Letter of Transmittal

Date: ……, 2010

Tahniat Ahmed Karim

Executive Vice President
&
Head of Humen Resource Dept.
BRAC Bank Ltd.
1 Gulshan Evenue, Gulshan, Dhaka.

Subject: Submission of Internship Report.

Dear Sir,

I have the pleasure to submit my internship report on ………….one of the most

important requirements for the MBA program. This report is an outcome of the internship
program I have undergone. All the works presented here is done with the utmost sincerity
and honesty. I have tried my best to make this report comprehensive and informative.

I am very grateful and pleased to submit my internship report in time. I will be beholden
to you for giving me such opportunity in your bank which was effective from July
15,2010 to October 15,2010.

Sincerely yours,

…………
(Rahima Akter)
MBA
Serial No- 203
Exam. Roll- 551
Stream: Strategic and International Management
Department of Management Studies
University of Dhaka

Abstract: For a developing country like Bangladesh Small and Medium-sized

Enterprises (SMEs) can be used as an effective weapon to fight against poverty. SMEs
offer large-scale employment and income-earning opportunities at low cost. Financing is
a major obstacle for the development of SMEs. In this regard, many commercial banks
come forward with their SME services. BRAC bank is known as the precursor of SME

1
services. After studying the SME service of BRAC Bank Ltd., this paper has identified
that……………

Key words: Small and Medium-sized Enterprises, large-scale employment, commercial

banks, financing,…..

Introduction: SMEs have been considered as the thrust sector in the economic
development of Bangladesh with growing importance from the policy makers, academics
and donors. It has assumed special significance for poverty reduction programs and
potential contribution to the overall industrial and economic growth. As a country of
LDCs, Bangladesh has started focusing attention on SMEs to enhance their role in
bringing about structural change in the country. Commercial banks are now playing an
increasingly active role to support SMEs. challenges………success factors………

Objectives of the study: This is an informative and exploratory study which focuses on
disseminating the concept of SME banking………. Furthermore, it will also focus its
attention to the…… In particular, this paper would like:

• To examine the role of commercial banks in the economic progress of

Bangladesh.
• To analyze the performance of SME services of commercial banks(in particular
BRAC Bank Ltd).
• Identify the major challenges regarding SME services.

Methodology of the study: Certain methods and techniques were utilized to collect data
for this report. Both primary data and secondary sources were chosen as effective means
of collecting data relevant to this report.

Interview was the basic technique that was employed to collect primary data
from people within the organization. Information about the varieties of SME
services of the bank was collected through interviews. Besides, on-the-job
experience helped me to learn quite a few things about the services as well as
about the organization.

On the other hand, secondary sources were used to collect data regarding the
company’s performance since its inception. Publications (particularly online)
and database within the organization helped me to gather necessary data and
information.

Limitations of the study:

The major limitations of this report are as follows:

• Time constraint.
• Insufficiency of the reference books

2
 • Some essential data availed because of marinating the
secrecy of the concern.

Literature Review: Economic history shows that development has started everywhere
with the banking system and its contribution towards financial development of a country is
highest in the initial stage. Modern banks play an important role in promoting economic
development of a country. Banks provide necessary funds for executing various
programmers underway in the process of economic development. They collect savings
of large masses of people scattered through out the country, which in the absence of the banks
would have regained ideal and unproductive. These scattered amounts are collected, pooled
together and made available to commerce and industry for meeting the requirements.

Economy of Bangladesh is in the group of world's most underdeveloped economies. One of

the reasons may be its underdeveloped banking system. Government as well as different
international organizations has also identified that underdeveloped banking system causes
some obstacles to the process of economic development. So they have highly recommended
for reforming financial sector. Since1990, Bangladesh Government has taken a lot of initiative
to make the financial sector more transparent. Different international organizations like
World Bank, IMF, ADB have participated in the formulation and implementations of these
reform activities.

In 1996, World Bank published "Bangladesh: Agenda for Action' in which it has
suggested a lot of recommendations for economic development of our country. These
recommendations include special presentation for reforming banking sector.

Bank is the most important financial institution in the economy. It plays a vital role in the
economy by providing means of payment and in mobilizing resources. The economic
development of a country depends on the development of banking sector. Today's modern
banks are not providing only traditional banking; rather banks are expanding the menu of
financial services.
Role Of Commercial Banks In The Economic Development Of A Country:
Commercial banks play an important and active role in the economic development of a
country. If the banking system in a country is effective, efficient and disciplined it brings
about a rapid growth in the various sectors of the economy. The commercial banks are
now not confined to local banking. They are fast changing into global banking i.e,
understanding the global customer, using latest information technology, competing in the

3
open market with high technology system, changing from domestic banking to
investment banking etc. The commercial bank are now considered the nerve system of all
economic development in the country. Significance of commercial banks in the economic
development of a country is discussed below:

1. Banks promote capital formation:

Commercial banks accept deposits from individuals and businesses, these deposits are
then made available to the businesses which make use of them for productive purposes in
the country. The banks are, therefore, not only the store houses of the country’s wealth,
but also provide financial resources necessary for economic development.

2. Investment in new enterprises:

Businessmen normally hesitate to invest their money in risky enterprises. The

commercial banks generally provide short and medium term loans to entrepreneurs to
invest in new enterprises and adopt new methods of production. The provision of timely
credit increases the productive capacity of the economy.

3. Promotion of trade and industry:

With the growth of commercial banking, there is vast expansion in trade and industry.
The use of bank draft, check, bill of exchange, credit cards and letters of credit etc has
revolutionized both national and international trade.

4. Development of agriculture:

The commercial banks particularly in developing countries are now providing credit for
the development of agriculture and small scale industries in rural areas. The provision of
credit to agriculture sector has greatly helped in raising agriculture productivity and
income of the farmers.

5. Balanced development of different regions:

The commercial banks play an important role in achieving balanced development in

different regions of the country. They help in transferring surplus capital from developed
regions to the less developed regions. The traders, industrialist etc of less developed
regions are able to get adequate capital for meeting their business needs. This in turn
increases investment, trade and production in the economy.

6. Influencing economic activity:

The banks can also influence the economic activity of the country through its influence
on :a. Availability of credit and b. The rate of interest If the commercial banks are able to
increase the amount of money in circulation through credit creation or by lowering the
rate of interest, it directly affects economic development. A low rate of interest can

4
encourage investment. The credit creation activity can raise aggregate demand which
leads to more production in the economy.

7. Implementation of Monetary policy:

The central bank of the country controls and regulates volume of credit through the active
cooperation of the banking system in the country. It helps in bringing price stability and
promotes economic growth with in the shortest possible period of time.

8. Monetization of the economy:

The commercial banks by opening branches in the rural and backward areas are reducing
the exchange of goods through barter. The use of money has greatly increased the volume
of production of goods. The non monetized sector (barter economy) is now being
converted into monetized sector with the help of commercial banks.

9. Export promotion cells:

In order to increase the exports of the country, the commercial banks have established
export promotion cells. They provide information about general trade and economic
conditions both inside and outside the country to its customers. The banks are therefore,
making positive contribution in the process of economic development.

10. Digitization through Virtual Banking:

Providing the banking services through extensive use of information technology.With the
increasing use of virtual banking there is greater reliance now on information technology
that decreases the number of physical bank branches and enables to deliver the banking
services to the customer with greater convenience.

