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Sustainable Business Model for SME Banking

By Ali Reza Iftekhar 

The financing of small and medium enterprises (SMEs) has been a subject of great interest for all concern intended to explore the business opportunity. It has already been recognized worldwide that Small and Medium Enterprises (SMEs) have an important role to play in industrialization, employment and income generation and economic growth of the country. In the present world economic situation, bank especially commercial bank is treated as the lifeblood of economy of any developed or developing country. With the tremendous increased need of time, commercial banks play an important role in case of overall economic development of any country. From this timely realization, commercial banks are relentlessly trying to provide better service to their clients in order to ensure higher profitability. Commercial banks need to find a sustainable way to get high profitable venture to satisfy its shareholders. Different survey result indicates that the perceived profitability of the SME segment is the most important drivers for banks’ involvement with SMEs.

Industrialization in Bangladesh are mostly surrounded by the medium and large industries. The pie of growth is now narrowing the part of large industries. Due to high competition the margin to finance in large and medium scales industries and business ventures are also thinning day by day. Thus the missing middle and small enterprises are taking the place of long cherished development of Bangladesh. Most development Experts are in favor of patronizing SME for rapid growth of Bangladesh economy. The government established the SME Foundation in 2006, the National Association of Small Cottage Industry of Bangladesh works as the apex trade body for SMEs in Bangladesh. Bangladesh Bank introduced a refinancing scheme in 2004 to overcome the financial constraints. The scheme was started with three sources of funds; Bangladesh Bank own fund, International Development Association and Asian Development Bank. In the last year another funding agency Japan International Cooperation Agency (JICA) is added for low cost pre and refinancing. So the SME patronizing as a mean of development is very much thought process of the policy maker of Bangladesh. This paper along with the power point presentation tries to inform the top management of the banks and Non Bank Financial Institutions (NBFIs) about why and how the SME financing is a sustainable model for Bangladesh.


SME Banking – Global View:

There is a growing acknowledgment worldwide that small and medium enterprises (SMEs) have a significant role to play in the present context given their greater resource-use efficiency, capacity for employment generation, technological innovation, promoting inter-sectoral linkages, raising exports and developing entrepreneurial skills. Their positioning flexibility is an important advantage in reducing regional imbalances. The future of SMEs is of major policy concern given their strategic importance in any discussion of reshaping the industrial sector.

SME banking is an industry in transition. From a market that was considered too difficult to serve, it has now become a strategic target of Banks worldwide. Leading banks reported ROAs of 3-6% for their SME compared with 1-3% bank-wide. SMEs are estimated to account for at least 95% of registered firms worldwide; in Europe, this number is well over 99%. Defined by the employees less than 250. There are 36-44 million formal SMEs globally. Contribution towards GDP of Malaysia (70%), Thailand (70%), Korea (90%) Philippines (70%) economies are dominated by SMEs. In term of employment SMEs are contributing 50%, 40%, 50%, & 40% respectively of the mentioned countries (Sources: Kuait Finance House in 2007).

Globally SMEs play very important role in all economies. In developed economies SMEs are working as the feeder vessels or as support to the large corporate. In developing economies, it works as the engine to ultimately create large corporate. In UK SME lending is at its highest level since 2008. Currently it is recognized that the UK economy can only be flourished if SMEs are given the backing to succeed.

At present “Invoice finance is a fantastic way for SMEs to maintain a steady cash-flow”. Japanese financial institutions and state agencies are working to promote more investment in SMEs especially in the steel, automobile, consumer electronics, and machinery and equipment industries. In USA SMEs were more export oriented than large farm. Exporting SMEs total revenue grew faster than the large exporting farm (i.e. SME 64%, Large 24%). Today, governments worldwide recognize the importance of SMEs and their contribution to economic growth, social cohesion, employment and local development. SMEs account for over 95% of enterprises and 60%-70% of employment, and generate a large share of new jobs in (The Organization for Economic Cooperation and Development) OECD economies. As globalization and technological change reduce the importance of economies of scale in many activities, the potential contribution of smaller firms is enhanced.

SMEs are the true backbone of the European economy and are accountable for the wealth and economic growth of the region. They also play a key role in innovation and R&D in the region. There are over 23 million SMEs representing around 99.8% of all the enterprises and 57% of them are sole proprietorships. They provide two third of the total private sector employment, represent 80% of total job creation and produce more than half of EU’s added value. (

It is evident that small and medium enterprises (SME) account for about 50% of GDP and 60% of employment worldwide. SMEs are estimated to contribute between 25-35% of all manufactured export. In terms of industrialization, Japan drew special attention to the professionals and policymakers in the international arena. Statistics show that Japan has achieved its industrial development heavily based on SMEs. Some of the worlds’ best performing economies, notably Taiwan and Hong Kong, are heavily based on the small enterprises. In much of the developing world, the private sector economy almost entirely comprises of SMEs. Contribution of the SMEs of some selected countries shows that it has provided very significant portion of GDP and employment in their national economy.

Country SMEs as % of all enterprises Contribution of SMEs to GDP % Contribution of SMEs to Employment %
Bangladesh 80.00 20-25% 40%
India 97.60 80%
Pakistan 60.00 15% 80%
China 99.00 60% 92%
Japan 99.70 69.50% 72%
Hong Kong 61.50%

Source: Asian Business Review, Volume 2, Number 2/2013 (issue 4)




SME in Indian Economy:

SME sector of India is considered as the backbone of economy contributing to 45% of the industrial output, 40% of India’s exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. With approximately 30 million SMEs in India, 12 million people expected to join the workforce in next 3 years and the sector growing at a rate of 8% per year, Government of India is taking different measures so as to increase their competitiveness in the international market. With this huge potential, backed up by strong government support; Indian SMEs continue to post their growth stories. Despite this strong growth, there is huge potential amongst Indian SMEs that still remains untapped. Once this untapped potential becomes the source for growth of these units, there would be no stopping to India posting a GDP higher than that of US and China and becoming the world’s economic powerhouse.


