410 Conference Proceedings-2025

Conference Proceedings-2025

Financial Inclusion of Selected SME Clusters: a Case study of Light

Engineering
DEWAN ABDUL KADER ZILANI1

Abstract: The Cottage, Micro, Small, and Medium Enterprise (CMSME) sector in Bangladesh significantly
contributes to the economy, accounting for 25% of GDP, 40% of gross manufacturing output, and 90% of private
sector enterprises. It employs 70-80% of the non-agricultural workforce. Despite its importance, the sector's direct
contribution to GDP can be enhanced to promote inclusive economic growth. While Bangladesh Bank has
implemented policies, including cluster-focused financial initiatives for CMSMEs, research evaluating their impact
is limited. This policy paper examines the Light Engineering sector as a sample cluster, using qualitative and
quantitative methods to assess challenges in accessing finance. Key issues include high interest rates, collateral
requirements, and lack of tailored financing. The study also evaluates the Credit Guarantee Scheme (CGS) introduced
in 2020, finding limited participation due to restricted quotas. It suggests a two-pronged policy mix: (a) Common
Facility Center (CFC) financing with a refinance scheme and credit guarantees, and (b) a Financial Information
Management System (FIMS) using mobile apps to streamline financial transactions and decision-making. Successful
implementation of these policies could foster inclusive economic growth by improving financial access for CMSMEs,
reducing poverty, generating employment, and supporting national development goals such as Vision 2041.

Introduction
1.1 Background and Motivation of the Study
With the aim <Leave no one behind=, United Nations has fixed 17 goals in 2015 as universal call, which is
known as Sustainable Development Goals (SDGs). Reducing inequality, eliminating poverty, achieving
sustainable economic growth and protecting the planet by all member countries is the main principles of SDGs.
The core vision of these goals is to ensure improvement with balanced social, financial and environmental
sustainability. Financial inclusion is crucial for fostering neutral and sustainable advancement in developing
countries. It involves ensuring reasonable and convenient access to formal financial sector. To ease poverty,
encourage economic progress and bolster social equity, financial inclusion act as a tool. It also leads to the path
of achieving the several SDGs, including SDG-1,2,5,8,10 and Perspective plan of Bangladesh 2021-2041.
In Bangladesh, there are nearly 7.9 million SMEs including micro enterprises contributing to Gross Domestic
Product (GDP) at an estimated 25% (Asian Development Bank (ADB) 2015). SMEs account for 11% of the
country’s industrial establishments, 30% of industrial employment and 40% of the manufacturing output
(Economic Census 2013). While SMEs have been considered as one of the few sectors that will drive the
economy to a higher growth state without compromising the stubborn distributional impact, these sectors are
still not competitive domestically and globally.

1
Joint Director, Bangladesh Bank
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 411

The pro-poor inclusive growth strategy of 8FYP includes two pivotal themes related to our discussion. One is
<Promote labor-intensive, export-oriented manufacturing-led growth= that linked with light engineering industry
cluster and the other one is <Infuse dynamism in the Cottage, Micro, Small and Medium Enterprises (CMSMEs).
The Government of Bangladesh (GoB) has put forward Light Engineering (LE) development policy 2022 for
the development of this cluster. Contribution of the sector in the GDP is 2.15%. Although Bangladesh Bank
formulated cluster finance policy (SMESPD Circular 05, 14 August 2022), with specific disbursement target for
all banks and NBFIs, still this cluster (LE) is facing hindrance to access financing facilities. As a result, financial
inclusion of this huge potential priority cluster is time demand.
1.2 Rationale of the Study
Defining the problem: Closing the SME financial inclusion gap can bring about significant gains in growth
potential. Access to finance of CMSMEs can contribute more than large firms in case of productivity and
employment. Bangladesh Bank (BB) has revised guidelines of cluster financing policy to grow specialized
products in a specific area in the country. Disburse target of cluster financing is set minimum 10 percent of their
total CMSMEs loans till December 2022. It will be increased by 1.0 per cent each year till 2024. Till now, it’s
only 5.73% of total disbursement.
Fig:1.1 CMSME Financial Inclusion Index (Source: IMF 19/02)

Fig1.2: LE at a glance (Source BIDA & BEIOA)