Profile of BRAC bank Limited: It was established by the BRAC (Bangladesh Rural
Advancement Committee). BRAC is One of the most successful N.G.Os. BRAC bank
limited is a scheduled commercial bank established in 2001 under the Bank Companies
Act, 1991 and incorporated as a Private Limited Company by the shares on May 20,1999
under the companies Act,1994 in Bangladesh. The bank has started operation since July
04,2001. At present they have ……branches. BRAC bank is surviving in the banking
arena through its unique and competitive products and it is the only providing 100%
integrated online banking services.

Briefing About BRAC Bank Ltd.:

Date of Incorporation May 20, 1999
Date of Commencement of Commercial Operation July 04, 2001
No. of Branches ……….

5
 No. of Unit Offices 292
Shareholding Structure:

Name of Shareholders No. of Shares Amount (Tk.) Percentage(%) of Shareholding

SShareholding Shareholders
B RAC 3,1 73,900 31 7,390,000 63.48%
Shore Cap International Ltd. 875,700 87,570,000 17.51%
International Finance Corporation (IFC) 949,800 94, 980,000 19.00%
Others 600 60,000 0.01 %
5,000,000 500,000,000 100.00%
Board of Directors:

SL. No. Name Status with the Bank

01 Fazle Hasan Abed Founder Chairman
02 Syed Humayun Kabir Director
03 Faruq A Chowdhury Director
04 Quazi Md. Shariful Alam Director
05 Aminul Alam Director
06 Paul D Christensen
Director
07 Imran Rahman Managing Director

6
Some issues on SME finance in Bangladesh Email this article
By Dr. Salehuddin Ahmed Governor, Bangladesh Bank Printer friendly page
Thu, 10 Aug 2006, 11:39:00 Access News Photos

Fiancial services for the poor have proved to be a powerful instrument for poverty
reduction enabling the poor to build assets, increase incomes and reduce the vulnerability
to economic stress. Today, access to credit is recognised as a 'right' of people globally.
Over the years, there has been phenomenal growth in activities of microcredit in many
countries of the world and a transition in the paradigm and modalities of microcredit.
Microcedit Summit Meeting first held in Washington DC, USA in February 1997 has
launched a global movement to reach 100 million of the world's poorest families,
especially the women of those families, with credit for self-employment and other
financial and business services by the year 2005. The UN has declared 2005 as the
"International Year of Microcredit", now is the time to reflect on the experiences of
Bangladesh, the birthplace of micro finance and the country with the biggest and most
vibrant micro finance sector.

As the microcredit movement matures, we get a clearer idea of what its strengths are and
what are its limitations. To move forward, we need to be more effective, and increase
outreach, design products to include the poorest, and also provide finance for growth and
employment oriented small and medium enterprises (SMEs) which are needed to spread
the poverty alleviation net wider, so that significant decline in poverty takes place.

A significant number of people around the world are excluded from full participation in
the financial sector. Although the unbanked has been an issue for some time, the subject
is now receiving greater attention, helped by the fact that 2005 is the United Nations'
Year of Micro-credit. Banking the unbanked is about bringing banking and financial
services to those people who, up to now, have not had access. Although the unbanked is
usually thought of in terms of individuals, it is an important issue for small firms as well.

Small and medium sized enterprises (SMEs) may not always have the same access to
banks and financial institutions as big firms. Thus access of SMEs to the range of
financial services is a key issue that needs to be considered in terms of banking the
unbanked.

It is generally recognised that SMEs have a significant role in employment generation,

poverty reduction and over all economic growth, specially for a developing economy like
Bangladesh. SMEs are typically labour intensive industries with relatively low capital
intensity. As such for a country like Bangladesh which is labour abundant and capital
scarce, SMEs have a natural comparative advantage. In recognition of the strategic
importance of the development of SMEs in promoting industrial growth, employment
generation and poverty alleviation the SME sector has been declared as a priority sector
in the Government's Industrial Policy 2005 and various measures have been initiated to
help maximise the SMEs growth potential.

7
Availability of finance is thought to be a major constraint to formation and growth of
SMEs in Bangladesh. Banks are reluctant to expand their SME credit portfolio because
they do not consider SME lending an attractive and profitable undertaking. This is so
because SMEs are regarded as high risk borrowers because of their low capitalisation,
insufficient assets and their inability to comply with collateral requirements of the banks.
Administrative costs are also higher because close monitoring and supervision the SME
operation becomes necessary.

Despite all these facts banks and financial institutions have been providing finance to the
SME sector and the volume of finance is showing an increasing trend. Most importantly
the share of private sector banks in disbursement of credit to the SME sector has been
increasing in recent years comparatively at a higher rate than the NCBs and state owned
DFIs.

There is an issue of interest rate charged by banks and financial institutions for SME
finance. Very often it is argued that the interest rate on SME loan is too high and needs to
be lowered. In this regard it may me mentioned that following the interest rate
liberalisation policy as a part of financial sector reforms, the responsibility to determine
interest on loans and advances has been left to the lending banks and financial
institutions. Under the liberalised interest rate regime central bank's intervention to
reduce interest rate for a particular sector will not be in order and involve the risk of
being construed as a retrograde policy. For entrepreneurs, though the supply of and
access to finance is very important, the cost of fund is also a factor for their sustainability
and expansion. The banks and financial institutions should consider the fact that if the
rate of interest is too high, then the profitability of entrepreneurs, especially for those of
the innovative projects will be adversely affected.

Bangladesh Bank (BB) has also undertaken programmes to provide relatively cheaper
funds to the banks and financial institutions which might encourage them for SME
financing.

SME has been identified in the PRSP (Unlocking the Potential) as one of the seven
critical sectors for pro-poor economic growth and special emphasis has been give on
rapid growth and development of this sector. According to the PRSP the thrust of SME
development should be on 'modern' SMEs that have higher growth potentials compared
to the traditional SMEs. The policies towards SMEs should be based on a positive
developmental attitude seeking to assist them by promoting efficiency, adaptation to new
circumstances and technology, rather than protecting the sector through a distorted
incentive structure. In the PRSP the actions suggested for the development of SMEs in
Bangladesh include (i) Adoption of an unambiguous definition of SME; (ii)
Strengthening of BSCIC's capacity to provide market information; (iii) Simplification of
regulatory procedures; (iv) Setting up an appropriate credit guarantee scheme for lending
without real estate based collateral; (v) Enlarging the base of conduit lending institutions;
(vi) Making BSCIC's industrial estate programme demand driven; (vii) Priority
development of the road network and supply of gas and electricity; (viii) Extension of
BOIs One-Stop Service to cover SMEs; (ix) Greater public private cooperation for the

8
design and implementation of effective business support service; (x) A differentiated and
hassle-free indirect tax system for SME; (xi) Calibration of trade policy reform to support
SME development.

BRAC Bank is one of the country\‘s fastest growing banks. With 71 branches, 60
SME Sales & Service Centers, over 200 ATM\‘s, 429 SME Unit Offices and
over 7,000 employees, BRAC Bank operation now cuts across all segments and
services in financial industry. The bank has already proved to be the largest
SME Financier in just 9 years of its operation in Bangladesh and continues to
broaden its horizon into Retail, Corporate, SME, Probashi and other arenas of
banking.

Introduction
1.1 Origin of the Report:

In recent days the Small and Medium Enterprise (SME) Financing has
become an important area for Commercial Banks in Bangladesh. To align its
corporate policy with the regulation of Central Bank, banks have become
more concerned about SME and opened windows to conduct business in this
particular area. This study has been conducted to fulfill the requirements of
sixth term MBM program and gain an insight about the present condition of
small and medium enterprise in the economy of Bangladesh and their
financing scenario in light of Bangladesh Bank regulation.

