The government is set to introduce an innovative financing model under a new law to enable small businesses and startups to show their moveable assets as collateral with a view to nurturing entrepreneurs and helping them secure loans.

A draft law for the collateral protection for movable assets has already been formulated, according to a finance ministry official. The ministry will submit it to the cabinet by June 30 next year for approval.

The law is expected to provide local technology start-ups a shot in the arm as they always find it difficult to borrow from local banks and non-bank financial institutions due to a dearth of collaterals considering the nature of their business.

AKM Fahim Mashroor, founder and chief executive officer of bdjobs.com and AjkerDeal, welcomed the initiative.

"Startups have no lands, fixed-deposits, or other assets to keep them as collateral in order to get loans from banks. So, they are always deprived of the badly needed financing that is essential for growth and to move to next levels."

The entrepreneur, however, thinks that banks will not provide the loans despite the law unless the central bank sets a mandatory minimum disbursement target.

He called for setting a Tk 100 crore disbursement target for the local startups.

The proposed law is in keeping with the conditions set by the global development partners when they extended budgetary support to the government to help the country recover from the shocks triggered by the coronavirus pandemic.

The government is framing the law as it wants to facilitate loans for at least 1,000 cottage, micro, small and medium enterprises (CMSMEs) and startup units by 2024.

It will also put in place a more conducive regulatory environment and introduce innovative financing modalities to overcome CMSMEs' collateral issue and enhance financial intermediation.

The government will help adopt an alternative credit scoring model by using digital transaction data, mainstreaming cluster and value chain financing, and promoting bank lending based on non-traditional collateral such as trade receivables and warehouse receipts.

Under the proposed law, raw materials, gold and other precious metals, patents, copyrights, work orders, furniture, tree, vehicles, agriculture and processed foods and fishery will be considered as collateral.

Policies for cluster and value chain financing, and adoption of alternative credit scoring models to offer digital loans will be introduced.

Among the initiatives, the digital credit scheme will commence in December 2022, the cluster financing scheme in September 2022, and the value chain financing in June 2023.

Limited access to affordable finance is one of the most critical constraints faced by CMSMEs in Bangladesh: Only 28 per cent of the CMSMEs have bank loans.

Banks are reluctant to lend to CMSMEs because of higher administrative costs and insufficient fixed assets as collateral, according to a government paper.

Cottage and micro-enterprises in the rural areas lack access to formal bank credit. As a result, they are compelled to borrow at higher costs from microfinance institutions or informal non-banking channels.

Meanwhile, the coronavirus pandemic has pushed many CMSMEs on the verge of bankruptcy and precipitated the breakdown of upstream and downstream production networks.

Although the government has announced many stimulus packages to strengthen the credit flows to the under-served CMSMEs hit by the pandemic, lenders were reluctant to extend the credit.

The CMSMEs, particularly owned by women and the micro-businesses in animal farming, trading, and services, are comparatively more affected because of their informal nature, the owners' weak financial literacy, and the lack of sufficient assets to cover the loans.

More than 70 per cent of the CMSMEs are located in rural areas. They account for more than 80 per cent of non-farm employment and contribute to rural development and poverty reduction.

Although local startup-ups receive almost nothing in the form of financing from banks and NBFIs in Bangladesh, global financiers are investing in them.

Bangladeshi start-ups have received $130 million so far this year, according to Dhaka-based consultancy firm LightCastle Partners. Of the sum, $126 million came from international sources as venture capitalists and angel investors see Bangladesh as an untapped market and with huge potential for the startups to expand.

Abul Kashem Md Shirin, managing director of Dutch-Bangla Bank Ltd, also welcomed the proposed law.

He says bankers don't usually feel comfortable in accepting moveable assets as collateral as it does not give them control over the assets. There is no guarantee that the assets would not be removed a day after the collateral is accepted.

In such a scenario, the proposed law will provide comfort, he said.

Shirin says startup firms usually don't have assets, but many of them have business potential. "If we can have moveable assets, copyrights and patents as collateral, the comfort level of banks will go up."

"If we don't lend them, these startups will not flourish in Bangladesh."

The financing for the startups will come from a fund set up using net profits of banks, said Shirin. 

Syed Mahbubur Rahman, managing director of Mutual Trust Bank Ltd, however, said startups should prefer equity, not debt.

"If they take on debt, how will they pay the interest? What will happen if they default?"