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Chapter-Five: Small and Medium Enterprise (SME)
5.0 New Definition of Small & Medium Enterprise (SMEs):
Definition of the SME & Micro Credit & Cottage Industries:
SL Segment Sector value of the fixed Assets (Except Labor or
No. of the Land & Building) including setup Manpower
Business cost
1 cottage industries Not more than 5.00 Lac Not more than 10
person
2 Micro Service & 10 person
Industries Trading
Manufacturing 5.00 Lac to 50.00 Lac <=10-20
3 Small Service & 5.00 Lac to 100.00 Lac 10-25
Industries Trading
Manufacturing 50.00 Lac to 1000.00 Lac 25-99
4 Medium Service & 100.00 Lac to 1500.00 Lac 50-100
Industries Trading
Manufacturing 1000.00 Lac to 3000.00 Lac 100-250
5.1 Prudential Regulations on SME Financing of Bangladesh
Bank:
Regulation 01:
Sources and capacity of repayment & cash flow backed lending:
(01) Banks shall specially identify the sources of repayment and
asses the repayment capacity of the borrower on the basis of
assets conversion cycle and expected cash flows.
(02) The rationale and parameters used to project the future cash
flows shall document and annexed with the cash flow analysis
undertaken by the bank.
Regulation 02: Personal Guarantee:
All facilities to Small Enterprises (SEs) shall be backed by the personal
Guarantees of the owners of the SEs. In case of limited companies,
guarantees of all directors other than nominee directors shall be obtained.
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Regulation 03:
Per Party Exposure Limit:
The minimum and maximum exposure of a bank on a single SE shall remain
within the range of Tk.2 lac and Tk. 50 lac respectively subject to the
following:
In case of working capital finance – maximum up to 100% of the net required
working capital or 75% of the sum total of inventory and receivables
whichever is lower.
In case of fixed assets purchase- Maximum up to 90% of the purchase price.
Regulation 04:
Aggregate Exposure of a Bank on Small Enterprise Sector:
% of classified SE advances to Maximum Limit
total portfolio of SE advance
a. Below 5% 10 times of the equity
b. Below 10% 6 times of the equity
c. Below 15% 4 times of the equity
d. Up to and above 15% Up to the equity
Regulation 05:
Limit on Clean Facilities:
In order to facilitate growth of smaller investments, banks are free to
determine security requirements for investments up to Tk. 5 lac. Guidelines
for security requirements for investments of amounts are more than Tk.5 lac
are given in Regulation-6.
Regulation 06:
Securities: For loan amounting Tk.2 lac to Tk. 5 lac
As a minimum banks must take charge over assets being financed.
For loan amounting Tk.5 lac to Tk. 50 lac
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(a)Hypothecation on the inventory, receivables, advance payments, plant
& machineries.
(b) Equitable mortgage over immovable properties with registered power
of attorney.
(c)Personal Guarantees of spouse /parents/ other family members.
(d) One third party personal Guarantee.
(e) Post dated cheques for each installment and one undated cheque for
full loan value including full interest.
Regulation 07
Loan Documentation:
For all facilities, banks must obtain (as applicable) and not limiting to
following documents before disbursement of loan can be made:
(01) Loan application Form duly signed by the customer.
(02) Acceptance of the terms and conditions of sanction Advice.
(03) Trade license.
(04) In case of Partnership Firm:
Copy of registered Partnership Deed duly certified as true copy
or a partnership Deed on non-judicial stamp of Tk. 150
denomination duly notarized.
(05) In case of limited company:
(a) Copy of memorandum & Articles of Association of the
company including Certificate of incorporation duly certified
by Registrar joint stock Companies (RJSC) and attested by
the MD accompanied by an up-to-date list of directors.
(b) Copy of board resolution of the company for availing credit
facilities and authorizing Managing Director/ Chairman/
Director for execution of documents and operation of the
accounts.
(c) An undertaking not to change the management of the
company and the memorandum & articles of the Co. without
prior permission of the bank.
(d) Copy of last audited financial statement up to last 3 years.
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(e) Personal Guarantee of all the Directors including the
Chairman and Managing Director.
(f) Certificate of registration of charges over the fixed and
floating assets of the Co. duly issued by RJSC.
(g) Certificate of registration of amendment of charges over the
fixed and floating assets of the company duly issued by
RJSC in case of repeat loan or change in terms and
condition of sanction Advice regarding loan amount,
securities etc.