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Generally, CMSME financial inclusion index will include access to Checking A/C, Saving A/C and Credit
(Investment, Working capital). The financial inclusion of the light engineering cluster is crucial for its growth
and sustainability. Light engineering, often referred to as the "mother industry," supports various other industries
by providing machinery, equipment, spare parts, and repair services.
Given the rapid growth of the manufacturing sector in Bangladesh, the demand for light engineering industry
cluster is expected to grow in parallel. While there are some variations depending on the type of Light
Engineering (LE) product, at least 50% or more of most LE products are currently imported into the country.
However, the sector faces several challenges, including a lack of modern technology, skilled workforce, and
mostly access to finance.
To address cluster finance issue, the government and financial institutions need to take initiatives such as
providing easy access to finance with flexible conditions, enabling industrial clusters with necessary IT facilities,
and adopting priority-based finance policy for the light engineering sector. These measures can help improve
the sector's capabilities, meet local demand, and compete in the global market.
1.3 Identification of the Problem
The problem can be stated as <Inadequate financing policy resulting low financial access to Light Engineering
Industry (LE) Cluster=. Therefore, the findings of this paper would be helpful to reduce gap of financing in LE
and suggest more prudent and result oriented cluster credit policy intervention that can be taken by BB and
others stakeholders towards achieving its objectives, SDGs and Vision 2041.
1.4 Conceptualization and Operationalization of the Problem:
To conceptualization the problem issue <Financial access=, it is necessary to understand the dimensions of the
problem and to operationalize the dimensions it needs to find out the numerically measurable parameters of the
dimensions.
Fig 1.3: Conceptualization and Operationalization
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 413

1.5 The Objectives of the Policy Paper

The Objectives of the Policy Paper will focus on the following areas:
a) To assess effectiveness of the existing cluster CMSMEs finance policies and programs taken by BB and
other Stakeholders.
b) To identify the key factors contributing to the limited utilization of financial services in the Light
Engineering (LE) clusters of CMSME.
c) To determine viable and effective policy options to leverage the flow of CMSME finance for the Light
Engineering clusters.
Literature Review
The core theme of the National Financial Inclusion Strategy-Bangladesh (NFIS-B) is "Journey towards
Sustainable and Impactful Financial Inclusion through Digitization and Innovation". For financial exclusion in
Bangladesh, identified major three common factors from NFIS-B are:
<(i) difficult-to-access localities: remote hilly and sparsely populated areas; haor, char and similar areas with
difficult terrain; and relatively underdeveloped areas with poor infrastructure; (ii) demand-induced impediments:
low incomes, lack of financial awareness and education, social exclusion and other constraints to availing
economic opportunities; and (iii) supply-led bottlenecks: distant location of bank branches, inconvenient
timings, cumbersome documentation requirements and procedures, unsuitable products and inconvenient
delivery mechanisms, unfriendly staff attitudes and similar other factors that preclude the inclusion of specific
groups.= Nevertheless, some other factors of financial exclusion are limited access or no access to land
ownership, lack of financial capability and collateral for women and lack of their formal identification.=
In the year 2006, United Nations (UN) conducted landmark research titled <Building Exclusive Financial Sector
for Development= which is widely known as the Blue Book for development thinking. In this research, the UN
had raised a very crucial question that <Why are so many bankable people unbanked?= Data has shown that
more than two billion people around the globe are not getting access to finance at present (Khandker, 2014).
Over the years, it’s a serious concern for underdeveloped, developing and developed countries, for which,
inclusive financial infrastructure has become a priority development strategy to cater all class of people.
One of the major issues towards access to finance by CMSMEs is lack of credit information (WBG, 2018).
Financing institutions cannot determine credit worthiness due to lack of this.
Financial exclusion needs to be addressed first to promote access to finance, (WBI, 2005). Financial exclusion
is resulted from both demand and supply side reasons. Economic diversification and growth challenges of many
countries are dependent on CMSME financial inclusion (IMF 2019/02). In the SME Policy 2019 of Bangladesh,
'SME Cluster-based Enterprises Network development and expansion' is set as strategic goals with certain
specific tools.
A study by N Ahmed and Z Bakht (2010) suggested that Access to finance is a major constraint for the growth
of Light Engineering cluster sector. Such problems include non-availability of sufficient working capital, high
interest rate on bank loan, lengthy and cumbersome procedure to receive bank loans, difficulty to get required
amount of loan, difficulty to get financial help for technological innovation and development and for risky
investment, lack of venture capital, etc.
According to BITAC, total global market demand is $7 trillion whereas our country’s total investment is only
$15 billion I the LEI (Rahman, 2018). Any country must be ready to infuse enough capital to grow into this
414 Conference Proceedings-2025

