This document discusses alternative sources of funding for micro enterprises. It defines micro enterprises as very small businesses with fewer than 6 employees. While banks provide some funding, micro enterprises often rely on alternative sources due to their small size and risk. The document lists various alternative funding options around the world such as microloans, credit unions, leasing, factoring, and government programs. It also discusses Bangladesh's experience, noting that over 90% of micro enterprise funding comes from alternatives like microfinance institutions, credit cooperatives, and trade financing. The main challenges with alternative funding are lack of regulation, high interest rates, and risks like adverse selection and moral hazard.

1. ALTERNATIVE SOURCES OF FUNDING
FOR MICRO ENTERPRISES
Md. Ashraful Alam
Deputy General Manager
SME & Special Programmes Department
Bangladesh Bank [Central Bank of Bangladesh]
Bangladesh
ACCESS TO FINANCIAL SERVICES FOR MICRO, SMALL AND
MEDIUM ENTERPRISES (MSME) 3 - 7 AUGUST 2015
BANK NEGARA MALAYSIA

2. DISCUSSION POINTS
 Definition and Nature of Micro Enterprises
 Funding Sources in broader term
 Mainstream funding sources
 Alternative funding sources
 Some Generic Alternative funding sources for MiEs
 Good practices around the world
 Some country Specific Examples [To be elucidated by
group work)
 Bangladesh’s experience in Alternative funding for MiEs
 Discussions

3.  While banks are open for businesses there are other ways
to get finances. Bank finance is not always right for the
companies- British Bankers Association via ft.com
(2013)

4. DEFINITION AND NATURE OF MICRO
ENTERPRISES
 Definition:
 Micro Enterprises: a business operating on a very small scale,
especially one with a sole proprietor and fewer than six (6)
employees – Wikipedia
 IFC has compiled a matrix for MSME definition of more than 133
countries. More or less micro enterprises are defined as enterprises
with the owner doing the business with employment less than 10
people.

5. ECONOMIC IMPORTANCE OF MIES
 Micro enterprises are an important source of income for many
poor people in low-income countries.
 The significant contributions of micro and small enterprises (MSEs)
constitute the greater portion of several economic activities of most
countries.
 MSEs contribute to gross domestic product, entrepreneurial skill
development, employment generation and innovation to many
developing economies.
 Recognizing this, governments and donors have sought to
promote these small firms, usually through credit programs.
 These efforts increasingly use semi-formal institutions such as
non-governmental organizations, specialized institutions that
concentrate on micro and family based businesses, and
cooperatives — particularly credit unions.

6. NATURE OF MICRO ENTERPRISES
Nature
 Mostly informal in many countries
 Micro enterprises are linked to Non-farm sector,
self employment and microfinance self help group
etc.
 It is a strategy for
Job creation,
 Self employment promotion in non-farm sector,
Rural industrialization and
Economic development with special reference to the poor
hence linked to poverty reduction.

7. DIFFERENCE BETWEEN IGA AND ENTERPRISE
Income generating Activities Enterprises
Activity oriented Profit oriented
Based on available skill Based on the market opportunities
Minimal focus on profit Strong focus on profit
Persistent in one activity Creative and flexible
Low risk High risk
No or low growth rate High growth rate
Financial discipline could be missing Financial discipline mandatory
Activity could be stagnant or may end
with earned or loss of income
Regular savings lead to expansion
which is part of an activity

8. TRADITIONAL BUSINESS FUNDING SOURCES
Equity Finance
Owners equity
Family and Friends
Capital market
Debt Finance
Bank Lending
Overdraft
Term loan
Working capital
Trade finance

9. MAINSTREAM FUNDING SOURCES FOR MIES
 Micro enterprise mainstream funding is owners equity
 To some extent experienced and stable micro enterprises have
access to bank credit
 Most of the micro enterprises uses internally generated funds and
trade credit for running there businesses.
 They face challenges in sourcing growth funding as access to
formal bank credit is restricted for them

10. ALTERNATIVE FUNDING SOURCES
 What is Alternative Funding sources?
 Alternative finance is a catch-all term encompassing a range of
emerging and lesser known lending options.
 Research has revealed that most micro and small businesses aren't
aware of alternative sources of finance. Not surprising when 80%
of businesses whose applications were rejected by a bank said they
were not given any information about alternative funding sources.
 Who is Suitable for alternative finance?
 There is no 'one size fits all' when it comes to alternative finance;
each type tends to fill a specific need so it does appeal to a range of
businesses. But even alternative lenders still want assurances you
can pay back a loan, so you will need a business plan with
projections and evidence that you’re carefully managing costs.

