Dubbed the 'missing middle' the small and medium enterprises (SME) segment holds great promise in almost every jurisdiction. Together with micro and cottage enterprises this sector contributes substantially to our gross domestic product (GDP). Additionally, this mostly informal sector generates way more employment than the formal sector. Therefore, the time is now ripe to put our money where our mouth is. In other words, it is imperative that Government go all out to give this burgeoning sector a shot in the arm. I would suggest that demand and supply sides of the equation be tackled simultaneously for maximum effect.
Too many banks are involved in lending to small industries, with varying levels of success. It is well-known that most banks home in on the big fish because the payoff is pretty handsome in relation to efforts expended. A favourite grouse of SME bankers concerns the lack, or insufficiency, of collateral. Consequently, the promising Micro, Small and Medium Enterprises (MSME) sector gets pushed under the rug. This neglect cannot go on for long as the opportunity cost is too great.
Without boring the reader with the niceties of definition, let me begin with salient points of the demand side. An overwhelming number of micro and cottage industries do not belong to the formal sector. So, they may not have municipal trade licenses and, by extension, bank accounts. In such a case, two useful data points - bank account and trade license - will have escaped national statistics. Even if some units do register it is not a given that they will maintain bank relationships. What I am driving at is these (invisible) firms have to be captured in a baseline survey, be it a census or something smaller carried out all over the country. So as not to unduly alarm businesspersons belonging to this shadow economy, survey firms may be pressed into service.
Leaving aside ethical issues of inclusive banking, netting firms hitherto excluded from the formal sector has a huge economic upside. The untapped demand for financial services globally runs into trillions of dollars. Just consider the benefits to accrue to employees in this sector as they transition from temporary and tenuous employment to more stable jobs. Skilled and experienced hands will command a premium. Over time, entrepreneurs will graduate from mere mechanics and tradespeople into seasoned businessmen. In contrast to the demand side the scope for interventions in the supply side is much more.
A dedicated bank to service the MSME sector needs to be opened with government patronage. All commercial banks should be invited to contribute to its capital formation. Those participating may be allowed to shrink their own SME portfolios over time. Sponsors should be warned the over-arching goal here is nation-building and not profits or dividends. To focus its energies on core activities and minimise the chances of fraud and theft the bank should forgo foreign exchange dealership licence for now. This will cut down paperwork and central bank inspections. Other banks will be happy to assist when such services are needed.
For the initial five years the bank should concentrate only on taking deposits, research, and advocacy. Lending, which is risky and ties up capital, can wait. Comprehensive data on micro, cottage, small and medium enterprises should be gathered country-wide. Research should try to uncover the reasons for loans going bad and their remedies. Bangladesh Bank (BB) and Bangladesh Institute of Bank Management (BIBM) are well-placed to assist.
In its upper echelons the proposed SME Bank should be manned by top-notch, preferably foreign-trained professionals. Their ranks should include qualified researchers. But they will not come cheap. Good management practices will percolate down. From day one the bank should differentiate itself and build a firewall to stay away from the ills afflicting its less fortunate cousins. Research output should indicate what works in the context of Bangladesh; bank management should not get swayed by the heft of multilateral institutions. In the early stages of their industrialisation Korea, Japan and Taiwan did not always listen to the World Bank.
Short-term business plans should dovetail with longer-term perspective plans. A key mission (backed by budgetary allocations) should be advocacy and outreach programmes. Capital should be able to cushion successive periods of losses. For the sake of good corporate governance, a supervisory board (a la Germany) should sit atop an active and well-paid board of directors.
Raihan Amin is Visiting Faculty, International University of Business Agriculture & Technology (IUBAT)
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