sector. Bangladesh LEI sector is reeling due to lack of capital (Rahman, M. S., Talukdar, M. M. U., Hossain, M.
M., & Das, T. 2022). A report showed that if investment in this sector increases by just taka. 60 billion every
year, productions from this sector can replace imports worth taka. 650 billion. Although financing gap is huge,
the commercial banks do not consider the LEIs bankable due to lack of specialized staff to deal those borrowers.
Complying traditional collateral policy is still a barrier to provide loan to LEIs. No special window is opened
till today from government to provide preferential loans to them (Talukder & Jahan, 2016).
Identification of Outcomes
3.1 Cluster Policy Initiatives Taken by Bangladesh Bank and Its’ Objectives
BB has taken strong initiatives for SME sector development and it’s financing. BB’s Policy regime has skewed
in favor of the financially excluded and unbanked mass of the country, specially, towards the SME entrepreneurs
with particular emphasis given to small entrepreneurs and cluster entrepreneurs. It has also given more emphasis
on manufacturing and service sector that are more capable of generating employment, equitable and enhanced
economic development; and traditionally developed industry clusters.
BB has set a target for all Bank/NBFIs to increase CMSME loan disbursement to 25% of the total loan portfolio
and provide loan facilities to cluster entrepreneurs, amounting to 12% of the total CMSME portfolio by 2024.
All banks and FIs have been disbursing credit to CMSMEs following their indicative target set on a calendar
year (January-December) basis.
3.2 Outcome of the Policy Initiatives
Against set target of 12% of the total SME portfolio by 2024, the outcome of the policy initiatives is shown in
below table:
Table 1 Outstanding and Disbursement of Loan to CMSMEs by Banks and FIs
Description Disbursement during No. of Outstanding as on
April-June, 2024 Enterprise 30 June 2024
Cluster Enterprise 2,731.73 crore 46,875 16,218.07 crore
Total CMSMEs 49,068.40 crore 289,033 2,83,236.32 crore
Percentage of cluster 5.57% 16.22% 5.73%
enterprise to total CMSMEs
Source: Bangladesh Bank
In the second quarter of 2024 outstanding of CMSME loan stood at Tk.283,236.32 crore which is only 19.25%
of total loan portfolio against the target of 24%. On the other hand, against the target of 12%, CMSME loan for
cluster stood at Tk.16,218.07 crore which is only 5.73% of total CMSME loan portfolio.
In case of Light Engineering (LEI) cluster performance, Statistical evidence shows that the percentage of LEI
based Cluster-CMSMES has higher positive growth over time till 2022. The government’s policy support and
10 per cent cash incentives for exports of light engineering products helped the rise in exports. Despite having
high export potential, the share of LEI products in total exports remained at around one per cent. However,
exports of light engineering products experienced fluctuations over time. Therefore, LEI cluster finance in right
time including other incentive remains a significant issue to foster its positive growth trends.
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 415

900
800
700
600
500
400 Figures in Million USD
300
200
100
0
2018 2019 2020 2021 2022 2023 2024

Figure Error! No text of specified style in document..1 Light Engineering Export (Source: Export Promotion
Bureau)
3.3 SMART Measures of the Outcomes
SMART analysis is a comprehensive framework for tracking and achieving specific goals, BB set target-based
lending for banks and FIs to increase CMSME financing facilities to the cluster entrepreneurs. Following Table
2 employs the SMART methodology to identify whether the target is Specific, Measurable, Achievable,
Relevant and Time-bound.
Table 2: SMART Analysis
Outcomes Specific Measurable Achievable Realistic Time
Increase loan to Cluster Yes, the policies
Yes, measured by
Increased owned CMSMEs by are in line with
the amount of
Loan to 12% of total CMSMEs existing By
loan disbursed by Yes
Cluster within 2024. But by laws/regulations 2024
banks and FIs to
CMSMEs June 2024 only 5.73% and national
cluster CMSMEs
is achieved. policies.
From the above analysis we can see that the target of CMSME loan disbursement to cluster entrepreneurs is not
achieved yet. So, it is required to identify the policy gaps.
The Context Analysis
4.1 Definition of CMSMEs
The Industrial Policy 2016 has defined Cottage, Micro, Small and Medium Enterprises which is based on the
value of fixed assets (excluding land and buildings) and/or the number of employees. SME & SPD of BB adopted
the definitions provided in Industrial Policy 2016 which is as follow:
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Table 3: Definition of CMSMEs