1.2 Background of the Study:

After Liberation of Bangladesh, intensive efforts were undertaken to

accelerate the rate of industrialization in the country. At the beginning,
import substitution and subsequently export-led economic growth strategy
was pursued for industrialization. In order to attain this objective, large
amount of industrial credit was funneled to the industrial sector. But the
whole exercise of industrialization came to a halt with the massive diversion
of resources to other non priority sectors. Policy makers, of late, have come
to recognize the contribution of SME sector towards economic development

9
in the country. Small and medium enterprises have been recognized as one
of the most important means for providing better economic opportunities for
the people of least developing countries like Bangladesh. A developing
economy like that of ours suffers from many peculiar problems such as
disproportionate pressure of population on agriculture due to lack of rural
industrialization, unemployment and underemployment of human and
materials resources, unbalanced regional development etc. The contribution
of small and medium enterprises in the solution of these problems is beyond
doubt, provided they are organized and run on scientific basis.

Small and medium enterprises are particularly suitable for densely populated
countries like Bangladesh where SME sector can provide employment with
much lower investment per job provided. Out of 11% employment of the
civilian labor force provided by the manufacturing sector, about two thirds
are estimated to be provided by the small and cottage industries sector.
Again, development of small industries facilitates the effective mobilization
of capital and labor resources. They also help in raising standards of living

of people in rural areas. Contribution of SME sector to GDP remained above

4% during the period from 1985-86 to 1999-00. Moreover, the present
contribution of SME sector to GDP is approximately 5% and SME sector
employs 25% of the total labor forces, thus this sector is the present
available sector for creation of jobs (Saha, Sujit R. 2007).

Research papers developed by Bakht, Zaid (1998) and Ahmad, Salahuddin

et al. (1998) described that the policy environment within which SMEs in
Bangladesh operate accompanies legal, regulatory and administrative
constraints to employment creation by SMEs. The robustness of SME

10
contributions to employment generation is a common phenomenon in most
developing countries in that the magnitude varies between 70% to 95% in
Africa and 40% to 70% in the countries of the Asia-Pacific region (Ahmed,
M.U. 1999).

Liberalization of industrial and trade regimes along with globalization are

likely to have
had significant effects on Bangladesh’s SMEs (Ahmed, 2002; Bhattacharya
et. al., 2000).

Various recent studies (Ahmed, M.U. 2001, ADB 2001, USAID 2001) show
that SMEs have undergone significant structural changes in terms of product
composition, degree of capitalization and market penetration in order to
adjust to changes in technology, market demand and market access brought
by globalization and market liberalization. The official data show that the
share of private investment in Bangladesh’s GDP in the late 1990s, which
may be considered as the post-reform era, has remained more of less
constant at around 15% (Bhattacharya, 2002). This may be interpreted as an
evidence of stagnant private sector activities in the country.

The recent private sector survey estimates the contribution of the micro,
small, and medium enterprises (MSMEs) is 20-25% of GDP (Daniels,
2003). While SMEs are characteristically highly diverse and heterogeneous,
their traditional dominance is in a few industrial sub-sectors such as food,
textiles and light engineering and wood, cane and bamboo products.
According to SEDF sources quoted from ADB (2003), food and textile units
including garments account for over 60% of the registered SMEs.

Despite these contributions in the economy of the country, Banking sectors

are not interested in financing the small and medium enterprises; rather there

11
is a decline in the amount of advances by the Banking sector. There are
approximately 52 Banks operating

in our country and all are serving large enterprises rather than SMEs though
only the
small enterprise’s contribution is 5% in GDP of Bangladesh in 2007. But
why?

What are the causes for which Banks are not interested in financing this
sector? From recent statistical data of Sonali Bank of Bangladesh, we see
that the credit recovery rate is 51.44% in this sector. Why this recovery rate
is not large enough? Why the SMEs are failing to payback their credit to the
lenders? We have tried to find out the answer of these questions in this
research paper.

1.3 Objectives of the Study:

Based on the above discussion the following objectives are set for the study :
•
To review the role of SMEs in the economy as well as current status of
SMEs
and their financing by Banks in Bangladesh.
•
To find out the reason why the Banks are not interested (problems) to
finance
the SMEs.
•
To review the present role of Regulatory Authorities in SME financing and
development.
1.4 Methodology of the Study:

The study was conducted mainly based on secondary information although

some information relating to entrepreneurs have been collected primarily.
The sources of data include Office Records, BIBM - Library, Different

12
Research Paper regarding SMEs, Different Publications on SMEs of
different banks and some websites.

Sample banks of DNCBs, PCBs, and FCBs from the sample frame, was
selected purposively considering the amount of loan size, interest rate, loan
processing fees, period of loans, mode of finance and management.

Policies relating to SME financing such as fiscal policy, monetary policy

and internal policies of commercial banks was examined thoroughly with a
view to find out the influence of existing policies on SME financing. Trend
and pattern of bank financing to SME was analyzed by classifying the
financing in terms of areas, rate of interest, types, category, and banks.

1.5 Limitations of the Study:

Since this research is only for academic purpose, there were some
limitations in this
study. These are mentioned below:
1. Discussion about the Small and Medium Enterprises is a vast subject, but
only
some selected areas are covered in the research paper.
2. The study is basically based on secondary data.
3. Time was enough but it was not possible to give full concentration in this
regard
due to continuous pressure from other courses.
1.6 Organization of the Report:

This paper is divided into ten chapters. The first chapter is the introduction
of the report. The second chapter focuses on the current status of SMEs in
the economy. The third chapter explains the current status of SME financing
by banks in Bangladesh. The fourth chapter explains why banks are not

13
interested in financing the SMEs. The fifth chapter shows minimum
requirements for SME financing according to Bangladesh Bank. The sixth
chapter contains prudential regulations for SME financing by Bangladesh
Bank. The seventh chapter shows guidelines by Bangladesh Bank for SME
financing. The eighth chapter describes other developmental activities for
SME financing. The ninth chapter explains constraints of SME financing.
The last chapter contains the concluding remarks of the report.

Current Status of SMEs in the Economy

2.1 Brief Macro-economic Review:

14
Bangladesh, mainly backed by the growth of manufacturing, construction
and service sector has achieved a year-upon-year GDP growth of 6.51% in
2006-07, as compared with the 6.63% in FY 2005-06, and 5.38% in 2004-
05. Per capita GDP recently surpassed $500. From 1% during the 1970s,
growth rate of GDP per capita has ramped up to over 3% since the early
1990s and, since 2003-04, even higher, to 4 off percent. Growth has been
more stable too; Bangladesh among the handful of countries that sustained
positive per capita growth in each year since the early 1990s. This
performance has been underpinned by rising agricultural and non-farm rural
output and a rapid expansion in export of readymade garments (RMG).

Faster economic growth has helped Bangladesh to reduce the poverty rate by
about 1 (one) percentage point per year since 1990. Poverty fell from 60% in
1990 to 50% in 2000. Although the latest poverty data are still being
collected, proxy indicators suggest that good progress on poverty reduction
and social development has continued in recent years. Many MDGs are also
on track for being met. (World Bank 2005)

The rate of gross investment in GDP in 2007-07 is 24.33%. The relative

share of private sector in gross investment, which has been growing
secularly, is 18.73% in 2006-07. Between 2005-06 and 2006-07, credit to
the private sector grew by 11.2%. The population growth rate averaged 1.5%
or so; the literacy rate has averaged at 62% during this decade.

