Coordination of Institutions

MSMEs are multi-sectoral, with the Ministry of Finance, the Ministry of Commerce, the Ministry of Industry (MOI), and the Bangladesh Bank all contributing to policy development. The SME Foundation (SMEF), the Bangladesh Small and Cottage Industries Corporation (BSCIC), the Bangladesh Industrial Technical Assistance Centre, the Bangladesh Council of Scientific and Industrial Research, the Business Promotion Council, and the Bangladesh Bank’s MSME Department have all been established to help MSMEs.

To support MSMEs, there is currently very little institutional coordination and no strategic vision or overarching policy framework. The MOI has taken center stage among the three concerned line ministries, with its new industrial policy focusing on the development of SMEs in manufacturing in particular. Contact us for government-backed loan services.

Policies Governing Regulation

The Bangladesh Bank has been developing and implementing initiatives for the development of small and medium-sized enterprises, including women entrepreneurs.

Small and Medium Enterprise Credit Policies and Programs were adopted in 2011. A formal definition of MSMEs, lending targets for commercial banks, a refinancing scheme, priority MSME activities, and a focus on lending to female entrepreneurs were all included.

It also simplified the procedures and requirements for lending to small businesses, including removing the need for collateral. The Bangladesh Bank also established a new department, the “SME and Special Programs Department,” to speed up government-backed loan activities and provide effective monitoring. 

The following are the 3  main regulatory support policies:

1. Loan Provisioning: It  is the process of putting money aside for a loan. The Bangladesh Bank provides attractive loan-provisioning options to support MSME financing, with general provisioning at only 0.25 percent. Housing, consumer, and corporate finance have equivalent rates of 2, 5, and 1%, respectively.

2. Allocation of capital: Risk-weighted assets are charged with capital. A risk weight of 75 percent is applied to a loan of less than Tk 3 million (US$35.9 thousand) to an MSME with unrated assets. The risk weight is 100 percent if the loan exceeds Tk 3 million. The risk weight for any large unrated group is 125 percent. 17

3. Cluster approach to MSME financing: An approach to MSME financing based on clusters. The Bangladesh Bank has given banks and non-bank financial institutions advice on developing customized financing solutions for 50 MSME clusters that it identified based on locations conducive to industry development.

4. Credit rating. The Bangladesh Bank has recognized the Bangladesh Rating Agency Limited as a specialized credit rating agency for MSMEs. It established the “Credit Rating Methodology for Small and Medium Enterprises,” which is a set of guidelines for credit rating MSMEs. 18

5. Directive to increase MSME loans: A directive to increase government-backed loan to small and medium-sized businesses. The Bangladesh Bank has also issued directives requiring that MSMEs receive 20% of all bank/financial institution loans. By 2021, this will be increased to 30%. The SME and Special Programs Department of the Bangladesh Bank has been tasked with formulating financial policy, facilitating credit, and monitoring MSMEs’ development.

1. The Bangladesh Bank establishes a year-end target for government-backed loan disbursement and works closely with banks and financial institutions to meet it.
2. Using the ‘Area Approach Method,’ banks and financial institutions divide their indicative targets by branch, region, and sector in order to achieve them individually.
3. Each bank/financial institution can develop its own business strategy with the fewest formalities in document execution for quick loan approval and disbursement.

The credit limit for small businesses ranges from Tk 50,000 to Tk 5 million (US$600 to US$60,000). Small business owners should receive at least 40% of the total disbursement target. Potential female entrepreneurs are given first priority.

Each bank/financial institution is required to set up a separate ‘Women Entrepreneurs’ Dedicated Desk’ with the necessary manpower. It should provide staff with MSME financing training and appoint a female officer as the dedicated desk’s chief. 19 Banks and financial institutions may grant women entrepreneurs loans of up to Tk 2.5 million (US$30,000) in exchange for personal guarantees. In that case, group safety and social security are important considerations. Group security/social security may be considered in this case. A total of 15% of total MSME credit would be allocated to women entrepreneurs.

