Presentation on theme: "Promoting SMEs though Access to Finance"— Presentation transcript:
1Promoting SMEs though Access to Finance Presented by:M. A. Baqui KhalilyDepartment of FinanceUniversity of Dhaka, Bangladesh.
2Overwhelming Interest in Access to Finance Seminal work of McKinnon (1973) and Shaw (1973) led to re-emergence of the issue of “finance matters in development”The classical work of Patrick (1966) – ‘demand following’ and ‘supply-leading’ finance strategy is re-visited.Debate on the direction of causality between finance and growth. This is well documented (King and Levin (1993), Levin and Zervos (1998), Arestis et. al. (2001), Gupta (1984).Several conclusions are derived from the literature: Finance follows growth in developing countries, and growth induces finance in developed countries.
3Micro Level Research on Access to Finance Rajan and Zingles (1998): Industries with access to external finance grow at faster rate.Wurgler (2000) and Aghian et. al. (2007) with similar conclusion: Increase in investment in more growing industries.BUT small and medium industries find it difficult to raise funds for inherent behavioral characteristics of financial institutions (Hutchinson and Xavier 2007; Berger and Udell 2004).Research on impact of microfinance reinforces the fact ‘access to finance’ matters (e.g., Hossain 1988; Khandker; Zohir et. al.; Rahman et. al.)
4SMEs in Development Agenda Most of the growth theories suggest that industrialization is the engine of economic growthA balanced growth of both agriculture and industrialization is very important and necessary for the economic development of BangladeshFor pursuing the industrial development efforts, the main objectives and strategies focused are optimal utilization of resources, creating employment opportunities and catalyzing the growth of production and exports
5SMEs in Development Agenda The World Business Council for Sustainable Development (WBCSD) showed that in the developing countries, more than 90% of all firms, outside the agricultural sector, are SMEs and microenterprises and generating a significant portion of GDPIn Bangladesh, enterprises of less than 100 employees account for 99% of firms and 58% of employment
6SMEs in Development Agenda (cont.) Well managed and healthy SMEs are a source of employment and wealth as well as poverty alleviation. Moreover, there is a positive relationship between a country’s overall level of income and the number of SMEs per 1,000 people (IFC, 2006)The World Bank’s Doing Business reports indicate that a healthy SME sector corresponds with a reduced level of informal or “black market” activitiesLocal SMEs can work as an important source of supply and service provision to the large enterprises of both national and internationalsSME is also good for communities itself, because through employment creation and growth, it will improve the standard of living of the communities.
7Sources of Finance and Stages of SME Development The entrepreneurs require mainly three types of finances:(i) equity capital - to finance assets at the start of a business;(ii) debts – to refinance assets; and(iii) working capital – to maintain the day-to-day activities (Jesmin, 2009)Access to credit/financing is deemed to be one of the greatest hurdles faced by SMEs
9INDUSTRIALIZATION AND SME DEVELOPMENT IN BANGLADESH Bangladesh inherited a weak backbone of industrialization since independence.According to Bangladesh economic review, the contribution of the broad industry sector to real GDP:17.31 percent in ,29.95 percent inSMEs witnessed very limited growth during 90s, and this was mainly due to negative growth of the small industries (employment size less than 20).
10State of SMEs in Bangladesh The importance of SME especially small and cottage industries is always recognized in every development plans of government before and since liberationRecently the development partners also giving importance to SMEsThe government of Bangladesh is also taking a lot measures for the improvement of the SMEs:Targeted program for SMETargeted for women entrepreneursSME FoundationRefinancing of SME loansThe main constraints of financing, even with continuous of effort of government, could not resolved
11State of SMEs in Bangladesh There were approximately 6 million micro, small and medium enterprises (MSMEs), which included enterprises with up to 100 workers employing a total of 31 million people, equivalent to 40 per cent of the population of the country of age 15 years and above (MIDAS,2003)By the end of 2010, it has grown enormously, at least by 50 percent. Approximately around 9 milion MSMEs.Contribution of MFIs.
12State of SMEs in Bangladesh There are more than 600,000 small and cottage enterprises in Bangladesh (Ahmed, 2004) .Some 3 million micro enterprises are also in operation90 percent of all industrial units are SMEs (SEDF, 2003)If we accept the estimates of Ahmed (2004) and the fact reported by SEDF, it can be estimated that there are some 900,000 industrial units in the country. Manufacturing sector contributes only around 10 percent of total employment.