Growth rate of manufacturing output of Bangladesh is on an increasing

trend. Manufacturing growth during 1992-96 averaged 8.21%. In the next
four years, the corresponding growth averaged more than nine percent
annually. Service sector grew at an average rate of 4.9%, which is lower
than that of industries (manufacturing) sector. The quantum index of SMEs
has grown by 5.4%. The export of readymade garments (RMG) both woven

15
and knitwear has picked up a commendable mode of growth, which earns
over 76% export earnings.

2.2 Current Status of Small and Medium Enterprises in Bangladesh :

The Small and Medium Enterprises worldwide are recognized as engines of

economic growth. The commonly perceived merits often emphasized for
their promotion especially in the developing countries like Bangladesh
include their relatively high labor intensity, dependence on indigenous skills
and technology, contributions to entrepreneurship development and
innovativeness and growth of industrial linkages.

2.2.1 Definition :
According to the latest circular of BANGLADESH BANK (Date –
26/05/2008), the
definition of Small & Medium Enterprise sector is given below:
Small Enterprises – Small enterprises refer to those enterprises which are not
any
Public Limited Companies and which fulfill the following criteria-
Service Concern- Having an investment of Tk. 50,000 to Tk. 50, 00,000
excluding
land & building and / or employing up to 25 workers.
Business Concern - Having an investment of Tk. 50,000 to Tk. 50, 00,000
excluding
land & building and / or employing up to 25 workers.
Manufacturing Concern - Having an investment of Tk. 50,000 to Tk.
1,50,00,000
excluding land & building and / or employing up to 50 workers.
Medium Enterprises – Medium enterprises refer to those enterprises which
are not

16
any Public Limited Companies and which fulfill the following criteria-
Service Concern- Having an investment of Tk. 50,00,000 to Tk.
10,00,00,000
excluding land & building and / or employing up to 50 workers.
Business Concern - Having an investment of Tk. 50,00,000 to Tk.
10,00,00,000
excluding land & building and / or employing up to 50 workers.
Manufacturing Concern - Having an investment of Tk. 1,50,00,000 to Tk.
20,00,00,000 excluding land & building and / or employing up to 150
workers.

SMEs in Bangladesh are also defined for purposes of industrial policies by

Ministry of Industries (MOI). Historically, this definition has been in terms
of fixed investment brackets, and a dual mode definition is in place, separate
for manufacturing establishments, and service establishments.

According to the Industrial policy 2005, small and medium enterprises shall
be
categorized using the following definitions:
a. Manufacturing enterprise:
Small enterprise – an enterprise should be treated as small if, in current
market prices,

the replacement cost of plant, machinery and other parts / components,

fixtures, support utility, and associated technical services by way of
capitalized costs (of turn key consultancy services, for example), etc,
excluding land and building, were to be up to tk. 15 million;

Medium enterprise - an enterprise would be treated as medium if, in current

market

prices, the replacement cost of plant, machinery and other parts /

components, fixtures, support utility, and associated technical services by
way of capitalized costs (such as turn key consultancy services), etc,
excluding land and building, were to be up to tk. 100 million;

17
b. Non-manufacturing enterprise:
Small enterprise – an enterprise should be treated as small if it has less than
25
workers, in full time equivalents;
Medium enterprise - an enterprise would be treated as medium if it has
between 25
and 100 employees.
2.2.2 Overview of the SMEs in the economy of our country:

There is a great interest in small and medium enterprises (SME) as a major

plank of poverty reduction in Bangladesh. The government has formulated a
comprehensive industrial policy 2005 by putting special emphasis for
developing SMEs as a thrust sector for balanced and sustainable industrial
development in the country to help deal with the challenges of free Market
economy and globalization.

Some data with a national scope that are pertinent to characterizing SMEs in
Bangladesh
as of 2001-2003 are presented in Table – 1. The highlight of this table is the
following:
There are some 78,440 private sector establishments of various sizes in
Bangladesh with
some 3.5 million workers employed in them. The urban Bangladesh
accounts for some

18
60% of units and 76% of employment in the private-sector enterprises. Rural
Bangladesh accounts for the rest. 93% of all units in Bangladesh belong in
the SME category, i.e. have between 20 and 99 employees. However, SMEs
account for only 44% of the total employment of the enterprise sector.

Private companies limited by liability account for strictly a very small

proportion of the
total number of SMEs in Bangladesh.

TABLE_1

2.2.3 Contribution of SMEs in the Economy:

In view of present economic development effort in Bangladesh the SME
sector plays an
important role. These are reflected in the following performance /activities
of this sector:
 During the Fourth Five year plan, a total of 0.35 million jobs were
created against
the target of 0.4 million.
 Contribution of SME sector to GDP remained above 4.5% during the
period from
2000-01 to 2004-2005 despite decline in the amount of advances by the
banking
sector to this sector.
 SME sector employs 25% of the total labour force. As a result, this
sector is the
present available sector for creation jobs.
 SME sector help alleviate poverty, increase income level of rural
people and
promote agro-industrial linkage in Bangladesh.
 SME sector requires lower energy supply, lower infrastructure
facilities and this
sector imposes less environmental risk.

19
 They contribute towards better utilization of local resources and skills
that might
otherwise remain unutilized.

 Small industries being labour oriented are capable of generating more

employment.
 They are necessary to maintain and retain traditional skills and
handicrafts.
 They are the only medium for diversification of rural economy and for
peaceful
and concurrent socio-economic development of all classes of people

20
Table – 2 shows the average employment per establishment within each of
the small and medium classes for urban and rural Bangladesh in 2001/2003.
The following results are worth highlighting. Let it be noted that these are
weighted averages.

First, the average employments per establishment for small establishments

have values of between 17 and 20 workers across all industries. We find a
similar a narrow range of between 65-69 employees for average employment
size for medium enterprise.

Table – 2: Average head-count per establishment across Bangladesh’s

industries, 2001-

Table-2

Table – 3 shows the percentage importance (in terms of both number of units
and the employment level) of SMEs in the overall world of enterprises. The
numbers of SME units predominate the numbers of large enterprises:
typically more than 90% of all enterprises are in the SME class-class.
However, the percentages share of SMEs in total employment controlling for
the location is almost always less than for the number of units.

21
Table – 3: The structure of “industries” in Bangladesh with respect to size of
firms,

From the above discussion, we can say that SMEs are playing an important
role in our
economy in various ways

 Small industries being labour oriented are capable of generating more

employment.
 They are necessary to maintain and retain traditional skills and
handicrafts.
 They are the only medium for diversification of rural economy and for
peaceful
and concurrent socio-economic development of all classes of people.
From the above discussion, we can say that SMEs are playing an important
role in our
economy in various ways.
Current Status of SME Financing by Banks in
Bangladesh
3.1. Current Status of SME Financing by Banks in Bangladesh

The NCBs are disbursing significant amount of credit under various

programs like Small Enterprise Development Project, Self-help Credit
Program, Projects for Small Entrepreneurs, Special Investment Program and
Agro-based Supervisory Industrial Credit etc. for the promotion and
development of SMEs. The investment of private sector banks in financing

22
SMEs remains insignificant in Bangladesh. Of all the private sector banks,
BRAC Bank, Eastern Bank Ltd. (EBL), Prime Bank Ltd, Dhaka Bank Ltd,
Mercantile Bank Ltd, Dutch-Bangla Bank Ltd, Islami Bank Bangladesh Ltd,
IFIC Bank Ltd. have the leading role in SME financing. Bank of Small
Industries and Commerce Bangladesh Ltd. (BASIC) is entrusted with the
responsibility of providing medium and long-term loans for

promotion and development of small-scale industries. The memorandum and

Articles of Association of the bank stipulates that 50% of loanable funds
shall be used for financing small scale and cottage industries. The
outstanding credit of BASIC stood at Tk158.9 crore at the end of December
2001 for small and cottage industries sector that rose to Tk178.7 crore by
12.46% at the end of December 2002.

