It is estimated that there are 12 million micro, small and medium enterprises (MSMEs) in Bangladesh. This estimate is based on the 2013 BBS National Economic Census, having 7.8 million MSMEs and an annual growth rate of 6.0 per cent. MSMEs contribute about 25per cent of the country's Gross Domestic Product (GDP), 31per cent of the industrial sector productivity, and employ 30 million people - 80per cent of industrial employment in the country. Not surprisingly, the MSME sector is called the employment generation machine of the country. However, even with such a significant contribution to the economy, the MSME sector is one of the most underserved sectors regarding access to finance in Bangladesh and other developing countries. In Bangladesh, more than 60per cent of micro-enterprises remain outside access to credit, and those with access to credit have exorbitantly high interest rates, such as 24-40per cent.
We have made much progress in the financial services sector using digital technologies since adopting the Digital Bangladesh vision in 2008. Mobile Financial Services (MFS) are widely adopted around the country. People use mobile phones to send money to family members, pay utility bills or recharge their mobile phones. More than a hundred million active customers make more than 30 billion taka transactions daily. The government is also disbursing safety net money and education stipends to millions of families using MFS. Other areas where we have made progress include internet banking, app-based banking and inter-operable ATMs. In addition, Bangladesh Bank and the government's ICT Division are working closely to launch a real-time interoperable payment platform named Binimoy shortly. It will be a big step forward for the payment sector in the country by triggering exponential growth, paving the way towards the coveted less-cash and cashless society, and facilitating the expansion of complementary financial services such as savings, credit and insurance.
Although technology has disrupted the payment sector, credit services have not changed much in the last few decades. It is time to disrupt the credit system and services using financial technology (fintech), including smart phones, the internet, big data and artificial intelligence (AI). In recent years, digital lending has expanded access to credit in the MSME sector in many countries, including India and China. Ant Financial in China has built a strong digital credit business using its "3-1-0 model", where applicants apply for the loan in 3 minutes, funds are disbursed within 1 second and human involvement is 0 (zero). Within four years of its inception, Ant's MYbank platform has made 16m loans and created a loan book of US$ 290b in partnership with 400 banks. Their end-to-end digital lending platform achieved a loan approval rate of 60per cent, kept a loan default rate of 1.3per cent and acquired 50per cent market share in MSME lending.
BANGLADESH BANK ENCOURAGES DIGITAL LOANS: Recently, Bangladesh bank issued a circular to promote small digital loans (Digi-loans) to reduce the financing gap among underserved and marginal people and expedite inclusive and sustainable financial sector growth. Here Digi-loan denotes loans offered by scheduled banks using end-to-end digital processes and digital channels (such as Internet banking, mobile apps, MFS and electronic or digital wallets). On top of this, Bangladesh Bank has also created a 100 crore taka refinancing fund for Digi-loan to incentivize the banks. Under this scheme, banks will get funds at 1per cent interest rate from BB and then lend to customers at 9per cent interest rate.
This circular represents a shift in gear where BB encourages banks to develop end-to-end loan products where all steps of customer selection, underwriting decision, fund disbursement, and repayment will be made using digital systems and processes. This also implies that banks do not need to meet customers face-to-face, and no wet-ink signature is required for loan application or acceptance. Also, digi-loan is expected to be unsecured, and traditional collateral-based lending will not be suitable for these. Instead, bankers will have to assess the repayment capability of applicants using projected cash flow analysis based on business category and transaction data and assess repayment willingness based on alternate data such as supplier payment history and regularity of business transactions.
This drive by Bangladesh Bank is expected to work as a major booster shot for banks to move towards innovative digital loan products. Traditionally banks are used to following BB guidelines in designing loan products, and currently, there is not a lot of differentiation in product offerings between banks in the market. Developing a Digi-loan product will involve investment and experimentation from the banks. Assuming the banks lend to customers at 9per cent interest rate and get funds at 1per cent from BB, Digi-loan will have an 8per cent margin. Even if the product has an overall cost and non-performance cost of 5-6per cent at the beginning, it will still provide 3-4 per cent net profit, encouraging banks to venture into the new world of digital lending.