13State of SMEs in Bangladesh Return to capital investment is higher for micro and small enterprises (above 30 percent) compared to 13 percent for the medium enterprisesSMEs in Bangladesh have higher profitability than some European countries. Operating profit of SMEs as reported in SEDF (2006):Bangladesh: 12 percentGreece: 7 percentFranc 5.1 percent, and Canada: 9.2 percentSMEs in Bangladesh have higher potentials and can play very significant role in growth and development, as it is Japan.
14State of SMEs in Bangladesh There is no precise estimate of the contribution of SMEs to GDP. Serder (2000) reported around 20 percent contribution of small-scale enterprises to GDP.Daniels (2003): Contribution of MSMEs - around 25 percent to GDP. The contribution is expected to increase with the inclusion of public sector enterprises.Rabbani and Sulaiman (2005) show that SMEs with relaxed liquidity constraint because of bank finance tend to create more employment than the SMEs with lesser or no access to creditDespite lack of adequate data, empirical evidences suggest that SMEs perhaps contribute around 25 percent to GDP
15SME Financing in Bangladesh Dismal pictures of SME financing:Khan, Imam and Khatun (1998)Khan, Imam, Khatun and Ahmed (2003)Daniels (2003)SEDF (2006)All these studies report same findings: Around forty percent of the SMEs do not approach banks for loans. Around fifteen percent of the loan applications are rejected on the ground of guarantee or collateral, asymmetric information and high transaction costIn Bangladesh, SMEs are largely financed by own funds.Equity fund through capital market is not a widely used source for small and medium entrepreneurs.
16SME Financing in Bangladesh The recent study of SEDF (2006) reinforces the earlier findings that SMEs have limited access to bank financingIt shows that about two-third of the SMEs did not approach banks for loansMost of them approached banks for working capital loans. Not all of them were granted loansIt takes about two months on an average to get loan sanctioned. The findings are similar to the earlier studies.
17Finance is a constraint Access of the small enterprises to credit has not improved over the past 30 year – access to finance is still a dominating constraint.All previous studies reported the same:SEDF (2006)Task Force report 2004Ahmed 2004Khan et.al. (2003)Daniels (2003)Serder (2000)Khan et. al. (1998)Rahman et. al. (1979)
18What is the Present Trend? Small have little access Trend in Industrial Finance by SizeYearIndustrial Term CreditWorking CapitalAs % of Total creditLMESEIndustrial CreditWorking capital200989.084.0495.472.3321.3017.59200593.063.0493.755.4617.8720.43200493.353.5292.886.3418.5919.49200394.262.9593.565.7219.5116.97Source: Bangladesh Bank Publications
19What restricts banks to finance SMEs? Literature on industrial finance and entrepreneurship development amply document two factors that restrict banks to extend sufficient credit facilities to the SME sector.:Collateral,High transaction costEmpirical evidences suggest that banks do not sanction credit to the SMEs for lack of collateral and high transaction cost (SEDF 2006; Khan et. al., 2003; Khalily et. al. 1994, Rahman et. al ).SEDF (2006) reports that even 16 percent of loans sanctioned did not take loan for lack of sufficient collateral.
20What Do We learn?Small enterprises are largely excluded. They are the “Missing Middle’. This group has nether access to formal credit market nor do they have access to micro credit market.Collateral is a constraint for promoting SMEs, in particular small enterprises.
21BRAC Bank and “Missing Middle” BRAC bank initiated SMEs lending in 2001BRAC Bank emerged through a process of learning. BRACThey probably perceived that while the ‘big push’ was required for taking micro enterprises to the next phase of development, it was important that small enterprises are promoted as they are the ‘missing middle’ in the path of developmentIn the private banks, the SMEs did not get sufficient access to get loan as the large corporation did.BRAC bank came to break that tradition, and started providing different types of SME loans, particularly small business, since inception
22Total number of borrowers by year (in thousands)
24BRAC Bank, as a Development Bank, follows Triple Bottom Line Although BRAC Bank finances SMEs, its focus has been on the small enterprises with average loan size around TK 5 lacs. WHY?They are largely left out in the credit marketSmall entrepreneurs are essentially the people within lower 50th percentile of income distributionThese entrepreneurs learn through doing, and/or learning from the experience of others in the same profitable businessThey have potentials to grow with backward and forward linkagesThese enterprises are generally family enterprises with participation of qualified family members and hired laborersThey will be effective agents of change at the community levelpromoting small enterprises will in fact help others with homogeneous characteristics to learn from the experiences of these arguably successful entrepreneurs.BRA Bank not only provides credit to small business, they promote social and environmental dimensions of credit as well.
