48828 MAY 2009 ABOUT THE AUTHORS SAYED TAREK KAMAL Winning through Cross-Cutting: Breaking has been an Operations Officer for Access to Finance in IFC's Down IFC Silos to Promote Access to Finance South East Development Facility (SEDF) Dhaka office since January in Rural Bangladesh 2007. Previously, Tarek was a credit manager and relationship manager at private-sector multinational banks. He has also In an increasingly congested market for financial institutions in the taught finance and management major cities of Bangladesh, United Leasing Company (ULC), an IFC at a leading university in Bangladesh. partner financial institution, decided to go where other such MEKHOLA HAQUE institutionswerenotyetfocusing--ruralBangladesh.ThisSmartLesson was with IFC for three and a half years, where she worked as an describes how IFC's South Asia Enterprise Development Facility (SEDF) analyst in the Value Addition to was able to leverage internal expertise and help ULC take a first- Firms (VA2F) team. Prior to joining IFC, Mekhola worked mover position and access viable businesses in rural Bangladesh. with Standard Chartered Bank for almost three years. She is currently working with Novartis (Bangladesh) Limited as Manager, Corporate Affairs & Communica- Background Lessons Learned tions. ULC, a non-bank financial institution, has been 1) Top and middle management buy-in is ZAKI UZ ZAMAN feelingthepinchofcompetitioninacongested necessary for any intervention to succeed; has been with SEDF's Agribusi- ness Team since October 2002. market. In Bangladesh, financial institutions, some quick wins can achieve that buy-in. Earlier, he was with the Danish including banks and non-banks, are crowding International Development into the major cities in search of business. When ULC requested help from SEDF to access Agency's (DANIDA) Aquaculture There are virtually no spreads in corporate ruralbusinessesinBangladesh,SEDFsuggested program as a Credit Officer. He financing. Business in this space is more of a a cluster of agri-machinery manufacturers has more than 10 years of working experience in the prestige issue. The margins are slightly better located in Bogra, in northern Bangladesh. This development sector. At present, in the small and medium enterprise (SME) cluster was selected based on research done he is the Task Manager for the field, but business is becoming highly on the sector by SEDF's Light Engineering advisory part of the IFC competitive. Because non-bank financial Sector (LES) team and based on the proximity education sector in Bangladesh. institutions are dependent on banks for a of the cluster to ULC's branch in Bogra. APPROVING MANAGERS large part of their funding, their spreads are However, while the senior management of Mrinal Kanti Sircar, Coordinator, much smaller, since it is difficult to charge ULC was open to looking at this cluster, the Sector Development Program, higher than market interest rates. Proactively, middle management team (comprised of the SEDF. ULC is trying to be the first mover in areas Bogra branch manager, the Dhaka-based head Roger Handberg, Acting Regional where other partner financial institutions of the small business department, and the Manager Access to Finance, SEDF. (especially the banks) are not yet focusing, i.e., head of the credit department) were reluctant rural Bangladesh. ULC requested help from to consider this cluster, as they had written it SEDF in accessing viable businesses in rural off as unbankable. Bangladesh.Theabilitytoconnectthefinancial institutionwithabankableenterprisesegment In addition, the head of the small business needed to be demonstrated in this case department questioned the possibility of through engaging IFC's expertise in agri- arriving at a viable business model with SEDF's business and access to finance, ranging from help,sincetheyhadalreadytriedunsuccessfully demonstrating knowledge about indigenous to finance these enterprises and felt that it just crop cycles to agri-machinery manufacturing could not be done. We were faced with a know-how and cluster relationships. manager who was reluctantly engaged because the senior management wanted to The lessons learned from our experience as try it. In an effort to convince this manager with ULC are as follows: and help some SMEs get access to finance, the LES team connected ULC with a few medium- IFC SMARTLESSONS -- MAY 2009 1 size agri-machinery firms that were in need of funds for group discussion, we learned that the manufacturers sold expansion. ULC in turn assessed the companies, found them their products on credit and received cash once the crop credit-worthy, and extended credit facilities to them. These had been harvested and sold for cash. Therefore, it quickly initial loans enabled us to bring the small business manager became evident that the cash flow was seasonal and, as on board with regard to the agri-machinery cluster in such, the entrepreneurs were only able to meet debt- Bogra. servicing requirements at specific periods of the year- especially with regard to the smaller manufacturers. After 2) Understanding how the businesses operate is key to advising ULC to think out of the box on loan products to developing a mindset among financial institutions that SMEs, we suggested that ULC consider the cash flow of the encourages the financing of SMEs. customer in designing a product for this industry. The LES team had as one of its clients the Bangladesh 3) Working together