience suggests, most of the failed businesses die within one to two years of their founding. So if a business survives around two years, it has the potential to survive longer. Hence the two years rule. However, for Women Entrepreneurs, IDLC provides loans with a minimum of one year of successful business operations as the rise of women-owned businesses is relatively new in our economy, and we encourage more financial inclusions for Women Entrepreneurs considering the sustainable well-being for the economy in the longer run,” says Arifur Rahman, Head of Products and Business Management, SME Division at IDLC Finance. 

The second requirement includes basic legal documents such as TIN, trade license, and financial accounts. IDLC usually seeks one-year financial data of an SME business. Without financial records, it is hard to assess and determine loans for a business. 

If we summarize, the IDLC SME loan process can begin with the SME entrepreneur reaching out to IDLC for a loan. An IDLC officer then visits the entrepreneur and collects basic information, such as how much loan is required, for what purpose, and so on. 

The officer asks for the necessary documents. If the documents are already prepared, they can immediately proceed forward. If not, the entrepreneur needs to update the documents and communicate with the officer. Upon receiving the documents, the sales officer creates a lead using his/her digital tab with the basic information of the entrepreneur. The lead then goes to the respective Sales Team Manager (STM). STM visits the entrepreneur in two working days. When STM visits and recommends, an IDLC credit analyst visits the entrepreneur within the next two days. If the analyst finds the file eligible for a loan, he sends the file to the credit approver within a day for approval. 

The entire approval process takes place digitally. Approvers can see all the documents online using IDLC’s credit appraisal software and review them within a day. Once approved, the entrepreneur receives the IDLC SME loan. 

Usually, it takes about 7-10 days to disburse a normal SME loan if customers don’t delay document submission. 

IDLC’s universe of SME Initiatives

With the tagline “Small is Beautiful” and six employees based out of an SME branch in Bogra, IDLC Finance began its work in the SME sector 15 years ago in 2006. IDLC’s work in the sector over the years has busted many myths about financing small businesses and demonstrated how access to finance for small businesses can transform communities. 

Over the years, it has improved its SME products and introduced many innovations. Today, IDLC’s SME product is constructed with several unique offerings designed to meet the needs of SME entrepreneurs.

The details: Up to BDT 5 crore loan can be availed through IDLC SME Term Loan. Qualified entrepreneurs can get collateral-free loans up to BDT 35 lakhs. Loan tenures are usually up to 13 months to 60 months. SMEs with a minimum of 2 years (for Women Entrepreneurs: 1 year) operational experience and a valid trade license can apply. Entrepreneurs should be between 20 to 60 years of age.

The product is built to provide the best possible service through quick processing with convenient repayment options consisting of equal monthly installments and/or customized repayment schedules. 

Seasonal SME loan is reconstructed for the type of businesses that experience seasonal sales or revenue turnover. The Abashon financing plan is designed for enterprises that require housing space and shelter for industrial workers. Similarly, businesses that require their fleet of vehicles can apply for Commercial Vehicle Financing.

To accelerate the startup ecosystem of Bangladesh, IDLC has designed ‘Udbhabon’ and ‘Startup Loan’ for infant businesses and novice entrepreneurs. 

Supporting women entrepreneurs: For women entrepreneurs, IDLC introduced ‘Purnota.’ By working with women entrepreneurs and development partners, it has found solutions to challenges many women entrepreneurs face in Bangladesh. Purnota started by addressing the challenge of access to finance by giving loans to women entrepreneurs. It has since evolved into a comprehensive suite of solutions and a robust support system for women entrepreneurs in Bangladesh. 

Purnota loan starts from BDT 2 lakhs, and eligible women entrepreneurs can access mortgage-free loans up to BDT 35 lakhs. The processing time for Purnota loans is between one week to 14 days maximum if an entrepreneur meets the requirements and submits a complete application. To date, IDLC Purnota has supported some 5300 women entrepreneurs and done some tk. 4451 million of financing with an excellent 1.11% NPL ratio. 

An outlier: IDLC today has a network of 28 SME branches across Bangladesh. SME contributes 37% of IDLC’s total loan portfolio with an excellent track record of below 3% non-performing loans (NPL) throughout the last 15 years. An outlier in the industry. 

The impact: IDLC’s work supporting SMEs has yielded an enormous impact on employment generation and economic development in the country. 

A joint study by the Policy Research Institute (PRI) of Bangladesh and IDLC titled “Access to Finance for SME & Impact on Job Creation: Empirical Evidence based on IDLC Finance” found over 100% growth in employment generation among IDLC assisted SMEs when you consider the time from inception until 2019. Over the same period, female-owned sample companies created more jobs than their male counterparts – nearly 40.5 percentage points more than the overall increase. 

Additionally, the study found that the majority of new jobs were created in the service (174,2%) and manufacturing (131%) sectors (from inception to 2019), supporting the conventional wisdom that manufacturing and service sectors create the most jobs.

Over the entire period (i.e. from inception to 2019), the largest growth was observed in salaried jobs – 134%, reflecting that small businesses are gradually shifting from informal to formal sectors. The majority of employment was generated by firms with investments up to BDT 100 million. 

Innovating for SMEs: The company is now looking to innovate further. As the digital economy grows in Bangladesh, IDLC is working to offer loans to online businesses under a new product initiative called E-loan. The company is already doing some piloting for the product. 

Supporting SMEs during the coronavirus pandemic

Like in most other countries, the coronavirus pandemic was unprecedented and shook the small and medium enterprises sector in Bangladesh. The fallout put many SMEs out of business and others mostly crippled. 

IDLC has taken a multidisciplinary approach to support SMEs — providing both financial and non-financial assistance — throughout the pandemic. 

First, the NBFI sector was allotted around BDT 600Cr as part of the government-subsidized pandemic stimulus package. Bangladesh Bank assigned around half of that disbursement target to IDLC last year. IDLC’s SME team disbursed the entire amount in 5 months. The company disbursed another BDT 30Cr fund from the SME Foundation to rural SMEs. 

In 2021, Bangladesh bank has allocated another BDT 320 crore to disburse as working capital to SMEs under the pandemic stimulus loan package. IDLC has started the disbursement, which is in full swing at the moment. At the same time, the company continues to finance SMEs on its own as well. 

Apart from financing, IDLC has also been providing advisory services and training to SMEs to navigate the challenges of the pandemic. 

The company’s work supporting SMEs amid the coronavirus pandemic is paying off. As of December 2020, IDLC’s SME portfolio grew an impressive 7.4% year on year, with the company disbursing loans worth $180 million. 

All these happened at a time when the world was going through deep uncertainty. The company says it aims to continue to invest in and innovate its offerings for SMEs in Bangladesh. 

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