Helping improve financial inclusion in Bangladesh.
Richard Williams, Nils Riemenschneider
The development potential of the country’s burgeoning micro-, small, and medium enterprise (MSME) sector is constrained by low rates of financial access with smaller businesses finding it hard to secure sustainable growth capital. As part of a consortium of partners, we led the design of a DFID-funded Business Finance for Poor Programme in Bangladesh (BFP-B). Our team conducted primary and secondary research including literature reviews and stakeholder interviews to identify existing challenges and assess the potential for a number of different financing options. This evidence was used to construct a business case for a comprehensive programme of supply- and demand-side initiatives, including a challenge fund mechanism and a credit guarantee fund. We are now providing strategic guidance and oversight as the programme is implemented within the country. Over the longer term, greater access to finance in the country’s small business sector should help improve livelihoods, create more employment opportunities, and ultimately act as a driver for socio-economic growth in Bangladesh.
Micro-, small, and medium enterprises (MSMEs) have a crucial role to play in driving growth in Bangladesh: empirical evidence suggests that the sector probably accounts for around 25% of GDP and employs around 40% of the county’s total labour force. MSMEs have the potential to act as an engine for socio-economic development, lifting millions out of poverty and helping move the country onto a middle-income growth trajectory. However, realising this potential depends to a large extent on banks and other financing organisations understanding the financial needs and behaviour of small businesses and not simply offering products better suited to larger and more formal businesses. Policymakers and donors have an important role to play in understanding the risks and costs incured by those organisations offering capital to small businesses and finding ways to reduce these without distorting markets.
Despite Bangladesh’s global influence on microfinance, there is still a way to go in ensuring widespread financial inclusion: according to World Bank data, only 17% those over 15 years saved at a financial institution during 2011 and only 23% took out loans during the same year.
This project was established to address this gap through the design and implementation of a comprehensive programme of support for small businesses in Bangladesh.
During the design phase of the project, we conducted a comprehensive assessment of the key obstacles to effective MSME financing, existing initiatives in the sector and potential entry points for donors. Our research was complemented by interviews with both public and private sector actors and reviews of international best practice.
We used this evidence to support DFID in finalisation of a business case for a comprehensive programme of supply- and demand-side initiatives aimed at improving access to finance for Bangladesh’s small business sector.
We are now providing strategic guidance and expert oversight to support the roll out of the programme over its five year implementation phase working with key stakeholders including small businesses business associations, commercial banks, microfinance institutions and regulatory bodies. As part of this, our technical experts have developed a monitoring and evaluating framework incorporating indicators for output-, outcome- and impact-level indicators to inform ongoing improvements as the programme is rolled-out.
Together with our consortium partners, we undertook the following activities:
- completing situational analysis of the existing financial access landscape in Bangladesh based on documentation reviews and stakeholder interviews;
- conducting evidence-based assessments of financial inclusion options including credit guarantee fund schemes;
- developing an incremental cost-benefit analysis to demonstrate the economy, efficiency, and effectiveness of different options and completing risk assessments incorporating safeguarding and mitigation measures;
- constructing a monitoring and evaluation framework incorporating indicators for programme outputs, outcomes, and impacts; and
- providing ongoing technical assistance and advice to support programme implementation.
This project is supporting micro-, small, and medium enterprises (MSMEs) in Bangladesh to gain access to financial services. By targeting those enterprises that are currently unserved by the formal financial sector, the BFP-B aims to provide a platform for improved incomes and greater financial security.
The programme will provide partial loan guarantees to MSMEs through a credit guarantee fund, supporting increased lending to previously unbanked, but creditworthy, organisations. In addition, a business finance challenge fund should help support the growth of diverse and innovative lending products and delivery channels by providing matched grant funding to organisations with practical and sustainable ideas for improving financial inclusion.
More broadly, the programme aims to foster and promote inclusive economic growth, improving livelihoods for some of the country’s poorest citizens, in line with Bangladesh’s national aspirations to achieve middle income status and further reduce poverty.