Mohammad Musleh Uddin
Deputy Secretary (Research Associate)
R&D and SME Dev. Department
Dhaka Chamber of Commerce & Industry (DCCI)
Cottage, Micro, Small and Medium Enterprises (CMSMEs) are the backbone of any economy to grow up with a sustainable growth. Over the last few decades, in most developing countries, financing in CMSMEs is now considered as a “new paradigm” to poverty reduction and economic growth In the development pathway of Bangladesh, the contribution of CMSMEs is undeniable. They contribute to a large part of economic output through employment. According to International Cooperation Organization for Small and Medium Enterprises in Asia (ICOSA), the share of CMSMEs in all enterprises is 80% in Bangladesh while it accounts 97.60% in India, 99% in China and 99.70% in Japan. The CMSMEs comprise 50.91% of the total number of micro-economic units in Bangladesh. Although CMSMEs are the most important part of any developing economy the contribution of CMSMEs to the GDP is only 25% in Bangladesh, whereas it is 80% in India, 60% in China, 69.50% in Japan 52% Sri Lanka and 40% in Vietnam.
CMSME Financing in Bangladesh:
It is encouraging that Bangladesh Bank has taken many initiatives and schemes to bring the CMSMEs into the mainstream of the economy through access to finance. Despite taking so many steps to develop CMSME sector of Bangladesh by the govt., compared with large enterprises, CMSMEs face special challenges or difficulties in developing their working capital with limited access to finance.
CMSMEs continues to face constraints particularly in terms of their ability to convert their trade receivables into liquid funds and have to account for significant losses in the form of irrecoverable bad debts. Furthermore, the working capital shortage disrupts liquidity since majority of the business to business (b2b) transactions are credit based and therefore liquidity shortage may affect productivity, costs and derivatively competition, value addition and others.
Adding with these, the Covid-19 pandemic brought more complex situation for the sector and hardly hit along with all spheres of life and business.
A new Initiative in alternative financing for CMSMEs:
To address this issue of disregarded trade receivable that predominantly affecting the CMSMEs, a debt factoring institutional mechanism can be utilized to circulate cash-flow. The financing system is an online bill-discounting platform where CMSMEs will get a way of raising funds by selling trade receivables from corporates. It is a mechanism to facilitate the CMSMEs through invoice financing by multiple financiers including Banks & NBFIs. The financial transactions will be processed through a systematic online process among the corporates, Banks & NBFIs and CMSMEs. The main objective of this platform is to address the working capital shortage and temporary liquidity shortfall of CMSMEs through accessing finance without collaterals for liquidating their receivables, which, in turn, would enable their businesses to grow.
The platform will enable discounting of Invoices/Bills of Exchange of CMSME sellers drawn on large Corporate, including Government departments and Public Sector Undertakings, through an auction mechanism to ensure prompt realization of trade receivables at competitive market rates. Moreover, this will serve as an opportunity for Banks and NBFIs alike to participate in this structured and ready market and bid winning bank will be in an advantageous position to extend its lending portfolio. In addition, CMSMEs will get greater access to finance, at competitive rates without providing any additional collateral.
On the same note, corporates will save on procurement cost through an improved negotiation of financing term for its vendors. Suppliers enjoy collateral free without recourse financing at a rate much lower than a bank loan. Since the corporates are enabling their CMSME suppliers get paid in a matter of few days, they are in a comfortable position to negotiate on the overall cost of procurement.
Success of TReDS platform: an Indian Case
‘Trade Receivables Discounting System (TReDS)’ was approved in India by Reserve Bank of India in 2014 to facilitate the discounting of invoices. Within last two years, 1600 MSMEs, 260 corporate houses and 28 banks and NBFCs listed in the TReDS platform- ‘M1xchange’ in India financed about US$416 million worth of MSME invoices. In 2019, this platform dealt around US$730 million indicating a huge growth.
- The digital platform can generate tangible benefits for CMSMEs as their likelihood of recovering their trade receivables in the shortest time frame possible helps in improving liquidity, generate working capital and involved minimal cost since the proposal has outlined a zero service charge.
- However, the pertinent laws including banking regulations require amendment and a regulatory impact assessment may be considered that would consider the effectiveness and benefits of such a platform to the business and economy.
- The processes and procedures of this platform should be governed through a guideline which could be formulated through intensive stakeholder consultation compliant with the legal and regulatory provisions which may be issued and amended from time to time.
- To popularize the platform, registration fees, transaction fees, VAT/TAX, pricing mechanism benchmark and other associated expenses need to be minimal.
- A strong IT infrastructure is needed to set up the platform. In this regard, it is important to give permission to those companies by the License Operator for clearing and settlement services.
- The construction of the platform needs to be made through bidding process rather giving opportunity to a single organization. And a government authority like Bangladesh Bank can have the authoritative power to control the platform for manipulation.
CMSME entrepreneurs are largely engaged with the value chain of agricultural, RMG, manufacturing and other export oriented and local industries. After Covid situation, the alternative financing platform may help the vulnerable CMSMEs to cope up with the disrupted business environment. Furthermore, sustainable development of CMSMEs will impact the behavior of large industries and help to create a healthy economic ecosystem for the country. Thus, CMSME enterprises need to be supported with sufficient financing to survive in this pandemic time with adequate working capital and trade receivable factoring can be one of the best alternative ways to financial stability.
Views expressed here are not from the organization that the authors represent.