outside traditional silos (Access to Engineering Industries Owners Association (BEIOA), an Finance, LES, Agribusiness) allowed us to achieve a association of machine shop owners based in Dhaka but synergy that resulted in a win-win-win for us and our with members and affiliates all over Bangladesh. In Bogra, clients. the association members were mainly agri-machinery and spare parts manufacturers-- the exact target group ULC Ultimately, the critical success factor in SEDF's ability to had looked at and considered unbankable. To overcome come to the assistance of ULC was the data collected over the perception of the middle management team that these several years by the SEDF agribusiness team that allowed SMEs in Bogra were unbankable, SEDF set up a focus group ULC to understand the agri-machinery business better and discussion between the members of BEIOA and ULC to provided the necessary weight to the findings derived from understand each other's requirements and determine the focus group discussions between BEIOA and ULC. The compatibility. detailed knowledge of the agri-machinery supply chain and constraints of local agri-machinery and spare parts The meeting did not start easy, however. The BEIOA manufacturers became the core value added that SEDF was members were somewhat disgruntled at the time of the able to bring to the project. Based on the research, ULC was first meeting, feeling that it was a waste of time. Similarly, abletodevelopaloanproductguideinwhichtherepayment the ULC team was weary of financing association members of the loan matched the seasonality of the cash flow (i.e., who they felt knew little about market practices, the notbasedonequalmonthlyinstallments),withtheflexibility industry norms and drivers in this sector. But from the focus of allowing larger companies the option to repay in equal monthly installments. The product itself, named Mousumee (meaning seasonal), is a working capital loan (maximum amount BDT 500,000, approximately US $7,350), with a tenor of 18 months due to the seasonality of the cash flow. However, given that there are companies with higher working capital needs, larger loans for longer tenor are also provided on an exception basis under the same product. This product is collateral free--in other words, no mortgage on the property is required. The chart demonstrates graphically a sample monthly Marketing poster for the Mousumee (Seasonal) Loan for repayment schedule for the 18-month loan facility. Every Agri-machinery Manufacturers. month requires a minimum payment at a specific date (in order to foster the discipline of adhering to repayments on 2 IFC SMARTLESSONS -- MAY 2009 a monthly basis). During the lean months, Conclusion repayment is only on the interest, whereas during the harvest months, when sales proceeds The success of this project has been threefold: are being received, repayments include principal amounts. There are two harvests · A group of people who were completely during the year for the indigenous crops dubious about the financing of agri- (summer and winter rice varieties)--from May machinery manufacturer clusters are now to July and November to January. During the actively targeting these companies. first harvest (May to July), when the enterprise has not been able to benefit from the · In Bogra, as a result of the launch of the investment, the repayment amount has been Mousumee product, ULC has developed a kept lower, while during the third harvest (May reputation as a financial institution that is to July of the following year) the repayment serious about financing nontraditional amount is much higher, as cash flow from the sectorsbyfirstunderstandingthebusinesses increased investment is also higher. However, and then proposing financing solutions. there is the flexibility of equalizing the Marketing Mousumee has resulted in SMEs repayment installments during three harvest from other segments coming to ULC for periods that this loan spans (at the request of financing. As a result, ULC has seen the entrepreneur). The willingness of this firsthand that its strategy of focusing on financial institution to customize these loans is financing in rural Bangladesh is viable. demonstrative of its commitment to lending to SMEs in rural Bangladesh. · ULC has developed two additional loan products that can be used to finance other The success of the project resulted from clusters,basedontechniquesfordeveloping important contributions by multiple teams in the product guide that SEDF helped with. SEDF, including the LES team who had sector knowledge and connections with the agri- By leveraging our internal expertise across manufacturers; the access to finance colleagues different groups--the value addition of this who had expertise in working with financial project-- the total implementation cost of this institutions, and the agribusiness team who project was almost negligible (approximately provided the highly valuable research on the US $4,000). The only major expenses were the nature of the businesses in the sector. Truly, the cost of IFC staff and the time cost of ULC staff most important success factor was the who were involved in the project. The product realization that working together made us was also launched on a very low-key targeted stronger and better prepared to address the basis, as per ULC's conservative approach. client's needs. DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SMARTLESSONS -- MAY 2009 3