The Bangladesh Bank asked all banks and non-bank financial institutions (NBFIs) to ensure micro, small and medium enterprises (MSMEs) receivable financing through the digital trading platform.
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.
The central bank issued the instructions in a circular in line with the "Guidelines for Local Factoring/Receivable Financing through Digital Platform-Pilot Phase" on Monday.
According to the Bangladesh Bank, from now on ThinkBig Solutions Ltd will operate the pilot-phased trading platform for the digital intervention in receivable financing.
"Before the system was installed, the MSMEs were bound to go to local banks and NBFIs for cashing invoices at a discounted rate and thus the enterprises had to spend more for the service," a central bank official, seeking anonymity, told The Business Standard.
"The regulator has now taken the decision and going to implement the system for a competitive environment among banks and NBFIs. The system includes bidding by banks and NBFIs after invoices are uploaded by MSMEs to cash."
According to the guideline, the investment limit for banks and NBFIs will be a maximum of Tk20 crore as a single financier at any point in time. And 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.
The Bangladesh Bank guideline says a majority of these MSMEs do not have access to sufficient credit and liquidity required for their daily working capital needs.
One of the pressing issues has been the reluctance of the formal sector to lend to MSMEs due to high perceived risks and higher operational cost since the loan size is very small and requires intensive monitoring and supervision, it added.
Also, MSMEs are highly unlikely to comply with the collateral requirements as typically they do not have immovable properties. So, the regulator has come out with this decision.
MSMEs also lack in providing necessary documentation in terms of required legal and formal agreements. On the other hand, terms and conditions for receiving loans by MSMEs from microfinance institutions are not favourable and often the interest rate is too high.
Thus, MSMEs mostly depend on informal sources of funds which results in higher borrowing costs. In this way, MSMEs have struggled to raise funds from formal sources resulting in a significant credit gap for the sector, the guideline added.