SME Banking Scope In Bangladesh (Part-3)

History of Bank in Bangladesh

Bank:

Banks are the most financial institution of the economy. They are the principal source of credit (loan able fund) for millions of households (individuals and families) and for most local units of the government. Moreover, for small business ranging from grocery stores to automobile dealers, banks are often the major source of credit to stock the shelves with merchandise or to fill dealer’s showroom with new goods. When the business and consumers need financial information and financial planning, it is the bankers to whom they turn most frequently for advice and council.

Worldwide, banks grant more installments loans to consumers than any other financial institution. Banks are among the most important source of short term working capital for business and have become increasingly active in recent years in making long term business loans for new plant and equipment.

Bank is financial intermediaries that offers the widest range of financial services- especially credit, savings and payment services and perform the widest range of financial function of any business firm in the economy. The multiplicity of bank services and function has led to banks being labeled “financial department stores”.

Origin of the Word

The name bank derives from the Italian word banco “desk/bench”, used during the new beginning by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, traces of banking activity can found even in ancient times.

In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived.

What Is the Economic Function of a Bank?

Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.

How Banks Work

Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks.

Through the process of taking deposits, making loans, and responding to interest rate signals, the banking system helps channel funds from savers to borrowers in an efficient manner. Savers range from an individual with a $1,000 certificate of deposit to a corporation with millions of dollars in temporary savings. Banks also service a wide array of borrowers, from an individual who takes a loan of $100 on a credit card to a major corporation financing a billion-dollar corporate merger.

The table below provides a June 2001 snapshot of the balance sheet for the entire U.S. commercial banking industry. It shows that the bulk of banks’ sources of funds comes from deposits – checking, savings, money market deposit accounts, and time certificates. The most common uses of these funds are to make real estate and commercial and industrial loans. Individual banks’ asset and liability composition may vary widely fromthe industry figures, because some institutions provide specialized or limited banking services.

1. Recognition of Right to Credit:

The view thus given of bank credit in general furnishes the key to the view which should be taken of the bank itself. It is, as we have already seen, a credit institution – an institution for the investigation, discussion, and recording of credits. It is not, in this aspect, what some have described it, an enterprise for “manufacturing” credit. The “manufacture” of credit, as clearly appears from what has already been said, is impossible. A basis of credit is automatically created whenever real buying’ power or value is in process of being brought into existence. Such power is created during the expenditure of labor and capital, but the real worth or value is often intimately associated with the other elements that appear in the general operations of his concern. The basis only appears when it is dissociated from the other elements in the aggregate of goods and expert means are needed to recognize it. The first function of a bank, then, is that of recognizing through scientific analysis the real nature and amount of the values which are presented. Fundamentally, therefore, the credit department of a bank is the basic element in its organization. It is true that in the past many banks have been able to do without credit departments and that at the present time there are not a few of them – chiefly the smaller and less advanced types of institution – which have no credit departments, or only very rudimentary organizations of the sort. These, however, usually accept the work of credit departments operated by their city correspondents. The true work of a bank credit department is done whenever any loan is made. It may be that the work of credit analysis is incidentally performed by the president or a vice-president of the bank or by some other officer who happens to have charge of the work of lending, but the function is there.

2. Guaranteeing of Values:

Secondly, the bank, after recognizing or analyzing credit, guarantees it. It does this by substituting its own credit for that of the “borrower” or owner of wealth. If A, for example, is producing steel from pig iron, the bank ascertains the value of the products which he has in process, which, we may say, is $25 per ton. It undertakes to loan, say, $10 per ton, and in order to carry out its part of the agreement it obligates itself to pay $10 on demand to anyone who may be designated by the owner of the plant. The owner leaves with the bank his own note, which may be secured or may be simply a claim upon his general assets. In either case, however, the loan is made on the strength of existing value. It represents that part of the value of the product which the bank is willing to guarantee. The bank does not expect to be called upon to meet this obligation for $10 per ton. On the contrary, it expects to offset the obligation against other claims, and as a net result it believes that it will not be called upon to reduce its holding of specie. That, however, is to be determined at a later time. The bargain which the bank makes when it enters into relationships with the borrower involves the substitution of its own obligation for that of the owner of the goods, and this is the essential point in the whole operation.