(06) Demand promissory note.
(07) Letter of Hypothecation of stocks and goods.
(08) Letter of Hypothecation of book debts & receivables.
(09) Letter of Hypothecation of plant & machinery.
(10) Charges on Fixed assets.
(11) Personal letter of Guarantee.
(12) Wherever practical, insurance policy for 110% of the stock value
covering all risks with bank’s mortgage clause in joint name of the
bank and client.
Regulation 08:
Margin Requirements:
Banks shall adhere to the minimum margin requirement as prescribed by
Bangladesh Bank (if any)
Regulation 09:
Credit information Bureau (CIB) clearance:
The condition of obtaining CIB report will be governed by rules &
regulations as prescribed by Bangladesh Bank from time to time.
Regulation 10:
Minimum conditions for taking Exposure:
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(01) Bank shall, as a matter of rule, obtain a copy of financial
statements duly audited by a practicing Chartered
Accountant, relating to the business of every borrower who
is a limited Co. or where exposure of banks exceeds Tk. 40
lac, for analysis and record.
(02) Banks shall assist the borrower in obtaining/ developing
books of accounts as per forms/formats prescribed by each
bank.
(03) Each bank shall develop their own Loan Application Form
and Borrowers Basic Fact sheet
Regulation 11:
Proper Utilization of Loan:
The Bank should ensure that the investments have been properly
utilized by the SEs and for the same purpose for which they are
acquired/obtained. Banks should develop and implement an
appropriate system for monitoring the utilization of investments.
Regulation 12
Restriction on facilities to related parties:
Banks shall not take any exposure on a SE in which any of its director,
shareholder, employee or their family members is holding 5% or more of
the share capital of SE.
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5.2 ANALYSIS OF SME INVESTMENTS IN SIBL: PRESENT SCENARIO
5.2.1 Why do you take the SME Investment Opportunity of SIBL?
Quick and modern banking services
Comparatively low rate of profit
Continuous and term investment facilities
Revolving method investment facilities without installment
100% shariah based Buy-sell/rent ensuring
5.2.2 Major Types of Small and Medium Enterprise
1. Light Engineering
2. Poultry Farm
3. Readymade Garments/ Local Garments
4. Fish Projects
5. Tat Shilpo
Major SME Sectors:
I. Trading
II. Manufacturing
III. Service
5.2.3 SIBL products for Small and Medium Enterprise (SMEs):
1. Bai-Muajjal Commercial, Small Enterprise (SE)
2. HPSM Commercial, Small Enterprise (SE)
3. HPSM Transport, Small Enterprise (SE)
4. Bai-muajjal Commercial, installment, Small Enterprise (SE)
5. Murabaha Commercial, Small Enterprise (SME)
6. Bai-muajjal Commercial (Micro-Enterprise)
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Hire Purchase:
It’s a contract between two parties, one is Hiree (leasor) and another is lessee
(Hirer) to acquire a resalable asset and to take the asset by the Hirer against
paying the rent and the value of the asset to the Hiree at a time for getting the
ownership of the asset.
Hire Purchase under Shirkatul Melk:
It is a special type of Hire Purchase contract where ownership is to be
transferred gradually paying part price specially, on paying installment. It has
been developed through practices. Actually it is a synthesis of three contracts.
Synthesis of three contracts:
1. Shirkat
2. Ijarah (Hire)
3. Sale (Buying purchase & selling both)
The term ‘Shirkat’means partnership or participation. Shirkatul Melk means
participation in ownership.
The term ‘Ijarah’ has been derived from the Arabic works (Ajr) and (Ujrat)
which means consideration, return, wages of rent. and The term ‘Sale’ is
contract between buyer and seller under which seller transfers the ownership
of certain goods of asset to the buyer against agreed upon price paid/to be
paid the buyer.
Related terminology of Ijarah (Hire Purchase):
Hiree (leaser)-Muajjir: who rents outs the property/asset
Hirer (lessee)-Mustajir: who gets the service and benefit from the property
against rent
Asset-Maajur : the asset which provides services and benefits i.e
rented out Property.
