i-SME: helping small businesses graduate from microfinance to banks loans

Small businesses in rural and peri-urban areas of Bangladesh often do not have access to formal financial services. This is because they lack organised financial data, legal documents, proof of repayment ability, security arrangement against loans, credit rating, and the financial literacy needed to be eligible for bank loans.

In addition, these businesses do not do have access to any assistance from financial institutions to process loan applications. This creates an environment that greatly inhibits their business growth and leads them to resort to informal sources of finance.

Meanwhile, the transaction cost for financial institutions to reach small businesses is very high, so they miss out on a big market.

I-SME: ENHANCING FINANCIAL PREPAREDNESS

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The Bangladesh SME Corporation (BSCL) launched i-SME to enhance the financial preparedness of small businesses. The i-SME initiative uses a proprietary MSME graduation model, which is designed to prepare small businesses for bank loans by first utilising micro-loans. Small businesses register on the i-SME platform for the opportunity to apply for micro-loans from participating partner microfinance institutions. 

As small businesses receive micro-loans and make regular instalment payments, i-SME creates instalment payment analytics. It also generates Credit Evaluation Reports (CER) that include financial statements, business valuation reports, credit evaluation reports and bank account-opening documents.

An i-SME partner bank can then use these documents in a loan appraisal process. The bank then extends finance to small businesses that might otherwise be unable due to, for example, a lack of compliance with loan appraisal requirements.

To date, 60 small businesses have availed loans with i-SME assistance. Of these, 26 have graduated to avail bank financing amounting to BDT 5,800,000.

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SUCCESS STORY 1: EVERYDAY NEEDS GENERAL STORE

CONSTRAINTS FACED BY AKBAR ALI, EVERYDAY NEEDS GENERAL STORE, COLONY BAZAR, SADAR UPAZILA, BOGRA

Everyday Needs is a general store trading daily groceries and cosmetics owned by Mr. Akbar Ali, who acquired the decaying business in late 2016. When he began his business, due to lack of inventory, the shop was losing opportunities to earn higher sales and profits. Mr. Akbar lost potential customers because he could not offer a diverse selection of products to meet customer needs. As he did not have capital to invest in inventory, his loan applications to several banks were all rejected due to lack of prior bank transactions and newness of the business.

I-SME SUPPORT TO EVERYDAY DAY NEEDS GENERAL STORE

Akbar learned that i-SME service centres offer business development services and assistance in loan application process. With i-SME support, Akbar received a micro-loan of BDT 50,000 from “SUPPORT for Rural Advancement” in June 2017. After the loan was repaid within a year, Akbar opted for a larger bank loan at a lower interest rate. 

Akbar then applied for a loan from project partner Bangladesh Commerce Bank. While Akbar repaid the micro-loan, the i-SME platform generated transaction analytics and credit evaluation report that fulfilled the bank’s transaction history requirements. Bangladesh Commerce Bank then sanctioned a two-year SME loan of BDT 400,000 to Everyday Needs.

IMPACT OF I-SME ON EVERYDAY NEEDS GENERAL STORES

Akbar invested the loan amount in working capital to purchase additional inventory worth BDT 300,000 and to repay suppliers an outstanding amount of BDT 100,000. As he purchased the bulk inventory in cash, he was able to buy at a discounted rate. This increased his sales and profit by 66% in comparison to the previous year.

Currently, the store makes an average daily sale of BDT 20,000, which generates a net profit of 10%. Mr. Akbar is optimistic about the future of his business and plans to include plastic commodities in his inventory.

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I am planning to obtain a dealership of trading PRAN-RFL plastic products. Expansion in plastic products will double my daily sales and profitability.
— Mr. Akbar Ali, Everyday Needs general store

SUCCESS STORY 2: MILON STORE

CONSTRAINTS FACED BY SREE POLAN SARKER, OWNER, MILON STORE, DURGAPUR BAZAR, RAJSHAHI

Polan had been trading grocery items in a makeshift temporary store in the open marketplace for 10 years. Later, he acquired grocery shop Milon Store and has been running it for six years. However, due to lack of finances, he was unable to buy bulk goods at lower wholesale rates, to improve the product offerings of the store, and to expand his business. This led to decreased sales margins and profitability as competition grew.

Polan approached several banks for loans, but was unsuccessful due to lack of transaction history and not meeting minimum bank requirements such as adequate physical assets for collateral. 

HOW I-SME INTERVENTIONS RESOLVED THESE CONSTRAINTS

With i-SME support, Polan received a micro-loan of BDT 50,000 from “SUPPORT for Rural Advancement” in May 2017. After the loan was repaid within a year, the business opted for higher amounts of bank loans at lower interest rates. Polan then applied for a loan from project partner Bank Asia. While Polan repaid the loan, the i-SME platform generated transaction analytics and credit information report. Bank Asia then sanctioned another two-year SME loan of BDT 300,000 to Milon Store.

IMPACT OF I-SME ON MILON STORE

With his loan from Bank Asia, Polan purchased additional inventory for his shop and added cosmetics to his line of products. He purchased grocery inventory stock worth BDT 200,000 and cosmetics worth BDT 100,000. 

The increased stock of products raised the sales by 66% compared to that of the previous year. The shop currently generates an average daily sales revenue of BDT 25,000. With this newfound access to finance, Mr. Polan plans to expand his business in future.

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Milon Store has the potential to utilise further investment in inventory. I am hoping to apply for BDT 1,000,000 loan once I have repaid the existing one.
— Mr. Sree Polan Sarker, Milon Store

ABOUT BUSINESS FINANCE FOR THE POOR IN BANGLADESH

Business Finance for the Poor in Bangladesh co-invested in i-SME initiative to enhance the financial opportunities of small businesses. Business Finance for the Poor in Bangladesh is a £26m strategic partnership between the UK and Bangladesh governments to boost access to financial services for small businesses.