Exploring the scope of SME bond

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The country's Small and Medium Enterprise (SME) sector is generally termed as among the backbones of the economy. The underlying need for the sector can be reflected in the development policy, although not very explicitly. For example, the Eight Five-Year Plan (8FYP), mooted in today's fiscal year (FY21), has emphasised the advancement of SME sector arguing that small and medium enterprises 'are playing a significant role throughout the market of Bangladesh, particularly in rural economy.' It also pointed out that 'most of the SMEs cannot make significant success because of many difficulties such as for example insufficient necessary funds, local level technology, patronisation etc.' The document outlined numerous measures to provide a boost to the sector.

The existing definition of SME, as set in the Industrial Policy 2016 and recognised by the SME Policy 2019, is a unified definition of Cottage, Micro, Small and Medium Enterprises (CMSMEs).  Thus it covers four types of industries. Small and medium industries are also divided in two categories-- manufacturing and services. The unified definition, despite some limitations, has reduced many misunderstanding about the SME sector. In lack of a unified definition, the sector faced a number of difficulties earlier and several are still prevalent.  

Currently, there is a major network of 7.81 million SME units in Bangladesh and the sector's contribution to Gross Domestic Product (GDP) is 25 %. The finance minister, in his budget speech last June, also mentioned:  "The federal government is putting on its endeavour to improve the contribution of this sector to 32 per cent by 2024." Nevertheless, lack of capital due to inadequate usage of finance and credit is a major barrier to the growth and sustainability of the sector which happens to be generating 80 % of the professional employment and adding 45 % of the manufacturing value.

Against the background, Dhaka Chamber of Commerce and Industry (DCCI) within the last month developed a set of suggestions to address the financing and other problems of the sector. Included in these are: separation of medium-sized businesses from the existing CMSME category, introduction of SME Bank and SME Bond. Terming usage of finance for cottage CMSMEs as the biggest challenge, DCCI President Rizwan Rahman also argued that separation of medium-sized businesses from that category could resolve lots of the problems. In the press meet he further mentioned that cottage, micro and small enterprises don't get enough usage of formal credit due to many obstacles while medium enterprises get a major portion of the amount dedicated for this segment of business. The recommendations placed by the DCCI, known as the voice of the country's SMEs, requires policymakers attention in particular when the sector is struggling very hard to regenerate from the negative affect of Covid. Despite providing Tk 20 billion working capital loan facility at a subsidised interest for CMSMEs during the pandemic, the sector is yet to utilise the facility efficiently.   

Against the backdrop, the thought of SME bond is particularly worthwhile taking into consideration the CMSMEs' insufficient capital because of inadequate usage of finance and credit.  Although corporate bond issuance is generally used by big companies, it isn't impossible for the SMEs.

UNDERSTANDING BOND: It really is to be noted that bond is a debt investment where an investor lends money to an entity (corporate or governmental) that borrows the funds for some time frame at a fixed interest. Being truly a variable-priced financial asset, bond can be a promise by the issuer (firms or the governments) to pay the bearer a certain amount (interest/yield) until its maturity. The core objective of a bond is to raise capital or funds. While government or treasury bonds are supplied by the federal government to finance budget deficit, corporate bonds are issued by private organizations or companies to borrow money from  individual and institutional investors. Generally known as fixed-income securities, bonds help organizations and governments raise capital. Unlike stocks, it offers a fixed and well-defined income stream for investors (that is clearly a 'coupon') and so are repaid back again to the investors towards the end of prescribed period referred to as 'maturity'.

As the backing for a bond is often the payment ability of a company, which is normally money to be earned from future operations, large companies have significantly more advantage in this regard. The payment ability of a company is reflected in the credit history which is vital in the financial market. One segment of the financial market is capital market which can be split into two parts: stock or equity market and debt or bond market. The bond market primarily includes government-issued securities and corporate debt securities. It facilitates the transfer of capital from savers to the issuers or organisations requiring capital for government projects, business expansions and on-going operations.

In Bangladesh, the capital market is predominantly an equity based securities market. Number of bonds and other debt instruments are insignificant and a corporate bond market is absent.  The country's bond market is dominated by the fixed income government debt instruments. The utmost savings of small investors are mobilised by mainly National Saving Certificates. The interests on these saving certificates are greater than that of other government bonds available in the market. The other main government debt instruments are treasury bills and treasury bonds, short-term and long-term in nature respectably.  Treasury bills and bonds are tradable available in the market through primary dealers. As backed by the federal government, these debt instruments are risk-free therefore don't require any credit rating in the domestic market. Purchasers and investors choose the low-yield bonds because of lower level of threat of return. 

SME FINANCE & SME BOND: In Bangladesh, SME financing is entirely reliant on banks. Bangladesh Bank statistics showed that within the last fiscal year (FY20), all banks and non-bank financial institutions (NBFIs) have disbursed an amount of Tk 1.53 trillion as loan to 691,664 CMSMEs. Simultaneously, 57,228 women-led CMSMEs received financing of Tk 51.78 billion from banks and NBFIs. Through the first quarter of the existing fiscal year (FY21), some Tk 386.89 billion was disbursed as SME loans by the banks and finance institutions.

The SME Policy 2019 set a fairly easy and 'increasing scope of usage of finance' among the core implementation strategies to create a captivating SME sector in the united states. It also outlined a number of tools including 'SME Bank' in the united states to enhance the scope of institutional funding for the sector. The policy, however, didn't consider 'SME bond' as a tool though the concept isn't a unique one. South Korea and China have already introduced the financial instrument. According to a written report of US Economic and Social Commission for Asia and the Pacific (UNESCAP), China developed three types of SME bond instruments. These are: SME collective note, SME joint bond, and SME private placement bond. South Korea also introduced a professional institutional buyer (QIB) system for SME bond trading. All these are still at a developing stage yet to take a comprehensive shape.

Without doubt, the well-developed financial market and infrastructure of these advanced developing countries are not much like Bangladesh perspective. Nevertheless, the encounters of SME bond in these countries should be reviewed and lessons should be taken into account in Bangladesh.

A big barrier to introduce the SME bond may be the country's underdeveloped corporate bond market. Some 94 corporate bonds and debentures were issued until FY19 through private placement while only three public-offering corporate bonds are actually available for sale.

Despite a number of initiatives going back two decades, the authorities are yet to build up the mandatory infrastructure for a corporate bond market.  Complexity in tax measures compounded by other regulatory and institutional drawbacks are hindering the development of the organization bond market.   An operating committee engaged by the federal government prepared a thorough framework on development of the country's bond market in 2019. The report also outlined a set of recommendations to produce a functional bond market. Progress of the implementation of these recommendations is fairly slow.

Another big challenge for SME bond is credit rating. Globally, SMEs are not sufficiently equipped to issue corporate bonds mainly due to lack of credit scores. The rating system is a sophisticated mechanism of the financial market to look for the level of risk. Any corporate attempting to avail the rating must go through a complex procedure and additional payment for the rating companies. Only big businesses think it is viable and essential to choose rating. Policymakers, regulators and industry leaders have to include an alternative mechanism for the moment to overcome the task. A study may be initiated in this connection.
Source: https://thefinancialexpress.com.bd

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