Banks’ Participation in Small Enterprise Financing: Problems and Issues in Bangladesh

Abstract

The economic and social importance of Small Enterprise (SE) sector nowadays is well acknowledged in academic and policy literature. SEs play a very momentous role in all countries including the developing economy like Bangladesh by contributing toward sustainable economic growth, employment creation, entrepreneurship development and export earnings. Focussing on the small enterprises’ lack of access to finance due to their own constraints as well as the financial institutions’ perception of high risk and high cost, this paper reveals the problems encountered by the small enterprises in obtaining loans from commercial banks in Bangladesh and the major problems faced by commercial banks while financing small enterprises. Primary data collection reaches three hundred forty one (341) small enterprises where they were interviewed using a set of questionnaires administrated directly by the researchers. The survey results indicate that 65.39% enterprises received loans from banks, while the rest did not receive any loan, and from other results it enables the researchers to conclude that the small enterprises face several problems in obtaining loans from banks. It is evident that high interest rate is the most significant problem followed by excessive security and guarantee requirement, working capital requirement, complexity of documentation, non availability of loan in due time,  non availability of the required amount, banker's reluctance and negligence, and mal-practices of bank officials. For the bank category, 22 different commercial bank managers were interviewed guided by the questionnaire, they have cited different problems related to the small enterprise financing, of which non availability of required documentation, absence of good record of transactions, bad repayment history, lack of financial capacity, lack of security and guarantee are very common. Based on the survey findings, a set of recommendations has been formulated for policy initiatives. Government and other related bodies should intensify their efforts to provide low cost funds to the commercial banks, FIs may concentrate on finding collateral substitute loan, documents issuing authorities should ease the process of getting documents, IT based loan approval procedures may be adopted to reduce loan processing time, banks have to adopt better internal control and governance mechanism to reduce malpractices, stakeholders should organize training activity to educate the SEs in recording business transactions, Government, should take initiative for building a good relationship between businessmen and bankers etc. may be considered to solve the prevailing problems.

Key words: Small enterprises, Access to finance, Commercial banks, Bangladesh