Inadequate financing has been considered as a critical bottleneck in the development of SMEs of all types. The SMEs face financing difficulties mainly because of the problems of asymmetric information, inadequate assets and absence of markets. In several instances, it was proven that SME clusters were useful in handling the asymmetric information and other related problems effectively and made differences in ensuring efficiency in SME financing. There are evidences that in several instances, clustering were beneficial to SMEs, especially smaller manufacturers, because it facilitated connections with the external economy including suppliers, workers, trade parties and financial institutions.
Considering the benefits of SME clusters, banks have followed cluster approach in several instances both in developed and developing countries. Cluster based approach in lending is intended to provide a full-service approach to cater to the diverse needs of the SME sector which may be achieved through extending banking services to recognised SME clusters. A cluster based approach may be more beneficial in dealing with well-defined and recognised groups. It is also recognised that financial institutions and banks have a critical role to play to develop SME clusters because small amount of finance to SMEs in a cluster can smoothen the processes and linkages.
Industrial cluster helps solve the difficulty of bank financing of SMEs in several ways: cluster increases the symmetry of information i.e., a bank is familiar with the situation of local enterprises, as a result it facilitates the opportunity of getting loan; cluster helps reduce the cost of banks i.e., banks may benefit a lot from economics of scale through lending many enterprises within one industrial cluster; cluster helps reduce credit risk of banks. Moreover, credit risk within an industrial cluster is mostly reflected on the risk of the industry which can be anticipated to some degree by the direction of industry and the overall growth situation. It is believed that a single SME in non-clusters is unable to reduce information asymmetry. Financial institutions may be unwilling to finance small borrowers on an individual basis due to the high cost of frequent small credit provision, but they may be willing to provide loans for a cluster that assembles small borrowers at a reduced cost.
Among the many compelling reasons why SMEs fail to realise their full potential in Bangladesh, inadequate access to finance is prominent and most commonly cited. With limited capital base of their own and limited access to institutional financing, most SMEs rely on inefficient financing service from informal sources. In the past, the government has attempted to provide small and medium enterprises with access to finance through targeted lending. A separate bank, namely, the Bank for Small Industries and Commerce (BASIC) was set up in 1988 with the objective of financing the small and medium enterprises. Of the other support bodies, BSCIC offers loans to individual entrepreneurs and it has collaborations with Bangladesh Bank. SME foundation has linkage with different banks to finance SMEs. In recent times, Bangladesh Bank has undertaken some measures to ensure greater access to bank finance by the SMEs. For the first time in Bangladesh, an indicative target for SME loan disbursement has been set from 2010 by the banks and financial institutions considering SME development as one of the most important development agenda of the country. Banks and financial institutions were encouraged to receive group security/social security in the SME financing by the central bank. These SME supportive systems are directly relevant for all types of SMEs including clusters.
In response to the policy initiatives, some positive changes have taken place in the area of bank financing to SME sectors of the country. Total SME credits increased from around 20 per cent to 27 per cent of their total credit portfolio in between 2009 and 2013. According to Bangladesh Bank, as of June end 2013, of the total outstanding volume of SME financing of the banking sector only around 2 per cent exposure was with SME clusters (geographically concentrated SME units). Most of SME clusters are located in rural areas, and due to the lower SME loan disbursement in the rural areas, the geographically concentrated SME manufacturing units are getting lower proportion of loans from banks and NBFIs. Available data indicates that a considerably low proportion of banks' SME credit goes to the clusters. Of the broad bank groups, performance of private commercial banks is relatively better. Of the total outstanding credit to the SME clusters, private commercial banks' exposure was three-fourth of the total.
As a financing approach, other than a few exceptions, banks do not make distinction between financing to the individual SME entrepreneurs and to the SMEs within a cluster. Generally, banks do not follow cluster approach to finance SMEs, as found in a recent survey by BIBM. Then available information indicates very limited financing to the crucial SME cluster-- light engineering and leather including footwear. As of June 2013, 48 per cent cluster financing goes to the RMG, 24 per cent to the rice mill clusters, only 5 per cent to the light engineering sector as observed in the BIBM study.
In connection with the lending behaviour of banks, there are limited instances of using alternatives to real estate based lending in the SME financing by banks in the country. Group guarantee and peer pressure, used in many cases of micro-finance, are not very common for SMEs. Instances of group security or social security are extremely limited. Banks face common difficulty in SME lending, because of the informal nature of many SME transactions and high cost of small loan administration.
In the context of Bangladesh, involvement of additional cost discourages banks in undertaking SME financing. Bangladesh Bank has significantly expanded its CSR activities in recent years, with pledging financial support to a number of projects. Besides, Bangladesh Bank has been encouraging and offering incentives to banks and financial institutions to undertake CSR activities to attain sustainable development. To support cluster financing, involvement of additional costs (not the financing part) of banks (at the initial stage) could be considered or counted as their CSR activities. This might be an encouraging factor for banks to undertake cluster promotion and financing.
Environmentally sustainable financing to SMEs may also be tagged with green banking initiatives of Bangladesh. The development of collaborative and sustainable clusters may be a way to stimulate innovations, manage resources efficiently, and can help environmental and social challenges. In the area of green financing, a few instances to the renewable energy sector are really encouraging. Involvement of additional cost and efforts on the part of the banks cannot be ignored in this connection. These initiatives of banks should get special treatment and support. The ongoing efforts of Bangladesh Bank in promoting green banking is a remarkable initiative. BB's initiatives have made notable changes in the environmentally responsible banking activities by the time. Sustainable and environmental cluster financing might receive incentive as part of promoting green banking initiative of the Bangladesh Bank.
Dr Shah Md Ahsan Habib is Director (Training) at the BIBM. ahsan@bibm.org.bd
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