Enterprise Economic Sector Value of Total Fixed Number of Loan
Type Assets Employees/workers Limit
Cottage Manufacturing Less than 10 Lac Up to 15 15 Lac
Micro Manufacturing 10 Lac Up to <75 Lac 16 to 30 1 Crore
Service Less than 10 Lac Up to 15 25 Lac
Trading Less than 10 Lac Up to 15 50 Lac
Small Manufacturing 75 Lac to 15 Crore 31 to 120 20 Crore
Service 10 Lac up to < 2 Crore 16 to 50 5 Crore
Trading 10 Lac Up to 2 Crore 5 Crore
Medium Manufacturing >15 to 50 Crore 121 to 300, labor up to 1000 75 Crore
Service 2 Crore to 30 Crore 51 to 120 50 Crore
Source: Bangladesh Bank Circular
4.2 Definition of Cluster
<A Cluster is a concentration of enterprises (50 or above) producing similar products or services and is situated
within an adjoining geographical location (3-5 kilometer) and having common strengths, weaknesses,
opportunities and threats= (SME Clusters in Bangladesh 2013). As per the BB policy, Tk 50,000 to Tk 5,00,000
can be disbursed to a single enterprise of cluster financing areas-based capacity.
4.3 Existing Regulations and Tools for Cluster CMSME Development
To create a better business environment for the CMSMEs in Bangladesh, Government has taken series of steps
over time. Among them below are mentionable:
 SME Cell in 2003 (under the Ministry of Industry)
 SME Policy Strategies 2005
 Small and Medium Enterprise Development Program (SMEDP)2006
 SME Foundation 2007
 SME Policy 2019
 Master Circular on CMSME Financing by Bangladesh Bank (2019)
 CMSME Cluster Finance Policy by Bangladesh Bank (2022)
 Credit Wholesaling Program (SMEF, 2022)
In addition to this, Bangladesh bank has proposed a guideline for <Local Factoring/ Receivable Financing
through Digital Platform=. This system will allow entrepreneurs to get finance from the formal finance sector
using accepted invoices and receivables as intermittent collaterals. On the other hand, light engineering sector
development history is shown below:
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 417

Fig: 4.1 Journey of LE at a Glance

4.4 Relevancy with SDG and Vision 2041

The aim of Sustainable Development Goals has 17 targets with universal call <Leave no one behind= which was
fixed by United Nations in 2015. The core vision of SDGs is balancing sustainability in social, financial and
environmental. Advancement of developing countries is highly interlinked with financial inclusion. It includes
access to formal financial sector reasonable and conveniently. As a tool, financial inclusion eases poverty, foster
economic progress, and equity socially. It also leads to the path of achieving the SDGs, specially

 Goal-8 (Decent Work and economic Growth) states to develop policies to promote decent job creation
and entrepreneurship; and to encourage growth of MSMEs through access to finance (8.3)
 Goal-9 (Industries, Innovation and Infrastructure) stressed in increasing affordable credit and the
integration into the market for the small-scale industries (9.3) (UN, 2015).
On the other hand, with a target to become a developed country by 2041 and bringing down poverty below 3 by
2041, the government of Bangladesh has made a perspective plan named Vision 2041. To materialize this target,
a strong and comprehensive drive needs to be taken to support the development of CMSMEs specially cluster
sector. Light Engineering in one of the top sectors where job creation and GDP growth prospect is very high.
4.5 CMSME Financing Status to Cluster Entrepreneurs
Analyzing the cluster entrepreneur’s participation ratios year by year provides crucial insights into trends and
disparities in cluster and non-cluster’s participation in CMSME financing and can serve as a valuable foundation
for policymaking and initiatives aimed at narrowing the finance gap and promoting greater financial inclusion.
To measure the finance gap in terms of cluster participation, I use the "Cluster's Participation Ratio" data
provided for each year (Appendix A). The Cluster's Participation Ratio represents the proportion of cluster's
participation relative to the participation of total CMSME. From BIDS survey (2024), it is shown that, NGOs
provide 47 percent of the total loan received by Light Engineering Cluster and are reported to be the most
convenient source of credit to clusters. Almost all (98 percent) of the firms in the Light engineering and
metallurgical works cluster are registered and 94 percent of the firms are located in urban areas.
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Fig: 4.2 Participation Status of Cluster CMSMEs