Main elements of Ijarah (Hire purchase):
1. Wording : Offer and Acceptance.
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2. Contracting parties : Hiree (Leasor) and Hirer (Lessee)
3. Subject matter of the contract : Rent and Services/Benefit
HPSM in banking:
Both the Bank and the Client supply equity in equal or unequal proportion for
purchase of an asset owning the same jointly, sharing the benefit as per
agreement and bearing the loss in proportion to their respective equity. The
share in the asset owned by the Bank is hired out to the client and eventually
the Banks sells and transfers its ownership to the client against payment of
price as per agreement i.e on installment. Here bank is Hiree(leaser) and
client is Hirer (lessee).
Some features of HPSM:
1. The Bank and the client purchase the asset jointly with specified equity
sharing the ownership under HPSM contract.
2. Through ownership is joint asset may be registered in the name of any
one mentioning in the name of Bank.
3. In the HPSM agreement Hiree does not sell of Hirer does not purchase
the asset but they promise to sell and purchase the same part by part
only.
4. As the portion of the Bank is sold and transferred part-by-part the rent
will be reduced proportionally. In practical rent reduced at the time
charging but payment made on equal Installment basis.
5. Under HPSM agreement bank will act as partner i.e Hiree and at last
as a seller and client will act as partner i.e Hirer and lastly as
purchaser. The sale and purchase will effect by separate sale contract.
6. The Hirer cannot change or remove the property without permission of
the Hiree.
7. The Hirer contract is binding and no party shall unilaterally rescind
except reasons that abrogate binding contract such as damage or
destruction.
8. If the hired asset is damaged or destructed accidentally the Hiree offers
a substitute with the same specification agreed upon in the hire
contract does not terminate.
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Shariah issues and rules of HPSM
1. The asset to be hired must be a non-fungible one (non-consumable).
2. The asset and the benefit/service from it must be within the category of
‘Halal’ or least ‘Mobah’ as per Islamic Shariah. As example of wine
producing machine and in some cases asset in Halal but some
services in Haram as example of weapon, service of which may be
productive-Halal or destructive-Haram.
3. The Hiree is under obligation to enable the Hirer to the benefit from the
asset by putting the possession of the asset at his disposal in useable
condition at the commencement of the hire period.
4. The hire contract becomes effective from the day on which the Hiree
transfers the possession of the good in order and assemble to the
Hirer.
5. Ownership risk will be borne by both the parties proportionally. The
Hirer will maintain the asset with due prudence and shall not be held
responsible for the accidental damage or destruction of the asset
without negligence, otherwise he must be responsible for the same.
6. The Hirer is responsible for keeping the asset in goods condition as
trustee.
7. Rent cannot be considered as price or part of price of the asset.
8. In a hire contract, the period of hire and the rent to be paid per unit of
time are being clearly stated.
9. It is a condition that the rent falls due from the date of handing-over of
the asset to Hirer and not from the date of contract but to be paid from
using of the asset.
10. It is permissible to advance, defer or install the rent in accordance with
the agreement.
11. The Hiree/owner bears all the basic cost for repairs & maintenance as
per contract.
12. The Hirer bears the cost of ordinary routine maintenance.
13. It is also permissible to sell the hired asset by the Hire to the Hirer
during the tenure of the hire period or in full at a time.
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MUSHARAKA (Partnership)
The word Musharaka is derived from the Arabic word Sharikah meaning
partnership. Islamic Jurists point out that the legality and permissibility of
Musharakah is based on the injunction of the Holy Qura’n, Sunnah, and Ijma
(consensus) of the scholars. It may be noted that Islamic Banks are inclined to
use various forms of Shariakt-al-Inan because of its built-in flexibility. At an
Islamic bank, a typical Musharakah transaction may be conducted in the
following manner
One, two or more entrepreneurs an Islamic bank to request the financing
required for a project. The bank, along with other partners, provides the
necessary capital for the project. All partners, including the bank, have the
right to participate in the project. They can also waive this right. The profits
are to be distributed according to an agreed ratio, which need not be the
same as the capital proportion. However, losses are shared in exactly the
same proportion in which the different partners have provided the finance for
the project. Musharakah may take two forms: I) Permanent and ii) Diminishing
Musharaka which are discussed below:
i) Permanent Musharakah
In this case, the bank participates in the equity of a company and receives an
annual share of the profits on a pre-rate basis. The period of termination of
the contract is not specified. This financing technique is also referred to as
continued Musharakah.
ii) Diminishing Musharakah
Digressive of Diminishing Musharakah is a special from of Musharakah, which
ultimately culminates in the ownership of the asset or the project by the client.
