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The country's Small and Medium Enterprise (SME) sector is frequently termed as one of the backbones of the economy. The underlying importance of the sector is also reflected in the development policy, although not very explicitly. For instance, the Eight Five-Year Plan (8FYP), mooted in the current fiscal year (FY21), has emphasised the advancement of SME sector arguing that small and medium enterprises 'are playing a major role in the economy of Bangladesh, particularly in rural economy.' It also pointed out that 'most of the SMEs could not make significant success due to many difficulties such as lack of necessary funds, local level technology, patronisation etc.' The document outlined a number of measures to give a boost to the sector.
The current definition of SME, as set in the Industrial Policy 2016 and recognised by the SME Policy 2019, is a unified definition of Cottage, Micro, Small and Medium Enterprises (CMSMEs). Thus it covers four types of industries. Small and medium industries are also divided in two categories-- manufacturing and services. The unified definition, despite some limitations, has reduced many misunderstanding about the SME sector. In absence of a unified definition, the sector faced a number of difficulties earlier and many are still prevalent.
Currently, there is a big network of 7.81 million SME units in Bangladesh and the sector's contribution to Gross Domestic Product (GDP) is 25 per cent. The finance minister, in his budget speech last June, also mentioned: "The government is putting on its endeavour to enhance the contribution of this sector to 32 per cent by 2024." Nevertheless, lack of capital due to inadequate access to finance and credit is a big barrier to the growth and sustainability of the sector which is currently generating 80 per cent of the industrial employment and adding 45 per cent of the manufacturing value.
Against the backdrop, Dhaka Chamber of Commerce and Industry (DCCI) in the last month came up with a set of recommendations to address the financing and other problems of the sector. These include: separation of medium-sized businesses from the current CMSME category, introduction of SME Bank and SME Bond. Terming access to finance for cottage CMSMEs as the biggest challenge, DCCI President Rizwan Rahman also argued that separation of medium-sized businesses from that category could resolve many of the problems. In the press meet he further mentioned that cottage, micro and small enterprises do not get enough access to formal credit due to many obstacles while medium enterprises receive a major portion of the amount dedicated for this segment of business. The recommendations placed by the DCCI, known as the voice of the country's SMEs, requires policymakers attention especially when the sector is struggling very hard to revive from the negative affect of Covid. Despite providing Tk 20 billion working capital loan facility at a subsidised interest rate for CMSMEs during the pandemic, the sector is yet to utilise the facility efficiently.
Against the backdrop, the idea of SME bond is particularly worthwhile considering the CMSMEs' lack of capital due to inadequate access to finance and credit. Though the corporate bond issuance is generally used by big companies, it is not impossible for the SMEs.
UNDERSTANDING BOND: It is to be noted that bond is a debt investment in which an investor lends money to an entity (corporate or governmental) that borrows the funds for a certain period of time at a fixed interest rate. Being a variable-priced financial asset, bond is also a promise by the issuer (firms or the governments) to pay the bearer a certain amount (interest/yield) until its maturity. The core objective of a bond is to raise capital or funds. While government or treasury bonds are supplied by the government to finance budget deficit, corporate bonds are issued by private firms or companies to borrow money from individual and institutional investors. Also known as fixed-income securities, bonds help firms and governments raise capital. Unlike stocks, it offers a fixed and well-defined income stream for investors (that is a 'coupon') and are repaid back to the investors at the end of prescribed period known as 'maturity'.
As the backing for a bond is usually the payment ability of a company, which is typically money to be earned from future operations, large companies have more advantage in this regard. The payment ability of a company is reflected in the credit rating which is very important in the financial market. One segment of the financial market is capital market which is also divided into two parts: stock or equity market and debt or bond market. The bond market primarily includes government-issued securities and corporate debt securities. It facilitates the transfer of capital from savers to the issuers or organisations requiring capital for government projects, business expansions and on-going operations.
In Bangladesh, the capital market is predominantly an equity based securities market. Number of bonds and other debt instruments are insignificant and a corporate bond market is absent. The country's bond market is dominated by the fixed income government debt instruments. The maximum savings of small investors are mobilised by mainly National Saving Certificates. The interests on these saving certificates are higher than that of other government bonds in the market. The other main government debt instruments are treasury bills and treasury bonds, short-term and long-term in nature respectably. Treasury bills and bonds are tradable in the market through primary dealers. As backed by the government, these debt instruments are risk-free and so don't require any credit rating in the domestic market. Purchasers and investors opt for the low-yield bonds due to lower level of risk of return.
SME FINANCE & SME BOND: In Bangladesh, SME financing is entirely dependent on banks. Bangladesh Bank statistics showed that in the last fiscal year (FY20), all banks and non-bank financial institutions (NBFIs) have disbursed an amount of Tk 1.53 trillion as loan to 691,664 CMSMEs. At the same time, 57,228 women-led CMSMEs received financing of Tk 51.78 billion from banks and NBFIs. During the first quarter of the current fiscal year (FY21), some Tk 386.89 billion was disbursed as SME loans by the banks and financial institutions.
The SME Policy 2019 set an easy and 'increasing scope of access to finance' as one of the core implementation strategies to create a vibrant SME sector in the country. It also outlined a number of tools including 'SME Bank' in the country to enhance the scope of institutional funding for the sector. The policy, however, did not consider 'SME bond' as a tool though the concept is not a unique one. South Korea and China have already introduced the financial instrument. According to a report of United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), China developed three types of SME bond instruments. These are: SME collective note, SME joint bond, and SME private placement bond. South Korea also introduced a qualified institutional buyer (QIB) system for SME bond trading. All these are still at a developing stage and yet to take a comprehensive shape.
No doubt, the well-developed financial market and infrastructure of these advanced developing countries are not comparable to Bangladesh perspective. Nevertheless, the experiences of SME bond in these countries need to be reviewed and lessons should be taken into consideration in Bangladesh.
A big barrier to introduce the SME bond is the country's underdeveloped corporate bond market. Some 94 corporate bonds and debentures were issued until FY19 through private placement while only three public-offering corporate bonds are now available in the market.
Despite a series of initiatives for the last two decades, the authorities are yet to develop the required infrastructure for a corporate bond market. Complexity in tax measures compounded by other regulatory and institutional drawbacks are hindering the development of the corporate bond market. A working committee engaged by the government prepared a comprehensive framework on development of the country's bond market in 2019. The report also outlined a set of recommendations to create a functional bond market. Progress of the implementation of these recommendations is quite slow.
Another big challenge for SME bond is credit rating. Globally, SMEs are not sufficiently equipped to issue corporate bonds mainly due to lack of credit ratings. The rating system is a sophisticated mechanism of the financial market to determine the level of risk. Any corporate wanting to avail the rating needs to go through a complex procedure and additional payment for the rating companies. Only big businesses find it viable and necessary to go for rating. Policymakers, regulators and industry leaders need to come with an alternative mechanism for the time being to overcome the challenge. A study may be initiated in this connection.