25How Effective is BRAC Bank? A recent study shows that BRAC Bank has made impact at the enterprise and household level of the borrowers.The study was conducted over randomly selected 525 enterprises of 21 SME unit offices of BRAC bankOf the enterprise borrowers, 35 percent were repeat borrowers. The other samples included enterprises who did not apply for repeat loan or rejected for the repeat loan.The basic characteristics prior to accessing Brac Bank credit were homogenous in terms of number of employees, assets size, initial capital size.
26Results Table: General characteristics of the borrowers Types of BorrowersAge of the entrepreneurEducational qualification of the entrepreneursExperience in Current businessExperience in Family businessNew38.11(8.48)9.49(2.97)12.13(7.12)11.00(13.22)Repeat40.01(8.60)9.54(3.31)15.01(8.30)8.05(10.48)Total39.419.53(3.20)14.09(8.04)8.85(11.08)
27Table: PSM estimates of financial indicators Variablet-testDifference as % of ControlAccumulation of AssetsTotal Assets at cost (USD)4.3462.08Total Assets at Market Price (USD)4.7750.12Growth rate of Total Assets (USD)3.69111.85Utilization of resourcesGrowth rate of Fixed Assets at cost3.0498.95Growth rate of Fixed Assets at market price6.37157.75Ratio of Fixed assets to Total Assets-2.49-12.75Sales-fixed Assets2.1666.3Long Run profitabilityGrowth SalesSales (US Dollar)3.194.4398.2476.3ProfitabilityProfit (USD)1.812.82Growth rate of Profit2.6875.02ROA-4.69-22.97Rate of Return-6.38-27.43Financial StructureTotal Capital (USD)4.133.44Total Debt (USD)3.6831.89Equity Capital (USD)3.4533.82
28Table: Matrix of Economic Indicators Specific measurement indicatorsRepeat BorrowersNew BorrowersDifferencet-stat% of change over control(N=134)(N=286)Employment creationNumber of full time male employees2.261.620.643.2739.64Number of full time female employees0.310.290.020.23
29Creation of competitive environment or business Table : Matrix of Economic Indicators: reflection of Perceptions (percent)Economic indicatorsRepeat BorrowersNew BorrowersDifferencet-statPercentage changeGeneration of savings75.9572.243.700.37-Income enhancement52.2130.8821.346.6069.12Business expansion71.7135.0336.688.84104.70Creation of competitive environment or business74.6871.513.170.49
30Table : Matrix of Social indicators Repeat BorrowersRepeat borrowersDifferencet-valuePercentage of change(N=134)(N=286)Use of child labor (Number)0.090.040.051.5714.20Education of children(Percentage increase in expenditure)51.8828.5223.354.3081.89Health (Percentage increase in expenditure)45.9926.3319.666.8174.69Television (percentage increase in expenditure)15.646.539.114.04139.46
31Table : Matrix of Market Development Indicators Growth rateBackward linkage167 percentForward linkage127.8 percentExpansion of similar business98.67
32Table: Matrix of effectiveness indicators Specific measurement indicatorsFirst time borrowerRepeated borrowerDiP>|z|DiDCreating awarenessCommunication by bank staff47.27(121)47.95(281)0.680.9004Bank advertisement3.91(10)2.73(16)-1.180.530Proximity to the unit office of BRAC Bank9.77(25)14.68(86)4.910.528Cost of fundLow interest rate2.76(7)4.451.690.421Accessibility to BRAC loanBorrower-friendly flexible lending system50.00(127)45.20(254)-0.0480.376
33BRAC BANK is effectiveBRAC Bank is effective in reaching the long ignored “missing middle” with average loan size of around Taka350,000.They do provide collateral free loans.Their loan programs have positive impacts at the enterprise and household level. Most interestingly, it has contributed to backward and forward linkages.The bank operates largely in rural areas, and therefore playing a critical role in rural financial market
34Can MFIs play a role in reaching out ‘missing middle’? MFIs are largely financing micro enterprises in Bangladesh.Missing middle can be financed by MFIs if lateral entry is permitted. Microcredit Regulatory Agency should think about it.This will also create competition in rural credit market.