While there has been notable progress in allocating funds within the CMSME sector, there is still a substantial
shortfall in providing loans to Cluster-owned CMSMEs.
4.6 Gap in CMSME Cluster Financing
The data reveals (Table 4.2) a mixed picture of achievements in cluster within the CMSME sector. The table 4.2
shows the achievements in December 2022, December 2023, and June 2024 in the context of cluster loan and
CMS loan within the CMSME sector.
Table Error! No text of specified style in document.: CMSME Financing: Target and Achievement
Achievement Achievement Achievement
Achieved target on CMSME Sector Target
(June 2024) (Dec, 2023) (Dec, 2022)
Size of CMSME loan portfolio of total 25% 19.59% 18.46% 18.63%
loan portfolio (2024)
Size of CMS loan portfolio of total loan 50% 67.71% 68.57% 66.59%
CMSME loan portfolio (2024)
Size for cluster owned CMSMEs of 12% 5.73% 5.67% 4.08%
total loan portfolio (2024)
The CMSME loan portfolio as a percentage of the total loan portfolio has shown incremental growth over the
years, from 18.63% in December 2022 to 19.59% in June 2024. While there has been progress, it remains below
the 2024 target of 25%. The allocation of loans to CMS within the CMSME sector is exceeding the target,
suggesting that overall support for micro and small enterprises is strong. However, this doesn't specifically
address Light Engineering cluster unless special avenue is opened for cluster based CMSMEs. Lastly, the
allocation of loans to cluster-owned CMSMEs, as a percentage of the total loan portfolio, is significantly below
the 2024 target of 12%. There has been some progress, but the achievement in June 2024 remains at 5.73%.
This underscores a persistent gap in supporting cluster entrepreneurs within the CMSME sector and calls for
focused interventions to reach the target.
In order to better understand the overall context of cluster-owned CMSMEs in reducing finance gap, stakeholder
analysis, PESTEL analysis, SWOT Analysis, and Problem tree analysis has been done.
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 419

Data and Methodology

5.1 Sources of Data and Analytical Framework
The policy paper is based on a combination of primary and secondary data. Primary data was collected through
a questionnaire survey targeting cluster-owned enterprises on a limited scale. This survey aimed to investigate
the central issues, underlying causes, and the impact of CMSME financing on cluster entrepreneurs. Secondary
data was sourced from reputable institutions, including Bangladesh Bank, Bangladesh Bureau of Statistics
(BBS), SME Foundation, World Bank Enterprise Survey, and Asian Development Bank (ADB). Quantitative
analysis, including the application of a linear probability model, was employed to identify potential causes and
effects, ultimately providing a rigorous justification for the effectiveness of CMSME Cluster financing policies.
It also sought to identify the obstacles these entrepreneurs face and gather their suggestions for overcoming these
challenges. Additionally, a Focus Group Discussion (FGD) was conducted to pinpoint shortcomings in existing
policies and to generate recommendations for policy improvement.
5.2 Discussion on Findings from Survey Data
Based on the questionnaire (Appendix E), this study collected a total of 120 responses from cluster entrepreneurs
and SME Bank officials. The survey data from cluster entrepreneurs provides compelling evidence of positive
trends. In comparison to the previous year, a notable 66.7% of enterprises report an increase in the number of
employees within their businesses due to expansion of business after availing loan. Additionally, 54.8% of
respondents express satisfaction with the adequacy of the loans for their business needs. Impressively, a
significant majority of cluster entrepreneurs, 92.9% and 95.2% respectively, acknowledge that after obtaining
loans, their businesses have experienced increased profits and higher sales figures.
Fig: 5.2 Insights from Survey Data (Demand Side-Entrepreneurs)

Opinion on Profit Increase Opinion on Sales Performance

5.3 Impact Analysis with Regression Model
This study employs probability model to estimate whether the identified and selected challenges and the
perceived solution strategies assist reducing financing gap or not. The dependent variable has been taken from
the survey response of the cluster entrepreneur that is <Supports Cluster through Financial Inclusion=, which
takes value 1 if the respondent entrepreneur provides rating 4 (Agree) and 5 (Strongly agree), and value 0
otherwise (rating 1, 2 and 3). For binary dependent variable, this study required to introduce binary dependent
variable model. The model and summary statistics of the regression model has been presented below:
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Linear Probability Model and Summary Statistics

Where,
i= 1,2,……,N
Φ(. ) is the cumulative distribution function
X i is the vector of independent variables
βi is the coeffifient of the respective variables
Summary Statistics

