SMEs face challenges because of high interest rates and difficult loan conditions

Alamgir Hossain, a small business owner in the jute industry, recently applied for a Tk5 lakh loan to expand his business. Initially denied, he was asked to provide three guarantors, his business trade license, and several other documents—a cumbersome process for a small entrepreneur.

“Our loan amount is minimal, but the difficulties are immense. Banks often refuse loans without strong references. The time spent on fulfilling these requirements causes delays, preventing businesses from starting on time,” Alamgir shared with the Daily Sun.

Like Alamgir, many SME entrepreneurs in the country face similar obstacles when seeking loans. Those who succeed in securing financing often struggle with high-interest rates and hidden terms that make repayment challenging.

SMEs: The Backbone of the Economy, Yet Struggling to Stay Afloat

Small and Medium Enterprises (SMEs) play a critical role in driving economic growth, fostering innovation, and creating jobs.

The contribution of SMEs to Bangladesh's GDP has grown steadily, with the Cottage, Micro, Small, and Medium Enterprises (CMSME) sector generating Tk1,00,257 crore in the 2019-2020 fiscal year, rising to Tk1,35,985 crore in the 2022-2023 fiscal year.

Despite their crucial role, SMEs face numerous challenges, particularly when it comes to obtaining loans with reasonable interest rates.

According to data from Bangladesh Bank, the average interest rate on SME loans has nearly doubled in just a year and a half. In June 2023, the average rate was 6.99%, but by December 2024, it had surged to 12.17%.

Additionally, many SMEs are unable to secure loans due to stringent bank requirements, such as the need for collateral, a strong credit history, and detailed business plans.

For small businesses lacking sufficient collateral or a long financial track record, securing loans becomes nearly impossible.

The High-Interest Rate Crisis

Central bank data shows that interest rates for the SME sector have steadily risen over the past six months. In June 2024, the weighted average interest rate (WAIR) for SME loans stood at 11.80%, increasing to 12.19% in November and slightly declining to 12.17% by the end of December 2024.

As a result, small industry term loan disbursements dropped by 43.92% year-on-year in the October-December quarter of FY2024.

This decline has had a major impact on small business owners like Saleha Begum Brishti, a former banker who now runs Manipuri fabric and jute factories in Shreemangal.

“Now, it’s difficult to obtain funds from banks. While there were low-interest loan schemes for the SME sector, they are not always available. When they are, interest rates soar to 17-18%. With such high rates, businesses face serious setbacks from the start, making profitability nearly impossible,” Saleha explained.

Ershad Ali Akash, who operates a large shoe factory in Bhairab with over 300 employees, pointed out the issue of “hidden conditions” in bank loans.

“Many times, despite paying only the interest, the principal amount doesn’t decrease. In some cases, the collateral is auctioned off without the borrower’s knowledge,” he said.

Systemic Barriers to Loan Accessibility

For many entrepreneurs, obtaining a loan is an uphill battle.

Alamgir Hossain, for instance, had to get verbal assurance from a senior official at Bangladesh Bank before his loan was finally approved. By the time the approval came, his business expansion was significantly delayed.

Dr. Zahid Hussain, former lead economist at the World Bank Dhaka office, noted that lack of capital is a significant barrier for entrepreneurs.

“Many businesses struggle to secure loans due to systemic issues within the banking sector,” he said.

Dr. Hussain added, “Meanwhile, large industrial groups have withdrawn thousands of crores from the financial sector, yet small entrepreneurs in rural areas continue to face challenges in accessing capital.”

The Need for Reform

Experts agree that government intervention is essential to support SMEs.

Dr. Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development and former director general of the Bangladesh Institute of Development Studies, stressed the importance of policy changes.

“Banks are more willing to provide large loans but are hesitant to lend to smaller businesses. Additionally, the paperwork is often too complex for SME entrepreneurs to navigate,” he pointed out.

He suggested government-backed loan programs with lower interest rates and fewer collateral requirements to help small businesses thrive.

Anwar Hossain Chowdhury, managing director of the SME Foundation, also highlighted the limitations of current initiatives.

“This fiscal year, the goal is to provide Tk450 crore in loans to SMEs through 23 banks and financial institutions at an interest rate of 4%,” he said.

“However, this is insufficient. With the right support from both the government and the private sector, SMEs have the potential to generate substantial foreign currency earnings,” he concluded.