SME Loan Default in Bangladesh

Conducted by: Wajid Hasan Shah

Research Fellow, Bangladesh Institute of Development Studies (BIDS)

Executive Summary:

Small and medium enterprise (SME) financing in Bangladesh is witnessing many problems. While access to financing is among the major highlighted issues for SMEs, issues such as lack of product diversification and problems associated with marketing are also commonly cited. Access to SME financing is a major concern; however, the problems associated with implementation of SME projects in cases where financing is accessed do not seem to attract warranted attention, even though this is apparently responsible for the high level of default loans witnessed in cases of SME financing. This project explores the economic challenges encountered by SME loan recipients, a study that had not yet been done in Bangladesh.

The main research questions revolve around problems in accessing SME financing and problems in implementation of SME projects. Key person interviews were conducted in all seven divisions of Bangladesh, i.e. Dhaka, Chittagong, Sylhet, Rajshahi, Rangpur, Khulna and Barisal, in one urban and one rural area of each division. In some cases, the two sites were chosen from the same district of the division, while in others, they were in different districts, depending on the high SME loan default ratio. This study provides better insight into the various problems faced in both SME financing and conducting SME activities across the country. Areas with have higher default rates on SME loan repayments were targeted for this purpose. 

The findings indicate that while political turbulence (hartals/general strikes and blockades) was the major factor in a high rate of SME loan default, issues such as willful default (most often due to rough behavior by credit relations officers), fund diversion (to other/new businesses, for buying land, for investing in the share market, etc) were also major factors, and that more adequate supervision was required in observing fund utilization. Providing SME bank officials high loan targets was also responsible for default, as previous SME loan recipients who had not defaulted on several SME loans were often given a higher loan sanction than they could subsequently handle, resulting in misuse of funds and ultimately loan default. Lack of awareness regarding high rates of various charges and even very high rates of interest among loan recipients was also observed.

*A project funded by the Innovations for Poverty Action (IPA) under the Partnership Development Grant supported by the Asian Development Bank (ADB) under ADB TA 8003.