Regulatory innovation key to unlocking finance for CMSMEs

Sketch: TBS

From high cost of doing business, product scarcity, supply disruption to liquidity crunch, the cottage, micro, small, and medium enterprises (CMSMEs) in Bangladesh are currently facing several significant challenges. 

In an interview commemorating World SME Day 2024, M Jamal Uddin, managing director and CEO of IDLC Finance PLC, opens up about these challenges and sheds light on the resilient spirit of the CMSMEs in Bangladesh, amidst a complex economic landscape. 

Jamal Uddin also discussed adaptive strategies, focusing on essential products and efficiency improvements, for small businesses to sustain operations amid declining revenues. 

Emphasising the critical role of regulators, he advocated for policies that enhance access to finance, crucial for CMSMEs navigating liquidity crises and high operational costs. 

In times of a multifaceted economic crunch, how are CMSMEs navigating their businesses in Bangladesh?

CMSMEs in Bangladesh are demonstrating impressive resilience in the face of multifaceted economic crises. Many of these enterprises focus on essential products, substantially catering to the domestic demand. 

They sustain their operations by adhering to fundamental business principles, though profit margins have tightened. Efficiency improvements are a key strategy, with many CMSMEs adopting cost-saving measures and refraining from major expansion plans to conserve resources.

Furthermore, a significant shift from receivables-based to cash-based operations has been observed. This transition is crucial for securing cash flow, although it might result in lower profit margins for some. 

It helps maintain liquidity, which is vital for daily operations. Additionally, CMSMEs are actively seeking more financing from banks and financial institutions to cover their high operational expenses and the increasing overall cost of doing business. 

What are the major challenges that CMSMEs face today and what are the ways out of these?

CMSMEs in Bangladesh are currently facing several significant challenges. The high cost of doing business is a major hurdle exacerbated by the widened working capital gap. Product scarcity, driven by import restrictions and the forex crunch, further complicated their operations, leading to supply chain disruptions. 

Liquidity crunch in the banking sector has resulted in banks and financial institutions not lending at the expected levels, making it difficult for CMSMEs to access the necessary funds. Additionally, high inflation has dampened overall demand, reducing revenue for these businesses.

To overcome these challenges, several strategic measures are essential. 

Stabilising the forex market is crucial to alleviate import restrictions and ensure a steady supply of necessary products, thus reducing cost pressures on businesses. Measures to lessen inflation are also critical. Lower inflation rates would help restore consumer purchasing power, boost overall demand, and increase revenue for CMSMEs.

Ensuring sufficient and affordable funding for CMSMEs requires improving the liquidity situation. This can be achieved by encouraging more lending from banks and financial institutions through expanded refinance schemes and risk-sharing mechanisms. 

Additionally, focusing on efficiency improvements through technological enhancements can help CMSMEs manage their costs better and produce more with less. 

Access to finance is attributed as a major obstacle for CMSMEs in Bangladesh. What role can the regulators play in easing their access to finance and encourage banks or NBFIs to cooperate?

Regulators can play a pivotal role in easing CMSMEs' access to finance and encouraging banks and financial institutions to facilitate the business growth of these key contributors to our economic growth. We have seen the positive impact of stimulus packages on businesses struggling through the Covid-19 period. 

In a market struggling from liquidity crunch, the market-driven lending rate shall continue to increase and put a burden on the business. Regulators can provide support to these businesses through refinance schemes, enabling banks and financial institutions who are currently navigating the liquidity crunch to provide financing at an affordable rate.

Implementing aggregator-based lead sourcing can also enhance access to finance. This involves forming partnerships between banks, FIs, and relevant parties such as fintech companies and business associations to streamline the process of identifying and reaching potential borrowers. This approach broadens the reach of financial services and ensures that CMSMEs with the highest potential are prioritised.
Expanding credit guarantee schemes on a larger scale can significantly encourage banks and financial institutions to extend more credit to CMSMEs. By reducing the risk associated with lending, these schemes make financial institutions more willing to provide loans to small businesses, even those without extensive collateral. Cluster-based financing, which focuses on financing groups of businesses within specific industries or geographic areas, can also reduce risks and streamline lending processes.

Regulators can facilitate these initiatives by creating a supportive regulatory framework, offering incentives for collaboration, and promoting partnerships. 

The liquidity challenge in the banking sector is a fact, while their bias for larger corporations over SMEs is also a factor. How should the authorities approach both their crises with liquidity and reluctance for small businesses?

Addressing the liquidity crunch and the reluctance to finance CMSMEs requires a multifaceted approach. The primary way to tackle the liquidity crunch is to match the maturity of assets and liabilities. Ensuring that the duration of loans and other liabilities aligns with the funding sources can help banks or financial institutions manage their liquidity more effectively. 

During the current liquidity crunch, the rate of return in the money market tends to be more attractive for banks or financial institutions to invest in money market instruments due to their higher returns and lower risk compared to lending to CMSMEs. In a market suffering from liquidity crunch and mired with credit risk, financing CMSMEs may not be lucrative enough for most banks or financial institutions. 

While the regulator's initiative for policies to promote market driven lending rates should positively impact the availability of funding for CMSMEs, the liquidity crunch is dampening the impact to a good extent.

To ensure CMSMEs are not left without support, regulatory authorities can encourage banks or financial institutions to collaborate between aggregators, fintechs and microfinance institutions who have a deep understanding of local markets and the unique needs of small businesses with banks or financial institutions who have the resources to provide substantial financial support. By working together, they can create a more inclusive financial ecosystem that meets the diverse needs of CMSMEs.

Regulators can facilitate these initiatives by creating a supportive regulatory framework, offering incentives for collaboration, and promoting partnerships. 

How is IDLC helping CMSMEs and what other institutions may learn from its overall approach in dealing with small businesses?

IDLC supports CMSMEs through several innovative strategies from which other institutions can learn. 

Firstly, we offer cash flow-based financing. Instead of relying solely on collateral, we assess a business's cash flow to determine its loan eligibility. This approach makes it easier for CMSMEs to access the funds they need for their operations and growth.

We also provide door-to-door service, bringing our financial services directly to the customers' premises. This personalised service helps CMSMEs save time and resources, making financing more accessible and efficient. By meeting customers where they are, we build stronger relationships and provide tailored support.

Our credit risk grading-based loan underwriting is another critical aspect of our approach towards driving efficiency. We meticulously assess the credit risk of each client, ensuring that loans are underwritten based on a comprehensive understanding of their financial health. This method has a proven track record of reduced default rates and promotes responsible lending, benefiting the CMSMEs and our institution.
Furthermore, we prioritise customer needs above all. Utilising our years of experience in financing CMSMEs, we cater to the unique challenges and requirements of each client and tailor our financial solutions to meet their specific needs. This customer-centric approach helps build strong, long-lasting relationships and ensures our clients receive the best support.

In addition to these strategies, IDLC also focuses on continuous innovation and leveraging technology to improve our services. All our relationship managers are equipped with tabs and the IDLC Sales app for collecting information and providing service to the customers from any location. 

Our risk managers process loan files in a unified loan origination system which is bolstered with our own developed credit scorecard engine. And all our disbursement processes are centralised to ensure proper compliance and timely delivery.