A Survey on the MsMEs of Dhamura, Barisal, Bangladesh.
Dhamura is a small village of Barisal District. It is around 256 km from the capital Dhaka and 24 km from Barisal. The centre of its economy is the local market. The position of the market has made it a profitable one. It is at the bank of Dhamura River and this market is a transition point for most other nearby locality for communication with the district or any other part of the country.
|Road to Dhaka|
|Road to Barisal|
Picture 1: The geographic positioning has made this area a centre of economic activities
Apart from the century old market, this area has many other signs of development. The literacy rate is around 60 percent and almost 95 percent children go to school, though the dropout rate is also high, as one in twenty children drops out before sixth grade. Many of them start participating in the rural economy and those who drop out before university level, usually start small business in the locality.
The remittance inflow in the economy is also high as many families have members staying abroad and sending money. These people help start up and run business and when they return permanently from abroad they start their own business.
Most of earnings come from farming but small and medium businesses are growing as well. The participation of woman in economy is also significant. Though, the main activities remain within farming and cottage industry but gradually woman are participating in rural SMEs as some of the shops are run by woman entrepreneurs in the market.
Picture 2: The Economy is still agriculture based
There is a government bank (Sonali Bank) in the market and most of the well known MFIs have activities in this locality, but here cooperative societies are playing a dominant role in rural financing in recent days. There are also individual lenders who meet short term financing needs but they charge very high interest rate.
The study is based on a survey conducted on the MSMEs of Dhamura, Barisal, Bangladesh. The centre of the economy in this village is the local market which is locally known as ‘bazaar’. Almost all of the MSMEs were included in the survey. All of them were asked same questions. To find the true picture, local support was taken so that respondents feel free to answer the questions.
The survey covered mainly the capital sources at the beginning of the business, use of loan financing at present, purpose of using the loan financing, amount of loan, the reasons for not taking loan, if they feel more capital is needed and finally what can be done to make them take loan financing and expand their business.
It is observed that most of the businesses are profitable and the growth rate is also steady but most of them lack recourses for which they cannot grow at a desired level. Their responses were then evaluated with other parts of Bangladesh and we found a great deal of similarities. It could be concluded that this local market and the economy of Dhamura depict the overall scenario of Bangladesh.
Capital Sources at the Beginning of the Business
The main sources of capital for initial investment is still own recourses. In Dhamura, people start business mainly, when they can save and gather adequate resources by their own.
Figure 3: Sources of Capital
Here, 58 MSEMs responded that they have started their business with their own capital. Another 13 percent people started the business with the help of their relatives. Those who have family members abroad, mostly in Saudi Arabia, Dubai, and Malaysia have had this support. The important findings is only 29 percent of the MSEMs started their business with the help of loan, which indicates the access to finance is limited to start-up a business in the locality.
This scenario remains almost same in the following stages of the business. During the growth stage of the business, these MSMEs seek for loan finance to facilitate additional sales. The MFIs and cooperatives play a vital role here. Most of the MSMEs are at the growth stage of the business life cycle and it is high time they get access to finance.
Usage of loan in running the business
After observing the sales and revenue growth of the MSMEs in recent years; it can be assumed that most of them are running at their full capacity with the internal resources. The average monthly earnings from the business of the medium to large enterprises are about BDT 20,000 and BDT 6,000 for micro and small enterprises. This surely indicates the profitability of the enterprises.
Figure 4: Use of loan
At this stage, 55 percent of the MSEMs have loans at present from one or more sources among the Government Banks, Private Banks, MFIs, Cooperatives, or other informal sources such as individual lenders lending at a high rate or relatives.
But, noteworthy thing is that 45 percent MSMEs have no loan financing. As, it is already mentioned that the economy is at growth stage, lack of financing is causing those enterprises unable to get finance lag behind.
We would find details about usage of loan and the reasons behind not taking any loan in following pages. Still, with almost half of the enterprises out of loan finance it is very difficult to strive forward.
Sources of Loan
A significant portion of the enterprises do not have access to loan finance. Though, there are sources available for loan financing in Dhamura; which depicts the scenario of most other parts of Bangladesh. These sources provide inadequate amount of fund or the products are not suitable for the MSMEs.
Figure 5: Sources of loan
There are mainly five types of sources available for the MSMEs in Dhamura. These five types of sources are also available across the country.