Table-6 gives an idea of the role of small and medium enterprises as

destinations for bank credit in 2004 and 2005. Bangladesh’s classification of
bank advances lumps medium enterprises with the large enterprises, while
small units are lumped with cottage-based units. As such, unfortunately, it is
not possible to speak of the access to finance issues for SMEs per se. We
know however separately that SCIs corresponds to more than 99% of all
productive establishments in Bangladesh.

Out of 3.8 million establishments of all kinds in Bangladesh, only 10,798, or

just about 0.3% happen to fall in either medium or large establishment size
class based on employment size. The percentage is even much lower in
manufacturing or trade---the two sub-sectors from which the case studies in

23
this paper are drawn. And yet, such staggering smallness of the proportion of
medium and large establishments is coupled with a preponderance of large
and medium enterprises in total credit disbursements from the banking
system. It is quite safe to assume that of total credit disbursed to large-and-
medium class, an overwhelming majority ---perhaps, 80% or so---is
arrogated by large establishments. It becomes quickly clear that SMEs, for
all their numerical superiority among establishments, receiving bank credit
is the exception and not the rule.

Why is the access to finance for the SMEs in Bangladesh not even based on
neutral ground, not to speak of rosy or good? This is because the issue of
bank credit is based on the ownership of collateral: bankers insist on
immoveable property for collateral. Only about 15-20% of the owners of
SMEs own any immoveable property at all in which the bankers are
interested. This automatically excludes about 80% of SMEs from being
among the privileged client of a bank loan.

Table – 6: Percentage distribution of advances made by PCBs, FCBs and

DNCBs in

INTRODUCTION
SMALL AND MEDIUM ENTERPRISES (SMEs) IN INDIA
General

24
In India, ‘small and medium enterprises’ (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale
industrial units. Any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset upto Rs10 million
is considered as a SSI unit and investment upto Rs. 100 million is considered as a medium unit. In addition, an SSI unit should neither
be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit.

The SME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobacco products, cotton
textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper
products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. SME sector
also has a large number of service industries.

The small scale sector in India comprises of a diverse range of units from traditional crafts to high-tech industries. The number of SSI
working units (registered & unregistered) in India totaled 11.4 million in 2003- 04—80.5 per cent of which are proprietary concerns
and 16.8 per cent are partnership firms and private limited companies.

Importance of SSIs in India

SSI is one of the significant segments of the Indian economy, contributing about 7 per cent to the Indian GDP and providing
employment to over 28 million people. The Indian SME segment’s current production value is almost Rs 816,000 crore. It contributes
to around 40% of industrial production & exports. It manufactures more than 8,000 diverse products, ranging from low-tech items to
technologically-advanced products. The SSI sector targets both domestic as well global markets. SSIs sector is recognized as the
engine of growth, accounting for about 70% of employment and contributes a significant amount for the growth of GDP. Globally,
99.7 per cent of all enterprises in the world are SME’s and the balance 0.3 per cent are large-scale enterprises. By contrast, the SSI
sector in India accounts for 95 per cent of all industrial units.

According to the Ministry of Small Scale Industries, the number of registered SSI units in India has increased from 11 million units in
2002-03 to 11.4 million units in 2003-04, up 3.6 per cent. The fixed investment grew by 5.04 per cent from Rs. 162,533 crore in 2002-
03 to Rs. 170,726 crore in 2003-04. About 8,000 products are manufactured in the small-scale sector. The production of SSI units in
India increased from Rs.311,993 crore in 2002-03 to Rs.357,733 crore in 2003-04.The industry groups—with a large share in the total
production of SSIs such as textile products, wood, furniture, paper, printing, and metal products—have recorded high growth rates.

The exports grew at a faster rate than production in 2002-03. While production at current prices grew by about 10.53 per cent and
exports rose by 20.7 per cent from Rs. 71,244 crore to Rs. 86,013 crore between 2001-02 and 2002-03. The industry groups with a
large share in exports are hosiery and garments (29.0%), food products (21.4%) and, leather products (18%).

The SSI units continue to create employment. The number of employed in the SSI sector went up from
260.13 lakh in 2002-03 to 271.36 lakh in 2003-04. This sector is next only to agriculture in employment.

25
26
27
28
vv

file:///I:/Case-Study-on-SME-Banking.htm

Introduction
1.1 Origin of the Report:

29
In recent days the Small and Medium Enterprise (SME) Financing has become an
important area for Commercial Banks in Bangladesh. To align its corporate policy with
the regulation of Central Bank, banks have become more concerned about SME and
opened windows to conduct business in this particular area. This study has been
conducted to fulfill the requirements of sixth term MBM program and gain an insight
about the present condition of small and medium enterprise in the economy of
Bangladesh and their financing scenario in light of Bangladesh Bank regulation.

1.2 Background of the Study:

After Liberation of Bangladesh, intensive efforts were undertaken to accelerate the rate of
industrialization in the country. At the beginning, import substitution and subsequently
export-led economic growth strategy was pursued for industrialization. In order to attain
this objective, large amount of industrial credit was funneled to the industrial sector. But
the whole exercise of industrialization came to a halt with the massive diversion of
resources to other non priority sectors. Policy makers, of late, have come to recognize the
contribution of SME sector towards economic development in the country. Small and
medium enterprises have been recognized as one of the most important means for
providing better economic opportunities for the people of least developing countries like
Bangladesh. A developing economy like that of ours suffers from many peculiar
problems such as disproportionate pressure of population on agriculture due to lack of
rural industrialization, unemployment and underemployment of human and materials
resources, unbalanced regional development etc. The contribution of small and medium
enterprises in the solution of these problems is beyond doubt, provided they are organized
and run on scientific basis.

Small and medium enterprises are particularly suitable for densely populated countries
like Bangladesh where SME sector can provide employment with much lower investment
per job provided. Out of 11% employment of the civilian labor force provided by the
manufacturing sector, about two thirds are estimated to be provided by the small and

30
cottage industries sector. Again, development of small industries facilitates the effective
mobilization of capital and labor resources. They also help in raising standards of living

of people in rural areas. Contribution of SME sector to GDP remained above 4% during
the period from 1985-86 to 1999-00. Moreover, the present contribution of SME sector to
GDP is approximately 5% and SME sector employs 25% of the total labor forces, thus
this sector is the present available sector for creation of jobs (Saha, Sujit R. 2007).

Research papers developed by Bakht, Zaid (1998) and Ahmad, Salahuddin et al. (1998)
described that the policy environment within which SMEs in Bangladesh operate
accompanies legal, regulatory and administrative constraints to employment creation by
SMEs. The robustness of SME contributions to employment generation is a common
phenomenon in most developing countries in that the magnitude varies between 70% to
95% in Africa and 40% to 70% in the countries of the Asia-Pacific region (Ahmed, M.U.
1999).

