Digital lending can help bridge $2.8b MSME financing gap: study

Bangladesh’s micro, small and medium enterprises (MSMEs) face an estimated $2.8 billion financing gap, while digital lending could help expand access to formal credit, according to a new study.

The findings were revealed at a seminar on “Ecosystem Mapping and Diagnostic Study on MSME Financing in Bangladesh” held in Dhaka on Tuesday (22 Sept), said a press release. 

The seminar was organised under The Asia Foundation’s “Bridging the Gap: Unlocking Small Business Finance through Fintech Partnerships” programme. LightCastle Partners conducted the study as research partner, with SME Foundation as implementing partner and Visa as strategic partner.

The study found that Bangladesh has around 7.16 million MSMEs, accounting for 61.2% of all enterprises and providing employment to around 19 million people.

Although 92.6% of MSMEs are micro enterprises, they receive only 14% of total disbursed MSME loans, highlighting the limited access of small businesses to formal finance.

The research, based on 329 MSME surveys, 19 key informant interviews, 12 in-depth interviews and four focus group discussions, found that 95.2% of surveyed businesses faced financial shortages and 86% had borrowed, while only 58% had formally applied for loans.

Only 2.62% of formal applicants reported being rejected, suggesting that many businesses drop out before reaching the formal loan application stage, the study said.

The study also identified significant potential for digital finance. Some 87% of MSMEs had a digital footprint and 97% were active on mobile financial services platforms, but only 11.55% had accessed digitally enabled credit.

Existing digital lending products were largely limited to Tk50,000 or less and offered short repayment periods. In contrast, around 60% of MSMEs preferred loans above Tk3 lakh, while 85% preferred repayment periods longer than six months.

Working capital accounted for 57% of MSME borrowing, according to the study.

It identified women-led and service-sector businesses as potential entry points for digital-credit pilots. Some 83.1% of women entrepreneurs with no prior knowledge of digital credit expressed interest in such services, while 86% of service businesses showed interest in digital credit.

The seminar brought together representatives from Bangladesh Bank, SME Foundation, banks and financial institutions, fintech companies, mobile financial service providers and development organisations.

The panel discussion focused on simplifying lending processes, building a digital ecosystem, digitising financial services, using data for credit decisions and bridging gaps between banks, customers and digital platforms.

Participants also discussed the potential use of artificial intelligence-assisted alternative credit scoring, stressing responsible data use, privacy and customer consent.

The study proposed four priorities: piloting digitally enabled lending, building interoperable and consent-based data systems, improving the commercial viability of small-ticket lending, and strengthening the regulatory and institutional environment for responsible financial innovation.

Filip Graovac, senior adviser for Innovation and Future Economy at The Asia Foundation and project lead of the programme, said the country needed to bridge the gap between capital and policy.

“We are not short of capital, we are not short of policy intent, we are short of the working connection between the two,” he said.

Chief guest Muslim Chowdhury, former comptroller and auditor general of Bangladesh and former finance secretary, stressed the need to keep small and medium enterprises separate in policymaking to avoid misguided policies.