Can innovative financing products and delivery channels for small businesses promote inclusive growth?

Feisal Hussain, Team Leader, BFP-B

Feisal Hussain, Team Leader, BFP-B

From left to right:     Jalalul Azim, Managing Director and CEO, Pragati Life Insurance Limited; Gokul Chand Das, Member, IDRA; Arijit Chowdhury, Additional Secretary, Financial Institutions Division, Ministry of Finance; Helal Uddin Nizami, Commissioner, BSEC and Shawkat Hossain, Managing Director, BD Venture     Limited

From left to right: Jalalul Azim, Managing Director and CEO, Pragati Life Insurance Limited; Gokul Chand Das, Member, IDRA; Arijit Chowdhury, Additional Secretary, Financial Institutions Division, Ministry of Finance; Helal Uddin Nizami, Commissioner, BSEC and Shawkat Hossain, Managing Director, BD Venture Limited

 

Business Finance for the Poor in Bangladesh (BFP-B) presented the policy study findings of Innovative MSE Financing products and Delivery Channels in Bangladesh in a seminar on 19 March 2019.

The study focused on regulatory barriers in launching, operationalising, pilot-testing and up-scaling of innovative financing products and delivery channels. The policy recommendations are around reviewing and amending regulations in composite insurance products, digitised Know Your Customer (KYC) documents, cloud technology in the banking system, and crowdfunding.

Executive Director of Economic Research Group (ERG) Dr. Sajjad Zohir, who conducted the study on behalf of BFP-B, presented the findings at the seminar. The event concluded with a panel discussion and Q&A session between the panelists and the audience. This blog post explores more about the discussions of the seminar “Advancing solutions through Innovative MSE Financing Products and Delivery Channels in Bangladesh”.

 
 

Introduction

Financial inclusion is necessary for inclusive growth in Bangladesh. Innovation is always a catalyst for growth. We looked into innovative products and delivery channels for small businesses in Bangladesh, the key challenges and opportunities they face.

From the study, it is clear that, if regulated properly, these products and delivery channels have tremendous potential to foster economic growth and increasing access to finance for all. In this regard, both the public and the private sector play a very important role in setting up and implementing policy guidelines that will promote their growth.

Regulators are ready to take recommendations from the stakeholders and to engage them with government development process for better policies that will boost inclusive growth.
— Helal Uddin Nizami, Commissioner, BSEC

Innovative financing: Challenges

Currently, Bangladesh faces a number of challenges when it comes to providing equal access to finance to small businesses. These challenges are a barrier to inclusive growth.

Some of the challenges include lack of insurance services and providers for small businesses, low promotion of innovations, and data insecurity.

There is also an urgent need for coordinating the activities of fintech companies and regulators. Moreover, banks are not always accessible to small businesses. It is important to open new avenues to increase these businesses’ access to finance.

Though small businesses contribute to the economic growth as much as the financial sector altogether, there is still remains an unequal distribution to financial access. For every 1 taka micro and small businesses receive as loans, medium and large businesses secure 7 taka.

Due to higher cost of distribution and higher apparent risks associated without credit histories, small businesses remain commercially less appealing to financial institutions.

 
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Key Policy Recommendations

A specific set of solutions and policy recommendations are required to solve these challenges. Some possible solutions in these areas are reviewing and setting up new regulations for composite insurance products to ensure better insurance services, digitising the KYC process for data security purposes, using more cloud technology in the banking system and making use of crowdfunding to encourage innovative investments.

Deeper insurance penetration is possible through alternative delivery channels and low-cost business process. This can be achieved by:

  • Revising Insurance Act 2010 to include composite insurance product.

  • Relaxing investment guidelines of Insurance Development and Regulatory Authority (IDRA) to pilot partner-agent model between insurance companies and microfinance institutions and creating new regulatory space for microinsurance.

Impact: If these changes are adopted, at least total $7,500 million of risk can be insured annually, generating premium income of $80 million. 12.5 million microfinance borrowers can benefit using microinsurance.

Cost of acquiring and servicing small businesses can be significantly reduced through digital transformations in documentation and cloud based storage for financial data. For which regulators can:

  • Revise circulars for consistent KYC requirement across different sectors and services and allow digitised documentation as evidence.

  • Develop guidelines to allow banks to store financial data using private cloud technology and to invest in locally owned clouds for safer financial data storage.

Impact: Cost of maintaining hardcopies of KYC documents will be reduced by 50% if these changes are enacted. Cloud technology will allow banks to access data 25% more efficiently and reducing the technical error by approximately 30%.

Creating additional flow of liquidity into financing small businesses through alternative investment tools will reduce the pressure of liquidity from the banking sector. This is possible by:

  • Introducing crowdfunding in existing rules and guidelines as alternative investment and use a regulatory sandbox approach to test feasibility.

Impact: These changes will trigger experimenting in equity market and allow innovative businesses to reach out to a large number of potential investors at once.

 
Dr. Sajjad Zohir, Executive Director, Economic Research Group (ERG)

Dr. Sajjad Zohir, Executive Director, Economic Research Group (ERG)

Arijit Chowdhury, Additional Secretary, Financial Institutions Division, Ministry of Finance

Arijit Chowdhury, Additional Secretary, Financial Institutions Division, Ministry of Finance

 

Panel Discussion key points

At the panel discussion after the presentation, the panelists discussed recommendations.

In his statement Arijit Chowdhury, Additional Secretary, Financial Institutions Division, Ministry of Finance emphasised that the government encourages innovative financing products to reach sustainable development goals.

When it comes to insurance services, Bangladesh is still lagging behind. IDRA member Gokul Chand Das pointed out that this is due to the lack of skilled human resources and mismanagement. However, composite insurance might help to solve the problem and better human resource and regulations are required to deal with the issues currently facing the insurance sector. It is necessary to start implementing the insurance process in Bangladesh.

Helal Uddin Nizami, Commissioner, Bangladesh Securities and Exchange Commission (BSEC) pointed out that new rules allowed small businesses to raise capital from the existing market. Market capitalisations will help improve the landscape for Bangladesh but the capital and securities market idea must be further developed.

In her closing remarks, Ms. Afsana Islam, Private Sector Adviser, DFID Bangladesh stated that the government can start a regulatory sandbox for startups on a small scale. If this concept is successful, larger scale measures can be taken at a later point of time. She further stated that we need innovative MSE funding because traditional funding is not enough and that is where regulatory bodies have a very important role to play.

We need innovative MSE funding because traditional funding is just not enough to fund small businesses.
— Afsana Islam, Private Sector Adviser, DFID Bangladesh