Digital finance grows, but small firms struggle for credit: experts

Digital transactions and financial inclusion are growing in Bangladesh, but many small and micro businesses still struggle to access formal finance because of a lack of collateral, high borrowing costs, poor records and tax fears, experts said.

As a result, the growth of digital payments has yet to make credit easier and more affordable for small businesses, they said at a group dialogue titled “Financial Inclusion 2.0”, organised by the Power and Participation Research Centre (PPRC) at Hotel InterContinental Dhaka.

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“Bangladesh now needs a new paradigm for financial inclusion. But a paradigm shift has to be based on a sustainable roadmap, not on something dramatic,” said Hossain Zillur Rahman, executive chairman of PPRC.

“There is no shortage of entrepreneurship in Bangladesh. Everywhere you go, you see entrepreneurial ideas. But where does it stop? It stops at access to finance,” he said.

AKM Enamul Haque, director general of the Bangladesh Institute of Development Studies, said bringing unbanked people and small businesses into formal finance should itself be a key target.

Poor maintenance of identity and business records remains a major barrier, he said, calling for links between training, finance, credit and repayment records. He also cautioned against excessive regulation.

Former Bangladesh Bank governor Ahsan H Mansur said financial inclusion should be treated as a development strategy. He called for credit-rating agencies and a single national QR code, and proposed annual subsidies of Tk 2,500 crore to Tk 3,000 crore for five years to expand digital transactions.

Finance Minister Amir Khosru Mahmud Chowdhury said robust internet connectivity, “One Citizen-One ID-One Digital Wallet” and bringing the rural economy into digital systems were essential.

He also highlighted family and farmer cards, “One Village, One Product”, bank-based allowance payments, cybersecurity and policy safeguards.

Prof Mohammad Helal Uddin, executive vice chairman of the Microcredit Regulatory Authority, said microfinance lending rates need to fall while smaller institutions remain viable.

He said microenterprise loans account for about 18 percent of customers’ loans, although such borrowers receive around 40 percent of total lending. Greater mobilisation of savings could provide microfinance institutions with cheaper funds, he added.

Md Fazlul Kader, managing director of PKSF, said ultra-micro, cottage and micro enterprises should not be governed under the same policy framework as medium-sized industries. He said the 24 percent microcredit interest rate is unsuitable for a growth-based economy and could be reduced further through greater use of technology.

Kamal Quadir, CEO of bKash, said more than 40 percent of mobile top-ups are now made through mobile financial services.

Sabbir Ahmed, country manager for Bangladesh at Visa, said collateral-based lending makes SME banking costly and difficult. Reaching around 9 million SME entrepreneurs through manual processes is extremely difficult, he said, citing India’s Unified Lending Interface as a model for linking payment and credit data.

Mohammad Mamdudur Rashid, managing director of United Commercial Bank, identified tax fears as a major barrier to formalisation and proposed tax exemptions for small entrepreneurs for their first three to five years.

Mahtab Uddin Ahmed, president of the Institute of Cost and Management Accountants of Bangladesh, said Bangladesh needs greater smartphone access and digital literacy.

Smartphone penetration is 47 percent in Bangladesh, compared with 89 percent in Sri Lanka and 87 percent in India, he said, adding that simply providing smartphones will not be enough without digital literacy.