3. Transferring of Titles:

Thirdly, the bank not only undertakes to put its obligation in place of that of the borrower, but it undertakes to keep this obligation steadily redeemable on demand in money, or in lieu of such redemption, to shift the “credit” from A to B and from B to any other that the latter may indicate, through a process of bookkeeping which involves the receiving, recording, and paying of claims drawn against the total credit which has been allowed. Closely connected with this function are the subordinate duties of exchange and remittance, which, as will be seen at a later point, are variants of the same general function.

Overview of Banking Environment in Bangladesh:

The banking industry in Bangladesh is more than 600 years old. In Bangladesh 1970’s banking sector in Bangladesh entered into new era when the entire commercial banks and financial institution were nationalized after the emergence of Bangladesh as an independent nation in 1970’s (except foreign banks) with fixed landing and deposit rates .

Action Plan to support the SME Centers, Women Entrepreneurship and one-stop facility

Sl. No.	Policy Decision	Action Taken	Further Action to be Taken
1.	Bringing uniformity in SME definition: Forremoving the ambiguity in prevailing SMEdefinition.	Bangladesh Bank issued a circular in 2008 to bring uniformity in SME definition, in consultation with National Board of Revenue (NBR), Board of Investment (BoI) & Ministry of Industries (MoI) (Circular attached).	The final draft of ” The Industrial Policy,2010″ has already been approved by cabinet on 06/09/2010 and published in the Web- site by MoI. With inclusion of uniform definitionof SME (copy available in theWeb-site).
2.	Access to SMEfinancing: Todevelop & boost upthe SME sector as well as the overall economy of the country.	Following funds are now in operation in Bangladesh governed by different entities like Bangladesh Bank, SME Foundation & Ministry of Finance (Banking & FinancialInstitutions Division):i) Bangladesh Bank Fund;ii) EGBMP/IDA Fund; iii) ADB Fund and iv) SME Credit Wholesaling Foundation Fund. – These funds have already been channelized through different Banks/NBFIs with a view to helping easy access to SME entrepreneurs.	Further funds for thedevelopment of SMEfrom ADB & JICA are in pipeline. -ADB fund will be available for SME financing in Bangladesh Bank from October/2010. The Loan and Projectagreement among Govt. of Bangladesh, Bangladesh Bank and ADB was signed on October 12, 2009. – Negotiation with JICA is expected in 2011.
3.	Issuance of Guidelinesfor financing SMEsector throughdifferent Banks & NBFIs: To involve different Banks & NBFIs for the sound development of SME sector.	The following circulars withNecessary guidelines have already been issued through Bangladesh Bank: BB’s ACSPD Circular No. 01 dated 02-05-04 has introduced a Refinance Scheme for Small Enterprise Sector to provide maximum 100% refinance facilities to support the development of the small enterprises. BB’s ACSPD circular No-02 dated 19/07/2005 was issued to encourage & boost up the SME sector availing the ADB Fund.  BB’s SMESPD Circular issued on 19-07-10 has introduced a Refinance Scheme for SME Sector to provide refinance facilities to enterprises outside Dhaka & Chittagong metropolitan area.  BB’s SMESPD issued a circular on 15/02/2010 to reduce the lower loan limit of the entrepreneurs.  BB, ACSPD circular No. 05 dated 04/05/08 issued by Bangladesh Bank with following important terms & conditions:  The Banks & Financial Institutions should inform BB about the target of their SME credit disbursement within the annually disbursed of total loanable fund.  40% of the total SME loan would be provided for Small Entrepreneurs & rest of the 60% for Medium Entrepreneurs.  Setting up dedicated desk for SME etc.	Bangladesh Bank willissue further NewGuidelines &Directives as and when necessary.