It operates in the following manner.
The Bank participates as a financial partner, in full or in part, in a project with
a given income forecast. An agreement is signed by the partner and the bank,
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which stipulates each part’s share of the profits. However, the agreement also
provides payment of a portion of the net income of the project as repayment
of the principal financed by the bank. The partner is entitled to keep the rest.
In this way, the bank’s share of the equity is progressively reduced and the
partner eventually becomes the full owner.
Definition of Permanent Musharakah:
The contributions of the partners under this mode may be equal or unequal
percentages of capital for the purpose of establishing a new income-
generating project or to participate in an existing one. In this arrangement,
each participant owns a permanent share in the capital structure and receives
his share of the profits accordingly. This type of a partnership is intended to
continue until the company is dissolved. However, one can exit the
partnership by selling his share of the capital to another investor.
Permanent Musharakah is used by Islamic Bank in many income generating
projects. They can provide financing to their customers, in exchange for
ownership and profit sharing in the proportion agreed upon by both parties. In
addition, the bank may leave the responsibility of management to the
customer-partner and retain the right of supervision and follow up.
The three steps to establishing Permanent Musharakah are discussed below:
One-Partnership in Capital:
The bank tenders part of the capital required in its capacity as a partner and
authorize the customer/partner to manage the project.
The partner tenders part of the capital required for the project and is entrusted
with what he holds from the bank funds.
Two-Results of the Project:
The intent of the project is growth, however, the project may profitable or it
may loss money.
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Three –Results of the Projects:
In the event a loss is incurred, each partner bears part of the loss
proportionate to his share in capital. In the event the venture is profitable,
earnings are divided between the two parties (the bank and the partner) in
accordance with the agreement.
The following is a discussion of those legal rules that apply to the Mushraka
relationship:
Rules for Permanent Mushrakah
i) It is a condition that the capital provided by each partner is specific,
existent and easily accessible .It is inappropriate to establish a
company with borrowed money for the purpose of profit.
ii) It is permissible for partners to have unequal ownership in the
project. The percent of ownership is set forth in the agreement.
iii) It is a condition that the capital of the company is money and
valuables. Some of the Jurists permit contributing merchandise as
invested capital. However, the merchandise must be evaluated.
And the value agreed upon by all parties. Once the value has been
established. It is counted as capital and stipulated in the contract as
such.
iv) It is impermissible to impose conditions forbidding one of the
partners from work. The company is built on honor and each
partner implicitly permits and gives power of attorney to the other
partner(s) to dispose of and work with for one partner to have full
responsibility for the operations of the company. Provided he is
granted this authority by the other partners.
v) A partner is trustee of company funds in his possession and he held
responsible for their use. it is impermissible to take a mortgage or a
guarantee against assets, but is impressible to take for profit or
vi) It is a condition that each partner’ share of the profits be known to
avoid uncertainty. Also, it is required that shares in capital but some
of the jurists permit variation in profit shares, so long as it is agreed
to by all of he partners. This may be the case when one of the
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partners is more dexterous and more diligent and does not agree to
parity, so variation in the sharing of profits becomes necessary.
Application of Permanent Musharakah
Permanent Musharakah is helpful in providing financing for large investments
in modern economic activities. Islamic banks can engage in Musharakah
partnerships for new or established companies and activities. Islamic banks
may become active partners in determining the methods of production cost
control, marketing, and other day-to-day operations of a company to ensure
the objectives of the company are met. On the other hand, they can also
choose to either directly supervise or simply follow up on the overall activities
of the firm. As part of the agreement, Islamic banks will share in both profits
and losses with its partners or clients in operations of the business.
Definition of Diminishing Musharakah
When the bank enters into a Diminishing Musharakah its intention is not to
stay in the partnership until the company is dissolved .In this type of
partnership, the bank agrees to accept payment on an installment basis or in
one lump sum, an amount necessary to buy the bank’s partnership interest. In
this way, as the bank receives payments over and above it’s share in
partnership profits, it’s partnership interest reduces until it is completely
bought out of the partnership.
After the discharge, the bank withdraws it claims from the firm and it becomes
the property of the partner. The decreasing partnership arrangement ins an
Islamic bank innovation. It differs from the permanent partnership only in
continuity. It appears that there are four steps of the diminishing partnership.