How SMEs are Perceived Globally:

Across the world, nowadays, Banks are considering SMEs as a potential sector to do business with. Some are already in the business with SMEs and some are planning to enter. We can highlight a report on a study in international level published in the Journal of Banking & Finance.

The quantitative data of the study says banks have significant credit exposure to the SME segment. For example, the ratio of SME loans to total outstanding private sector loans (including retail) reached 37% in Argentina and 14% in Chile in 2006. In Colombia, the national bankers’ association (Asobancaria) estimates a rapid increase in SME lending from a low base in 2003, with the share of SME lending in the total commercial loan and lease portfolio of credit institutions almost doubling in less than four years to reach 25% by 2006.

In terms of interest and participation in doing business with SMEs it is revealed that large banks including foreign ones are the main players in SME market. Private domestic banks are highly exposed and public banks are a bit behind. The Study says level of exposure of private banks is 56% in Argentina and 16% in Chile. In Argentina, private domestic banks are followed by public banks (31%) and foreign banks (27%), while in Chile they are followed by foreign banks (12%) and public banks (6%). It was believed that foreign banks are mainly focused on the large corporate business. But now they are also finding SMEs as a potential sector and expanding their business accordingly.

The SME market is Competitive and not Saturated. Based on that banks are finding profitable growth prospect in SME Financing. Banks expand their engagement with SMEs by deepening both relations with existing clients and targeting untapped pools of new clients. Even the banks are not going with specific sectors or geographic focus. They are trying to extend their market as wide as possible considering this sector is in a growing trend.

There is another important factor driving banks’ desire to become involved with SMEs is Profitability of the sector. Not only that profits in the SME sector are attractive, but importantly that they are attractive relative to the alternatives after controlling for risk. For example, banks have experienced a thinning of margins in the corporate sector because of intensified competition from local and international capital markets, and in the consumer sectors because of strong competition from other financial and non-financial institutions (such as department stores). Similarly, with more stringent fiscal policies improving government access to capital markets, the opportunities for lending to the government at a spread over the cost of funds have shrunk significantly, particularly in Argentina and Chile.

Banks are considering the relationship of the SMEs with the large corporate client-the chain relationship of suppliers, outsourcers and distributors/dealers with the large corporate. From their existing corporate clients bank can have information about the SMEs which helps reducing the problem of asymmetric information banks face in approaching new SMEs. This way banks are sorting out the potential SMEs and doing business with them more efficiently. From the large corporate point of view if they use strong SMEs in their supply or outsourcing they can have more flexibility in focusing their main business and reduce their fixed operating costs. Ultimately, banks are increasingly engaged in the SME sector is consistent with the hypothesis that the mentioned changes in industrial organization, with less vertical integration and greater modularity and network economies via supply chains and outsourcing, generate new demands of financial products and services for SMEs that large banks are better able to provide.

There are opportunities of exploring scale effects, synergies, and linkages. Using the relationship of the SMEs with banks large corporate clients bank can go for cross selling opportunities. Bank can offer customized bundle products, fee based services, advisory service, software service to the SMEs that usually they don’t have. This way bank can broaden their income generating areas and diversify risk in terms of lending to a new type of firms and deriving income from non-lending activities. This also limits the burden that lending imposes on banks’ limited capital.

As per Policy Research Working Paper on Drivers, Obstacles, Business Models, and Lending Practices of Bank Financing for SMEs around the World, the survey includes a number of questions related to how banks perceive the SME segment. Figures show that most banks (80% or more), independent of where they operate and of their ownership type, perceive the SME segment to be big and with good prospects. In terms of drivers, it reveals that the perceived profitability of the segment is the most important driver for banks’ involvement with SMEs. 81% of banks from developed countries and 72% of banks from developing countries indicate that this is the most important determinant for their involvement. While private and foreign-owned banks point to the profitability of the segment as the key driver, government-owned banks are less driven by the profitability of the market (only 47% rank profitability as the key driver compared to 83% of foreign and 75% of private banks).

Most banks perceive prospect in SME segment financing is very good. But what are the obstacles in SME segment. There is disagreement regarding the obstacles to SME financing. As per the study mentioned above among banks in developed countries, the top 6 obstacles are Competition in the SME segment (45% of banks in developed countries give the highest rating to this obstacle). On the other hand, among banks in developing countries, the top rated obstacle is the macroeconomic environment (39% of banks indicate this as the top reason impeding their growth in the SME segment). Surprisingly, only 8% of developing country banks rate the legal and contractual environment as the top obstacle. This suggests that perhaps banks adapt to the legal and contractual environment in which they operate by offering instruments that allow them to circumvent existing deficiencies. Government-owned banks rank regulation and the macroeconomic environment as the most important obstacles, while foreign-owned and privately-owned domestic banks rate the degree of competition in the SME segment along with the macroeconomic environment as the most prominent obstacles.

