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The central bank has asked all banks and non-bank financial institutions (NBFIs) to utilize digital trading platforms in providing micro, small and medium enterprises (MSMEs) access to receivable financing.
The Bangladesh Bank on Monday issued a circular in this regard conforming with the “Guidelines for Local Factoring/Receivable Financing through Digital Platform-Pilot Phase,” asking financial institutions to ensure digital intervention in receivable financing.
“We already have been depending on a hybrid modality that utilizes both manual and automated processes to provide access to receivable financing to the MSME sector,” Md Kyser Hamid, the CEO at Bangladesh Finance told Dhaka Tribune.
However, the manual process is highly inefficient, as the authentication and verification process of the invoices provided by suppliers to avail the loans elongates the time taken to access it.
“A digitally-enabled ecosystem that connects all stakeholders of the financial supply chain, including payment systems, suppliers and their customers as well as lenders, makes the verification and authentication process even less complex and allows the suppliers to access such kind of financing easily,” Kyser Hamid further explained.
Receivable or factoring financing is a term that describes several different techniques a business can use to raise funds against the amounts owed to it by its customers in outstanding invoices, also known as its trade receivable or account receivable, therefore, receiving funds based on issued invoices.
“Those invoices refer to the purchases made, but the payment hasn’t been received yet. From an accounting perspective, these are accounts payable and accounts receivable. For example, let’s say Dhaka Tribune depends on suppliers who provide drinking water filters, and other such office suppliers. But they are not paid instantly but as per a pay cycle which might be more than 30-60 days sometimes,” explained Hamid.
“This means that the working capital of such small businesses are stuck with its customers and for them to operate they can access loans against those invoices from financial institutions, for which we give them like 70-80% of the pay off which they pay back later,” he also added.
According to a central bank official, prior to the move, MSMEs would have to physically visit local banks and NBFIs for cashing invoices at a discounted rate, increasing their expenditure which will be addressed by the move by the central bank.
According to the circular of the central bank, in attempts of incubating a competitive environment among banks and NBFIs, BB have decided to implement a pilot-phased trading platform for the digital intervention in receivable financing to be operated by ThinkBig Solutions Ltd.
As per the guideline, to provide MSMEs access to sufficient credit and liquidity required for their daily working capital needs, the investment limit for banks and NBFIs will be a maximum of Tk20 crore as a single financier at any point in time.
The maximum amount of investment as a single financier to a single corporate buyer at any point in time will be Tk5 crore during the piloting phase.
Additionally, the central bank stated that the formal sector has previously shown reluctance to lend to MSMEs due to high perceived risks and higher operational costs since the loan size is very small and requires intensive monitoring and supervision, as the enterprises are unable to provide any sort of legal collateral.
MSMEs mostly depend on informal sources of funds which results in higher borrowing costs for which, MSMEs have struggled to raise funds from formal sources resulting in a significant credit gap for the sector, the guideline added.
Speaking to Dhaka Tribune, Syed Almas Kabir, president of Basis pointed out such digital intervention can automate the process of borrowing at financial institutions through a process of credit rating from transaction data recorded by these platforms and financial institutions using technologies like, artificial intelligence (AI), Big Data analytics, etc which can in term act as collaterals for such enterprises in the future.
Kyser Hamid also told Dhaka Tribune that the pilot project will start very soon.
(DT)
