Breaking the barriers to CMSME lending in Bangladesh

The Cottage, Micro, Small, and Medium Enterprises (CMSME) sector is a crucial pillar of Bangladesh's economy, playing a significant role in driving economic growth, employment, and social development. With CMSMEs representing nearly 99 per cent of all businesses, they contribute about 25 per cent to the country's GDP and 40 per cent to total employment, supporting around 31 million people.

Beyond its economic impact, the CMSME sector is also critical for the country's social and economic resilience. These enterprises often demonstrate agility and innovation, enabling them to adapt quickly to changing market conditions and introduce new products and services. Furthermore, CMSMEs significantly contribute to Bangladesh's export earnings, particularly in labour-intensive industries such as ready-made garments (RMG), textiles, and handicrafts, accounting for about 40 per cent of total exports. However, despite their importance, CMSMEs face substantial challenges, with access to finance being the most significant barrier to their development. There are, however, a number of challenges in CMSME financing and strategies are required to overcome those.

LACK OF PROPER FINANCIAL DOCUMENTS AND INFORMATION GAPS: One of the key barriers to CMSME financing is the lack of proper financial documents and comprehensive credit information. Many CMSMEs operate in informal or semi-formal sectors without adequate financial records or audited statements. This lack of documentation limits bankers' ability to assess creditworthiness, increasing perceived risk and making them hesitant to extend credit. To address these challenges, banks can simplify documentation processes, assist CMSMEs in preparing structured financial statements, and offer financial literacy programs to educate entrepreneurs on maintaining proper records. Alternative credit assessment methods like psychometric testing or behavioural scoring, alongside partnerships with fintech companies, accountants, and credit bureaus, can provide deeper insights into CMSMEs' financial health, improve credit information sharing, and ultimately enhance access to finance.

LIMITED COLLATERAL AVAILABILITY: CMSMEs often lack sufficient or acceptable forms of collateral to secure loans, such as real estate or machinery. This lack of collateral makes bankers reluctant to lend to these enterprises. To address this, banks can explore alternative forms of collateral, including personal guarantees, inventory financing, or receivables as security. Much emphasis shall be given to regular supervision and monitoring of CMSME clients. Unsecured lending options tailored for CMSMEs, supported by government-backed guarantee schemes, can also be considered. Developing microfinance products or establishing credit guarantee funds can further reduce the collateral burden on small businesses.

HIGH OPERATIONAL COSTS AND PERCEIVED RISK: CMSME loans are often costly to process and manage, with administrative burdens and high perceived risks due to market susceptibility, limited income diversity, and lack of comprehensive credit histories. Banks can mitigate these challenges by leveraging technology to automate processes, employing advanced credit scoring models that use non-traditional data, and offering smaller initial loans. Providing specialised training for bank officers involved in CMSME lending is also crucial. With a skilled workforce, the opportunity to cut costs is greatly enhanced.

INADEQUATE BUSINESS SKILLS AND KNOWLEDGE: Many CMSME owners lack formal business training, leading to poor financial management and decision-making. This lack of expertise increases the likelihood of business failure, deterring bankers from extending credit. Banks can support these businesses by offering or partnering with institutions to provide training, mentorship, and advisory services. It helps CMSMEs develop stronger business plans and enhances their chances of obtaining credit.

VULNERABILITY TO ECONOMIC SHOCKS: CMSMEs are more vulnerable to economic downturns, market disruptions, and external shocks, which increases the risk of loan default and makes bankers hesitant to lend. To address this barrier, banks can offer flexible financing solutions, such as working capital loans or revolving credit lines, that adjust to the business's cash flow needs. Financial products that include insurance against market or economic shocks can help CMSMEs manage risk. Encouraging diversification strategies among CMSMEs can also reduce their dependence on a single market or product line.

CULTURAL AND BEHAVIOURAL FACTORS: Cultural and behavioural biases against smaller businesses or a preference for larger clients can contribute to bankers' reluctance to lend to CMSMEs. To counter this, banks can conduct awareness and sensitivity training for staff to address biases against CMSMEs and foster a culture that values these businesses. Developing relationship management programs that assign dedicated account managers to CMSME clients can build trust and long-term partnerships.

CONCLUSION: To overcome the above mentioned barriers, banks need to adopt a multifaceted approach that simplifies documentation, offers alternative collateral options, leverages technology for cost reduction provides financial literacy and business training, and fosters a supportive banking culture for CMSMEs. With targeted strategies and collaboration among financial institutions, fintechs, and government bodies, CMSMEs' access to finance can be significantly enhanced, driving inclusive and sustainable growth in Bangladesh.

Md. Tauhidul Alam, CICC, is a Senior Faculty and Head of the Learning Facilitation Wing, MTB Training Institute (MTBTI). Opinion expressed in the piece is personal