In general, banks in developed and developing countries have a positive perception of government programs to support SMEs. In developing countries more than 70% of banks rate the impact of interest subsidies, guarantee programs, and directed credit program as positive. Regulatory subsidies are less popular with only 47% of banks rating them as having a positive influence. Among, developed countries more than 50% of banks rate government programs as having a positive effect on their involvement with SMEs. Comparing banks by ownership type, reveals some differences in how banks rate guarantee programs. While more than 80% of government and foreign banks rate guarantee programs positively, only 52% of private domestic banks do so. On the other hand, more than 70% of government, private and foreign-owned banks give a positive rating to interest rate subsidies and directed credit programs.

SME Banking – Bangladesh Perspective:

Though Bangladesh is an agricultural based country (85% people are living at the village), the Small and Medium Enterprises (SMEs) has been termed as the “engine of economic growth” for Bangladesh and contributing largest portion of the employment. This sector has played a great part in the economic development for an economically challenged country like Bangladesh. In modern concept of SME, they are not only concentrating on low tech, low cost technologies rather they are focusing on non-traditional manufacturing and service sector as well. Indeed, the growth has been aided by many bi- lateral, multilateral and other national institutions who have worked tremendously for the growth of SMEs in the country. Due to Governmental liberal policy and central bank support, banks are playing a significant role but there is still opportunity to contribute more for sustainable development of SMEs.

The purpose of finance in this sector is to bank the “un-banked” micro, small and medium enterprise. SMEs have a significant role in employment generation, poverty reduction and over all economic growth, especially for a developing economy like Bangladesh. SMEs are typically labor intensive industries with relatively low capital intensity and growth opportunity. As such for a country like Bangladesh which is labor abundant and capital scarce, SMEs have a natural comparative advantage. In recognition of the strategic importance of the development of SMEs in promoting industrial growth, employment generation and poverty alleviation the SME sector has been declared as a priority sector in the Government’s Industrial Policy 2010 and various measures have been initiated to help maximize the SMEs growth potential.

Bangladesh Bank, IFC, SME Foundation, European Union and different chamber bodies are working a lot to identify the real challenges and opportunities of the SME sector development in Bangladesh. According to the survey conducted by the National Private Sector Enterprise Survey in 2003 there are estimated 6 million micro and SME enterprises in Bangladesh. At the same time, it is also estimated that there are some 31 million people (around 25% of the total workforce) are involved in SME sector. Other data suggest that the SME sector accounts for around 95% of all registered enterprises in the country. SMEs have been identified in the Poverty Reduction Strategy Paper (PRSP) as one of the seven critical sectors for economic growth in a country like Bangladesh. According to the PRSP, the thrust in the SME segment should be on the “modern” SMEs rather than the traditional ones. It is evident in the industry as most of the commercial banks are financing to these modern SMEs.

Small and Medium Enterprises (SMEs) are the single largest industrial sector of the Bangladesh economy. Moreover, sustainable SMEs development of Bangladesh can also role to achieve above vision by 2021. According to vision 2021 of Bangladesh Government, GDP can be raised 8% by 2015 and 10% by 2021. Hence, Contribution of industrial sector mainly SMEs to national GDP can be doubled by 2021. The growth of the manufacturing sector will have to be attained through improvement of existing enterprise and also by creating new ones. SMEs are playing a fundamental role of the economic development and also for furthering growth, innovation and prosperity. In this perspective Government of Bangladesh (GOB) has taken industrial policy 2010 to increase the industry sector‘s share in GDP 40 percent from 28 percent by 2021, with the proportion of the workforce employed in the sector concurrently rising 25 percent from 16 percent of the country’s total labor force. Hence, SMEs can link for over 99 percent of private sector industrial establishments providing job opportunities to around 70 to 80 percent of the non-agricultural labor force, if hinders of SMEs can be removed . In Nepal, SMEs constitute more than 98% of all establishments and contribute 63% of the value added segment. SMEs contribution in Bangladesh Economy:

Aspects Role of SMEs
National Gross domestic product 25%
Gross manufacturing output 40%
Industrial Jobs 85%
Total labor force 25%
Total exporting earning 89%
Percent of business Over 95%
Absorbed industrial workers 70% to 80 %

Source: [16]

SME Banking is growing very rapidly in recent years for economic development. In any country SMEs are holding the majority shares of economy and represent a significant share of employment.SMEs are more financially constrained than large firms and importantly, lack of access to external finance is a key obstacle to firm growth. In most of the countries, there are a large number of initiatives have been taken to foster SME financing including government subsidized lines of credit and public guarantee funds. Furthermore, most of the large companies usually start as small enterprises, so the ability of SMEs to develop and invest becomes crucial to any economy wishing to prosper. The ‘‘conventional wisdom” on SME finance argues that ‘‘supply- side” factors are at the root of the inadequate financing of SMEs. In particular, the way in which financial institutions operate is biased against offering SME financing due to the higher NPL and monitoring cost. Thus, many banks and other financial institutions are not interested in serving SMEs and they think that lending to SME is not profitable.

For not getting finance from Bank or NBFIs, one of the main obstacles is difficult to ascertain the SMEs if firms have the capacity to pay (have viable projects) and/or the willingness to pay (due to moral hazard). This problem particularly undermines lending from institutions that engage in more impersonal or arms-length financing that requires hard, objective, and transparent information to take decision. This problem can be managed by offering relationship based banking. Relationship lending can mitigate opacity problems because it relies primarily on ‘‘soft” information gathered by the loan officer through continuous, personalized, direct contacts with SMEs, their owners and managers, and the local community in which they operate.


