Reducing wealth inequality through financing SMEs
According to a research conducted recently by Credit Suisse, Oxfam and the Washington Post, global inequality is growing fast and half of the world's wealth now lies in the hands of just 1.0 per cent of the world population. About 3.4 billion people - just over 70 per cent of the global adult population - have wealth of less than $10,000. A further 1.0 billion - one fifth of the world's population - are in the $10,000-$100,000 range. Oxfam published a startling report showing that the richest 85 people in the world have more wealth than the poorest 3.5 billion.
The middle classes have expanded due to the dominance of the very rich, according to a research by Credit Suisse, which also found that for the first time, there are more individuals in the middle classes in China - 109m - than the 92m in the US. Tidjane Thiam, the chief executive of Credit Suisse, said: "Middle class wealth has grown at a slower pace than wealth at the top end. This has reversed the pre-crisis trend which saw the share of middle-class wealth remaining fairly stable over time."
According to the Washington Post, the amount of money that was given out in bonuses on Wall Street last year is twice the combined amount of all earning made by minimum-wage workers in the USA. In a study of 34 developed countries it has been found that the United States had the second highest level of income inequality after Chile.
Inequality brings some unwanted consequences in society. It increases crime as studies have always established a positive link between income inequality and crime. In a research conducted between 1968 and 2000, most researchers found that economically unequal societies have higher crime rates.
Inequality also lowers the standard of health as access to quality health care and healthy food is limited and unavailable for the poor. Economic inequality increases political inequality. When wealth is concentrated in the hands of a few, political power and all facilities tend to be skewed in favour of the small wealthy group. In addition, nations with high degrees of economic equality and a relatively small low-income population are likely to have a substantially higher level of education.
Inequality is a great concern of our age. The rich and the fortunate are being provided with more opportunities in their business under the cover of incentive, tax haven facilities with the offshore banking system and many more. Recently, a huge leak of documents from a Panamanian law firm, Mossack Fonseca, has thrown new light on how the rich and powerful hide their wealth. It has also drawn renewed attention on Panama itself, one of the world's best known tax havens.
Most of the enterprises in a country are small and medium-sized enterprises (SMEs). It is not easy for them to get financial assistance from the financial institutions whereas it is not possible for someone to be an entrepreneur or an industrialist without the assistance of financial institutions. Financial institutions are also more interested in financing the established business houses and influential industrial entrepreneurs. Therefore the rich are becoming richer every day.
But of late the financial institutions are showing some interest in financing SME and small entrepreneurs because of lower risk in this sector. Financing SMEs is also not like keeping all eggs in a single basket.
Financing SMEs could contribute a lot in reducing wealth inequality in society. There are many entrepreneurs in society who have no strong capital base but have business talent and can not grow due to lack of adequate capital. Poverty and regional disparity can be reduced by patronising the SME sector and growth of GDP (gross domestic product) can be accelerated. Consequently the wealth inequality will be reduced, consumer society will be expanded and above all, the economy will flourish.
Enterprises which have fixed assets other than land and building and have financial strength ranging from Tk.50 thousand to Tk.20 million and employ 25 to 150 people are termed as SMEs. These criteria may slightly vary from country to country.
If we look at the global scenario we shall find that the SME sector is the backbone of the economies in high-income countries. But it is far less developed in low-income countries. The Organisation for Economic Co-operation and Development (OECD) reports that more than 95 per cent of enterprises in the OECD countries are SMEs. These enterprises account for almost 60 per cent of private sector employment, contribute largely to innovation, and support regional development and social cohesion. The SME sector makes a critical contribution to GDP and employment in low-income countries.
A recent study, conducted by the Bangladesh Institute of Development Studies (BIDS) finds some constraints faced by SMEs of the country. They are: lack of freehold land in setting up new enterprises, inadequate infrastructure and utility services, inefficient legal and regulatory framework, lack of access to finance, deficiency in entrepreneurial, managerial and technical skill and insufficient business support services.
The BIDS also stressed that among the many compelling reasons for SMEs not being able to realise their full potential, inadequate access to finance is crucial and most commonly cited. With limited capital base of their own and little or no access to institutional financing, they rely on inefficient financing service from informal sources, which eventually proves unsustainable let alone growth stimulant.
The INSPIRED SME survey also reveals that 68.6 per cent of small enterprises and 44.7 per cent of medium enterprises identified access to finance as a major constraint. High interest rate is mentioned as a hindrance as well. The SMEs surveyed were given loans at an interest rate of 15.6 per cent in 2012.
There was a government directive that 5.0 per cent of a bank's loan portfolio be set aside for SME financing. A separate bank, namely, the Bank for Small Industries and Commerce (BASIC) was also set up in 1988 with the objective of financing the small and medium-sized enterprises. The central bank, on the other hand, issued directives to both public and private commercial banks regarding working capital loans, use of standardised documentation procedure and time limits for credit sanctioning and loan disbursement.
Notwithstanding one of the main factors that have hampered the inflow of institutional finance in small and medium-sized enterprises is banks' pre-occupation with collateral-based lending. Traditionally banks have used fixed asset ownership, particularly land ownership, as the basis for judging credit worthiness. This puts small and medium enterprises at a relative disadvantage as they often cannot put up such collaterals for loan.
Moreover, in spite of directives from the central bank to follow standardised procedure, the loan application process has still remained lengthy, costly and cumbersome. In addition, loan processing, particularly in the case of public sector banks, involves high transaction costs for borrowers in terms of time and unofficial payments made thereof.
Another major weakness of business financing in Bangladesh is lack of its modernisation for purposes of e-commerce. In the context of an evolving global trading system the importance of e-commerce can hardly be overemphasised.
Whatever the reality is, in order to overcome all these obstacles in SME financing the concerned authorities and the stakeholders should undertake some pragmatic steps as the following:
First, it should be made obligatory for the commercial banks and other financial institutions to disburse SME credit according to the target set by the Bangladesh Bank and send disbursement report to the central bank.
Banks and other non-banking financial institutions should be comparatively flexible in maintaining collateral security keeping the rate of return at a single digit.
Productive employment should be created in the manufacturing and organised service sectors and withdrawal of labour force out of the low-skilled and low-return agricultural sector and informal activities.
Micro, small and medium enterprise activities should be enhanced in the rural and backward regions that might be helpful for rural development and reduction of poverty and regional disparity.
Following the guidelines of the Bangladesh Bank, area and cluster approach is to be adopted in SME credit disbursement that could help SMEs survive in a highly competitive market.
The financial institutions should develop exclusive loan products that relate better to specific type of credit needed in SMEs.
Proper training of bank officials and setting up of SME cells to identify potential borrowers, loan disbursement, monitoring use of credit and collection of loan.
Differentiated and hassle-free indirect tax system has to be adopted by the National Board of Revenue (NBR) favouring SMEs.
In view of scarcity of skilled manpower for SMEs the system of technical and vocational education in the country needs to be revamped.
Only then we shall be able to make a significant progress in ensuring equitable distribution of wealth in society where wealth inequality would remain at a reasonable level and consequently it might obviously be helpful to create a peaceful, tolerant and well-educated society.
The writer works at a private commercial bank.