Those are mentioned below:
Steps of Diminishing Musharakah
i) Participation in Capital: The bank-tenders part of the capital
required for the project in its capacity as a participant and agrees
with the customer/partner on a specific method of gradually selling
its share in capital back to the partner. The partner-tenders part of
the capital required for the project and agrees to pay the agreed
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upon amount in return for the ultimate full ownership of the
business.
ii) Results of the projects: The intent of the project is capital growth.
The project may be profitable or lose money.
iii) The distribution of the Wealth accrued from the Project: In the
event of loss each partner bears his share in the loss in his exact
proportionate share of capital. In the event that the project is
successful, profits are distributed between the two partners (the
bank and the customer) in accordance with the agreement
iv) The bank sells its share in Capital: The bank –expresses its
readiness, in accordance with the agreement, to sell a specific
percentage of its share of capital.
v) The Partner-pays the price of that percentage of capital to the bank
and the ownership is transferred to the partner. The process
continuous until the bank has been fully compensated for it’s capital
share of the business. In this way the bank bas its principal returned
plus the profit earned during the partnership and vice versa.
vi) In the first Conference of the Islamic Banks in Dubai, he
conferences studied the topic of partnership ending with ownership
(decreasing partnership) and they decided that this type of business
relationship may take one of the following forms:
The First Form: In this form, he bank agrees with the customer on the share
of capital and the conditions of partnership. He Conference has decided that
the bank should sell its shares to the customer after the completion of the
partnership. Furthermore, they determined that the selling of the banks
interest to the partner should be done under an independent contract.
The Second Form:
In this form, the bank to participate in financing all or part of the capital
requirements in exchange for sharing in the prospective earnings. In addition,
the bank gains the right to retain the remainder of the income for the purpose
of applying it towards the capital provided by the bank.
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The third Form:
In this form, the bank and partner’s ownership is determined by stocks
comprising the total value of the asset (real estate). Each partner,(the bank
and the customer)gets its proportionate share of the earnings from the real
property. On an annual basis, the partner may purchase a prescribed number
of the bank’s shares until such time that the partner becomes the sole-owner
of the real property.
There are some legal rules for diminishing Musharakah as given below:
Rules for Diminishing Mursharakah
In addition to all the legal rules that apply to permanent partnership which also
apply to the decreasing partnership, the following rules also must be
observed.
i) It is a condition in the decreasing partnership that it shall not be a mere loan
financing operation. In other words there must be shared ownership and all
the parties must share in the profits or losses during the period of the
partnership.
ii) It is a condition that the bank must completely own its share in the
partnership and all rights of ownership with regard to management of the
business. In the event that bank authorizes its partner to manage the
business, the bank shall have the right of oversight supervision and follow up.
iii) It is impressible to include in the contract of decreasing partnership a
condition that adjudges the partner to return to the bank the total of its share
in capital in addition to profits accruing from that share, because of
resemblance to RIBA (usury)
iv) It is permissible for the bank to offer a promise to sell its shares in the
company to the partner, if the partner pays the values of the share. The sale
must be concluded as a separate deal with no connection to the contract of
the company
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Application of Diminishing Musharakah
The diminishing Musharakah is suitable for the financing of industrial business
that has regular income. It can be considered to be the appropriate mode to
finance collective investment. In this arrangement, the bank earns periodic
profits throughout the year and it encourages the partner to participate in the
join investment. In addition its fosters individual ownership by allowing the
partner to gradually buy the bank’s ownership interest. In term of society as a
whole it corrects the course of the economy by developing a mode of positive
partnership instead of the negative relationship of indebtedness. In addition, it
assists in the equitable distribution of societies wealth.
Economic Analysis of Mursharakah
Financing through a Musharaka partnership investment based. The capital
provider has full control in the management of the business. In addition, he
shares proportionately in both the profits and losses of the business.
Therefore, the rate of return ins uncertain and can be either positive or
negative The cost of capital is also uncertain and there exists perfect
correlation between the relationship of cost of capital and rate of return on
capital.
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5.2.4 Small and Medium Enterprises products offered by SIBL (Table)
Table -5.1: Bai-Muajjal (com) Small and Medium Enterprise (SME)
Investment Regular Criteria
Criteria
Ceiling Min 2,00,000 TK
Max 30,00,000 TK
Eligibility for Each client should obtain trade license from concerned
Investment authority. Each businessman having experience of at least
one year will given preference to the investment facilities.