Business models for SME Banking:


The Least Development Countries (LDCs) in the east started refocusing their attention on SME to enhance their role in bringing about structural changes in their economy through accelerating bank finance. Most of the Banks have set up separate departments to manage their SME Banking business. In the developed countries, most of the private and foreign owned banks distinguished between small and medium sized business but state owned banks are somewhat less likely to have separate their SME department. The greater number of banks operating both in developed and developing countries have decentralized their selling of non-lending products to small and medium-sized enterprises. Comparing to the foreign and government-owned banks, private commercial banks are somewhat less likely to decentralize the sale of non-lending products. In contrast to sales, banks’ loan approval process, risk management, and handling of non-performing loan recovery functions tend to be more centralized particularly in developing country. The financial assessment of the business is the most important consideration across all firms, although it is more important for large enterprise than for small enterprise lending. A firm’s credit history with the bank is the second most important criterion, with the owner’s characteristics and the purpose of the loan being next in importance.

The differences are particularly striking for loan approval and risk management. Comparing banks across ownership types, government-owned banks are significantly more likely to decentralize loan approval, risk management, and the recovery of non-performing loans. Banks from developed and developing countries are more prone to use scoring models in making decisions regarding small rather than medium-sized enterprise loans.

In developing countries, a higher percentage of banks are not using credit score cards because they tend to operate in less sophisticated markets with less information available about the borrowers. To use the scoring model, adequate information, sophisticated IT system and credit history is mandatory. Foreign-owned banks are somewhat more likely to rely completely on scoring for credit decisions than domestic banks, for both small and medium-sized enterprises. This might reflect that foreign banks have better statistical models and/or have less direct contact with borrowers and, hence, have to rely more on arms-length lending techniques. But scoring is used primarily as one input in the lending decision process. Among banks in developing countries, only few banks are approving small (medium-sized) business loans purely based on scoring & majority portion of banks are using scoring as an input for small (medium-sized) business lending. Among banks in developed countries, maximum banks are using scoring model only as an input into loan decisions for small businesses.

It is observed from various sources, comparing SME to large firm financing for all banks and countries combined, banks are less exposed to SMEs due to the experience of more defaults on loans to these firms and charge them higher fees and interest rates. The share of bank loans to small (medium) firms averages 11% (13%), while banks’ exposure to large firms averages 32%. Fees on small (medium) business loans average 1.11% (0.96%), while they average 0.76% for loans to large firms. The share of non-performing loans for small (medium) business loans is 7.4% (5.7%), while it averages close to 4% on loans to large firms. Banks in developing countries tend to provide a lower share of investment loans and to charge higher fees and interest rates.


Conventional model:


Most of the banks strategically decided to have the existing Corporate Loan Department also handle the SME lending and the Loan officers make it part of their portfolio. Because of the personalized, community-based nature of the contacts that relationship lending implies, the conventional wisdom argues that it is difficult for large and foreign banks to engage in this type of lending. Moreover, there is the perception that large and foreign banks are relatively less capable of processing and quantifying ‘‘soft” information and transmitting it through the formal communication channels of large/complex organizations for which the headquarters are far away. As a result, the segment has to rely on small or niche banks, which are close to the relevant sector, community, or neighborhood and, therefore, are typically domestic.

Contrary to the perception that banks in general are not interested in lending to SMEs, we find that most banks do indeed want to serve SMEs and find this segment profitable, especially as margins in other banking markets narrow due to intensified competition. In particular, as the public sector and large corporations gain access to local and international capital markets and as competition in the retail sector (among banks and retail chains) increases, banks have greater incentives to incur the switching costs needed to pursue new business in the ‘‘middle” market of SMEs. In this context, SMEs emerge as a strategic sector for most banks—including large and foreign banks, not just small and niche banks. As a result, the SME market in the sample countries has become competitive, yet is still far from saturated.

Strength of the Conventional model: To start the SME business under the existing relationship model has some advantages like lower administrative cost, can develop the market quickly, capable to capture existing market, easier to learn by experience, they can test it first, can lowering the risk by taking adequate collateral like corporate lending.

Weakness:Under the conventional approach, there is no specific policies to run the SME business, time consuming decision making (lengthy procedure), weak monitoring tends to possible bad loans, no training/knowledge for SMEs, just thinking about corporate clients which creates customers dissatisfaction/lots of rejections, big problem with risk department, lack of diversification, they do not know how to evaluate.

Modern Concept/Model:


Lending is just one part of a larger overall package that banks provide to SMEs. Banks find SMEs profitable through a combination of services; and this places cross-selling at the heart of the banks’ SME business strategy.In effect, banks have developed a wide range of fee-based, non-lending products and financial services for SMEs. These products and services can be very attractive in terms of profitability; in fact, the evidence suggests that lending is not always the main or the first product offered to SMEs and that it is often offered as a way to eventually cross-sell other lucrative fee-based products and services, including payments, savings, and advisory services. Cross-selling is a way for banks to maximize their scarce resource (capital). Moreover, selling products and services to SMEs deepens the engagement of banks with the firms, is part of the efforts of banks to become the principal bank the SMEs engage with, and may thus facilitate increasing the amount of lending to each SME while attracting other clients (like the SME employees, the owners, and their families).

Some of the technologies applied to lending to SMEs (other than relationship lending) benefit from the effects of economies of scale and scope. For example, credit scoring models that rely on statistical properties to assess risk need a large number of clients and loans, which tend to increase with bank size. Also, dealing with large corporations allows banks to reach out and offer loans to good SMEs that have long-term relations with those corporations (thereby reducing principal-agent problems and improving risk management). Moreover, large banks can seize the benefits from scale in supplying non-lending products and services to a large number of firms, taking advantage of their service platforms, technical expertise, and IT and back-office infrastructures.

