How banks can help SMEs flourish in a tight economic environment

M Nazeem A Choudhury. Sketch TBS

In today's turbulent global economy, Cottage, Micro, Small, and Medium Enterprises (CMSMEs) in Bangladesh are facing mounting challenges—from soaring inflation and currency depreciation to supply chain disruptions and subdued consumer demand. Yet, these enterprises remain the lifeblood of the economy, contributing close to 25% of GDP and employing over 7.8 million people.

In such financially stressful times, banks have an increasingly vital role to play—not just to help SMEs survive, but to support their growth amid adversity.

According to the SME Foundation, there are approximately 7.9 million SMEs in Bangladesh. These businesses are essential to job creation and economic dynamism. However, access to timely and adequate financing remains a major obstacle. Traditional banks often maintain a conservative, collateral-heavy lending model, demanding complex documentation that many SMEs, especially marginal and micro-enterprises, struggle to provide. As a result, a significant number of businesses remain excluded from formal credit systems.

This conventional model overlooks the operational realities of SMEs. While they may lack fixed assets, many possess strong growth potential. Banks must adopt more flexible credit assessment tools, focusing on alternative indicators such as cash flow stability, digital transactions, supply chain relationships, and sector-specific trends. One-size-fits-all lending must be replaced with customised financial products tailored to the actual needs of SMEs.

Encouragingly, some institutions—like Prime Bank PLC—are already exploring SME-focused solutions and alternative risk assessment models. Scaling such initiatives across the financial sector could unlock significant economic potential. In particular, unsecured or partially secured loans for working capital, equipment purchase, or expansion are critical. These allow SMEs to modernise and stay competitive in today's volatile economy.

The broader MSME sector contributes about 32% of Bangladesh's GDP and employs 85% of the industrial workforce, according to the SME Foundation and Bangladesh Bureau of Statistics. Yet many of these enterprises—especially those in rural and semi-urban regions—remain underserved due to infrastructural and geographic limitations.

As of December 2024, Bangladesh Bank data shows that out of total outstanding loans of Tk17,02,036 crore, only Tk3,13,175 crore (about 18%) went to CMSMEs. Even more concerning, less than 6% of this amount reached women-led enterprises.

However, digital transformation presents a powerful solution. Banks must invest in mobile financial services, agent banking, and digital platforms to improve financial inclusion. These tools allow SMEs to operate remotely, transact efficiently, and build a verifiable financial history to support future loan applications.

User-friendly mobile apps and web portals—especially in local languages—can simplify loan applications, inventory management, and tax filing. This is especially important for onboarding informal businesses previously excluded from the financial system. Additionally, banks can utilise alternative data sources—such as mobile wallet usage, utility bill payments, and e-commerce activity—to construct digital credit profiles without the need for traditional paperwork.

Despite the urgent need for capital, SME loan disbursement declined in 2024. Banks disbursed Tk229,312 crore in 2023, but this fell to Tk214,417 crore in 2024—a 6% drop. This worrying trend is likely driven by cautious lending, tighter monetary policy, and overall economic uncertainty. Given SMEs' critical role in employment and productivity, reversing this decline must be a policy priority. Simplified lending procedures and alternative credit assessments can be game-changers.

Beyond finance, banks can offer non-financial services that build SME capacity and long-term resilience. Business advisory support, financial literacy, digital training, and compliance assistance can have a lasting impact, particularly for women and youth entrepreneurs who often face social and financial hurdles.

Women-led CMSMEs make up 24% of the total, yet they remain vastly underserved. Of roughly 2.8 million women-owned businesses, formal financing remains negligible. While Bangladesh aims to allocate 15% of SME loans to women by 2027, current disbursement is under 6%. Between 2010 and 2024, total loans issued under the Women Entrepreneur (WE) category stood at just Tk20,574 crore—far below actual demand.

Dedicated loan products, mentorship initiatives, low-interest credit lines, and better promotion of refinance schemes can help address this gap. Banks should also offer preferential interest rates and grace periods for start-ups and tech-enabled ventures led by women and young entrepreneurs.

Realising the full potential of the SME sector will also require stronger collaboration between banks, the government, regulators, development partners, and fintechs. By aligning with Bangladesh Bank's credit guarantees, refinance schemes, and stimulus packages, banks can mitigate risk and increase credit flow. Additionally, they can act as intermediaries for concessional funds from institutions like the World Bank, ADB, and IDCOL, particularly for green and sustainable SMEs.

The current economic climate also offers an opportunity to pivot towards sustainable finance. Banks can promote 'green finance' by supporting SME investments in renewable energy, energy-efficient equipment, and waste-reducing technologies. Encouraging adoption of ESG (Environmental, Social and Governance) practices can enhance resilience, open doors to global markets, and attract impact-oriented investors.

Moreover, strengthening supply chain financing, offering inventory loans, and introducing insurance services can further help SMEs weather future shocks. However, one of the biggest hurdles remains formalisation. Many entrepreneurs avoid banks due to mistrust, a lack of financial education, or bad past experiences. Bridging this trust gap is crucial. Banks must simplify procedures, ensure transparency, and prioritise responsive service.

Encouraging account openings, digital transactions, and linking financial products with trade licences or tax IDs can gradually bring informal enterprises into the formal economy.

While global and domestic headwinds remain, they also present a chance for systemic change. By embracing innovation and inclusivity, banks in Bangladesh can enable SMEs to not only endure current challenges but also drive long-term, sustainable growth. The entrepreneurial spirit across the nation is alive and well. It's time for banks to step up—not just as lenders, but as partners in national development.

M Nazeem A Choudhury is the deputy managing director at Prime Bank PLC