ALTERNATIVE SOURCES OF FUNDING FOR MICRO ENTERPRISES

Md. Ashraful AlamDeputy General ManagerSME & Special Programmes DepartmentBangladesh Bank [Central Bank of Bangladesh] Bangladesh

ACCESS TO FINANCIAL SERVICES FOR MICRO, SMALL AND MEDIUM ENTERPRISES (MSME) 3 - 7 AUGUST 2015

BANK NEGARA MALAYSIA

DISCUSSION POINTS Definition and Nature of Micro Enterprises Funding Sources in broader term Mainstream funding sources Alternative funding sources Some Generic Alternative funding sources for MiEs Good practices around the world Some country Specific Examples [To be elucidated by

group work) Bangladesh’s experience in Alternative funding for MiEs Discussions

While banks are open for businesses there are other ways to get finances. Bank finance is not always right for the companies- British Bankers Association via ft.com (2013)

DEFINITION AND NATURE OF MICRO ENTERPRISES

Definition:

Micro Enterprises: a business operating on a very small scale, especially one with a sole proprietor and fewer than six (6) employees – Wikipedia

IFC has compiled a matrix for MSME definition of more than 133 countries. More or less micro enterprises are defined as enterprises with the owner doing the business with employment less than 10 people.

ECONOMIC IMPORTANCE OF MIES Micro enterprises are an important source of income for many

poor people in low-income countries. The significant contributions of micro and small enterprises (MSEs)

constitute the greater portion of several economic activities of most countries.

MSEs contribute to gross domestic product, entrepreneurial skill development, employment generation and innovation to many developing economies.

Recognizing this, governments and donors have sought to promote these small firms, usually through credit programs.

These efforts increasingly use semi-formal institutions such as non-governmental organizations, specialized institutions that concentrate on micro and family based businesses, and cooperatives — particularly credit unions.

NATURE OF MICRO ENTERPRISES

NatureMostly informal in many countriesMicro enterprises are linked to Non-farm sector,

self employment and microfinance self help group etc.

It is a strategy for Job creation, Self employment promotion in non-farm sector, Rural industrialization and Economic development with special reference to the poor

hence linked to poverty reduction.

DIFFERENCE BETWEEN IGA AND ENTERPRISE

Income generating Activities Enterprises

Activity oriented Profit oriented

Based on available skill Based on the market opportunities

Minimal focus on profit Strong focus on profit

Persistent in one activity Creative and flexible

Low risk High risk

No or low growth rate High growth rate

Financial discipline could be missing Financial discipline mandatory

Activity could be stagnant or may end with earned or loss of income

Regular savings lead to expansion which is part of an activity

TRADITIONAL BUSINESS FUNDING SOURCES

Equity FinanceOwners equityFamily and FriendsCapital market

Debt FinanceBank Lending

OverdraftTerm loanWorking capital Trade finance

MAINSTREAM FUNDING SOURCES FOR MIES

Micro enterprise mainstream funding is owners equity

To some extent experienced and stable micro enterprises have access to bank credit

Most of the micro enterprises uses internally generated funds and trade credit for running there businesses.

They face challenges in sourcing growth funding as access to formal bank credit is restricted for them

ALTERNATIVE FUNDING SOURCES What is Alternative Funding sources?

Alternative finance is a catch-all term encompassing a range of emerging and lesser known lending options.

Research has revealed that most micro and small businesses aren't aware of alternative sources of finance. Not surprising when 80% of businesses whose applications were rejected by a bank said they were not given any information about alternative funding sources.

Who is Suitable for alternative finance? There is no 'one size fits all' when it comes to alternative finance;

each type tends to fill a specific need so it does appeal to a range of businesses. But even alternative lenders still want assurances you can pay back a loan, so you will need a business plan with projections and evidence that you’re carefully managing costs.

ALTERNATIVE FUNDING SOURCES Why Micro enterprises need alternative sources

Micro enterprises rely primarily on personal savings of owners, and sometimes business profits, if any for their financial needs.

They have little or no access to formal external credit. Traditional financial institutions regard Micro enterprises as high risk and high default rate businesses. As a result, the financial needs of Micro enterprises are not considered in the lending policy formulation of banks.