SME focused banks decided to have the SME lending be handled out of the Retail Division and handled at the branches. To show the market the commitment to this sector, they decided to open up a SME center. Anytime someone would come into the center there would be someone to serve the SME customer.

Strength: For the modern concept of SME, Top management focused particularly on SME segment, set a dedicated platform, well staffing & wider distribution channels, offering good customer service & cross selling, high penetration & loyalty, easy categorization of loans, less rejections due to skilled manpower, well defined product marketing & employee understanding, faster approval process which meet the customer’s want, can develop a culture & market perception.

Weakness: To run the dedicated SME, you have to deploy the dedicated manpower for business booking, approval and monitoring which is very costly than the conventional relationship based model. Since the sales executive focuses specifically on the product base lending, as such they have the limited credit knowledge as the product is parameterized. Under this approach, some banks have no clear approval policy which hampers the credit quality.

Why Banks go for SME Banking?

There are so many attractive reasons for Banks to enter the SME Banking market. Perhaps the most important of these is volume as SMEs typically make-up more than 90% of the registered businesses in any country. There are several other reasons as well, however, including:

a) Diversification of revenue: The Bank is not wholly dependent upon revenue from larger businesses or from a consumer market; within the SME sector the businesses are in a variety of industries, so a downturn in a single industry is not felt as sharply.

b) Diversification of Credit Risk: The SME Loans are relatively smaller; the bank has less exposure in the event of default of a single borrower. From a risk point of view the performance of the port-folio is more important that the performance of individual loans. The portfolio is less risky because the customers are in different lines of business, and are not interdependent.

c) Opportunity to cross – sell a range of products: There is huge opportunity to generate revenue by cross selling of multiple products because the business owner is making all the decisions for the business, a call on the business can result in deposit, fee based services, and loan sales to the owner, his family, employees, and the owner’s network of contacts. SME business owners are a great source of referrals.

d) Good for the Economic growth of the community: This is the Engine of Growth as the bank makes more loans to local SME Businesses, those businesses can increase their sales, buy more assets, and hire more employees, which in turn benefits more businesses and the community as a whole.

e) High Profit Margin: Typically there is no interest rate restriction for the SME lending and Banks earn more by taking higher interest and fees against SME lending. Though there is higher administrative cost but banks can manage that cost by ensuring the quality of asset, cross selling and mobilizing low cost deposit

f) Incentive from Central Bank: In Bangladesh, general provision for SME lending is only 0.25% comparing to the large corporate (1%) and consumer lending (5%), classifying SME loans up to Tk 1 million after 180 days instead of 90 days and allowing refinance facility @5% interest which help to lowering the cost of fund as well as cost of capital.

g) Incentive from SME Foundation: SME Foundation is working hard for SME sector development. They are educating customers to make them bankable by extending training & awareness building program like seminar, road show product display etc. and offering low cost fund @4% for lending to the manufacturing concerns as well as cluster development.

What SMEs Want?

SMEs largely are looking for reliability, flexibility and convenience. In particular:

a) Relationship with the bank: The SME is willing to make an investment to get this and in many way is looking for an enhanced relationship,. The bank and the banker are sources of advice and education. The bank and the banker are sources of advice and education on financial matters for the SME.

b) Reliable and consistent availability of credit: In the west banks tend to route staff more than the business owner would like. SMEs want a bank /loan officer who understands the risk and opportunities of the business, so that the business owner does not have to explain this again and again (and re-incur the fixed cost of establishing the relationship).

c) Quick, local decisions: SME planning timetables are often quite quick – loan funds are needed immediately, and a long decision time is a major problem. The closer to the client that the decision is made (few approval levels) the faster the decision can be made.

d) One size does not fit all: SMEs need a banker who can recognize credit needs and provide appropriate credit. There should be flexibility in bank products to meet client needs.

Definition of SME:

The central bank has come up with a new definition for small and medium enterprises in line with the government’s industrial policy of 2010 vide their circular no. SMESPD/01 dated June 19, 2011. The summery of the definition is as under:

Sector Trading/Services





 Micro & Cottage  Fixed Assets: Below Tk 0.5 Million & Staff   1-10  Fixed Assets: Below Tk 0.5 Million & Staff   10-24
Small Segment Fixed Assets : BDT 0.5 Million – BDT 10 Million & Staff 10-25 Fixed Asset Tk 5 Million– BDT 100 Million & Staff 25-99
Medium Segment Fixed Assets BDT10 Million – 150 Million; Staff 50-100 Fixed Assets: Tk100 Million – 300 Million & Staff 100-250

Note :    Fixed Assets excluding land & building. And definition conflict between cottage and micro industry will make the entity a micro enterprise. A woman, who owns a private firm as the proprietor or she holds 51 percent stake in a private firm run jointly or registered with Joint Stock Company, will be treated as ‘women entrepreneur.’