Eligible Nationality: Any citizen born in Bangladesh.
entrepreneur/ Age: Min 18 years and Max 60 years.
owner
Eligible Nature of Business: Small and medium scaled trading,
Business Manufacturing, service, agriculture, agro-based industries
etc.
Legal form of Business: Sole proprietorship, partnership,
Limited company.
Purpose To purchase materials/ commodities for trading and service
concern.
Determination Decided by the management considering the client’s need
of Investment and business potentiality.
amount
Investment 1 year on revolving basis
Tenure
Profit and 16% per annum on revolving basis( subject to change as per
other charges management of the bank)
Security Primary security:
Hypothecation of goods/commodities/materials to be
purchase under Bank’s Investment.
Irrevocable general power of Attorney.
Secondary/ collateral security:
Registered mortgage of readily saleable immovable
property/possession mortgage of shop.
Mortgage of land and buildings in good location with clearly
demarcated boundaries.
Mortgage must be of the immovable property owned by the
client, his/her father, mother, brother, spouse.
registered irrevocable general power of attorney.
Personal guarantee of spouse/ parents/ other family
members.
One post dated cheque covering the limit and profit.
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HPSM (Commercial) SME
(Shirkat, Ijara & Sale)
Table -5.2: Higher Purchase Shirkatul Melk (HPSM) com. Small and
Medium Enterprise (SME)
Investment Regular Criteria
Criteria
Ceiling Min 2,00,000 TK
Max 50,00,000 TK
Eligibility for Each client should obtain trade license from concerned
Investment authority.
Each businessman having experience of at least one year will
be given preference to the investment facilities.
Eligible Nationality:
entrepreneur/ Any citizen born in Bangladesh.
owner Age:
Min 18 years and Max 60 years.
Eligible Business Nature of Business:
Small and medium scaled trading, Manufacturing, service,
agriculture, agro-based industries etc.
Legal form of Business:
Sole proprietorship, partnership, Limited company.
Purpose To purchase capital machineries, office equipments, furniture
and fixtures etc for trading, manufacturing and service concern.
Determination of Decided by the management considering the client’s need and
Investment business potentiality.
amount
Investment 2-5 years on mid-term basis.
Tenure
Profit and other 16% per annum on revolving basis( subject to change as per
charges management of the bank)
Security Primary security:
Hypothecation of goods/commodities/materials to be purchase
under Bank’s Investment.
Irrevocable general power of Attorney.
Secondary/ collateral security:
Registered mortgage of readily saleable immovable
property/possession mortgage of shop.
Mortgage of land and buildings in good location with clearly
demarcated boundaries.
Mortgage must be of the immovable property owned by the
client, his/her father, mother, brother, spouse.
registered irrevocable general power of attorney.
Personal guarantee of spouse/ parents/ other family members.
One post dated cheque covering the limit and profit.
Required no of cheques to be obtained covering the no of
installment.
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HPSM (Transport) SME
Shirkat, Ijara & Sale)
Table -5.3: Higher Purchase Shirkatul Melk (Transport) Small and
Medium Enterprise (SME)
Investment Regular Criteria
Criteria
Ceiling Min 2,00,000 TK
Max 30,00,000 TK
Eligibility for Each client should obtain trade license from concerned
Investment authority.
Each businessman/ entrepreneur having experience of at least
one year will be given preference to the investment facilities.
Eligible Nationality:
entrepreneur/ Any citizen born in Bangladesh.
owner Age:
Min 18 years and Max 60 years.
Eligible Business Nature of Business:
Small and medium scaled trading, Manufacturing, service,
agriculture, agro-based industries etc.
Legal form of Business:
Sole proprietorship, partnership, Limited company.
Purpose To purchase vehicles like car, microbus, auto-ricshaw, pick-up
vans etc for trading, manufacturing and service concern.
Determination of Decided by the management considering the client’s need and
Investment business potentiality.
amount
Investment 3-5 years on mid-term basis.
Tenure
Profit and other 16% per annum on revolving basis( subject to change as per
charges management of the bank)
Security Primary security:
Hypothecation of goods/commodities/materials to be purchase
under Bank’s Investment.
Irrevocable general power of Attorney.
Secondary/ collateral security:
Registered mortgage of readily saleable immovable
property/possession mortgage of shop.
