Clustering is a recognised strategy to strengthen and consolidate SMEs through promoting interconnectedness, competition, and cooperation. Policymakers take interest in the cluster based SME development because of the evidences that SMEs may enjoy competitive advantage and economies of scale by sharing and cooperating. Necessity of greater cooperation, collective behaviour by the smaller firms, contingency funds for the rainy days, and addressing environmental risks in business operations received renewed focus in the context of the Covid-19 crisis. SMEs are affected severely during Covid-19 situation throughout the globe. Supporting and reaching SMEs, operating in differential market environments, and challenges became extremely difficult during lockdown. It is much easier for the policymakers to understand the need and challenges of the smaller firms operating as an interconnected groups and reach out in a crisis. From the firms' perspective, clusters offer opportunities to cooperate, work together, and raise voices together in emergencies. Cluster development strategy is expected to come up with greater vigour in the new normal where technology, innovation, contingency arrangement, and environmental risk mitigation efforts are expected to be integrated strongly with that of the traditional criteria of cluster identification and assessment. And very importantly, the challenges of access to finance of the SMEs may effectively be handled by developing a performing cluster. In the context of the pandemic, greening the SMEs became essential jobs for sustainability. Developing 'Green SME Clusters' might be the true sustainable SME strategy in the new normal.
Simply having a number of similar SME units together or creation of an SME assembly is not the sufficient condition to obtain positive outcome. It is possible to have a good number of SME units physically together with missing basic criteria of a performing cluster: networks, linkages, competition, and cooperation. To optimise benefits of the cluster, these criteria should be attained. Generally, one should not expect spontaneous attainment of all these criteria, rather it is crucial for the policymakers and other stakeholders to intervene effectively for developing advantageous SME clusters. And these clusters might be very useful in overcoming the key financing difficulty of the SMEs that originates from the problems of asymmetric information, inadequate assets and collateral security, and absence of markets. Alongside policymakers, banks/financial institutions (NBFIs) have a crucial role to play to contribute to SME cluster development as a key stakeholder of the SME financing process.
Regarding cluster development, there are differentials in opinions and changes in the perceptions with the changing circumstances. The meaning of 'geographic proximity' is a contested issue in cluster research and policy, and opinions vary as to whether proximate means within 'driving distance', a city, a province/state or even a nation. Today, 'physical proximity' is no longer a pre-requisite for cluster concept, however, benefits of physical proximity cannot be denied. There is also no doubt that cluster in the form of simply geographical concentration may not always perform. It is well recognised that SME clusters may be natural clusters (like electronics cluster at Silicon Valley) that spontaneously grow and government created clusters (like industrial parks and export processing economic zones) that is induced through deliberate policy actions. Natural clusters have advantage of having key functional elements like trust, collaboration, and flow of knowledge. However, the key rationale behind government created cluster is the cost effective way of providing support to a group of SMEs operating in the same sector; and these clusters are helpful to make targeted and sector specific interventions.
In the context of Bangladesh, a good number of geographically concentrated SME clusters were identified back in 2013. As in most other developing countries, SMEs of Bangladesh confront a number of inherent financing challenges ranging across inadequate access, lack of bankable attributes, lack of collateral security and diseconomies of scale. Though, Bangladesh Bank has undertaken some remarkable measures for ensuring greater access to finance of the SMEs of the country, a lot to be achieved to create a win-win situation for the supply side (bank and NBFIs) and the demand side. Another notable central-bank driven financing dimension of the financial sector of Bangladesh is the 'green financing'. The necessity of greening economic activities and the financing received newer impetus in the context of Covid-19 situation. Under the umbrella of 'sustainable financing', it is now the formation of green SME clusters that may contribute to developing efficient green financing in the SME sectors.
In spite of some remarkable development in SME sector and its financing, many SMEs rely on inefficient financing services from informal sources in Bangladesh. However, efforts are on and SME financing markets are improving amid several challenges. Bangladesh government has been active in promoting SMEs, and lack of access to finance as a critical challenge has rightly been recognised in the policy documents. In line with its Vision 2021, the government of Bangladesh has been working to improve SMEs' access to finance and financing gap through multiple channels. 'SME Cluster-based Enterprises Network development and expansion' has been identified as part of the strategic goals with certain specific tools in the SME Policy 2019 of the government of Bangladesh. Regarding institutional arrangement, SME Foundation has particularly been involved in promoting SMEs and has also undertaken some notable measures in the SME cluster development. However, it is the performing clusters that contribute, and a generic SME strategy may not be enough for the development of performing clusters. SME Foundation performed the primary and essential job of identification of clusters based on geographical proximity of SMEs of all sectors. For drawing benefits, it is time for up-gradation of the cluster mapping by identifying current status, performance, and levels.
Regarding the exposure of individual banks in SME cluster financing (in terms of credit disbursement), the distributions have been much skewed. Cluster financing models vary in different banks/NBFIs and are not standardised. The volume of cluster financing by banks and NBFIs remained insignificant of the total, and in most instances, these financing activities are hardly distinguishable from regular SME financing. This special approach of financing may have similarities but should not be diluted with the regular form of SME financing, and banks and NBFIs should handle cluster financing under specific and customised policy and strategic guidelines using separate desks. Practically, other than a few exceptions and with limited loan exposure following SME Foundation Whole Sale Cluster Model, banks/NBFIs hardly make distinction between financing individual SME entrepreneurs and SMEs within a cluster. Cluster identification and the essential support services are very limited in the lending process of cluster financing by the banks/NBFIs. Despite some success stories, banks and NBFIs are yet to adopt effective cluster financing approach in the country. Special cluster development and financing model for women entrepreneurs might be contributory in handling even greater challenges of the SME financing to the women SME entrepreneurs. Banks and NBFIs are required to formulate bank-specific SME cluster financing policies and strategy to effectively implement their SME cluster financing targets. A minimum portion of SME cluster financing targets may be imposed with tagged incentive structure.
Involvement of additional costs and efforts may be discouraging for banks and NBFI in undertaking SME financing. This is even more obvious for the SME cluster financing. Bangladesh Bank has significantly expanded its CSR activities in recent years, pledging financial support to a number of projects. Besides, BB has been encouraging and offering incentives to banks and NBFIs to undertake CSR activities to attain sustainable development. To support cluster financing, involvement of banks' additional costs (not the financing part) might be considered or counted as their CSR activities. This may be an encouraging factor for banks/NBFIs to undertake cluster promotion and financing. It is important to realise that if SME financing is a 'Credit plus approach', then SME cluster financing has to be 'Credit Plus Plus approach' that requires greater investments and efforts, and the benefits are also much higher and sustainable. In addition, greening this financing model is a crucial requirement in the new normal. Green SME cluster financing model might add another feather to the central bank's efforts toward sustainable banking. Green financing has already started contributing to minimising environmental risks and financial inclusion challenges. Aligning with the green growth movement, green SME cluster financing model might be a great force for handling both the challenges of financial and environmental sustainability of SME financing in the country.
Dr. Shah Md Ahsan Habib is Professor, Bangladesh Institute of Bank Management. [email protected]