The most desired service provider is government institutions and the people in rural areas still prefer government services. They feel the commercial banks or other institutions have goal of profit maximization and they do not consider the economic condition. Whereas, government institutions’ main purpose is economic development; as a result, they feel government institutions would provide loans with lower interest rate. This perception also creates a barrier for non government organizations in terms of fair competition.
Unfortunately only 9 percent MSMEs could get fund from Government Banks. In Dhamura, the only source of government finance for MSMES is Sonali Bank and in a few cases Bangladesh Krishi Bank. There is a huge demand and supply gap for government funding here. MSMEs consider government services would match with their benefit but access to it is minimal.
The main sources of private banking services come from BRAC Bank and National Bank mainly for two reasons. One, these banks have branches near to Dhamura and secondly, it is easier for the entrepreneurs to get loans from these two banks than government banks. Though, the MSMEs believe the interest rate is too high, but 20 percent enterprises have loan from private commercial banks.
MFIs provide 17 percent of the financing but this rate was higher in earlier years. The products provided by the MFIs are not suitable for the MSMEs of Dhamura. Again, the amount of loan is also important here. Where most of the small enterprises have access to MFIs but most of the medium and large enterprise are interested in other sources than MFIs.
Cooperatives in Dhamura are in boom state. There are many cooperatives here and most of the MSMEs have or had used it as a source mainly because the source is readily available and the fund is easy to collect. AT present 31 percent MSMEs have loans from these Cooperatives which are locally known as “Multipurpose’. The repayment procedure is troublesome for the enterprises, as most of the cooperatives collect fund on daily basis and sometime weekly basis.
Other informal sources are individual lenders, relatives etc who provide fund mainly for short term financing at a high interest rate, sometime as high as 200 percent. Those MSEMs needed funds for emergency or for a short period take this loan. And the fund is used mainly for working capital purposes and times before occasions, for instances before EID or Puja.
Purposes of using loan
The primary purpose of using loan is for expansion. When the MSMEs want to grow their business they seek for financing. Another use is working capital in where enterprises use the fund to meet day to day expenses or meet short term liabilities. New venture is considered as enterprises expanding beyond current business, i.e. starting another business.
Figure 6: Purpose of using loan
AT the growth stage the MSMEs go for expansion, try to capture more market share or generate more sales. As a result, 53.33 percent MSMEs in Dhamura use loan for expansion.
On the other hand, 40 percent MSMEs of Dhamura, use loan as working capital which help them keep running their enterprises in tough times. Some of the entrepreneurs mentioned that they do not take loan until they have no other options.
Majority of the MSMEs, 93.33 percent use fund for these two purposes, where only 6.67 percent MSMEs use loan financing for new venture. This concludes why the economy in Dhamura is growing at a slow rate. Hardly any new business opportunities are created in recent days. Existing businesses are growing but new opportunities are not added to the existing one. But, if along with expansion of current businesses, enough new businesses had started, the growth rate would have been much higher.
Reasons for not taking loan
Forty five percent MSMEs in Dhamura do not have loan finance at present. So, indentifying the problems is crucial. These MSMEs required loan financing for growth but there are some issues for which they are reluctant to take loan. If these issues are resolved then they would take loan.
Figure 7: Reasons for not taking the loan
Rigid procedure includes all the processes required to get a loan. For example, one of the respondents informed us there are more than 100 documents needed to be submitted to get a CC loan from Government Bank. Another entrepreneur told that he was waiting for a loan for more than two years after his application. The rigid procedure mainly applies for the government banks as the cooperatives require minimum documents and it is also true for MFIs. But private commercial banks’ process is not too encouraging for the MSMEs. 12 percent MSMEs did not take any kind of loan because they felt the procedure is too rigid for them and they may not get the loan in time.
High interest rate is also a major drawback. Among the MSMEs of Dhamura 24 percent think the interest is too high to have loan financing. One of the entrepreneurs provided us with an example that though the written interest rate is 12 percent but he had to pay more than 70 percent. So, the MSMEs are well aware of the real interest rates and thus they are not taking any loan. The interest is high for private commercial banks that provide long term financing whereas cooperatives provide short term financing and the interest rate is very high. The interest rates of MFIs are also high as the repayment is made on daily or weekly basis. Though, the interest rate is low of government banks but because of other reasons MSMEs are not encouraged to take support from them.