Variables count Mean std min Max

Supports Cluster through Financial Inclusion 60 0.761905 0.431081 0 1
Log of total number of skill employee 60 1.49749 0.783332 0 3.401
Log of Business Experience 60 1.405138 0.694951 0 2.302
Education Level (Above Higher Secondary) 60 0.666667 0.477119 0 1
Challenges
Lack of collateral or guarantee 60 0.880952 0.32777 0 1
Non-cooperation from bank/FI officials 60 0.095238 0.297102 0 1
Higher rate of interest 60 0.666667 0.477119 0 1
Excess documentation 60 0.571429 0.50087 0 1
Required facilities
Flexible terms and conditions to avail financing 60 0.666667 0.477119 0 1
Reduce time to approve loan 60 0.595238 0.496796 0 1
More women led cluster financing facilities 60 0.666667 0.477119 0 1
Lower rate of interest rate 60 0.52381 0.505487 0 1
Ease of Collateral requirement 60 0.690476 0.467901 0 1
Specialized Training and Awareness 60 0.547619 0.503761 0 1
The summary statistics reveals that, on average, respondents in the study exhibit a moderate level of support for
entrepreneur’s business expansion, with a mean score of approximately 0.762. Furthermore, the average
logarithm of the total number of skill employees in businesses stands at approximately 1.497, indicating that, on
average, businesses tend to employ a moderate number of skill workers. In terms of education, slightly over half
of the respondents report an education level above higher secondary, with an average score of approximately
0.667. Respondents also face various challenges, including a notable lack of collateral or guarantee (mean ≈
0.881) and relatively high-interest rates (mean ≈ 0.667). Nevertheless, some positive factors are reported, such
as the presence of more women-led cluster financing facilities (mean ≈ 0.667) and an easier terms/condition to
repay (mean ≈ 0.690). These insights offer a snapshot of the respondents' views on cluster’s readiness and the
challenges they encounter in the context of CMSME financing.
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 421

