Informal sector struggles in Bangladesh due to rigid banking policy

DHAKA, Bangladesh

Despite making major contributions to Bangladesh’s economy, the country’s informal sector continues to struggle due to unfriendly banking policies, say experts.

According to the Bangladesh Bureau of Statistics, small- and medium-sized enterprises (SME) are responsible for 25% of the country’s GDP and nearly 40% of the employment. The country has 7.8 million registered SMEs that employ 24.5 million people.

But the National Association of Small Cottage Industries of Bangladesh recently reported that 50% of the SMEs were affected or closed during the pandemic, as most of them were unable to get their hands on government-announced stimulus.

Marking Entrepreneurship Week, which falls on March 1-7, Aktaruzzaman Akash, 28, who recently graduated from Jahangirnagar University in the Dhaka, told Anadolu Agency that he started dry fruit, honey, and shrimp farming. He moved to the southwestern Satkhira district, known for the world’s largest mangrove Sundarban forests, to try his hand at growing and marketing agriculture products.

“I started business dreaming of establishing my company with employment opportunities in my villages. I faced financial hurdles during the pandemic. I couldn’t get support due to rigid bank documentation,” he said.

Chachi Mamun, head of the Bangladeshi SME Forum, said that there is a huge opportunity for the cottage, micro, small and medium enterprise (CMSME) sector in the country thanks to the availability of young population and fertile land.

“The sorry state has prevailed in the informal sector due to the go-slow mode in the bureaucratic management and non-cooperation between government and the private sector,” he said.

The government had announced 200 billion ($2.3 billion) for the CMSME sector affected by the COVID pandemic. But the country’s central bank and other financial institutions did not proceed with loans meant for SMEs and CMSMEs.

Banks deprive SMEs

In contrast, private banks granted loans to bigger businesses, said Mamun.

Fahim Mashroor, an expert and prominent technology entrepreneur, told Anadolu Agency that the government will have to ensure the survival of over 7 million SMEs as they are deprived of bank support.

“Under the Bangladesh central bank provision, SMEs or small businesses could not get loans from financial institutions until they are registered and obtained government license. But most of the people involved in SMEs do not have licenses. We have to ease the loan proceedings with less documentation, and the government should help in market for SMEs expansion further,” he said.

According to the local Centre for Policy Dialogue (CPD) think tank, only 30% of SMEs have bank accounts.

Mashroor asked the government to launch an internship payment scheme to help startups or private companies hire and train fresh graduates. He said many neighboring countries have launched such programs to support young people upgrading their skills.

Mafizur Rahman, managing director of the SME Foundation, said despite comparatively low interest rates of 9%, the $2.3 billion stimulus package failed to see any major loan disbursement. The government even offered to pay 5% of the interest so that borrowers would only have to pay 4%.

“We held meetings with private banks representatives to bring changes in loan policy to support the informal sector like what we see in China, Thailand, or Malaysia. It will also cover freelancers to get soft loans through digital financing,” he said.

He said if the policy is approved by the government, the banks could provide loans up to 50,000 takas ($5,800) to SMEs after just producing a national identity card, avoiding the need for extensive documentation.