Bank & NBFI information of Bangladesh:

In Bangladesh we have 5 (five) category of Banks & Non-Bank Financial Institutions. As of December, 2013, the total SME loan outstanding comparing to the total portfolio of various categories is appended below for your information:

                                                                                                                                                                Tk in crore

Bank Category Total Loans SME Loans % of SME     Loans % within SME Segment
NCB 84,039.89 15,445.43 18.38% 13.32%
Specialized Banks 31,213.60 9,269.20 29.70% 7.99%
Foreign Bank 23,853.26 2,265.08 9.50% 1.95%
PCB 3,15,328.57 85,333.22 27.06% 73.65%
NBFIs 31,449.30 3,571.94 11.36% 3.09%
Total 4,85,884.62 1,15,884.87 23.85% 100% 


SME Market Size and Pie – December, 2013:

As on December, 2013, the overall industry portfolio of SME Banking was Tk 1,15,884.87 crore approximately, which is about 23.85% of the total outstanding balance of the industry loans and advances, i.e Tk. 4,85,884.62 crore. The overall percentage of banks’ exposure on SME Banking is increasing which is going to create saturation and Bank wise SME loan disbursement Target & Achievement for year 2013.

Figure in (BDT) crore

Nature Loan Disbursement Target- 2013 Loan Disbursement Achievement-2013 % of Achievement
State owned Banks 5,820.02 5,147.92 88.45%
Specialized Banks 5,565.00 3,690.36 66.31%
Foreign Banks 13,56.46 1,187.04 87.51%
Private Commercial 58,973.72 73,411.89 124.48%
Non-Bank Financial Institutions 2,471.67 1,886.04 76.31%
Gross Total 74,186.87 85,323.25 115.01%

In the year 2013, the overall target of SME Loans was Tk. 74,186.87 crore and the achievement in terms of loan disbursement was Tk. 85,323.25 crore, where the achievement was 115.01%.

SME Classified Loans as of December, 2013:

Category of Banks Total Loans SME Loans Total SME CL outstanding % of CL with SME Loans
State owned Banks        84,039.89          15,445.43 2,656.88 17.20%
Specialized Banks        31,213.60            9,269.20 1,281.53 13.83%
Foreign Banks        23,853.26            2,265.08 226.81 10.01%
Private Commercial     315,328.57          85,333.22 4,567.02 5.35%
Non-Bank FI        31,449.30            3,571.94 420.69 11.78%
Gross Total    485,884.62      115,884.87 9,152.93 7.90%





Issues to be considered for SME lending:


There are some issues for lending to SMEs, and these must be addressed for sustainable SME business. The issues may be discussed as under:

a) Cost to serve: The cost of analyzing an SME loan is the same as analyzing a large loan. Since this cost of lending is fixed, large loans are relatively more profitable. This can be addressed through changing analysis procedures and expense control by adopting credit score card model or deploying dedicated SME Credit Risk officers under Risk Management department.

b) Less information available: The smaller the business, the less likely it is to have audited statements and important information is often in the owner’s head. Trained Loan officers can mitigate this problem by preparing financial statement using entrepreneur’s sales register. This is addressed by using substitutes for formal financial statements.

c) Higher failure rate for small business: While this is generally true, failures are more common at startup (within the first three years of the business life). However, the bank can avoid this problem by not lending to start up business. However, under the credit guarantee scheme bank can finance to start up business.

d) Higher Interest rates are counterproductive: SMEs are willing to pay higher interest rates to cover the additional costs. However, if the interest rates are raised too much, the better businesses may (not the worse businesses) drop out and portfolio becomes riskier. If the SME entrepreneurs use the fund efficiently then they can minimize the cost at significant level.


SME business is not rocket science. Any Bank or Financial institution having clear vision & strong will can successfully perform SME Business. To establish successful SME operation, bank may adopt following measures:

Board and Top Management’s Support – Financial and non-financial resources: Firm support from the Board & top management is required to set up dedicated SME department in structured way. Clear understanding from the top level management is very important. Posses a clear, well- defined strategy that is supported by key members of the institution is key success factor to set up the structured SME.

Demonstrated commitment throughout the senior level: Since the model is top down approach, the senior level management is well aware of the mission and vision. They should have adequate knowledge to run the business. They should review the progress time to time. Senior management should have clear understanding about the SME market, where the bank plans to operate.

Dedicated Relationship Team/Division: There should be dedicated Sales (may be contractual) & Relationship team to serve the SME customers. They solely work for SME no other works of the branch. They may sit in the branch with separate reporting line to SME Unit Head/SME Head rather reporting to Branch Manager.

Selling Versus Risk: Bank intended to do SME business, should develop the appropriate lending as well as depository products for SME customers. SME Head will ensure selling of appropriate products effectively. As there is aggressive sales model, hence bank must establish a good credit control team (SME Risk) under Credit Risk Management. This risk team can ensure the qualitative growth. Side by side strong credit monitoring is important to manage the risk effectively.

The strategy must fit within the bank’s overall strategy: There must be a real commitment from the Board and management. There should be a stable and profound support from the Board and Management for an extended period of time throughout the design, testing and implementation of the process. In addition to the financial resources, other resources need to be prioritized as well –e.g. allocation of staffing, systems, training.

Strong MIS: To run by a sales team approach there would be a lot of people, products, segmentation within the SME division. To measure success, failure, quality and profitability bank must have strong MIS support. To ensure this state of the art IT platform is mandatory.

Centralized vs decentralized credit approvals: To have better credit control centralized approval system bank more effective. In a bank under centralized platform it is possible. But for bank within small to moderate size it is possible. For large banks, especially the State owned banks, it is very difficult to standardize centralize process. In those banks regional approval process would work well. Centralized approval process may sometimes become lengthy if there is limited manpower comparing high volume of submission.

Separate marketing from credit risk: The best practice is separate marketing team from the credit risk department. There should not be any approval authority under business unit. Because business unit has a target and there is scope of compromise if they have the delegation for approving loan.