11. ALTERNATIVE FUNDING SOURCES
 Why Micro enterprises need alternative sources
 Micro enterprises rely primarily on personal savings of owners, and sometimes
business profits, if any for their financial needs.
 They have little or no access to formal external credit. Traditional financial
institutions regard Micro enterprises as high risk and high default rate
businesses. As a result, the financial needs of Micro enterprises are not
considered in the lending policy formulation of banks.
 Most of them are denied access to financial assistance from traditional
financial institutions.
 Three things to consider before deciding Alternative source
 Cost of Money (Effective cost of using the money or Annual percentage rate0
 Timing of charge of fees/commission/discounts/interest
 Terms of payment
 All these affects the cost of borrowing and ease of using the alternative lenders
money

12. GROUP WORK
 Make a group of Eight
 Please define Micro enterprise in each jurisdiction at least in terms of
employment
 Discuss among yourself about what are the alternative sources of
funding for micro enterprises in each of group members jurisdiction
 Exclude Crowed Funding
 Come up with a list
 You should list the common sources among countries once
 Identify the challenges in using alternative funding sources by MiEs
 Select one representative from each group to present the finding
 Time allocation
 For brainstorming - 10 minutes
 Prepare the list - 10 minutes
 Present - 5 minutes

13. ALTERNATIVE FUNDING SOURCES FOR MIES
1. Leasing
2. Factoring
3. Receivable financing
4. Wire house receipt
5. Work order
6. Hire purchase
7. Government
Assistance
8. Venture capital
9. Angel investors
10. Micro lenders
11. Micro finance
institutions
12. Franchising
13. Family and friends
loan
14. Peer to Peer loan
15. Asset based lending
(Movable /immovable)
16. Money lenders.
17. Trade credit
18. NBFIs
19. Credit cooperatives
20. Money lenders
21. Merchant Cash
Advance
22. Credit cards
23. Vendor Credit
24. Bartering
25. Credit Unions
26. Purchase order
financing
………………………….
•Alternative funding sources are numerous and vary from country to country
•It is almost impossible to have a list of alternative sources of funding for Micro
Enterprises (MiEs)
•However there are some commonalities among the alternative sources of funding
which we can generalize
•Some generic Alternative sources of funding for MiEs

14. GOOD PRACTICES IN ALTERNATIVE FUNDING
FOR MIES AROUND THE WORLD
 Credit Unions
 Credit Cooperatives
 Factoring
 Leasing
 NBFIs
 MFIs
 Government Support programs
 Secured Transaction Lending
 Venture capital (government/private)
 Asset based lending
 Angel Investment
Community based lending

15. BANGLADESH’S EXPERIENCE IN
ALTERNATIVE FUNDING FOR MIES
 Bangladesh Micro enterprises sector
 According to the latest Economic census Bangladesh has 8.00
million economic unit.
 97% of all economic (non-farm) unit have employment <10
 Majority of this micro enterprises are in the non-farm services
and trading sector.
 According to IFC survey in Bangladesh there are 19.3 million
Micro finance borrowers
 The 63% is informal
 Mostly Rural
 In Bangladesh micro enterprises are eligible for bank lending
and central bank also provides low cost funding to
commercial banks for on-lending to micro enterprises

16. BANK LENDING TO MICRO ENTERPRISE IN
BANGLADESH
 Banks are already expanding their presence in non-urban areas
( one urban to one rural, agent banking and mobile banking)
 Several banks including state owned commercial banks have
been recently targeting microenterprises (e.g. Islami Bank
Bangladesh Ltd with its Micro-Enterprises Investment Scheme
– MEIS, Prime Bank Sonali Bank and Agrani Bank)
 Many banks have developed innovative and less traditional
credit policies with respect to acceptable collateral for loans
(e.g. United Commercial Bank, Prime Bank).

17. ALTERNATIVE SOURCES OF FUNDING FOR MIES IN
BANGLADESH
 In Bangladesh Non-Bank Financial Institutions are within the regulatory
control of Bangladesh Bank [Central bank of Bangladesh]
 However although MiEs are eligible and are taking finances from the banking
and NBFIs but more than 90% of MIEs funding requirements are met by
alternative funding sources
 Among the alternative funding sources for MiEs in Bangladesh following are
the major categories
 Micro loan offered by MFIs registered under the MRA – More than 600 licensed
MFIs operating through out the country
 Credit Cooperative Societies lending to its members- more than 700 cooperative
societies through out the country
 Factoring
 Leasing
 Receivable finance
 Work order finance
 Finance against ware house receipt
 Trade finance
 Vendor financing
 Government supported micro finance programs

18. CHALLENGES AND RISK IN ALTERNATIVE FUNDING
 Lack of regulation
 Lack of control
 High interest rate
 Lack of prudential regulation in some alternative funding
providers
 Agency problem
 High transaction cost
 Adverse selection
 Moral hazards
 Absence of customer protection

19. QUESTION?