WB for ensuring access of 'missing middle' to finance

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Syed Ishtiaque Reza
A World Bank study has suggested increased access to finance, of what it called, the "missing middle" to ensure the growth in rural Bangladesh.
It referred micro, small, and medium-size enterprises (MSMEs) and marginal, small, and medium-size farmers (MSMFs) as the "missing middle" in a study of the world Bank titled "Increasing Access to Rural Finance in Bangladesh,"
"Over the years Bangladesh's banking sector experienced robust growth. Despite the government's effort, access to finance of the missing middle remained very limited," Aurora Ferrari, who led the study, said in an interview with the Financial Express.
She was aided by Henry Bagazonzya, who came from the WB's head office in Washington DC, and officials from the Bank's Dhaka office.
Aurora, a senior specialist of the Bank's Private and Financial Sector Department in Europe and Central Asia, said MSMEs and MSMFs are the engines of growth in rural Bangladesh. But the rural enterprises consider access to finance a major obstacle to their operations, she said adding that if an enabling environment is created, these enterprises could continue to grow and lead Bangladesh's rural economy.
The missing middle, she said, needs the access to finance in time to take advantage of market and investment opportunities.
The study found that lending to the missing middle was very limited. It is estimated that bank lending to both urban and rural MSMEs accounted for just two per cent of total lending in 2005, according to the study.
When her attention was drawn to extensive microfinance activities by the NGOs, Aurora said the microfinance operations, traditionally the largest provider of small loans in rural areas, mainly concentrates on landless poor.
She said their micro-finance operations are mainly focused on members through weekly repayments, which are not suitable for the missing middle.
The market size for loans to MSMFs is estimated to be nearly Tk. 88 billion, with 4.3 million potential clients. By comparison, the study says, in 2005 the banks in Bangladesh disbursed Tk. 42 billion as crop production loans.
Financial institutions aiming to operate in rural areas in these countries usually have to deal with high transaction costs, low population densities, remoteness of localities, and a heavy focus on agriculture, with related weather and commodity risks.
The WB study says Bangladesh's banking sector has grown quickly since 1995, with bank assets growing by nearly 23 per cent a year between 1995 and 2005. Moreover, the banking sector grew faster than GDP during this period, with the loan size rising from 21 to 30 per cent of GDP and deposits jumping from 26 to 39 per cent of GDP. Yet this expansion has not really benefited the missing middle.
Farmers, Aurora said, in general are shy or afraid of going to the banks for loans. MSMEs, she said, cited the high costs, direct and indirect, as the obstacles to getting loans. Direct costs include interest rates and other transaction costs such as for documentation, including financial statements, titles, and the like. Indirect costs include long processing times and intensive application processes requiring many meetings between borrowers and banks. To ease the situation, she said, the banks should go the farmers and the enterprises offering lucrative products to them.
Aurora appreciated the initiatives of the Brac Bank, the only bank in the country serving the MSMEs. Quoting a survey the study said large farmers tend to borrow from formal and informal sources more than small farmers do.
About 22 per cent of landless farmers have access to formal or informal loans, compared with 38 per cent of large farmers, it added.
A government refinance scheme that should have facilitated agricultural lending has instead become the main source of funding for Bangladesh Krishi Bank (BKB) and Rajshahi Krishi Unnayan Bank (RAKUB)'s growing capital deficits, and agricultural lending is falling, compromising their capacity to serve the missing middle.
Private banks have high earnings from corporate lending and the rural branches are there only to collect deposits that are then used for loans in urban areas, the WB team said.
Most lending opportunities in rural areas involve MSMEs and MSMFs, which banks cannot serve profitably under the current legal and regulatory framework and with current lending methodologies, Aurora said.
She suggested that with suitable products and technology, micro finance Institutions (MFIs) could scale up their lending to the missing middle. With the right enabling environment and development of the right products, the insurance sector could take up some commercial agricultural risk.
Citing example from India, Aurora said the ICICI Lombard General Insurance Company, in collaboration with an Indian MFI designed a rainfall-indexed insurance product. The study suggested two initiatives from the government here.