Banks should go further in disbursing loans by tackling challenges facing the cluster-based approach to lending
IDLC Finance Limited kicked off cluster financing in 2010 in Bogura's light engineering sector, lending around Tk60 crore – the recovery rate of which was around 98%.
Bank Asia Limited and BRAC Bank followed suit, each financing in specialised clothing clusters at a concessional interest rate in 2018. Their loan recovery was 100%.
Despite a handful of success stories, banks and non-banking financial institutions (NBFI) are yet to adopt an effective approach to cluster financing for small and medium-sized enterprises (SMEs) in the wake of some challenges, according to a study.
The revelation came at a workshop titled "Are Banks Engaged in SME Cluster Financing?" which was hosted online on Wednesday by the Bangladesh Institute of Bank Management (BIBM).
BIBM Prof Shah Md Ahsan Habib presented his research findings at the event.
As per the findings, banks are only minimally interested in cluster financing for SMEs.
The study observed that only 5-6% of loan disbursement targets in this sector are being achieved through cluster financing.
Cluster financing 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.
Underscoring the importance of such financing in the development of cottage, micro, small and medium enterprises, the central bank needs to form a separate cell and formulate a policy, the study recommended.
The research found that cluster financing did not increase between 2013 and 2019 despite the increase in loans disbursed by banks in the SME sector.
Except for one or two banks, the rest are only minimally interested in disbursing loans in this sector.
The researchers recommended the formulation of a separate policy on cluster financing in coordination with the Bangladesh Bank, the SME Foundation and the ministries concerned.
Taking part in the discussion, Arif Khan, chief executive officer and managing director, IDLC Finance Limited, said those who are working in this field should not just formulate theoretical policies while sitting in the offices, but rather, they should come up with an effective policy based on their expertise.
Husne Ara Shikha, general manager of SME and Special Programmes Department, the Bangladesh Bank, agreed with Arif Khan.
She said the reason behind the lack of cluster financing policy is that there are no SME-related products on the market.
Highlighting the reluctance of banks to do such financing, she said from January to March this year, 26 banks and 26 NBFIs did not provide any money for a cluster-based approach to lending.
Bangladesh Krishi Bank Managing Director Ali Hossain Prodhania said many banks are not interested in financing the cluster system for various reasons including: the lack of trade licences among the traders, a lack of good guarantors against loans, and above all, a lack of credible information about the loanees.
Farzana Kha, general manager, SME Foundation, said in 2013, the SME Foundation identified 177 clusters across the country. These include: handicrafts, light engineering, ready-made garments, rice mills, shoes, chess, jamdani, plastic items, etc.
Banks can start working on financing possibilities in these identified clusters.
Speaking as the chief guest of the workshop, Bangladesh Bank Deputy Governor SM Moniruzzaman said the central bank has always been working for the development of the SME sector.
Banks should go further in disbursing loans by tackling the challenges facing cluster-based lending.
The challenges include: the high cost of supervision and monitoring of SMEs, the lack of knowledge about cluster financing, the regulatory ban over availing refinancing facilities in the case of a loan without collateral, and above all a lack of interest on the part of top management in cluster financing.
BIBM Director General Md Akhtaruzzaman presided over the workshop, which was moderated by Mohammed Sohail Mustafa, CFA, BIBM associate professor and director (Training).