Photo credit: BRAC Skills Development Programme
In Bangladesh, 87% people work in the informal economy. Micro, cottage, small and medium businesses employ about 21 million people, according to a recent Bangladesh Bank study. While microfinance has been an effective approach in reducing poverty and helping businesses move forward, it is important to combine it with effective advice provision for new entrepreneurs.
Microloans were created to ensure that the poor and disadvantaged people previously seen as ‘unbankable’ can access financial assistance. Despite criticisms, Bangladesh has shown more positives than negatives when it comes to microfinance. Households are often members of multiple loan programmes, expanding their choices. However, when it comes to setting up businesses, SME banks and microfinance providers tend to be less willing to risk to giving loans to those starting businesses (as opposed to those with established ones).
BRAC’s Skills Development Programme has been providing new entrepreneurs with entrepreneurship training and links to finance since 2017, with an emphasis on business development and how new entrepreneurs can access resources. While 2 interventions are working together to understand how both services can complement each other; the usual scenario is that 8 out of 10 young entrepreneurs (especially female ones) complain that finance officers have negative social perceptions around gender; such as assuming that young women starting businesses will default on their loans, that married women with children will not give enough serious attention to their business, or that divorced women will default without a male guardian. Also, officials are reluctant to give loans to younger women entrepreneurs.
Starting new businesses is risky, of course. 9 out of 10 start-ups basically fail, according to Forbes. If that is the case, this risk becomes a problem for the banks. But this creates difficulty for young entrepreneurs who need loans to develop new and innovative ideas. How can these risks be reduced, and to what extent can better advice – more relevant and timely - contribute to this?
There are approximately 12.3 million young people between the age of 15-24 in Bangladesh who are ‘not in Education, Employment or Training’, and a significantly higher proportion of these are women and girls. Apart from giving them learning pathways, it is important to create access to jobs. Since there are limited formal jobs, often disadvantaged youth, especially women opt for informal jobs.
From BRAC’s experience in working with the informal economy, many young people want to start their own businesses after working for 3-4 years. They face three major challenges: (i) developing a solid business plan, (ii) accessing and dealing with the necessary formal paperwork, and (iii) getting access to finance. Although the Government has advocated for low-cost finance provision, many lenders are reluctant. This problem has been exacerbated by the pandemic, when many young entrepreneurs were forced to default. Banks are now extra cautious.
This has created a mismatch between the objectives of entrepreneurship programmes and finance institutions. One deals with supply-side development through training and advice, and the other with demand-side loans and judging the risk of default. Providing both services from one institution could perhaps ease the pain of these young entrepreneurs.
At BRAC, this is what we wanted to test. The Skills Development Programme has joined hands with the Microfinance Programme to develop a loan product specifically for the youth who want to start their own businesses. In the last 5 years, despite some challenges, about 4800 potential entrepreneurs have graduated from the scheme, around 3200 have started their own businesses, and 40% have received business loans.
Photo credit: BRAC Skills Development Programme
Advice provision for entrepreneurship training is currently siloed. Government ministries, SME Foundation, and other associations provide advice and set loan criteria. However, if microcredit organisations were to focus on hard-to-reach youth, then more people would get access to loans. The challenge is to use evidence-based criteria to assess a person’s creditworthiness rather than relying on assumptions or stereotypes. Advice provision works better if it is linked more closely and coordinated with microfinance institutions.
As a result of this thinking, training participants are provided with general business information, as well as more specific advice based on discussions about their needs on how to develop their particular businesses. This two-phase approach, where the initial focus is on setting up the business, and then in phase two on progressing and upgrading it, results in a more sustainable business model. Entrepreneurship services can then be continued with appropriate ‘hand holding’ in place to further build the viability of the business and generate more jobs. It is hoped that entrepreneurs would continue to see such services as valuable, and in the future perhaps pay for them.
From BRAC’s experience we see that young entrepreneurs require lots of support – and that access to information and good-quality mentorship are essential if business growth is to be achieved. After the training period is over, many end up calling up BRAC trainers in search of advice on various issues such as, how to diversify their businesses to earn more, find additional product sources, reduce the cost of doing business, or how to access additional loans. In such cases, microfinance may have a service where entrepreneurs can call for advice. This approach to demand-driven advice is a more realistic and practical one than simply relying on theoretical or generic knowledge.
About the author
Tasmiah T. Rahman has been working in the development sector for over 13 years. Currently working as the Associate Director, Skills Development Programme, BRAC. Prior to that she worked as Current In charge and Head of Programme of BRAC Skills Development Programme since 2018. Her work area is focused on skills development and employment for disadvantaged youth, understanding the informal economy and gender-based challenges in training and employment. Prior to joining BRAC, she worked with various International NGOs and consulting firms in Bangladesh and Nepal. She likes to understand the nuances of peoples’ everyday lives and has written op-eds published mostly in local dailies and LSE South Asia Blog. She has also co-founded the DSDE (Desperately Seeking Development Expert), a vibrant social media group with 13k members of practitioners working in the development field in Bangladesh. She completed her MSc in Social Policy and Development (focusing on NGO policy) from LSE, UK in 2015 and has a bachelor’s degree in Economics from Bangladesh.