Discussions, research and analysis are as intense as problematic is the issue of SME (small and medium-sized enterprises) financing globally. Despite frantic efforts made by the policymakers towards solving financial constraints facing the SMEs, the problem of restricted access to "timely and adequate" credit continues to persist, leaving millions of SMEs cash strapped and seriously limiting their prospects for growth. Evidence from Asia-Pacific countries shows that financing barriers result in an average decline of 10 per cent in the growth of small enterprises compared to 6.0 per cent for their large counterparts. A simple solution to this intractable problem is not possible without adoption of a holistic approach which must hit the core issues causing it from both supply and demand sides. An attempt is made here to provide a clue towards a sustainable solution.
WHY SMES ARE FINANCIALLY CONSTRAINED: Major obstacles to SME access to finance are widely discussed and need no rediscovery. The most common factors hindering SMEs from accessing formal financial institutions are: (i) information asymmetry; (ii) exceedingly high collateral requirements; (iii) high transaction costs; (iv) high risks; (v) lack of transparency in SME management; (vi) low managerial capacity; and (vii) small capital base.
What is, however, missing from this list is the lack of trust and confidence which looms large in the minds of both banks and SMEs which are outcomes of tense relationships between the lenders and the SME borrowers. This happens as both parties are insensitive to the needs of each other. There is thus ample room for the policy makers to intervene, primarily as facilitators.
The problem of limited credit flows to the SME sector in Bangladesh is further aggravated by almost conspicuous absence of new and innovative credit schemes and financial products introduced in many countries to inject increased flow of institutional funds to the sector. These include a long list, but the important ones are: leasing, factoring, credit guarantees, venture capital, angle financing, credit rating/scoring, etc., which are being popularly used in many countries to scale up SME financing which are relevant to the size and credit history of the SMEs.
Difficulties facing the SMEs in raising funds also vary in degree and intensity at different stages of their life cycles which are categorised as "Start-up", "Growth and Break-Even", "Maturity", "Transition" and "Exit". While personal assets and loans from family and friends constitute the major sources during start-up stages, they also need funds from seed capital, venture capital, business angels, and/or government or institutional sources to keep their operations going. However, the SME entrepreneurs typically experience extreme difficulties in raising funds at the most critical stages of initial growth to pass the break-event point and start making money. Short-term loans, working capital and log-term loans from the commercial banks constitute the critically important sources of funds which are most difficult to come by.
FORMS OF FINANCING: Experiences of different countries show that SMEs can obtain necessary funds from a variety of financial instruments that are broken down into six broad categories as listed below:
Evidence concerning use of sources of funds across countries widely varies. Though difficult, source to access commercial banks and other financial institutions appear to play the key role in formal SME financing in most countries. In Bangladesh, 30-35 per cent of total bank loan portfolios now goes to the SME sector, which is a significant rise compared to only 10 per cent in 2006. But compared to the needs this is still too inadequate, leaving substantial SME credit demands unmet. The major institutional providers of SME financing in the Asia Pacific region are seen to constitute the following.
(a) Commercial Banks
(b) Development Financial Institutions
(c) Specialised Financial Institutions
(d) Government Programmes and Initiatives
(e) Public And Private Credit Guarantee Schemes
MAJOR DIRECTIONS OF POLICY INTERVENTIONS: The role of government interventions is important in expanding SME finance spaces, especially in the developing countries like Bangladesh. However, the goal of government interventions, both direct and indirect, must be to achieve an efficient market mechanism, correct market failures, and avoid negative market distortions. The government is to perform a market facilitation role to narrow the gap between SMEs and the sources of finance. The primary objective has to be creation of an enabling environment that offers incentives for the financial providers to fill the SME financing gaps. This requires putting in place a proper regulatory and supervisory framework which balances the risks and benefits of providing innovative SME financial products that help narrowing the SME financial gaps.
The government also has the responsibility to build reliable and comprehensive financial infrastructure. At the same time, the government and SME agencies should also facilitate SME capacity and creditworthiness by providing localised training and consultation services in collaboration with the financial service providers to meet the specific needs of both supply and demand side stakeholders. To achieve these multi-dimensional objectives of an overall SME-friendly business environment, the following strategies may be suggested in the light of the global best practices:
(i) Maximising supply of working capital of SMEs through effective utilisation of both informal and internal financing sources, developing a pro-business regulatory framework and taxation system, protecting property rights and improving managerial skills of the SME entrepreneurs
(ii) Narrowing the SME financing gap
(iii) Development of both debt and equity markets
(iv) Reduction of information asymmetry
(v) Facilitate equity funding by encouraging private investors (i.e. angel investors, venture capitalists, etc.) to participate in SME financing
(vi) Introduction of credit guarantee schemes to encourage lenders to participate in the SME lending businesses
(vii) Combining financial services with provisions of business development services aimed at enhancing SME creditworthiness, minimising lending risks and attractiveness of the potential investors in the SME sector
(viii) Strengthening the bank-SME relationship through increased interactions and information exchange between the two groups
(ix) Putting in place a Four-Tier Financial System for the SME sector aimed at restructuring the institutional network of the financial sector into a simplified framework for clear division of functions, so that its outreach, targeting, and institutional coordination are best suited for an enhanced and sustainable SME financing
(x) Finally, a matrix of summary policy measures including legal, regulatory, direct and indirect government support and financial intermediation, suggested to facilitate greater access of SMEs to institutional financing in Bangladesh on a sustainable based.
Professor Momtaz Uddin Ahmed, Department of Economics, University of Dhaka.
ahmed_1947@hotmail.com
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