Liberalization of industrial and trade regimes along with globalization are likely to have
had significant effects on Bangladesh’s SMEs (Ahmed, 2002; Bhattacharya et. al., 2000).

Various recent studies (Ahmed, M.U. 2001, ADB 2001, USAID 2001) show that SMEs
have undergone significant structural changes in terms of product composition, degree of
capitalization and market penetration in order to adjust to changes in technology, market
demand and market access brought by globalization and market liberalization. The
official data show that the share of private investment in Bangladesh’s GDP in the late
1990s, which may be considered as the post-reform era, has remained more of less
constant at around 15% (Bhattacharya, 2002). This may be interpreted as an evidence of
stagnant private sector activities in the country.

The recent private sector survey estimates the contribution of the micro, small, and
medium enterprises (MSMEs) is 20-25% of GDP (Daniels, 2003). While SMEs are
characteristically highly diverse and heterogeneous, their traditional dominance is in a

31
few industrial sub-sectors such as food, textiles and light engineering and wood, cane and
bamboo products. According to SEDF sources quoted from ADB (2003), food and textile
units including garments account for over 60% of the registered SMEs.

Despite these contributions in the economy of the country, Banking sectors are not
interested in financing the small and medium enterprises; rather there is a decline in the
amount of advances by the Banking sector. There are approximately 52 Banks operating

in our country and all are serving large enterprises rather than SMEs though only the
small enterprise’s contribution is 5% in GDP of Bangladesh in 2007. But why?

What are the causes for which Banks are not interested in financing this sector? From
recent statistical data of Sonali Bank of Bangladesh, we see that the credit recovery rate is
51.44% in this sector. Why this recovery rate is not large enough? Why the SMEs are
failing to payback their credit to the lenders? We have tried to find out the answer of
these questions in this research paper.

1.3 Objectives of the Study:

Based on the above discussion the following objectives are set for the study :
•
To review the role of SMEs in the economy as well as current status of SMEs
and their financing by Banks in Bangladesh.
•
To find out the reason why the Banks are not interested (problems) to finance
the SMEs.
•
To review the present role of Regulatory Authorities in SME financing and
development.
1.4 Methodology of the Study:

The study was conducted mainly based on secondary information although some
information relating to entrepreneurs have been collected primarily. The sources of data
include Office Records, BIBM - Library, Different Research Paper regarding SMEs,
Different Publications on SMEs of different banks and some websites.

32
Sample banks of DNCBs, PCBs, and FCBs from the sample frame, was selected
purposively considering the amount of loan size, interest rate, loan processing fees,
period of loans, mode of finance and management.

Policies relating to SME financing such as fiscal policy, monetary policy and internal
policies of commercial banks was examined thoroughly with a view to find out the
influence of existing policies on SME financing. Trend and pattern of bank financing to
SME was analyzed by classifying the financing in terms of areas, rate of interest, types,
category, and banks.

1.5 Limitations of the Study:

Since this research is only for academic purpose, there were some limitations in this
study. These are mentioned below:
1. Discussion about the Small and Medium Enterprises is a vast subject, but only
some selected areas are covered in the research paper.
2. The study is basically based on secondary data.
3. Time was enough but it was not possible to give full concentration in this regard
due to continuous pressure from other courses.
1.6 Organization of the Report:

This paper is divided into ten chapters. The first chapter is the introduction of the report.
The second chapter focuses on the current status of SMEs in the economy. The third
chapter explains the current status of SME financing by banks in Bangladesh. The fourth
chapter explains why banks are not interested in financing the SMEs. The fifth chapter
shows minimum requirements for SME financing according to Bangladesh Bank. The
sixth chapter contains prudential regulations for SME financing by Bangladesh Bank.
The seventh chapter shows guidelines by Bangladesh Bank for SME financing. The
eighth chapter describes other developmental activities for SME financing. The ninth
chapter explains constraints of SME financing. The last chapter contains the concluding
remarks of the report.

33
Current Status of SMEs in the Economy
2.1 Brief Macro-economic Review:

Bangladesh, mainly backed by the growth of manufacturing, construction and service

sector has achieved a year-upon-year GDP growth of 6.51% in 2006-07, as compared
with the 6.63% in FY 2005-06, and 5.38% in 2004-05. Per capita GDP recently surpassed
$500. From 1% during the 1970s, growth rate of GDP per capita has ramped up to over

34
3% since the early 1990s and, since 2003-04, even higher, to 4 off percent. Growth has
been more stable too; Bangladesh among the handful of countries that sustained positive
per capita growth in each year since the early 1990s. This performance has been
underpinned by rising agricultural and non-farm rural output and a rapid expansion in
export of readymade garments (RMG).

Faster economic growth has helped Bangladesh to reduce the poverty rate by about 1
(one) percentage point per year since 1990. Poverty fell from 60% in 1990 to 50% in
2000. Although the latest poverty data are still being collected, proxy indicators suggest
that good progress on poverty reduction and social development has continued in recent
years. Many MDGs are also on track for being met. (World Bank 2005)

The rate of gross investment in GDP in 2007-07 is 24.33%. The relative share of private
sector in gross investment, which has been growing secularly, is 18.73% in 2006-07.
Between 2005-06 and 2006-07, credit to the private sector grew by 11.2%. The
population growth rate averaged 1.5% or so; the literacy rate has averaged at 62% during
this decade.

Growth rate of manufacturing output of Bangladesh is on an increasing trend.

Manufacturing growth during 1992-96 averaged 8.21%. In the next four years, the
corresponding growth averaged more than nine percent annually. Service sector grew at
an average rate of 4.9%, which is lower than that of industries (manufacturing) sector.
The quantum index of SMEs has grown by 5.4%. The export of readymade garments
(RMG) both woven and knitwear has picked up a commendable mode of growth, which
earns over 76% export earnings.

2.2 Current Status of Small and Medium Enterprises in Bangladesh :

The Small and Medium Enterprises worldwide are recognized as engines of economic
growth. The commonly perceived merits often emphasized for their promotion especially
in the developing countries like Bangladesh include their relatively high labor intensity,

35
dependence on indigenous skills and technology, contributions to entrepreneurship
development and innovativeness and growth of industrial linkages.

2.2.1 Definition :
According to the latest circular of BANGLADESH BANK (Date – 26/05/2008), the
definition of Small & Medium Enterprise sector is given below:
Small Enterprises – Small enterprises refer to those enterprises which are not any
Public Limited Companies and which fulfill the following criteria-
Service Concern- Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding
land & building and / or employing up to 25 workers.
Business Concern - Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding
land & building and / or employing up to 25 workers.
Manufacturing Concern - Having an investment of Tk. 50,000 to Tk. 1,50,00,000
excluding land & building and / or employing up to 50 workers.
Medium Enterprises – Medium enterprises refer to those enterprises which are not
any Public Limited Companies and which fulfill the following criteria-
Service Concern- Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000
excluding land & building and / or employing up to 50 workers.
Business Concern - Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000
excluding land & building and / or employing up to 50 workers.
Manufacturing Concern - Having an investment of Tk. 1,50,00,000 to Tk.
20,00,00,000 excluding land & building and / or employing up to 150 workers.