The Bangladesh Bank’s Department of Banking Inspection-3 conducts regular on-site inspections to ensure that the above guidelines are followed. The success of MSME loan disbursements is used as a criterion for the bank’s continued approval of new branches. For financing priority sectors such as MSMEs and agriculture, new branch licenses will be issued. Beginning in 2010, these were referred to as the ‘MSME/Agriculture Branch’ rather than the ‘MSME Service Centre.

The interest rate on MSME loans can be set by each bank/financial institution. For women entrepreneurs, however, the bankrate plus 5%, but not more than 10%, would be appropriate. 20 The Bangladesh Bank also instructed banks and non-bank financial institutions (NBFIs) to set aside 15% of total MSME funds exclusively for women entrepreneurs.

The “Enterprise Growth and Bank Modernization Project” (EGBMP) of the World Bank:

This project aimed to stimulate investment through small businesses in order to compensate for job losses caused by closed SOEs (for example, Adamjee Jute Mills). Tk 6 billion (US$72 million) from the Bangladesh Bank, US$10 million from the World Bank through the EGBMP, and Tk 0.6 billion (US$7.2 million) from the government made up the Tk 1.2 billion (US$14 million) Small Enterprise Fund. The scheme was extended to banks and non-bank financial institutions (NBFIs) at the bank rate in exchange for their financing of small businesses, and it demonstrated strong market demand. The money recovered from refinanced loans or government-backed loan is used as a revolving fund.

Fund-1 “Small and Medium Enterprise Sector Development Project” (SMESDP) of the Asian Development Bank (ADB):

In 2005, the ADB added an additional US$30.0 million to the Small Enterprise Fund (SEF). A total of Tk3.4 billion (US$40.7 million) was given to banks and NBFIs for a total of 3,264 businesses, with disbursement completed in September 2009. Tk 3.3 billion (US$39.5 million) had been recovered as of mid-2014.

The ADB Fund-2 “Small and Medium-Sized Enterprise Development Project” (SMEDP): 

was created to help eligible MSMEs access medium- to long-term financing. The total fund was US$95.0 million, with the ADB contributing $76.0 million and the Government of Bangladesh (via the Bangladesh Bank) contributing $19.0 million, which was transferred from the previous ADB-1 (SMESDP) Fund balance.

 Japan International Cooperation Agency (JICA) Two-Step Loan (TSL) Fund:

“Financial Sector Project for the Development of Small and Medium-Sized Enterprises” (FSPDSME) of the The goal is to establish a medium- to long-term finance market for government-backed loan, with a focus on productive investments. The fund’s total size is JPY 5 billion (US$45.5 million equivalent), including technical assistance and a TSL of JPY 4.79 billion (US$43.5 billion). Participating agreements were signed by 25 banks and 21 NBFIs. 271 businesses had been refinanced for a total of Tk 2.0 billion (US$23.9 million) as of mid-2014.

Industries that process Agro-based products:

In 2001, the Bangladesh Bank established a scheme for agro-based product-processing industries outside of the Divisional Head Quarters and Narayanganj town using its own funds. It was raised from Tk 1.0 billion (US$12 million) in 2001 to Tk 2.0 billion (US$23.9 million) in 2012, then to Tk 4.0 billion (US$47.8 million) in 2013. Banks are offered refinancing.

In the cottage micro and small business segment:

there are a slew of new entrepreneurs. The Bangladesh Bank has set up a fund of Tk 1.0 billion (US$12 million) from its own resources to help new cottage, micro, and small businesses get started. The entrepreneurs are chosen and trained by well-known public and private training providers, and they will be given financing at a bank rate plus 5%. This fund’s refinancing or government-backed loan is expected to begin soon.

Refinance scheme for Islamic banks based on Islamic finance (Sharia):

This fund was established by the Bangladesh Bank with the goal of enhancing the role of Islamic banks in SME financing. It will do so, in particular, by refinancing Islamic banks’ loans to agro-based industries and small businesses (including women-led enterprises).