Advancing Financial Solutions for Small Businesses in Bangladesh

Highlighting Bangladesh’s MSME sector, the article advocates for digitally integrated loan products driven by fintech innovations as a transformative solution to address financial access challenges and propel economic growth.

Micro, Small, and Medium Enterprises (MSMEs) are the backbone of job creation in developing economies like Bangladesh, yet they face significant financial access challenges. Yet, accessing finance remains a struggle for these businesses, obstructed by information asymmetry, high transaction costs, and a scarcity of collateral. For MSMEs, access to digitally integrated loan products—providing direct and swift entry to working capital loans at fair interest rates—is crucial. Utilizing digital data, credit scoring, and artificial intelligence offers a transformative opportunity to improve Bangladesh’s credit landscape. The seamless digitalization of lending processes marks a pivotal innovation in the country’s expanding market. Fintech advancements have streamlined the gathering and sharing of information, fundamentally altering how funds are distributed and utilized. This study examines the financial hurdles encountered by MSMEs and proposes the creation of a digitally unified ecosystem to foster the sector’s expansion.

In developing countries, Micro, Small, and Medium Enterprises (MSMEs) play a major role in the economic development of every country. Today, it’s clear that this sector is a leading source of employment, accounting for 80% of Bangladesh’s total workforce. In addition, the sector provides 25% of the country’s GDP by generating a wide range of products and services. Access to finance stands out as a crucial need for MSMEs to operate smoothly, as maintaining continuous business operations presents a significant challenge. Additionally, prioritizing eco-friendly production, ensuring employee health and safety, and improving their quality of life pose substantial challenges. Conversely, over 75% of MSMEs lack access to banking services, often due to insufficient documentation, such as trade licenses, or a shortfall in capacity, skills, and innovation. Furthermore, the cost of operations in this sector is on the rise. Nevertheless, many entrepreneurs rely on informal channels to operate their businesses, securing capital independently or through family and friends. Frequently, MSME entrepreneurs struggle to sustain their businesses for reasons such as inadequate research, absence of a clear business plan, insufficient funding, financial mismanagement, and ineffective marketing strategies. Despite the extensive research addressing various challenges, there’s a significant gap in studies exploring SME policies and regulations to facilitate the adoption of innovative technology in Bangladesh. This contrasts with the abundant research primarily aimed at identifying and resolving issues, highlighting a need for focused investigation into policy and regulatory frameworks supporting technological advancement in the SME sector.

Over the past decade, financing for SMEs has increased from 85,323 crore taka ($1,003.8 million) to 2,20,550 crore taka ($2,594.7 million), showcasing a significant upward trend. This growth signals the effectiveness of stakeholder initiatives aimed at enhancing the SME sector in Bangladesh. ​

In Bangladesh, an estimated 8 to 12 million MSMEs operate, with approximately 2.30 million situated in urban areas and the majority in rural locations. The sector’s market size exceeds BDT 437.80 billion, yet rural MSMEs often remain inaccessible to traditional financial institutions due to existing banking structures and financial models. This gap presents a substantial opportunity to support these unbanked businesses by leveraging digital solutions. Connecting MSMEs with funding through diverse channels such as banks, non-profits, and crowdfunding could foster sustainable business growth. The digital integration of these channels offers a promising pathway. Thorough research is essential to outline such an ecosystem, involving key fintech ecosystem stakeholders: startups, technology developers, the government, financial consumers, and traditional financial institutions. At the heart of this ecosystem, fintech initiatives drive significant innovations, targeting niche markets and offering personalized services. Technology developers equip fintech startups with necessary digital platforms, while government regulations align with national economic goals to support the fintech landscape. Financial consumers, including individuals and SMEs, form the revenue base for fintech firms. Traditional financial institutions, facing competition from fintech, are adapting by collaborating with startups to maintain their market position.