SMEs in Bangladesh are also defined for purposes of industrial policies by Ministry of
Industries (MOI). Historically, this definition has been in terms of fixed investment
brackets, and a dual mode definition is in place, separate for manufacturing
establishments, and service establishments.

The quantum index of SMEs has grown by 5.4%. The export of readymade garments
According to the Industrial policy 2005, small and medium enterprises shall be
categorized using the following definitions:
a. Manufacturing enterprise:
Small enterprise – an enterprise should be treated as small if, in current market prices,

the replacement cost of plant, machinery and other parts / components, fixtures, support
utility, and associated technical services by way of capitalized costs (of turn key
consultancy services, for example), etc, excluding land and building, were to be up to tk.
15 million;

36
Medium enterprise - an enterprise would be treated as medium if, in current market

prices, the replacement cost of plant, machinery and other parts / components, fixtures,
support utility, and associated technical services by way of capitalized costs (such as turn
key consultancy services), etc, excluding land and building, were to be up to tk. 100
million;

b. Non-manufacturing enterprise:
Small enterprise – an enterprise should be treated as small if it has less than 25
workers, in full time equivalents;
Medium enterprise - an enterprise would be treated as medium if it has between 25
and 100 employees.
2.2.2 Overview of the SMEs in the economy of our country:

There is a great interest in small and medium enterprises (SME) as a major plank of
poverty reduction in Bangladesh. The government has formulated a comprehensive
industrial policy 2005 by putting special emphasis for developing SMEs as a thrust sector
for balanced and sustainable industrial development in the country to help deal with the
challenges of free Market economy and globalization.

Some data with a national scope that are pertinent to characterizing SMEs in Bangladesh
as of 2001-2003 are presented in Table – 1. The highlight of this table is the following:
There are some 78,440 private sector establishments of various sizes in Bangladesh with
some 3.5 million workers employed in them. The urban Bangladesh accounts for some

60% of units and 76% of employment in the private-sector enterprises. Rural Bangladesh
accounts for the rest. 93% of all units in Bangladesh belong in the SME category, i.e.
have between 20 and 99 employees. However, SMEs account for only 44% of the total
employment of the enterprise sector.

Private companies limited by liability account for strictly a very small proportion of the
total number of SMEs in Bangladesh.
Table – 1: Number of units and levels of employment in small and medium enterprises,
2001-03
(All numbers are in thousands)

37
Table – 2 shows the average employment per establishment within each of the small and
medium classes for urban and rural Bangladesh in 2001/2003. The following results are
worth highlighting. Let it be noted that these are weighted averages.

First, the average employments per establishment for small establishments have values of
between 17 and 20 workers across all industries. We find a similar a narrow range of
between 65-69 employees for average employment size for medium enterprise.

Table – 2: Average head-count per establishment across Bangladesh’s industries, 2001-

03

(All numbers are in

thousands)

file:///I:/Sabina/achievements.php.htm

BRAC Bank awarded prestigious FT Sustainable Bank of the Year 2010

BRAC Bank has been awarded as the Sustainable Bank of the Year 2010 at the FT
Sustainable Banking Awards 2010. The award was jointly announced by Financial Times
newspaper and IFC at the award ceremony on 3rd June 2010 in London.

The FT Sustainable Banking Awards is presented by the London-based international

newspaper Financial Times and IFC, a member of the World Bank Group. Now in their
fifth year, the awards recognize banks and other financial institutions that have shown
leadership and innovation in integrating social, environmental and corporate governance
considerations into their operations. BRAC Bank has been announced as the winner of
the 2010 FT Sustainable Bank Award from Emerging Markets in Asia.

Lars Thunnel, Executive Vice President and CEO of IFC presented the award to BRAC
Bank's Chairman Mr. Muhammad A. (Rumee) Ali and CEO Mr. Syed Mahbubur
Rahman at the gala award ceremony in London. Dr. Atiur Rahman, Governor of
Bangladesh Bank was also present in the program that witnessed the presence of more
than 250 senior bankers and decision-makers in the area of sustainability. Dr Mo Ibrahim,
Chairman and founder, Mo Ibrahim Foundation, and Founder, Celtel International, was
keynote speaker at the dinner. The event followed a one-day Sustainable Banking
Conference organized by the Financial Times and IFC.

38
"The award is a global recognition of the unique contribution BRAC Bank has made in
establishing a bank that truly believes in socially responsible banking and is making a
difference in the lives of many small businesses all over Bangladesh. A segment that was
largely ignored by our financial industry. I am sure BRAC Bank model will be replicated
in many countries in the years to come" said Mr. Rumee Ali in his initial reaction. "This
award has made Bangladesh proud!"

"Broadening financial services to the poor and helping to raise living standards around
the world is good for business and good for the global economy", said Lars Thunell, IFC
Executive Vice President and CEO. "As these award recipients demonstrate, an
increasing number of financial institutions recognize that and are finding innovative ways
to expand access to finance and improve the environment."

DHL–Daily Star Bangladesh Business Awards 2008

BRAC Bank received the prestigious Business Award styled DHL-Daily Star Bangladesh
Business Awards 2008 as ‘Best Financial Institution of the Year’ for its innovation in
products, services, financial performance/ productivity, company management and
contribution to Bangladesh’s development. BRAC Bank is a full fledged commercial
bank; yet, it has significantly contributed in the development of SME sector by creating a
unique model of collateral free SME lending, which enabled the SME entrepreneurs (the
missing middle) to get easy access to finance. Furthermore, with its wide distribution
network, BRAC Bank reached the greater population even at the distant corners of
Bangladesh.

On behalf of the Bank, Mr. Muhammad A. (Rumee) Ali, Chairman of BRAC Bank
Limited received the award from Dr. Saleh Uddin Ahmed, Governor, Bangladesh Bank
and the chief guest of the award giving ceremony.

BRAC Bank received National Award as the Highest VAT payer for the financial year
2007-2008

BRAC Bank Limited has recently received the prestigious award for being the highest
VAT paying organization in national level in service industry.

Dr. ABM Mirza Azizul Haque Honorable Adviser Finance & Planning Ministry, Govt. of
People’s Republic of Bangladesh, handed over the award & crest to BRAC Bank Limited
at a ceremony held in Osmani Smriti Milonayaton.

BRAC Bank received ICAB National Award

BRAC Bank Limited has been awarded ICAB National Award from Institute of
Chartered Accountants of Bangladesh (ICAB) for one of the Best Published Accounts &
Reports 2007 recently.

Dr. A. B. Mirza Md. Azizul Haque former Adviser Finance & Planning Ministry, Govt.

39
 of People's Republic of Bangladesh, handed over the award to BRAC Bank Limited at a
ceremony held in Bangladesh-China Friendship Conference Centre.

Fastest growing bank in the country for the last two years

Leader in SME financing through 350 offices

Biggest suit of personal banking & SME products

Large ATMs (Automated Teller Machine) & POS (Point of Sales) network

Mr. Muhammad A. (Rumee) Ali

Chairman

Mr. Shib Narayan Kairy Mr. Quazi Md.Shariful Ala Ms. Nihad Kabir
Director Director Director (Independent)

Dr. Hafiz G.A. Siddiqi Ms. Tamara Hasan Abed Mr. Syed Mahbubur Rahman
Director Director Managing Director and CEO

Appendix 1
Dear Shareholders,
It is my great pleasure to welcome you all at the 11th Annual
General Meeting of BRAC Bank Limited. At the very beginning, I
would like to express our heartiest gratitude for your continuous
support and cooperation in BRAC Bank limited being recognized as
the premier brand in the financial industry of Bangladesh.