DEVELOPING AN END-TO-END DIGITAL LOAN PRODUCT: To create an end-to-end digital loan product, a bank needs to work on the following areas:
1. Digital loan team with a proper mandate including research and development as well as launching and piloting before full-scale deployment
2. Technology for digital lending for customer acquisition to lending to client management and recovery
3. Data for credit risk assessment (need enough data to assess ability and willingness to repay the loan)
4. Digital payment platforms such as MFS or e-wallet (simple mechanism for fund disbursement/usage and loan repayment)
A bank may want to develop all four of these themselves. However, traditionally some of this work is outside the expertise and experience of banks and, therefore, will require a large investment in both time and money and involve significant risks. Alternatively, a bank may work with fintech platforms and specialized partners to launch lucrative Digi-loan products quickly to lead the market.
TALLYKHATA PLATFORM FOR MSME LENDING: TallyKhata is Bangladesh's leading digital MSME platform. It provides an intuitive app helping small businesses to maintain transaction records and accept/make digital payments. Launched during the Covid pandemic in 2020, TallyKhata (TK) is the fastest growing platform with 4 million registered small businesses and more than a million daily transactions.
TallyKhata is integrated with a digital wallet named TallyPay under a payment service provider (PSP) license from Bangladesh Bank. The wallet is opened using BB e-KYC guidelines with online verification against the national ID database. This wallet provides a complete digital payment solution for small businesses, such as accepting in-store QR code and online payments, collecting customers' dues, paying utility bills, and making payments to suppliers and distributors.
TallyKhata is ready to collaborate with banks and provide an end-to-end digital lending platform for micro and small enterprises, especially micro merchants. It is a complete solution consisting of origination, underwriting, disbursement, repayment collection, portfolio monitoring, and assistance.
TK collects more than a thousand data points on businesses using sources such as cashflow data, transaction data, owner KYC, shop photos, utility bills and significant FMCG invoices. TK generates a credit score for each applicant using advanced data analytics and artificial intelligence. A digital lending Portal (DLP) is provided to bankers where they can view loan applications, including key business KPIs, credit scores and business profiles, conduct loan assessments, communicate with applicants, make underwriting decisions and even activate loan disburse funds. DLP may be customized to include the bank's own assessment mechanism with integration into its credit management and core banking systems.
After a lending decision is made, a borrower can access the loan fund using their bank account or directly using the TallyPay wallet within the app. For example, a shopkeeper can use the available fund to pay suppliers for purchasing products the shop sells.
Apart from acquiring new loan customers, TallyKhata also helps banks repay loans by sending timely in-app payment reminder messages to borrowers. Bankers and TK back-end team monitor the portfolio performance using a dashboard and intervene when specific borrowers' repayment becomes irregular. TK field officers may also visit the borrowers to assist in repayment collection if and when required.
TallyKhata was recently selected by the Visa APAC accelerator program in 2022. Other four companies selected are from New Zealand, Japan, Singapore and India. TallyKhata is the first Bangladeshi fintech to be selected in this prestigious cohort. Here TK is working with local banks to issue Visa virtual cards for cashflow-based working capital loans to micro-merchants.
BUILDING A SCALABLE MSME LENDING BUSINESS: TallyKhata is adopted by millions of small businesses in the country for their day-to-day business records. It has been trendy among retailers around the country, including general stores, mudi shops and neighbourhood shops. We have more than 100,000 regular TK users, and they have a high demand for working capital loans. These are businesses with permanent shops with steady cash flow and visible inventory on the shelves - a suitable category of clients for launching a Digi-loan product.
For micro and small enterprises (MSEs), Digi-loan promises simple and easy access to working capital loans from banks. It offers a simple process, quick turn-around time and reasonable interest rates. For a bank, digital lending promises a low cost of customer acquisition, low default rate, and common operations costs. It is an excellent opportunity to build an MSME loan portfolio all over the country outside the limitation of the branch network. There is a US$ 2.8 billion (more than 25 thousand crore taka) credit gap in the micro merchant sector. If a bank moves early, it can capture 10 per cent of this market in a few years, having an MSE portfolio of Tk 2,500 crore.
We have a great opportunity to improve the credit system in Bangladesh using digital data, credit scoring and artificial intelligence technologies. This provides an excellent opportunity to expand credit into the MSME sector, impact the livelihoods of millions of families and expedite national economic growth using increased productivity and employment. Digital lending for MSMEs will be an essential smart solution for smart Bangladesh we want to build.
Shahadat Khan, Ph.D. is founder & CEO, TallyKhata, Bangladesh.