4.	SME SupportCenters for OneStop Facility :To assist and promote the SME Entrepreneurs.	i) Bangladesh Bank has issued a circular on May 8, 2008 regarding the introduction of SME Service Centres for Loan disbursementand recovery in the Small and Medium Enterprise (SME) Sector in Banks. The Service Centres will be allowed to perform thefollowing functions :a) The SME Service Centres will render banking services only for receiving application, disbursement, monitoring and recovery of loan to SME sector. b) The SME Service Centres will be allowed to receive foreign remittances and deliver/ handover the same in domestic currency to the payees concerned. c) The SME Service Centres will be allowed to open a seperate desk in order to prioritize the women entrepreneurs involved in the promotion of Small and Medium Enterprise (SME) Sector. ii) Help line Outreach Centre: Ministry of Industries (MoI) under the direct support and supervision of SMESDP project is operating 71 helpline centers all over the country. These centers are established to facilitate existing and potential entrepreneurs regarding easy access to business information. iii) “Women Entrepreneur’s Dedicated Desk” Bangladesh Bank has established a ‘Women Entrepreneur’s Dedicated Desk’ in SME & Special Programs Department and advised all the banks and non-bank FIs to establish a separate desk to help the women entrepreneurs regarding all sorts of facilities and information Of SME.	Promotional workslike-workshop,seminar, symposiumand also training programmes are continuing and will be continued. – Setting up of SME product display centre is under progress in SME Foundation and it is expected to function by October/2010. The products of SMEs will be exhibited in the display centre. It will help, among others, develop marketing opportunities for the SMEs.
5.	Women EntrepreneurshipDevelopment:To extend the involvement ofwomen in the economic activities	i) Bangladesh Bank Initiatives: BB has issued ACSPD Circular No-01 dated February 7, 2007 declaring the special allocation of 15% of total SME Refinance able loan for women entrepreneurs.*At the initial stage total amount of fund for women entrepreneurs were TK 45 crore which is now raised to TK 120 crore. BB issued a circular on March, 2008 directing all Banks & NBFIs to set up separate “Women Entrepreneur’s Dedicated Desk” and to provide necessary training to the suitable workforce after recruiting them to assist & encourage women entrepreneurs and also advising them to consider the disbursement upto TK 25,00,000/- only against personal guarantee.  BB, ACSPD Circular Letter No. 02 dated March 02, 2009 has been issued directing Banks & NBFIs approaching to BB for refinancing claim after disbursing 10% of their total SME loan to the Women Entrepreneurs. ii) SME Foundation’s Initiatives: Women Entrepreneurship development is one of the most prioritized commitments of SME Foundation (SMEF). SMEF is working in diversified sectors in relation with the empowerment of women entrepreneurs in SMEs. The goal of these activities is to bring the women entrepreneurs in the mainstream of development process and thus ensure their empowerment. The remarkable initiatives undertaken by the SMEF for women entrepreneurship development are:  A five year Gender Action Plan has been developed for Women Entrepreneurship Development.  A working Group has been established to provide strategic support for Women Entrepreneurship Development.  Arrangement has been made for encouraging Women Entrepreneur by awarding ‘Best SME Women Entrepreneurship Award’.	An ADB financed TAprogramme is going to be implemented byWomen Chambers ofCommerce of Bangladesh from December, 2010. Bangladesh Bank will issue further circulars as and when necessary to facilitate more financing for the women entrepreneurs and to promote women entrepreneurship all over the country. – SME Foundation has already planned to arrange at least 8 training programs on different trades to promote women entrepreneurship in this fiscal year. – 30 women entrepreneurs will be trained on beautification course in October/2010. – National SME women’s entrepreneur award will be given in October/2010.