Access to finance, graft remain key barriers: IFC

Access to finance, corruption and political instability are three major barriers the private sector faces in Bangladesh, according to a study.

The private sector arm of the World Bank on Wednesday published the report on "Bangladesh's Journey to Middle Income Status: The Role of the Private Sector."

The International Finance Corporation, IFC, surveyed 103 private firms from February to April 2019 in order to assess the firms' resilience and deeper challenges.

The Metropolitan Chamber of Commerce and Industry, Dhaka, MCCI, and the IFC jointly organised the report launching programme in the city.

Equitable growth, finance and institutions senior economist Ali Zafar, M Masrur Reaz and IFC consultant Faaria Tasin conducted the survey.

The report says 24 per cent of the firms identified access to finance as major constraints while 18 per cent cited corruption as the greatest difficulty, and 11 per cent political instability and nine per cent pointed to informal competition as the top challenges.

However, the country's private sector sees the future even grimmer as firms ranked access to finance 27.6 per cent of obstacles in the future.

They also listed trade logistics and customs administration 17.8 per cent, corruption 16.5 per cent, law order and security 13.2 per cent, informal and formal competition 10.5 per cent and taxes 7.6 per cent as the future obstacle of the private sector.

The survey reform has lost momentum during the last decade.

"With conspicuous exception of energy policy and zones policy coupled with strong infrastructure projects, there has been slippage in reform in several areas, especially the financial sector, doing business, tariff harmonisation and logistics modernisation," it said.

The survey finding said Bangladesh's future success will depend on the continuation in these key areas.

The survey conducted detailed case study on 10 biggest and most successful conglomerates to understand Bangladeshi firms better.

The studied firms consisted of a diversified range-from pharmaceuticals, mobile banking, steel, food, apparels, construction to agro-processing, but remained anonymous.

The firms, mostly family-owned, avoided debt and were not interested in going for stock market listings as they have access to capital from some banks, the case study found.

It said most of the companies interviewed chose to keep their company within a tight circle of family members and associates and did not seek outside talent.

The study said private sector has pushed for specific policy support from the government via various chambers and associations.

The firms said the advantages of family businesses are trust, focus on the longer-term sustainability and creative use of internal capital to fund company such as cross-financing from other companies in the same conglomerate.

The study said about seven of the 10 firms are interested in the rapid expansion of their businesses while three of 10 believe in slow expansion and consolidation.

The responses of smaller firms to the survey also varied by their nature and size. The report reveals that smaller firms are more likely to rely on their savings.

They, as opposed to larger firms, identify financing as the major constraint. Additionally, smaller firms are more adversely impacted by taxation.

Meanwhile, manufacturing and larger firms, compared to service firms, are more affected by land and energy access, finds the survey.

However, both types of firms are concerned with issues of corruption and logistics.

Smaller firms tend to not engage in product diversification and are more cautious in terms of business expansion.

The study also reveals that the impact of technology and automation on the firms is not so significant. Only one-third of them are impacted by automation whereas one-third is not. The rest are partially impacted.

The report, however, highlighted the role of the country's private sector, which has helped power and sustain growth, possibly leading the country to attaining middle-income status.

Bangladesh has already graduated to a lower-middle income country status from being a low-income one, recognised by the World Bank in 2015.

As the country moves to attain the middle-income country status, it will have to increase its private investment to between 29 per cent and 32 per cent of GDP, the report highlights.

Speaking at the programme, private industry and investment adviser to Prime Minister Salman F Rahman said businesses should have regular interactions with private banks.

He said 80 per cent of the banking sector is now controlled by the private sector.

"It is like the private sector is complaining against private sector when access to finance comes as the top obstacle," he said.

Mr Rahman said capping interest rate at 9.0 per cent is against international norms.

But he said the market raised the interest rate to 14 to 15 per cent, which is practical. He said the government will watch the decision and will review it , if needed.

The advisor said the structural mismatch in the long-term lending against short-term deposits is one of the reasons for difficulties in access to finance.

He stressed the need for boosting the bond market and capital market for facilitating long-term finance for the private sector.

Mr Rahman said they are not in favour of opening foreign exchange regime, but gradually liberalising it.

He said not only readymade garments, all export sectors need incentives.

He hinted at reducing the tax rate in the next national budget for 2020-2021 for expanding trade and business across the country.

Former president of MCCI Syed Nasim Manzur said the contribution of businesses is not recognised and mistrust exists between the private sector and policy makers.

He questioned why no Bangladeshi businessman has been awarded with the highest state honour.

"I think it is very unfair and hope it will change," he said.

He said cost of finance should come down along with access to finance.

Hinting at the recent decision on 9 per cent interest rate, he said regulated interest rate is not the answer to high cost of finance.

He said cost is determined by the market, but investment depends on cost of finance.

"Cost of finance is very important and we should talk about it," he said.

He said the country's policy changes very rapidly, which has an impact on the predictability.

"Nobody invests in an unpredictable business environment," he said.

Executive chairman of BIDA Sirazul Islam, Policy Research Institute Executive Director Ahsan H Mansur, ambassador Farooq Sobhan, among others, spoke at the programme.

MCCI president Nihad Kabir moderated the programme.

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