The Role of Banks in Supporting Small and Medium Enterprises (SMEs) in Bangladesh

Bank Financing and Policy Support

Bangladesh Bank, the central bank, has been instrumental in promoting SME financing through targeted policies and programs. It mandates that banks and financial institutions allocate an increasing share of their loan portfolios to SMEs, with a target of 27% by 2029. This policy aims to ensure sustained credit flow to SMEs, including cottage, micro, small, and medium enterprises.

Total financing to SMEs has grown substantially over the past decade, rising from Tk 85,323 crore to around Tk 220,500 crore. This growth reflects improved access to credit facilitated by Bangladesh Bank’s interventions, such as refinance facilities at concessional rates and relaxed lending conditions, including collateral-free loans for certain SME segments.

Challenges in SME Financing

Despite progress, challenges remain. SMEs face a significant financing gap estimated at $2.8 billion (Tk 237 billion), limiting their capacity to expand and innovate. Rising lending rates have further strained SMEs, with the interest rate spread for SME loans increasing from 2.61% in June 2023 to 6.26% in March 2025, making borrowing costlier.

Collateral requirements and documentation hurdles continue to restrict many SMEs from accessing formal credit. Although some banks now offer collateral-free loans, these remain limited, and many entrepreneurs still struggle to meet loan eligibility criteria.

Innovations and Future Directions

Banks are adopting innovative approaches to SME financing, including digital lending platforms and supply chain finance, often in collaboration with fintech companies. These initiatives aim to reach underserved and marginal SMEs, enhancing financial inclusion and supporting micro-merchants.

Moreover, Bangladesh Bank’s Master Circular on SME financing and special programs for women entrepreneurs reflect a commitment to inclusive growth. Training programs for both borrowers and bank officers are also emphasized to improve loan utilization and repayment behavior.

Conclusion

Banks in Bangladesh have significantly expanded their role in supporting SMEs through increased credit allocation, policy support, and innovative financing mechanisms. While the sector faces challenges such as a large financing gap and rising lending costs, ongoing reforms and digital initiatives hold promise for enhancing SME access to finance. Strengthening collateral-free lending, easing credit access, and fostering close bank-SME relationships are critical for unlocking the full potential of SMEs in Bangladesh’s economic growth.

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