Dedicated Credit Administration & Collection Team: Bank should have separate Credit Administration Department who will complete the documentation without any compromise and ensure disbursement after completing 100% perfection of documentation. Dedicated collection team will ensure timely repayment by the customer. They should demonstrate proactive attitude in collection to manage the portfolio quality.

Separate small business and medium business: Approach to small enterprise is not similar to the medium business. Generally, Banks offer lending product (term loan) to the small business and relationship based approach offer to the medium business. To satisfy the different segment customer, Bank should separate the small from medium business. Medium business client is handling like corporate customers; small segment is terminating in nature.

Focus on getting ample data to make a good decision: Vintage analysis and detail information of the borrower, market as well as the related industry will help to take prudent and prompt decisions. Credit related information is available from central bank through CIB and one can obtain detail information from the market.

Focus on cost effectiveness: Bank should ensure the cost control. Since the small segment loan is supervisory credit in nature and huge administrative cost involves there to manage the portfolio. Hence cost control is the vital part to make the segment profitable.

Team approach: A team approach is very important to serve better to the SME customers. SME customers are very sensitive and want very faster service. If team cohesiveness is prevail across the process then it will be easier to serve the customers which establish more customer loyalty.

Linkages with other areas of the Bank (consumer and corporate) and through value chain: Supply chain and value chain with corporate and consumer will ensure the bank’s to get more profit and to support the all customers under the value chain.

SME Banking as Focus for growth: Since the corporate clients are very limited and a new corporate house cannot grow overnight. Due to main focus on lending corporate business by most of the banks, growth prospect in this segment is now very low. But in SME banking, growth prospect is still in very high trend. Banks should focus more in SME Banking. Even a big part of SMEs in Bangladesh are still un-banked. If SMEs get proper attention from banks they will grow as corporate clients.

Focus on the liability side: Most banks’ SME Banking usually focuses only on SME lending side and ignores the liability side. Bank should focus on deposit/transactional account of the SME customer which will help to mobilize low cost deposit. The balance growth of asset and liability improve the profitability of any bank’s SME department.

Primary screening: There should be primary screening process which helps faster disposal process and also reduce the processing cost. Credit score card can help in this regard.

Alternative Distribution Channel (ADC): SME customers want faster decision and service. To serve the SME, alternate distribution channel is very essential. Some banks manage the huge customers through call center. Though it is critical but if it can be managed efficiently, it will create value to differentiate one from others.

Industry Specialization: Segmental approach needs specific expertise in particular sector. To serve the particular cluster/industry, proper training on the specific industry is essential. If RM (Relationship Manager) has the adequate knowledge on the particular industry, then he can extend advisory support which help to build stronger relationship.

Standard products with limited flexibility: Bank need to standardize the products for lending as well as deposit. SME customers prefer standard product. Bank can also offer bundling and packaging products to serve the SME customer as per their requirement.


Pro-active sales approach: A few customers come to the bank for their requirement. The modern concept suggests the Hunter-Farmer model. The sales executives will go to the SMEs to assess their needs and offer banking solutions. Relationship managers can manage the existing clients by sitting in the branch. Pro-active sales approach will help the sustainable growth with stronger relationship.

Building the commitment needs to be managed through effective communication and participation. In addition, it will be critical to have the support of other areas of the Bank such as HR, IT, Legal etc. It is important to have these areas involved early on as part of the design process to aid in the design and build commitment.

Again, it has been demonstrated that having strong leadership and commitment at the head of the SME banking is completely critical. This person(s) will need to drive the process to ensure success. There must not be competition between units and divisions in the bank. It should be clear which market the SME sector/unit will focus on.

A key stumbling block at many banks is getting the commitment of the Risk Department. This is especially true for SME lending as the risk criteria will be different from what the bank may used to. Senior staff throughout the bank, such as Branch managers, should have their responsibilities clearly adjusted to include the activities of SME Banking, as it relates to them individually. It is even better if compensation is tied to performance and linkages with the SME Banking.

Showcasing the Success Story of Eastern Bank Limited:

With a vision to become the bank of choice and to be the most valuable financial brand in Bangladesh, Eastern Bank Ltd. (EBL) began its journey in 1992. Over the years EBL has established itself as a leading private commercial bank in the country with undisputed leadership in Corporate Banking and a strong Consumer and SME growth engines. EBL’s ambition is to be the number one financial services provider, creating lasting value for its clientele, shareholder, employees and above all for the community it operates in.

To ensure long term growth prospect of the Bank, Honorable Board of Directors of Eastern Bank Limited has approved to launch Small Enterprise [SE] financing with following objectives since July, 2006:

–          To enter into vast and untapped customer segment with structured lending process

–          To increase lending in Small Business segment for sustainable asset growth

–          To earn high interest margin

–          To increase fee & commission by offering cross selling activities

–          To avail the benefits of SE development funds

–          To increase the diversification of Bank’s overall credit risk

Although the SE market is not totally new to EBL, but a generalized lending policy and traditional products could not bring much success in this segment. The management realized the opportunities exist in the segment and thrived for a proven SE financing model for long term growth prospect. In June 2005, EBL responded to the Technical Assistance (TA) offered by SouthAsia Enterprise Development Facility (SEDF) for establishment of Small Enterprise Financing Model at EBL by Horus Development Finance (HDF), a leading French consulting firm (who implemented the SE Financing model in Eastern European Countries under kfw the German Development Finance Organization). With their (HDF) assistance, EBL has developed the following in order to enter in to the SE Financing:

a). SE Credit Policy & Process

b). SE Credit Products and Program Guides

c). Credit Appraisal Manual

d). Human Resource Guidelines for SE lending officers

EBL started it’s structured SME operation through only 9 (nine) SME centers by appointing 34 employees including sales executive. There is dedicated business team who are calling to the clients, preparing the proposals, managing the portfolio under relationship manager concept. After preparing the proposal, the business team send the same to the Credit Risk Management Department (CRM) centrally. Under CRM, there is a dedicated team work only to assess the SME proposals. In the branch/region, there is no delegation, rather the proposals assess and approve centrally.