Table 9: Regression Output from Probability Model

Dependent Variable: Supports Cluster through Financial Inclusion (Yes=1, No=0)
Variables Coefficient std err P>|z|
Constant 5.1527 2.641 0.051
Log of total number of skill employees 0.9096 0.635 0.152
Log of business experience (year) 0.9856 0.487 0.043
Education Level (Above Higher Secondary=1, Otherwise=0) 2.4473 0.893 0.006
Lack of collateral or guarantee (Yes=1, No=0) -8.8980 1.079 0.000
Non-cooperation from bank/FI officials (Yes=1, No=0) -3.2045 1.113 0.004
Higher rate of interest (Yes=1, No=0) -4.1797 1.309 0.001
Excess documentation (Yes=1, No=0) 0.5829 0.658 0.376
Strict terms and conditions to avail financing (Yes=1, No=0) -4.5476 0.847 0.000
Reduce time to approve loan (Yes=1, No=0) 0.1451 0.911 0.873
More cluster focused financing facilities (Yes=1, No=0) 4.2672 1.467 0.004
Lower rate of interest (Yes=1, No=0) 2.0335 0.995 0.041
Ease of Collateral requirement (Yes=1, No=0) 3.1601 0.748 0.000
Specialized Training and Awareness (Yes=1, No=0) 1.5643 0.835 0.061
Observation 120
R-square 0.6337
Table 9 presents the findings derived from the Probit Model, aiming to assess the influence of various challenges
and recommended policy measures by entrepreneurs on cluster's support for investment decision-making4a
proxy for debt financing. The constant (5.1527) term signifies the baseline probability of cluster entrepreneurs
endorsing investment decision-making support when all other factors are neutral or absent. Its proximity to the
0.05 significance threshold suggests a potential influence, although further investigation is warranted.
In examining the factors influencing cluster entrepreneurs' support for investment decision-making, several
noteworthy patterns emerge. Firstly, the logarithm of the total number of skill employees within a business plays
a significant role, with each incremental unit in this logarithm (0.9096) corresponding to an increased likelihood
of cluster entrepreneurs endorsing investment decision-making which reflects business expansion. This suggests
that fostering enterprises with more investment may deploy more employee resulting more growth. Furthermore,
the level of education proves influential, as cluster entrepreneurs with educational qualifications surpassing
higher secondary (1 if above higher secondary, 0 otherwise) are linked to a substantial increase (2.4473 units)
in the likelihood of endorsing more investment in this context.
Conversely, barriers such as the lack of collateral or guarantees (-8.8980), non-cooperation from bank or
financial institution officials (-3.2045), higher interest rates (-4.1797), and stringent terms and conditions (-
4.5476) are associated with decreased probabilities of less employment. These findings underscore the
substantial impact of these obstacles in discouraging such support. Additionally, the presence of cluster-focused
financing facilities (4.2672), lower interest rates (2.0335), ease of collateral requirements (3.1601), and access
to specialized training and awareness programs (1.5643) all correspond to increased probabilities of endorsing
more investment making and expansion which is an outcome of CMSME financing facilities.
Conclusively, Probit Model outcomes provide valuable insights into the factors shaping cluster entrepreneurs'
support for investment making within the realm of CMSME financing. These findings underscore the critical
role of factors like education, cluster-focused financing facilities, lower interest rates, and relaxed collateral
requirements in promoting CMSME financing for cluster entrepreneurs which in turn ensure more export, reduce
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poverty, create employment and foster economic growth of the country. Conversely, non-cooperation from
financial institutions, stringent terms and conditions, and high-interest rates significantly hinder cluster
entrepreneurs’ access to CMSME financing facilities which in turn increase import and affect inclusive and
sustainable development of the country.
5.4 Stakeholders’ Opinion on Challenges and Suggestion (FGD outcome)
A comprehensive focus group discussion was conducted, engaging a diverse array of stakeholders, including
officials from the SME and Special Programs Department of Bangladesh Bank, cluster entrepreneurs, and
representatives from banks and FIs (Annexure E). The primary aim of this discussion was to examine the
challenges faced by cluster entrepreneurs in accessing CMSME financing, identify the limitations inherent in
existing policies, and brainstorm effective strategies to overcome these challenges. The Key findings of the
discussion are as follows:
 The foremost challenges encountered by light engineering cluster entrepreneurs in accessing CMSME
financing include the lack of collateral, high interest rates, inadequate skills and education, limited
awareness about available financing facilities, lack of commitment from banks and FIs, and barrier from
excessive VAT, easy import and less incentive to export.
 Participants underscored the tendency of banks and FIs to prioritize corporate borrowers over CMSME
borrowers, especially cluster entrepreneurs, due to the relatively small loan sizes that require more
intensive monitoring.
 The discussion emphasized the crucial need for financial literacy programs. These programs should
focus on building financial information management skills, encompassing budgeting, investment
planning and comprehension of loan terms.
 Suggestions included conducting workshops, webinars, and information campaigns to disseminate
knowledge about available financing options and their associated benefits.
 The group advocated for the more customized financing facilities that address the unique needs and
challenges faced by cluster entrepreneur’s especially long-term financing. Flexible repayment terms,
lower interest rates and reduced collateral requirements were identified as potential strategies to enhance
accessibility.
 Representatives from banks and financial institutions emphasized the importance of incentivizing banks
and FIs to encourage them to focus on cluster entrepreneur lending.

 Participants discussed the necessity of establishing a robust system for monitoring and evaluating the
implementation of CMSME financing policies targeted to cluster entrepreneurs to ensure their
effectiveness and accountability of banks/FIs.
5.5 Limitations
Due to time constraint the primary data collection relied on a limited-scale questionnaire survey and respondents
are from demand side (Cluster entrepreneurs) and supply side (Bank/NBFI officials) only, which may not be
representative of the entire population of cluster-owned CMSMEs. The small sample size could limit the
generalization of the findings. While quantitative analysis, including the linear probability model, was employed,
establishing a causal relationship between CMSME financing and investment outcomes can be challenging.
There may be confounding variables or unobserved factors that were not accounted for in the analysis.
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 423

