Collateral-free loan for women entrepreneurs: Making the process smooth
If a woman owns a private enterprise or proprietary enterprise, or owns 51 per cent of the capital in a shared enterprise or listed private company, it is deemed a business run by a female entrepreneur.
Percentages of full female ownership and partial ownership are the lowest in Bangladesh (10 per cent and 1.0 per cent respectively), compared to Bhutan (40 per cent and 30 per cent), Malaysia (22 per cent and 8 per cent), Nepal (20 per cent and 10 per cent), and the Philippines (68 per cent and 30 per cent).
Financing gap for women entrepreneurs (WEs) is quite high in the country. In 2016, about 54 per cent of the demand for financing from WEs or women in business (WoB) remained unmet by banks and non-bank financial institutions (NBFIs), show data from the World Bank and the Bangladesh Bank (BB).
Only Tk 5.3 billion was disbursed against a demand of Tk 10 billion and about two out of three WEs were unable to get financing of more than 75 per cent of their entire requirement.
PROVISIONS FOR COLLATERAL-FREE LOANS: Banks and financial institutions (FIs) can provide collateral-free loan up to Tk 2.5 million against a personal guarantee when the borrower is a 'woman entrepreneur' or at least 51 per cent share of the borrowing institution is owned by a woman, according to an SME Sector Programme Development (SMESPD) Circular on SME Financing, published on January 7, 2016 and SMESPD Circular on 'Expediting Financing to Cottage, Micro, Small and Medium Enterprise Sector' published on April 2, 2017.
Group security or social security may be considered for disbursing such loans to new entrepreneurs (both male and female) in cottage, micro and small enterprises, amounting to Tk 1.0 million or more under refinancing scheme as per the BB circulars.
The applicable interest rate of the credit for WEs will be at bank rate plus a maximum of 4.0 per cent spread (currently 9.0 per cent maximum). Loan for WEs of less than Tk 50,000 does not fall under the category of SME (small and medium enterprises). In that case, a WE can apply for group-based loan for more than Tk 50,000 under refinancing scheme at an interest rate of 10 per cent maximum.
Group members for a WE, the main borrower, loan amount, loan sanction and distribution and requirement of documents will be determined by the rules and regulations of sanctioning bank, and based on lender-borrower relationship. Banks prefer their discretion in delivering this kind of loans.
Security, offered by the group against the loan taken by a member, includes both assets and guarantee. It is mostly used for repayment of the loan. If any member becomes defaulter, the whole group will be considered as defaulter and will be deprived of further loan.
As a result, defaulter member will be bound to repay the loan under pressure of group members. This kind of loan is effective for the WEs, but they still cannot get maximum benefits out of it because of stringent conditions.
Banks or FIs are supposed to accept and settle loan applications from WEs under SME category with highest priority. They have been instructed to provide credit to new WEs under cottage, micro and small sectors for mainstreaming the women.
All banks and FIs have been advised to find out and train at least three (3) prospective women entrepreneurs under SME category. Accordingly, banks and FIs shall take initiative to advertise all the facilities for WEs in both electronic and print media.
The government is set to create a Tk 1.0 billion fund for startups as it looks to alleviate youth unemployment. Rent of businesses showroom run by WEs are exempted from VAT (value-added tax) to bring more women to the entrepreneurship landscape.
However, a BB survey on 680 WEs found that 32 per cent of them faced challenges in getting loan and 23 per cent lacked proper information and guidelines. An IFC (International Finance Corporation) survey covering 500 WEs has shown that 69 per cent of WEs had difficulties in meeting collateral requirements and were required to provide collateral and guarantee for their loans amounting to less than Tk 1.0 million.
SURVEY FINDINGS: Based on the study of website information of banks, BUILD (Business Initiative Leading Development) found that six (6) out of 11 banks provide WEs with collateral-free loan up to Tk 2.5 million and five (5) banks up to Tk 1.0 million.
WEs are required to produce guarantor, documents such as trade license, income and sales statement, financial statement, cash flow statement, utility bills, contract paper of office/factory with owner, chamber certification, corporate social responsibility document and market analysis report.
BRAC Bank has so far disbursed Tk 70 billion to both male-and-female-headed SMEs. Percentage of Non-performing loans (NPLs) for this category of lending is 2.5 compared to six (6) per cent for secured loan. BRAC Bank's window for women banking, TARA has 2,900 female SME business customers.
There are examples of collateral-free loan disbursement for WEs, though interest rate is high. This loan requires higher monitoring, thus involving additional costs.
According to conditions, a business must have a valid trade license and be operating for at least one year or more. It must generate sufficient cash flow and profit to ensure timely repayment of loans. It must be sole proprietorship, partnership or private limited company.
Charges payable include: Loan application fee (Tk 200), CIB report charge (Tk 100), Letter of Disclaimer (Tk 300), Letter of hypothecation for each additional business entities (Tk 300), Letter of personal guarantee for each PG (Tk 300), and Security replacement fee (Tk 1000). So, it seems that aggregate cost of loan is huge and involvement of middleman may raise it further.
Another example is Eastern Bank Limited, which distributed loan among more than 700 WEs (9.0 per cent). Collateral-free loan for WEs up to Tk 2.5 million and for men up to Tk 20 million is available.
DIFFICULTIES AND REMEDIES: The central bank has tried to provide facilities for WEs to get financing from different schemes, but conditions of having a valid trade license for a marginal WE proves to be harsh. A simplified trade license can be prescribed instead. Certification from chambers, associations and foundations, educational certificates, and reputation of products and trademark could help as collateral security.
Another complicated issue, according to a 2016 SMESPD circular, is guarantor identification for marginal WEs as banks and FIs want at least two guarantors for WEs, a condition which, in most cases, is difficult for them to meet.
New entrepreneurs-both male and female-in cottage, micro & small enterprises can avail of collateral-free loan of Tk 1.0 million or more under refinancing scheme. But the Industrial Policy 2016 has not clearly defined what new entrepreneur means.
Dedicated help desks, in line with the BB policy, need to be made operational at banks and FIs. Incubation facilities - trade license issuance, market analysis, generating financial and income statement, and loan application-are some of the specialised requirements for the WEs.
The BB can come up with a revised circular to raise the ceiling of collateral-free loan for WEs to Tk 3.5 million and publish a list of documents required for loan application especially for cottage, micro and small entrepreneurs.
It is found that e-commerce, f-commerce-based companies run by WEs are more profitable than conventional businesses. However, a new mechanism needs to be developed involving experts from IT sector, policymakers and bankers for valuation of products in the IT sector so that bankers can take a decision on loan disbursement.
Another problem is the requirement of TIN (taxpayers' identification number) certificate for loan up to Tk 500,000, a ceiling which should be increased to Tk 1.0 million. Translation of documents into Bangla and loan against advance telegraphic transfer (TT) can also be allowed to provide some relief to the WEs to get loans from financial institutions.
Ferdaus Ara Begum is Chief Executive Officer at Business Initiative Leading Development (BUILD)