After approval, the same will be sent to the Credit Administration Department who are responsible to complete the documentation perfection, limit loading and disbursement. CAD specialized team is dedicatedly work for SME.

Collection responsibility is lying with Relationship team up to 90 days of the past due loans. After 90 days, the file transfers to the Recovery team for taking legal action as well as for negotiation. EBL has introduced 14 lending and 3(three) depository products to meet the SME customer’s demand. You can visit the website of EBL to get the detail information. EBL website:

The success story of EBL SME Banking is directly tied with the growth of its customers. EBL wants qualitative and sustainable growth in SME unit. EBL always try to serve their customer with world best services with zero tolerance in delivering services to their clientele as like their strategy with the ‘beyond lending’ approach. This approach is to serve the client not only in financial services but also to serve them in need based approach.

SME Business is based on the self dependent model, where it is expected that the lending will be made from funds sourced by SME Liability Team. Now a day’s SME Banking is not only confined in lending solution but also involves self sufficiency in business i.e. SME now want to mobilize deposit as well as to lend in the same pace without being dependent on other segment of the Bank for fund management.

In the year 2013, SME Banking has strengthened it foothold by ensuring portfolio growth while maintaining quality of assets. The new provisioning arrangements for all types of loans created a negative impact for the short-term on the profit margin of the commercial banks, but it will bring greater benefits to the economy in the near future. EBLSME Banking has proved it’s strength to manage the port-folio in a good manner.

EBL SME Banking Evaluation: IFC Scorecard

81% 69% 69% 73% 87%
EBL Score 75.8% State of the Art Bank 100%

Source: EBL Diagnostic Report-2009 by IFC-SEDF

Strength of EBL SME identified by IFC:

  1. Credit Culture: EBL has a strong credit culture. From the top, the CEO sets the tone by emphasizing the need to focus on strict credit granting criteria and pro-actively focuses attention on any credit segments that show indications of rising NPLs. The message has been to grow the portfolio only as long as the general high credit quality can be maintained. In the annual report, the top listed strategic priority is to ‘focus on asset quality’.
  2. Organization and Management Team: There is a logical organizational split between retail (Consumer and “S” SME) and larger loans (Corporate and “M” SME) that enables different skills and different systems to be applied based on the size and complexity of loans. Further, the centralization of the credit functions seems to work well for EBL in building a high quality portfolio with uniform credit analysis and strong oversight and controls. Some credit decisions might take a little longer using this centralized model but for now, with the current size and composition of the portfolio, the structure works well. The management team has very strong credit experience and is able to provide the required oversight of credit risk management.
  3. Reporting: The MIS system enables segmentation of loans in various categories and provides inputs for reports that give adequate information and analysis of performing and problem loans. For instance, the quarterly ‘Portfolio Watch’ report is a clear and comprehensive exposition of the composition of the portfolio of both performing and non-performing credits, including trends. It provides a good use of the available data to provide an overview of the quality of the portfolio and concentrations. However, as discussed more below, the richness of the analysis can be further improved by increasing the amount and type of data being collected and performing stress tests.
  4. Policies and Procedures: EBL has a comprehensive credit policy and an operations manual. The policies are well written and appear effective in directing sound credit risk practices, including loan restructuring and collections, within EBL.

To ensure access to finance with innovative financial solutions, EBL SME Banking has been divided into 3 (three) segments i.e. Small Business, Medium Business & Liability Business. There are some sub-divisions within the Small Business i.e. Small Segment unit, Women Entrepreneur Cell, Agri loan unit & Recovery unit. In addition to above we have a MIS team and an independent monitoring department at Head office level. Every business Unit has separate segmental Head. The present organizational structures are as follows:


–          Robert Patterson- SME Banking Expert, Canada

–          Imran Bashir – SME Consultant, Pakistan

–          Mathew Hanna – SME Banking Expert, USA

–          Md. Ashraful Alam- Deputy General Manager, Bangladesh Bank




  1. The SME Banking Knowledge Guide, IFC Publications
  2. Bank Financing for SMEs around the World by Thorsten Beck, Asli Demirguc- Kunt & Maria Soledad Martinez Peria (November,2008)
  3. Bank Involvement with SMEs: Beyond Relationship Lending, Journal of Bank & Finance 34(2010)2280-2293,
  4. IFC /WBI SME Banking Training Program by International Finance Corporation
  5. Some Issues on SME Finance in Bangladesh by Dr. Salehuddin Ahmed, Governor, Bangladesh Bank
  6. Proposed Research Direction for Sustainable SMEs in Bangladesh by Md Mamunur Rashid
  7. Problems and prospects of SME Financing in Bangladesh by Md. Shahnur Azad Chowdhury, Kazi Golam Azam & Serajul Islam, Asian Business Review, Volume 2, Number 2/2013 (issue 4)

Writer: Managing Director & CEO, Eastern Bank Limited     

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