Mortgage of land and buildings in good location with clearly
demarcated boundaries.
Mortgage must be of the immovable property owned by the
client, his/her father, mother, brother, spouse.
registered irrevocable general power of attorney.
Personal guarantee of spouse/ parents/ other family members.
One post dated cheque covering the limit and profit.
Required no of cheques to be obtained covering the no of
installment.
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Bai- Muajjal (Commercial) SME
(Sales on Credit)
Table-5.4: Bai-Muajjal Commercial (Baim) Small and Medium Enterprise
(SME)
Investment Regular Criteria
Criteria
Customer This segment consists of business enterprise requiring
segment investment of Tk. 30,000 to 5, 00,000.
Eligibility for Each client should obtain trade license from concerned
Investment authority.
Each businessman/ entrepreneur having experience of at least
one year will be given preference to the investment facilities.
Eligible Nationality:
entrepreneur/ Any citizen born in Bangladesh.
owner Age:
Min 18 years and Max 60 years.
Eligible Business Nature of Business:
Small and medium scaled trading, Manufacturing, service,
agriculture, agro-based industries etc.
Legal form of Business:
Sole proprietorship, partnership, Limited company.
Purpose To purchase materials/ commodities for trading and service
concern.
Determination of Decided by the management considering the client’s need and
Investment business potentiality.
amount
Investment 3-5 years on mid-term basis.
Tenure
Profit and other 16% per annum on revolving basis( subject to change as per
charges management of the bank)
Security Primary security:
Hypothecation of goods/commodities/materials to be purchase
under Bank’s Investment.
Irrevocable general power of Attorney.
Secondary/ collateral security:
Registered mortgage of readily saleable immovable
property/possession mortgage of shop.
Mortgage of land and buildings in good location with clearly
demarcated boundaries.
Mortgage must be of the immovable property owned by the
client, his/her father, mother, brother, spouse.
Registered irrevocable general power of attorney.
Personal guarantee of spouse/ parents/ other family members.
One post dated cheque covering the limit and profit.
Required no. of cheques to be obtained covering the number of
installment.
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5.3 SME Loan Documentation & Loan Processing Procedure
Account opening with Bank:
The first criterion of any loan sanctioning procedure is that the client must a
current account with the bank. SIBL provides the current account as the name
of Al-Wahidia current account in favor of the client’s.
CIB Reports:
The position of the loans up to Tk. 1.00lac is to be reported to Bangladesh
bank. While considering a sanction of loans to a party, banks are required to
obtain CIB reports from Bangladesh Bank to know whether the proposed
borrower has any classified loans with any other branch of the other bank.
Guarantors/Collateral:
For SME Loan,
If it is <5lac, then 2 personal Guarantors are required.
If it is ≥5lac, then collaterals are required.
Proposal Processing & Investment Sanction Process:
After having investment application from the clients Relationship Manager
prepare an investment proposal on the basis of information provided by
clients. Investment department of any branch makes investment proposal and
send the proposal to the head office (HO) to prepare final proposal. After
getting proposal from the branch HO scrutinize the proposal and if need run
investigation of the clients. If Ho pleased about the investment application and
proposal sent by branch then the HO send sanction letter to branch. While
branch office get sanction letter from the HO branch disburse the investment
amount to the clients. The monitoring and investment administration jobs
start after making disbursement of the amount to the clients.
5.4 Risk Factors for SME Loan
Every advances/investment has some risks. During my internship period, I
have seen the following risk is highly being considered by the loan officer for
SME Loan purposes. These are:
Location of the Businesses
Stock of the Businesses
Guarantor Genuineness
Trend of Businesses
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The following investment risk grading is used by SIBL investment department--
---
Table-5.5: Investment Risk Grading (IRG)
Number Grading Short Score
1 Superior SUP Fully cash secured,
secured by government
guarantee/international
bank guarantee
2 Good GD 85+
3 Acceptable ACCPT 75-84
4 Marginal/Watchlist MG/WL 65-74
5 Special Mention SM 55-64
6 Substandard SS 45-54
7 Doubtful DF 35-44
8 Bad/Loss BL <35
While making investment SIBL uses the above Investment Risk Grading to
assess the client’s demand of investment, pricing the investment facility,
approval of investment. If he risk grading score is 75 means the investment is
acceptable. The above proposed IRG scale consists of eight categories with
short name and numbers are provided is the basic risk grading format used by
SIBL for making investment. To approve the SME investment SIBL uses the
above Risk Grading System.