Most of the commercial banks require collateral such as land, property etc. Cooperatives are based on local trustworthiness and MFIs are based on group activities. The collateral has to be immovable property which the rural MSMEs lack. And entrepreneurs do not have good perception about collateral as from previous experiences with local individual lenders. But it is not a major concern as only 4 percent MSMEs consider this as the reason for not having loan financing.
One of the interesting findings is MSMEs who did not considered loan financing as a source of capital would have considered it, if they had found government services available. Still only 4 percent considered this but those who have taken loan also informed that they would rather prefer government services. One may think it is mainly because of a tendency of default, but surprisingly there are only a few cases of defaults in recent days.
The MSMEs of Dhamura like most other parts of Bangladesh has unique demand. Most of them informed that the repayment system is not desired. Sometime they need to pay high amount of principal in early periods. MFIs and cooperatives have a repayment policy based on daily or weekly basis which MSMEs feel troublesome. Twenty percent MSMEs feel if there were products which fulfilled their demand they would have considered loan financing as an option.
Surprisingly, highest number of MSEMs responded that they are not interested in loan financing at all. And the main reason behind this is the general perception of people about loan and the prior experiences. They would rather have current profitability than take loan and improve their condition. This is the area where a number of awareness programs need to be targeted.
Required more capital
The MSMEs are performing well in terms of profitability and growth, but most of them lack adequate capital.
Figure 8: Needed more capital
Eighty seven percent MSMEs of Dhamura needed more capital and they are aware of the inadequacy. They feel that with additional amount of financing they could grow further as there is scope for expansion.
Thirteen percent of the respondents consider that they do not need more capital. These MSMEs have businesses which have few market demands, for example CD/VVD rental services, or there is no scope for growth. In general, most of the businesses are running at their growth stage, so they need more capital.
We tried to find out what needs to be done to meet the MSMEs’ demand as we are concerned with demand side constraints. The result is not surprising; the entrepreneurs of Dhamura have expressed what we have observed all over the country. These MSMEs are willing to take loan financing if they have their demands fulfilled.
Figure 9: Expectation from the loan
This question was asked all to the MSMEs who have taken loan financing and who have not. The objective was to find out possible guidelines as they are the people who would take the loan and what they think matters most.
Twelve percent MSMEs think the procedure to get loan need to be a simple one. The times required to collect the fund should not be long. And preparing documents includes high amount of transaction costs for them, as most of them never had the documents like chairman certificates or reference before. This cost need to be minimized to serve them as well as the time.
It is already mentioned that the interest rate is too high for MSMEs when we consider cooperatives, commercial banks or even MFIs. And it is the area where most of the MSMEs are concerned about. Those who have taken loan from one of the sources are unwilling to have further loan until they have sources providing loan at a lower interest rate. 36 percent MSMEs considered interest rate needs to be lowered.
As, most of the enterprises have no collateral suitable for the loan financing from commercial banks and government banks for long term financing, they think either the types of collateral need to be changed or the requirement of collateral need to be removed. 12 percent MSMEs consider collateral is the barriers for the expansion they seek with the help of loan financing.
Another 12 percent MSMEs feel government service could be the solution. They feel commercial banks and other non government institutions are concerned with generating profit. The interest of government is public welfare and the MSMEs think only the government service could help meeting their demand.
Specific products need to be developed for the needs of rural MSMEs. Both the government and non government institutions need to be well aware of this fact and try to serve them with their desired product. In Dhamura the cooperatives are filling the gap and the entrepreneurs are paying the price with high interest rate. 20 percent MSMEs of Dhamura consider that they are underserved with desired products in terms of loan financing.
Though, most of the respondent who did not considered loan financing as a source of capital because they did not have any interest in loan at all, but in general the rate is only 8 percent. But this portion of the market segment needs to be evaluated as well. There is lack of information to them and the perception about loan financing need to be changed.
As we all know, with the limited amount of internal resources they cannot grow further. To move further these MSMEs should have access to financial services. Another important thing is that, the participation of woman entrepreneurs need to be ensured because they cannot overcome the barriers to get access to finance. Most of the MSMEs, irrespective of gender feel the road for expansion is not encouraging for them. A number of things can be done for that. But for now, access to finance is still limited in rural areas of Bangladesh leading to slow economic development.