In Mollahat and Subidpur unions of Nalchity upazila, Jhalokathi, 70 families are involved in the traditional Shitolpati weaving industry. They have tried several times to get bank loans to expand their businesses but failed. Although the SME Foundation promised to provide loan assistance, it did not materialize. As a result, they were unable to expand their business. The standard of living and financial condition of the CMSME entrepreneurs in the cluster did not improve.

A similar situation exists in the Adamdighi upazila of the Bogura district. For around 40 years, the weaving industry has grown around Shaoil Bazar in Nashratpur Union. Workers there recycle fabric waste to produce yarn, which is used to make sweaters, mufflers, blankets, and mattress covers. However, many involved in this craft are now leaving the industry. They are forced to seek alternative livelihoods in other professions without access to loans.

This is not limited to Jhalokathi or Bogura. Many CMSME clusters nationwide are struggling to survive due to a lack of credit. In 2022, Bangladesh Bank directed that at least 10 percent of CMSME loans should go to cluster-based enterprises, aiming to increase it to 12 percent by 2024. However, research shows that only 5.73 percent of CMSME loans have reached clusters. Not only are these enterprises being left behind, but the overall loan distribution to CMSMEs is also shrinking. This is despite the government’s strong focus on CMSMEs for export diversification and job creation.

A large part of Bangladesh’s rural economy and employment depend on Cottage, Micro, Small, and Medium Enterprises (CMSMEs). Some of these businesses are concentrated in specific areas known as CMSME clusters. Dewan Abdul Kader Jilani, Joint Director of Bangladesh Bank, conducted a study on how much loan support these clusters receive. He presented his research at the annual banking conference organized by the Bangladesh Institute of Bank Management (BIBM).

The study, titled “Financial Inclusion of Selected SME Clusters: A Case Study of Light Engineering,” shows some important findings. Banks and financial institutions have given loans to 289,033 CMSME enterprises in total. Among them, only 46,875 are cluster-based. That means just 16.22 percent of all CMSME borrowers are part of a cluster. As of June 2024, the total CMSME loan portfolio stood at BDT 2.83236 trillion. Out of this, cluster-based enterprises received only BDT 162.18 billion, just 5.73 percent. So, although over 16 percent of CMSMEs are in clusters, they are getting less than 6 percent of the loans.

Bank officials say that the banking sector cannot properly finance cluster-based CMSMEs. As a result, these enterprises often turn to NGOs or microfinance institutions for credit. If they could get loans directly from banks, the interest rates would be lower. That would help small and marginal entrepreneurs change their fortunes and grow their businesses more effectively.

Mohammad Ali, managing director (MD) of Pubali Bank, told Bonik Barta about the challenges of financing cluster-based CMSMEs. He said, “NGOs coordinate with cluster-based CMSMEs by assigning one person to manage the group. After giving loans, they meet with borrowers weekly and actively follow up on repayments. That’s why NGOs have better loan recovery rates.”

“For banks, giving loans to clusters is very difficult. In our legal system, loan cases must be filed against individuals, not groups. So, we can’t take legal action against an entire cluster. Also, bank officials can’t supervise loans the way NGOs do—it’s too challenging,” he added.

However, many entrepreneurs from clusters still take out loans individually. Mohammad Ali said, “I sent officers to some clusters, including the footwear cluster in Bhairab, to offer loans. However, they reported that many good entrepreneurs had already taken loans from different banks. So, even though the lending is not cluster-based, banks are still financing individual CMSME entrepreneurs.”

In a circular issued in August 2022, Bangladesh Bank emphasized the crucial role of the CMSME sector in the country’s economic progress. The circular stated that cluster-based financing is a globally recognized approach to support this vital sector. If Bangladesh’s promising clusters receive proper support, they can significantly contribute to the national economy.

Bangladesh Bank instructed that banks and financial institutions must allocate at least 10 percent of their CMSME loans to clusters to promote this. This target should increase by at least 1 percent each year, reaching 12 percent by 2024. The aim is to make cluster-based bank loans more accessible and effective in driving economic growth.

The BIBM study shows that, up to June 2024, banks and financial institutions disbursed BDT 2.83236 trillion in loans to the CMSME sector. This accounted for 19.25 percent of total loans, though Bangladesh Bank had set a target of 25 percent. The study also noted that banks are falling behind in meeting CMSME loan targets. In 2020, they achieved 90.25 percent of the target. This dropped to 85.37 percent in 2021 and declined to 84.88 percent in 2022. In 2023, there was a slight improvement to 84.98 percent, but it remained below the goal. By 2024, loan disbursement to the CMSME sector dropped significantly again, with banks failing to meet even 79 percent of the target.