Funding the unfunded for inclusive growth

According to the International Monetary Fund (IMF), Bangladesh is the second fastest growing economy in the world with a 7.3 per cent gross domestic product (GDP) growth rate. Bangladesh has also been ranked 41st among the world's largest economies in 2019, by a London-based think-tank. Undoubtedly, infrastructural development has played a vital role in achieving this economic growth. But this infrastructural development does not guarantee solutions to all problems related to socio-economic development. If we think infrastructural development is a run-way for growth engine, then to take off this growth engine we need a propellant. Development of micro or very small business sector could be the propellant. Micro or very small business consists of proprietorship/partnership firms running as small manufacturing units, shopkeepers, fruits/vegetable sellers, truck operators, food-service units, repair shops, machine operators, small industries, artisans, food processors and others, in rural and urban areas.

In any developing economy, micro or very small businesses provide lion's share of the job market. In a country like Bangladesh having a demographic dividend, the development of this informal business sector would be a panacea for socio-economic development. This informal business sector is truly vast because more than 90 per cent of total business entities in Bangladesh fall under this sector. These micro business entities are economically active in enormous ways in manufacturing, services, and trading. Unquestionably, they are the largest contributors to GDP and largest employment generators. So, this informal business sector plays a significant role in socio-economic development and poverty eradication. As micro or very small business entities are mostly disorganised or informal, they are generally unfunded. That means access to finance or dearth of credit is one of the major problems faced by this sector. Though some micro-finance institutions are providing funds to micro or very small businesses, the rate of interest is too high. Also funding flows from other informal channels known as private creditors or mahajans to this sector at high interest rate. Though they are supposed to pay off debt obligations accrued from the loan provided by micro-finance institutions and other informal channels from profits they made, in reality they need to pay off the debt obligations from their equity portion which makes expansion process of the business entities rather slow. And to our dismay, high cost of fund sometimes leads to negative business growth and for several cases shutdown of business operation.

Currently, some financial institutions are providing funds to small and medium-sized enterprises (SMEs) but they are not in a position to finance micro or very small business entities. The major impediments to finance this informal business sector include difficulties in reaching out to the customers falling under this segment, lack of collateral and lack of proper books of accounts maintained by business entities etc. Also financial institutions need to downscale their loan size to provide loan to this informal business sector; transaction cost in disbursing large number of small credits is a major problem for formal financial institutions. Fortunately, most of the impediments can be resolved by bringing disruption in our conventional way of banking. For instance, we can easily reach out to the customers by electronic KYC (Know Your Customer). Instead of balance sheet-based financing, financial institutions can go for transaction-based financing to solve the collateral related problem. Cluster-based financing could be an easy solution to initiate wholesale financing in this informal business segment. And to reduce transaction cost in financing micro businesses, financial institutions can introduce digital platform through the use of financial technologies. That means financial institutions should come up with an array of innovative initiatives. Simplification of process and procedure of financial institutions in case of financing this special segment is a prerequisite because conventional way of financing may lead to operational inefficiency in this regard. It is also imperative for financial institutions to work closely with both local and international development agencies for technical assistance and other financial supports.

To provide credit to micro or very small business entities, financial institutions need some special assistance from the government. Policymakers should come up with necessary steps to bring this informal business sector under formal credit channel. The government can establish micro-units development and refinance agency just like MUDRA Bank in India to distribute loans at low rates to micro-finance institutions, banks, and non-banking financial institutions which then provide credit to MSMEs (Micro, Small and Medium Enterprises). Also, credit guarantee scheme for micro business entities would be a time befitting step from government level as a credit guarantee scheme covers collateral free credit facility extended by banks including non-bank financial institutions.

Since growth has to be in an inclusive way, development of the informal business sector is crucial as it is an established fact that this informal business sector not only contributes significantly to GDP but also generates large-scale employment. Thus to keep the growth engine functioning, we need to give special attention to this informal business sector. While large corporate business entities have a role to play in economic development and employment creation, this has to be complemented by micro and small business entities. According to Bangladesh Bureau of Statistics (SBS), Bangladesh has achieved 7.86 per cent GDP growth rate in the last fiscal year and is projected to achieve 8.13 per cent growth rate in the current fiscal year. To sustain this robust growth, we need to focus on making it inclusive by funding the unfunded just as we are currently banking the unbanked for financial inclusion.

Bangladesh has already achieved huge success in financial inclusion by banking the unbanked through taking some crucial steps such as facilitating opening of bank account for farmers, school banking and mobile banking etc. So the country should also be able to achieve success in funding the unfunded with the collaboration of private, government and international development agencies.

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