Economy of Bangladesh · Industrial Development · Industrialization · Small and Medium Enterprise (SME)

A sustainable mode of financing for industries

A sustainable mode of financing for industries

Md. Joynal Abdin

The Independent on August 19, 2016

 

The present government of Bangladesh has expanded its vision 2021 into vision 2041 by updating a few targets. Prime Minister Sheikh Hasina is committed to us to reaching into a peaceful, prosperous, happy and developed nation comparable with the developed world by the year 2041. In other word, we could state that, in the year 2041, Bangladesh will become a peaceful, prosperous and developed country after crossing the status of a middle-income country. With these visions in mind government formulated the 7th Five Year Plan and started sincere implementation of the document. On the other hand, Bangladesh Nationalist Party (BNP) chairperson Khaleda Zia announced her plans to ‘elevate Bangladesh to a higher-middle income state by 2030’ during the last council of her party. As per her declaration Bangladesh will become a modern democratic and higher middle-income country with the per-capita income reaching around US $ 4,000 to 5,000 by 2030.  Government’s vision 2021 and 2041 and opposition’s (not in parliament) vision 2030 both the declaration make a consensus that Bangladesh is united for being a higher middle income country by the period of 2030 to 2041. Bangladesh has few remarkable achievements in the Millennium Development Goals during 2000 to 2015. We are more sincere to achieve the Sustainable Development Goals by 2030.

      All the above mentioned targets / goals state that presently Bangladesh economy is passing through a significant phase of preparing us to be a higher middle income country by 2030 – 2041 period. To achieve this vision Bangladesh has to fight with a long list of challenges like providing decent job to a large number of unemployed and under employed population, accelerating economic growth into double digit and maintain a steady upward curve, increasing social safety net, ensuring education, health care, food security, self-sufficiency in food, technological development so on and so forth. Government is unable to meet these targets without private sector development through industrialization. For this reason industrial development is the highest priority of the government to facilitate self-employment, new employment generation, increasing export earnings, fostering economic growth finally building a poverty free higher income Bangladesh.

National Industrial Policy 2016, 7th Five Year Plan, ICT Policy, and Upcoming SME Policy Strategy incorporate specific tasks for each of the organ of the government for promoting industrialization from respective ends.

Currently there are 7.81 million different categories of industrial units / enterprises in Bangladesh; among these 6.84 million are cottage, 0.10 million micro, 0.85 million small and 0.07 million medium enterprises / industrial units. About 87.44 percent  of the enterprises are fully domestic market based, only 1.14 per cent  enterprises are fully export oriented, and 0.82 percent enterprises are involved with local as well as export markets. These industries are employing about 20.50 million people; about 4 million of them are female. Current rate of employment generation of Bangladeshi enterprises is about 3 people per enterprise. It is very low in number, because most of the enterprises are suffering from different types of difficulties. If a congenial business environment could be offered the same number of enterprises could generate employment to 80 million people easily.

Major challenges of the Bangladeshi enterprises are experiencing are; low productivity due to the use of inappropriate technology, smaller investments capacity due to limited access to finance, irregular/inadequate supply of power, high rate of interest on bank loans, inadequate availability of raw materials (in few sectors), absence of clear-cut government policies, lack of skilled technicians and workers, low range of product diversity due to the absence of research and development facilities, poor physical infrastructure and high transportation costs, unofficial cost of doing business,     absence of an effective and transparent legal system, and poor information about market opportunities and requirements of that market etc.

If we would like to draw a frequency table with all of the above mentioned challenges of the industrialization of Bangladesh then the most frequent challenge would be smaller investment capacity, limited access to bank loan, higher rate of interest in one sentence it would be problematic access to finance. Bankers / lenders are arguing that they are searching for qualified investors / entrepreneurs with adequate amount of bank loan but not getting entrepreneurs. But the entrepreneurs are claiming that one of the most important barriers towards further growth of their business is limited investment capacity or unavailability of bank loan. Let’s try to believe that both the parties are right and both the opposition statements are true. Further analysis done by various experts find out that, SMEs limited access to finance is not the disease; but it is a symptom of disease. Most of the SMEs are doing business informally. They do not manage proper written documentation of financial transactions even the transaction of goods / raw materials. They do not maintain business account in any bank just to deposit the cash. As a result,  it is quite difficult to determine their depth of financial ability or eligibility for a bank loan. Whatever is that cause or effect it is quite sure that, doing business with a double digit rate of interest loan is quite difficult.

In such a situation government could promote venture capital for lending in SME sector of Bangladesh. Now come to the point, what venture capital is? Venture capital is financing that investors (lender as partner) provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions that pool similar partnerships or investments. Why venture capital is worthy than that of the bank loan? In case of bank loan the entrepreneurs are bound to repay the lending amount with interest (in a predetermine rate). The risk is taken by the entrepreneur’s only. On the other hand, venture capital is an amount of fund (in a proportionate rate) entrepreneurs are getting against ownership (of that particular portion) of the enterprise. Risk is shared by the entrepreneur as well as the venture capital investor / firm. Entrepreneurs could get relief of higher rate of interest of bank loan by using venture capital funds. On the other hand, banks are reluctant to finance the startups, whereas venture capital is offering funds to the startups only.

The idea of venture capital was originated in 1946 in the USA. Later on it became popular in Europe in 1970s. Statistics states that 1981 – 1987 is the most peak  tenure for venture capital mostly in the US and European economies. Journey of venture capital in Bangladesh is still in an infant stage. A few venture capital firms started their journey during the last five years. Notable Bangladeshi venture capital companies are BD Venture Limited, Venture Investment Partners Bangladesh Ltd, SEAF Bangladesh Ventures (SEAF BV), Athena Venture & Equities Ltd, and  Bangladesh Venture Capital Ltd etc.

Government issued Venture Capital Rules “Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015” for that first time in Bangladesh in June 22, 2015 through Gazette Notification. It is the primary guideline for the venture capital firms. Now government shall undertake initiative to make this source of capital popular through different initiatives. Because of it is interest free (based on profit) source of fund for investing by startups or further growth of existing small enterprises. From religious perspective it is more acceptable due to its non-dependency on predetermined rate of interest. Till now only a few SME entrepreneurs hardly know about this source of fund. They are running behind high interest bank loan from one bank to another but never think of going to any venture capital company’s office. It is because they are not aware of it. So existing venture capital firms as well as the government, development agencies could take the role to promote venture capital and make people’s awareness about it.

Till now Bangladeshi venture capital firms are having a very limited amount of funds to invest in comparison of schedule banks or leasing companies. Government is investing the Entrepreneurship Equity Fund (EEF) as venture capital for fostering industrialization in Bangladesh. Previously it was managed by the central bank and currently it is being managed by the ICB. Criticism is available in the market that this is a political fund and many EEF invested firms are not becoming full functioning ever. Therefore, this venture capital amount of the government could be invested through private venture capital companies for better utilization and proper management of the fund. Government could facilitate local venture capital companies to get similar funds from global venture capital companies or investment banks. Low cost multinational funds like IDB, ADB could make available to the local venture capitalists to make the sector stronger and matured. A full functioning venture capital sector could meet up the increasing demand for investment fund of the local SME sector. It could lead us to an industrial revolution in Bangladesh. This industrial revolution is essential for achievement of vision 2021, 2030 and 2041. Thus a dependable financing mechanism could foster the movement of Bangladesh to become a higher middle income country before the projected period.

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