Probable Policy Options

Considering the problems and challenges mentioned FGD, KII, sample survey and causes found in Problem tree
analysis, suggested policy options are:
Option 1 Common facility Center (CFC) financing for cluster group.
Option 2 Introducing <Cluster Enterprise Refinance Scheme followed by Credit Guarantee=.
Option 3 Developing a Financial Information Management System (FIMS) and implement it
through bKash or Rocket or Banking apps
Option 1: Common facility Center (CFC) financing for cluster group.
Identified Causes Result from Policy Option-1
No scope to invest in Fixed asset (Machinery Fixed Asset investment is ensured by a close
or Physical structure) group
Unable to pay high installment size Installment is shared resulting small size
No sufficient Collateral No need of collateral
Acceptance of Guarantor Group member will be guarantor
Eventually, it will help to improve productivity, sales revenue, adopt new technology and overall growth of that
cluster.
Option 2: Introducing <Cluster Enterprise Refinance Scheme followed by Credit Guarantee=.
Identified Causes Result from Policy Option-2
High Interest Rate Refinance from BB will reduce interest rate
Unable to pay high installment size Low-interest rate result in low installment
No sufficient Collateral No need of collateral due to credit Guarantee
Acceptance of Guarantor Optional
Therefore, if dedicated refinance for cluster entrepreneurs is introduced with credit guarantee facility, collateral
issue will be resolved and cluster entrepreneurs will be comfortable to enjoy finance from formal CMSME
Finance sector in reduced rate of interest.
Option 3: Developing a Financial Information Management System (FIMS) and implement it through bKash or
Rocket or Banking apps
Identified Causes Result from Policy Option-3
No Recorded Financial Statement Easier Financial Statement Generation
No informal Transaction Recording (Cash) Easy to record with no extra manpower
Assessment problem from Stakeholder Easy to assess from Investors and creditors
Maintaining A/c in MFS, Banking Apps and All A/c integration and fund transfer under
others system separately. proposed system.
CIB Status of Entrepreneur Feature may be included.
Delay in Loan Processing Lowest possible time required
Lots of Legal Documentation Integration results less documentation
Lack of tailored Financial Product Proposed system will match feasible loan
VAT, TAX Calculation and Recording Easy to integrate in proposed System
424 Conference Proceedings-2025

Fig 6.1: Financial Transaction using FIMS is integrated in Bkash/ Rocket/ Banking Apps

So, introducing financial transaction recording in mobile based apps is the only quick solution to address the
long-awaited demand of Banks/NBFIs. To reduce loan processing time as well as assessing the limit of loan,
financial transaction recording is must and for cluster entrepreneurs who has very limited resource to do the job
manually, this system should be made compulsory to use at least 06 months prior giving loan to them. Besides,
BB already introduced Merchant account under MFS (bKash, Nagad, Rocket), PRA account which can be
integrated in proposed Financial Transaction based app. This app will help reduce human effort and
documentation. Investors and creditors will be able to use the report of these app in making investment or finance
to an entrepreneur.
Conclusion
This study sheds light on the critical issue of cluster's access to finance, within the CMSMEs sector in
Bangladesh. While BB has taken commendable policy initiatives to enhance financing to the cluster CMSMEs,
the impact of these policies on Light Engineering sector remains a relatively unexplored terrain. Our study, while
acknowledging data and methodological limitations, has made a significant contribution by utilizing both
qualitative and quantitative approaches to assess the effectiveness of these policy initiatives.
Through qualitative methods such as context analysis, SWOT analysis, PESTEL analysis, problem tree analysis,
and focus group discussions, we have identified key challenges and policy recommendations that can enhance
cluster entrepreneurs' access to finance. These challenges include the lack of collateral, limited use to financial
information recording, high interest rate and rigid terms and conditions imposed by financial institutions.
Additionally, our quantitative analysis, employing survey data and statistical models such as the linear
probability model has provided empirical evidence of the positive impact of CMSME financing on productivity,
expansion of business and employment generation.
This policy paper suggests the following refinements of BB/Govt policies that should be addressed properly:

 To enhance CMSME financing for cluster entrepreneurs with no/limited collateral, BB can extend the
guarantee facility against the loan taken by cluster entrepreneurs. Guarantee facility against cluster
entrepreneurs’ loan will also reduce the non-repayment risk of banks and FIs. BB can collaborate with
other government agencies and development partners like the World Bank, IFC and ADB to ensure
guarantee fund.

 SME Foundation, Bank/NBFIs, a2i or BB should take steps to develop <Financial Information
Financial Inclusion of Selected SME Clusters: a Case study of Light Engineering 425

Management System (FIMS)= apps and induce all CMSMEs including cluster entrepreneurs to use it as
a solution umbrella of many challenges faced by them during access to finance.
Above mentioned refinements could be implemented easily with existing administrative setup and incurring low
cost. Proper attentions and co-ordinations among different authorities are very much needed to create an enabling
environment that fosters cluster entrepreneurs' access to finance, ultimately contributing to inclusive economic
growth, employment generation, reducing financing gap, achievement of SDGs and Vision 2041.
426 Conference Proceedings-2025

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