Expanded Information Services on Small Loans Will Lead to Increased Credit Access for SME

Lobbying and public education efforts by the IRIS JOBS Program recently helped bring about changes at the Credit Information Bureau (CIB) of the Bank of Bangladesh, which may usher in a new credit era for Small and Medium Enterprises (SMEs).

The JOBS program recognized that the Credit Information Bureau's failure to provide information on loans of less than 1 million Tk ($20,000) resulted in the exclusion of important data regarding smaller loans, which are usually associated with SME needs.

JOBS personnel therefore worked to address this issue by meeting with officials from the Bank of Bangladesh, various ministries, trade associations and chambers of commerce.  Representatives of JOBS also spoke in public and lobbied for the extension of the CIB to include small loan information for SMEs.

The Central Bank of Bangladesh has now expanded the CIB's services to include information regarding loans as small as Tk. 100,000 ($2,000).  During the first phase of CIB expansion, beginning in September of this year, CIB will maintain and share information on loans as low as Tk. 500,000 ($10,000).  Over the course of the second phase, this information will be extended further, to loans as small as Tk. 100,000.

Removal of Interest Rate Band on SME Loans

One priority of the JOBS program is to advocate increased access to credit by the SMEs.  JOBS has been championing the abrogation of the interest rate band and has strongly advised the government to allow the banks to charge market-based interest rates for SMEs.  As a result of these efforts, on July 14, 1999, the Government of Bangladesh removed the interest rate band (9%-12%) and the commensurate 3% subsidy on loans to SMEs.  The liberation of credit by the government will allow credit to be subjected to market mechanisms.

The interest rate band was a classic example of the operational failure of a well-intentioned government incentive program.  Ironically, the subsidized interest rate designed to help SMEs grow, did them a disservice.  Under the program banks were induced to give SME loans at a lower interest rate than the market rate and the government would subsidize the loss that the banks suffered.  However, the reimbursement procedure to obtain the subsidy money from the government was extremely time-consuming and became a formidable task for the banks.  This bureaucratic burden and the fact that banks often did not receive the promised subsidies, actually discouraged banks from making loans to SMEs.

Since JOBS also encourages the idea that banks should provide some incentives to responsible SME borrowers for timely repayment of loans, the government’s decision to remove the interest rate band is seen as a timely move in the right direction.

Increasing the Turnover Ceiling for SMEs

Entrepreneurs, business associations, and chambers of commerce applauded the Government of Bangladesh's decision to raise the turnover tax ceiling from Tk. 1.5 million to Tk. 2 million.  This decision, strongly encouraged by the IRIS JOBS Program, represented a move towards ensuring a level playing field for SMEs operating in Bangladesh.

The need to raise the tax ceiling has become an increasingly pressing issue in Bangladesh because SMEs in India are enjoying more conducive arrangements and offer products at more attractive prices.  SMEs need to maintain accounts systematically, in a standardized format that is acceptable to authorities for VAT and income tax purposes.  JOBS, the chambers of commerce and various associations, continue to advise the government to increase the turnover ceiling to Tk. 3 million, in an effort to make it par with the Indian ceiling of Rupee 4 million.

USAID Revives LCG on Private Sector Enterprise Development

USAID’s move to revive the Local Consultative Sub-Group (LCG) for Private Sector Development brought together donors in a concerted effort to focus on private sector enterprise development.  As part of this undertaking, The JOBS program assumed the responsibility of serving as the secretariat of the LCG and coordinating LCG activities.   The LCG supports working jointly on specific activities to ensure improved use of scarce resources that are available for development and to avoid repetitious efforts made by donors.  The LCG also serves as a platform for the donors to review policy issues related to sectors of activity.  The Private Sector Development LCG shares experiences in the development of SMEs and coordinates policy advocacy in the area of enterprise development

In the first meeting, participants from the different donors involved in private sector development agreed that the LCG will serve as a forum for progress review and for offering ideas on implementation synergy.  The group has decided to meet every three months.