Most of them are denied access to financial assistance from traditional financial institutions.

Three things to consider before deciding Alternative source Cost of Money (Effective cost of using the money or Annual percentage rate0 Timing of charge of fees/commission/discounts/interest Terms of payment All these affects the cost of borrowing and ease of using the alternative

lenders money

GROUP WORK Make a group of Eight Please define Micro enterprise in each jurisdiction at least in terms of

employment Discuss among yourself about what are the alternative sources of

funding for micro enterprises in each of group members jurisdiction Exclude Crowed Funding Come up with a list You should list the common sources among countries once Identify the challenges in using alternative funding sources by MiEs Select one representative from each group to present the finding Time allocation

For brainstorming - 10 minutes Prepare the list - 10 minutes Present - 5 minutes

ALTERNATIVE FUNDING SOURCES FOR MIES

1. Leasing2. Factoring3. Receivable financing4. Wire house receipt5. Work order6. Hire purchase7. Government Assistance 8. Venture capital9. Angel investors10. Micro lenders11. Micro finance institutions12. Franchising13. Family and friends loan

14. Peer to Peer loan15. Asset based lending (Movable

/immovable)16. Money lenders.17. Trade credit18. NBFIs19. Credit cooperatives20. Money lenders21. Merchant Cash Advance22. Credit cards23. Vendor Credit24. Bartering25. Credit Unions

26. Purchase order financing………………………….

•Alternative funding sources are numerous and vary from country to country•It is almost impossible to have a list of alternative sources of funding for Micro Enterprises (MiEs)

•However there are some commonalities among the alternative sources of funding which we can generalize

•Some generic Alternative sources of funding for MiEs

GOOD PRACTICES IN ALTERNATIVE FUNDING FOR MIES AROUND THE WORLD

Credit Unions Credit Cooperatives Factoring Leasing NBFIs MFIs Government Support programs Secured Transaction Lending Venture capital (government/private) Asset based lending Angel Investment

Community based lending

BANGLADESH’S EXPERIENCE IN ALTERNATIVE FUNDING FOR MIES Bangladesh Micro enterprises sector

According to the latest Economic census Bangladesh has 8.00 million economic unit.

97% of all economic (non-farm) unit have employment <10 Majority of this micro enterprises are in the non-farm

services and trading sector. According to IFC survey in Bangladesh there are 19.3 million

Micro finance borrowers The 63% is informal Mostly Rural In Bangladesh micro enterprises are eligible for bank lending

and central bank also provides low cost funding to commercial banks for on-lending to micro enterprises

BANK LENDING TO MICRO ENTERPRISE IN BANGLADESH

Banks are already expanding their presence in non-urban areas ( one urban to one rural, agent banking and mobile banking)

Several banks including state owned commercial banks have been recently targeting microenterprises (e.g. Islami Bank Bangladesh Ltd with its Micro-Enterprises Investment Scheme – MEIS, Prime Bank Sonali Bank and Agrani Bank)

Many banks have developed innovative and less traditional credit policies with respect to acceptable collateral for loans (e.g. United Commercial Bank, Prime Bank).

ALTERNATIVE SOURCES OF FUNDING FOR MIES IN BANGLADESH In Bangladesh Non-Bank Financial Institutions are within the regulatory control of

Bangladesh Bank [Central bank of Bangladesh] However although MiEs are eligible and are taking finances from the banking and

NBFIs but more than 90% of MIEs funding requirements are met by alternative funding sources

Among the alternative funding sources for MiEs in Bangladesh following are the major categories Micro loan offered by MFIs registered under the MRA – More than 600 licensed MFIs

operating through out the country Credit Cooperative Societies lending to its members- more than 700 cooperative societies

through out the country Factoring Leasing Receivable finance Work order finance Finance against ware house receipt Trade finance Vendor financing Government supported micro finance programs

CHALLENGES AND RISK IN ALTERNATIVE FUNDING

Lack of regulation Lack of control High interest rate Lack of prudential regulation in some alternative funding

providers Agency problem High transaction cost Adverse selection Moral hazards Absence of customer protection

QUESTION?