5.6 Selection of Borrower: Is the Borrower Creditworthy
Borrowers creditworthy depend on the repayment capacity of the borrowing
money to the banker. Banks consider those customers as creditworthy who
have well repayment reputation, repayment on due time and formally have a
good customer relationship with the banker. Borrowers’ creditworthiness
depends on five Cs.
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6.0: Ratio Analysis of SME Investment from the year 2005 to 2010
Table-6.1: Ratio Analysis of SME
Ratio 2005 2006 2007 2008 2009 2010
SME Investment to Total Deposit 0.32% 0.53% 0.52% 0.59% 1.63% 1.75%
SME Investment to Total Investment 0.35% 0.56% 0.62% 0.71% 1.94% 1.96%
Investment Income on SME to Total 0.58% 0.076% 0.75% 0.68% 0.80% 0.92%
Investment Income
Investment Income from 26.37% 32.44% 32.65% 27.91% 31.70% 32.15%
Commercial Banking to Total
Investment Income
Investment Income from Installment 0.040% 0.027% 0.029% 0.013% 0.014% 0.015%
Investment Scheme to Total
Investment Income
Figure-6.1: SME Investment to Total Deposits
Figure -6.1: Showing last 5 years performance index of SIBL in terms of SME
to Total Deposits.
The above ratio indicates that out of Total Deposit what proportion will be
extended in SMEs sectors. We can see that, in 2010, it was 1.75% of Total
deposit and in 2005; it was 0.32% of Total Deposit. This ratio shows an
increasing trend over the years, except 2007.
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6.1 SME Investment to Total Investment
Figure-6.2: SME Investment to Total Investment
The above ratio indicates that out of Total Investment what proportion will be
extended in SMEs sectors. We can see that, in 2010, it was 1.96% of Total
Investment and in 2005, it was0.35% of Total Investment. This ratio shows an
increasing trend over the years.
Figure-6.3: Investment Income from SME to total Investment Income
The above ratio indicates that out of Total Investment Income what proportion
will be earned from SMEs sectors. We can see that, it was fluctuating over the
years. In 20100, it was 0.92% of Total Investment Income and in 2006; it was
0.08% of Total Interest Income.
Figure-6.4: Investment Income from Commercial Banking to Total
Investment Income
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From the above figure it is seen that the investment income from commercial
banking to total investment income is fluctuating but not most, in 2005 it was
26.36% but in the year 2010 it was 32.15% indicates growing trends.
Figure-6.5: Investment Income from Installment Investment Scheme to
Total Investment Income
Investment income from installment investment scheme to total
investment income is decreasing trends shown in figure 6.5.
6.2 SME Disbursement for past 5 glorious years:
Table-6.2: SME disbursement amount over the years
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Year Amount in million Tk.
2010 69.12
2009 51.54
2008 14.13
2007 10.20
2006 8.53
2005 5.32
The above table indicates that the amount disbursement in SME was raising
trends over the years.
Figure-6.6: SME Financing in million Tk.
In the above graph, we can see that financing in SMEs in different years are
increasing trend. In year 2005, it was tk. 5.32million but in year 2010 it rose up
to tk. 69.12 million.
6.3 Investment income earned by overall SME Investment
Table-6.3: Investment Income from SME
Year Investment Income from SME (in million Tk.)
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2010 3.69
2009 2.45
2008 1.87
2007 1.56
2006 0.14
2005 0.98
Figure-6.7: Investment Income from SME
In the above graph, we can see that Investment Income from SMEs in
different years are increasing trend except 2006.There is a huge fluctuation
arises in 2006 due to non repayment of SME Loan by the client’s. In year
2005, it was tk. 0.98million but in year 2010 it rose up to tk. 3.69 million.
Table-6.4: SME outstanding from 2006 to 2010 (Amount in Lac Taka)
Year 2006 2007 2008 2009 2010
SME Outstanding 6.96 1.2 14.13 51.54 170.35
From the above table it indicates that the amount of outstanding increased
along with the increasing of SME Investment.
Figure-6.8: SME Outstanding from the year 2006 to 2010
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From the figure it is seen that the investment outstanding in SME is increasing
trends due to the increasing trends in investment amount in SME.
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