Leveraging FinTech to Enhance Access to Finance for Small Enterprises in Bangladesh

Abstract

The study explores and demonstrates, as it aimed to, the prospects of leveraging FinTech to enhance access to finance for small enterprises (SEs) in Bangladesh and recommends the required policy measures. Individual sets of preceding studies on issues including small business growth, financial inclusions, access to finance, the FinTech revolution, or bank FinTech collaboration have identified different sets of individual findings. These are brought together into a coherent whole in the study, with the broader aspect of lessening the longcherished

financing problems faced by SEs through leveraging FinTech, the disruptive phenomenon in the global financial service industries of recent days. The research ascertains that the global studies on access to finance for small businesses have reached a new era (starting from Beck and Demirguc-Kunt's 2006 study to the present studies), firmly stating that ‘technology-driven and innovation-led models’ can have their enhancement despite market imperfections. But in this regard, Bangladesh studies are lagging behind, mostly showing the demand and supply-side constraints or the market imperfections of debt finance for SEs following the earlier global studies (of the 1980s to 2006). Further, bank lending in Bangladesh is still characterized by the traditional lending mechanism with the problems of information asymmetry, lack of collateral security, and high interest. Even where banks are digital finance service-oriented, they mostly deal with the application of FinTech payment systems. The lending aspect of FinTech is still the least emphasized. Whereas, in current days, the funding problems are found to be resolved by the cutting-edge features of ‘collateral-free instant lending at minimum cost’ offered by FinTech credit in many parts of the world's SME finance practices. To lessen the above gaps both in Bangladesh literature and practices, the prospects of FinTech credit in the banks’ lending mechanisms were found to be mandatory to be explored. In assessing this prospect, the study first conducted a ‘document analysis’ (Cresswell, 2014) to get an idea of the current regulatory base that will help get the required policies to enact FinTech credit in Bangladesh. Quantitative research was conducted on a survey of 311 small enterprises covering all three trade, manufacturing, and service industries from the country’s SME hubs that looked into whether leveraging FinTech would be a viable option in Bangladesh. This was accompanied by two qualitative researches. At first, in-depth interviews with the finance providers (primarily bankers) were held to assess their attitude toward working with FinTech. Then another set of in-depth interviews was conducted to understand the regulators' and financial experts’ opinions on the challenges and opportunities of bank-FinTech collaboration. Major explorations came up, showing that significant numbers of relevant legal and regulatory initiatives have already been taken in line with the global standard that might facilitate a FinTech credit environment. The quantitative research findings show that using FinTech by SEs can significantly enhance the relevant indicators of access to finance for SEs in Bangladesh. Thus, using FinTech by SEs is found to be prospective from a market point of view, or the demand side of debt financing. From a supply-side perspective, it is also found to be promising, as most of the responding banks agreed to work in a motivated state with FinTech to finance SEs. The regulator and experts also found the bank's FinTech business model to be a prospective one in the Bangladesh case, as it will provide collateralfree

real-time loans, ensure financial inclusion, provide comfort to banks, support banks, sustaining and already have the country’s present regulatory base and FinTech ecosystem.

Another prime focus of the broad research objective was to identify the policy issues to be addressed further to enact FinTech credit. Based on document analysis on the regulatory basis of world-leading FinTech countries and of Supreme Banking Regulation Authorities, reviews of the debt finance market here in Bangladesh, debt providers’ approaches, opinions from the country’s banking regulatory authorities and financial experts, and last but not least, from the experience of the pilot projects run by the newly initiated bank-FinTech collaboration for debt finance, this study proposes required policy recommendations in eight important areas.

Thus, the study contributes to the SE finance literature by providing an alternative theoretical view (technology-driven and innovation-led) for combating major barriers to SE growth. It presents, for the first time of its type, an immense elaborative research work by hosting several quantitative and qualitative research methods on FinTech applications in debt finance for small enterprises in Bangladesh. In addition, it recommends required policy measures to enable a more FinTech-intensive environment for debt finance and further move toward a bank-centric FinTech model in a transition economy where the adoption of FinTech in the real market is still supposed to be in question. The study provides the scope to work with further details on the products, policy enablers, or enabling technology-wise sub-sections of FinTech for SME finance in the future.