Boasting one of the world’s fastest GDP growth rates, Bangladesh stands out as one of eleven emerging markets on the brink of achieving upper-middle-income status. This shift is characterized by a transition from traditional industries to more modern, non-traditional sectors. Despite these advancements, the country’s various sectors, including finance, face technological deficits. In an economy as vibrant as Bangladesh’s, the financial industry is poised for significant digital transformation. Yet, the journey toward fintech integration is complex, marked by challenges such as adapting a consumer base accustomed to conventional methods and addressing privacy concerns effectively. Additionally, the relatively low rates of internet and banking penetration present further hurdles to overcome.

In Bangladesh, while nearly 70 percent of adults are linked to financial services via Mobile Financial Services (MFS) accounts, about 30 percent remain unbanked. The usage of MFS among these individuals is predominantly for basic transactions, such as remittances. Several challenges persist, including limited financial literacy, a lack of proficiency with mobile applications and devices, inadequate security and privacy measures, and cultural attitudes towards loan repayment. These issues highlight the need for comprehensive strategies to enhance financial inclusion and education.

Innovation and SMEs in Bangladesh

The 2013 BBS National Economic Census reveals that Bangladesh is home to an estimated 12 million Micro, Small, and Medium Enterprises (MSMEs), marking a significant presence with a robust annual growth rate of 60%. These enterprises are pivotal to the economy, contributing approximately 25% to the Gross Domestic Product (GDP), accounting for 31% of industrial sector productivity, and providing employment to 30 million people—representing 80% of the industrial workforce. Despite their economic contribution, MSMEs face considerable challenges in accessing finance, with over 60% of micro-enterprises excluded from formal credit systems and facing prohibitively high interest rates ranging from 24% to 40%.

The advent of financial technology (fintech), including the use of smartphones, the internet, big data, and artificial intelligence (AI), offers a promising avenue to address these challenges. The concept of digital lending, exemplified by Ant Financial’s “3-1-0 model” in China, demonstrates the potential of fintech to revolutionize credit access. This model, which allows loan applications to be processed in 3 minutes, funds disbursed in 1 second, and requires no human intervention, has significantly expanded credit access, showcasing a successful digital credit business that partners with over 400 banks.

For Bangladesh, the integration of fintech into the MSME sector represents a critical opportunity for growth and innovation. The Central Bank’s role in encouraging banks to adopt digital lending practices is crucial. By embracing digital solutions for lending, Bangladesh can enhance financial inclusion for its MSMEs, propelling the sector forward and reinforcing its position in the emerging market.

Advancing Micro, Small, and Medium Enterprises: A Holistic Approach to Digital Finance and Innovation

Presenting a pioneering model designed to bolster the Micro, Small, and Medium Enterprise (MSME) sector, particularly in developing nations like Bangladesh, this initiative endeavors to forge strategic partnerships with financial institutions, fintech firms, and insurance companies. By fostering collaboration, this model aims to cultivate a sustainable ecosystem that empowers MSMEs with improved access to finance, offering lower interest rates to diminish transaction costs and foster an environment conducive to business expansion.

The development of this model was guided by a robust research methodology, encompassing literature reviews, case studies, fieldwork, and comprehensive analysis of primary and secondary data. Utilizing statistical models, artificial intelligence, and digital channels, this research adopted a mixed-methods approach to gain nuanced insights into the potential impact of this initiative.

The data collection process was exhaustive, comprising surveys of 1000 MSME entrepreneurs, alongside engagement with financial institutions and fintech companies. This phase was instrumental in shaping research inquiries, reviewing existing data, determining the research framework, gathering new insights, analyzing data, and presenting findings.

This study’s significance lies in its endeavor to delineate a novel model capable of fortifying the MSME sector in Bangladesh, potentially catalyzing positive economic ramifications. By rendering finance more accessible to MSMEs, this model aims to stimulate business growth and potentially uplift a significant portion of the populace. Furthermore, if successful, this model could serve as a blueprint for other developing nations across Asia and Africa, aligning with the Sustainable Development Goals (SDGs) by 2030.

In essence, this model aspires to enhance MSMEs’ financial accessibility, fostering their growth and thereby contributing to Bangladesh’s economic development, while also offering potential benefits to other developing regions. The ultimate goal is to facilitate business expansion and economic prosperity, mindful of the broader economic impact while refraining from overstating potential outcomes.

(To learn more about the mentioned study, contact the author.)