Banking channels must recognize SMEs

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Banks and financial institutions should introduce innovative instruments to convince small and medium-sized enterprises (SMEs) to integrate them into formal banking channels, Khondakar Golam Moazzem, research director at the Center for Policy Dialogue (CPD), said on Saturday.

Banks think SMEs are unbankable, but it’s not hard to see that these small businesses are, in fact, doing quite well, he said.

Moazzem also said that this is not their weakness (SMEs), but rather their characteristic, and that is how they operate.

“It is the financial sector that must develop a model adapted to the financial inclusion of SMEs.”

He was addressing the Third Plenary Session “Macro-Financial Environment and Financial Sector” at the Ninth Annual Banking Conference-2022 organized by the Bangladesh Institute of Banking Management (BIBM) on Saturday.

Mahmood Osman Imam, Professor of Finance at the University of Dhaka, Md Mohiuddin Siddique, Professor at BIBM, and Md Shahid Ullah, Associate Professor, also addressed the session under the chairmanship of the former Deputy Governor of the Bangladesh Bank, Ziaul Hasan Siddiqui.

Emphasizing on making finance more accessible to SMEs, Moazzem said that foreign direct investment was mainly concentrated in large companies, while SMEs were even deprived of obtaining funds from formal channels.

He suggested that policy makers create an ecosystem to channel FDI to small businesses to largely contribute to the financial inclusion of this informal sector.

Despite a liberal FDI regime in Bangladesh, he notes, FDI inflow is not so satisfactory due to policy inconsistencies, bureaucratic hassles, lack of proper infrastructure and a complex tax system.

Moazzem suggested that banks and financial institutions partner with NGOs and organizations such as the SME Foundation to find a way to disburse funds to small businesses.

Professor Mahmood Osman Imam said banks and financial institutions were less interested in disbursing funds to SMEs through other entities due to higher transaction costs.

There was a 9% interest rate bar on loans, which made it harder for banks to disburse loans to SMEs through third parties, he added.

In addition, public banks are burdened with excessive liquidity while many private banks have faced irregularities in outstanding loans.

Two research papers “Foreign Direct Investment, Financial Development and Economic Growth: Empirical Evidence from Developing Countries” and “The Unconventional Monetary Policy Measures and the Covid-19 Pandemic: Lessons from Global Perspective” were presented during the session.

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