Since the inception, BRAC limited has undertaken various steps in

preserving and promoting the interests of its customers, employees, shareholders while
serving the greater purpose of sustainable development. Corporate social Responsibility
is integrated in the DNA of all the activities of BRAC Bank limited. The Bank operates
under a “Triple Bottom Line’ agenda where profit and social responsibility go hand in
hand as it strives towards a poverty free and enlightened Bangladesh.

In Bangladesh, Small and Medium size Enterprises (SMEs) do not get the same access to
banks and financial institutions as big companies do, But SMEs have a significant role in
employment generation, poverty alleviation and overall economic growth, especially for
a developing economy like that of Bangladesh’s. BRAC Bank started its business in 2001
with a clear vision to work as a catalyst for the vibrant yet unbanked SME sector in
Bangladesh.

40
BRAC Bank limited has a wide distribution coverage across Bangladesh in SME
business. Being the pioneer, BRAC Bank limited still holds the ‘Number One’ position in
SME business. In 2009 alone we distributed loans to 67.047 Small and Medium
Entrepreneurs’ amounting to BDT, 32,188.26 million; we also opened 29 SME Service
Centers. Currently we are 59 SME Service Centers and 429 Unit Offices strong.

Your Bank is continuously expanding its business to reach the doorstep of our valued
clients. Despite the worldwide economic turmoil, your Bank did well amid both favorable
and unfavorable conditions. In 2009 we expended our network across the country. During
the year we opened 13 branches, 57 ATMs. Now we have 69 branches, 179 ATM booths,
30 Cash Deposit Machines, 1558 POS terminals, 19 Utility Services Bill Payment Booths
and also 1900 Remittance Delivery Points. The grand total of our customer touch points
is 3,814 serving a total of 878,837 customers. This, I believe is perhaps one of the highest
amongst the private sector banks, which has been achieved in a short period of less than
nine years that the Bank has been in existence.

2009 was an exceptionally challenging year for the financial sector in Bangladesh. The
gap between national deposit and national investment was increasing in the last three
years. On one hand, low investment resulted in excess liquidity in the money market. On
the other hand, the Bank was under pressure to cut its interest rate and reduce the service
charges over the year. Despite the adverse situations, the performance of your Bank was
remarkable.

Last year your Bank earned BDT. 1303.58 million net profit which is 34% higher from
the previous year. Our Net Assets Value (NAV) stood BDT 371.55. In 2008 it was BDT
311.71. In 2009 our Earnings Per Share (EPS) stood at BDT 60.98. Last year it was BDT
45.00 which means this year’s EPS is 36% higher from the previous year. Our Bank’s
operating profit is BDT 3,717.58 million, Growth rate is 17%. Our total assets stand at
BDT 94,581 million which is 31% higher from the previous year. We trust that your
Bank will scale new heights in years to come by continuously improving customer
services.

Apart from commercial banking last year your Bank entered into the equity market. We
have acquired 51% Shares of Equity Partners Securities Limited. Now these two
companies are running their business under the names of BRAC EPL Investments
Limited and BRAC EPL Stock Brokerage Limited respectively. We want to become a
financial institution where we can offer the entire gamut of financial services to our
customers. This will ensure access of the people in the lower income bracket to the
country’s vibrant capital market and also ensure that they do so in a prudent and
profitable manner. Your Bank wants to take a strong position in the capital market
through investment in this market.

We are pleased to inform you that your bank always thinks beyond the banking
boundaries which contain an un-tapped potential. Accordingly, this year we are in the
process to form a subsidiary company to work as a Payment System Operator (PSO) and
Payment Service Provider (PSP) as per the Bangladesh Payment and Settlement System

41
Regulations, 2009 where BRAC Bank Limited will hold 51% share and the partner
Money in Motion (MIM) will hold the remaining 49% Share Money in Motion is a USA
registered limited liability company, The president of MIM is Iqbal Quadir who is a
professor at Massachusetts Institute of Technology (MIT), a visionary entrepreneur and a
leading advocate for the application of mobile phones in addressing many of the
challenges faced by low-income countries. MIM is in the business of developing banking
services fro the un-banked, utilizing new information and communication technologies,
electronic platforms, including mobile phones. We believe, this joint venture company
will soon become an important part of BRAC Bank’s service delivery channel, thereby
enabling us to tap into huge new customer base by providing then with eCommerce and
Mobile Banking related services.

We have also invested in another potential company named Dun & Bradstreet Rating
agency Bangladesh limited. The Dun & Bradstreet Corporation is headquartered in New
Jersey, USA. It is a provider of credit information on businesses and corporations. The
company is best known for its D-U-N-S (Data Universal Numbering System) identifiers
assigned to over 150 million global companies. Dun & Bradstreet Rating Agency
Bangladesh limited is a joint venture company set up with equity participation from some
of the major Banks and financial institutions of Bangladesh and Dun & Bradstreet Middle
East South Asia. The proposed company aims to provide credit rating for the small and
medium enterprises of the country, thereby hoping to have a positive impact on the
development of SME sector.

We informed you last year that to expand our business as well as to meet relevant capital
adequacy requirements, we were going to issue Subordinated Convertible Bond as Tier-II
capital. We are pleased to inform you that we have already submitted the application to
the Securities and Exchange Commission for approval. The bond size is BDT 3.00 billion
where proposed pre-placement and public offering ratio is 90:10 respectively.

BRAC Bank Limited is continuously updating its technology platform to enhance its
services. Our investments in technology have enabled us to expand the market base to
grass-roots level. Combining technology and skilled manpower is helping us to reach out
to every section of customers. We would not confine ourselves as a traditional bank. Last
year, the Bank made significant investment in a new data center. This is part of the
Bank’s strategy to ensure that all customers’ transactions are handled efficiently in a
secure environment.

Your Bank is fully committed to develop the human resources as the crucial part for
Company’s development. Human resources are important to gain a competitive edge over
competition together with product expansion. Throughout the year we have conducted
well planned training programmes with experts of the respective fields of the banking
business. In the year 2009 a total of 8644 people were provided a total of 177,142 hours
of training; on an average, each participant has received 57 hours of formal training. We
are happy to inform you that the entire staff of your Bank is linked with the IT system,
thereby enabling us to introduce e-learning modules for the members of staff to help them
train themselves. HR department would continue to monitor and deliver upon training

42
and development needs of our staff over the years. Development of skilled human
resources is a core objective of the Bank.

As per Bangladesh Bank guidelines, to implement Basel-II BRAC Bank shall have to
fulfill the required Paid Up Capital and Reserved Fund of Taka 400 crore within August
11, 2011 and the Paid Up Capital will be not less than Taka 200 crore and BRAC Bank
shall also require to maintain a minimum Capital Adequacy Ratio (CAR) of at least 10%
of Risk Weighted Assets (RWA) with Core Capital (Tier-1) not less than 5% of RWA.
Whereas we have 607 Crore Paid Up and Reserved Fund and also maintain 12.69% of
Risk Weighted Assets (RWA). In Tier-1 we have 10.26% Risk Weighted Assets and
Tier-II 2.42%. As our Tier-II capital is not sufficient against our future business growth
projection, we are going to issue Subordinated Convertible bond for raising fund.

From this year, your Bank has a dedicated team for developing the Service Quality. The
team is dedicated to promote and implement service at a global standard on all levels. We
see our customers as our guests. A service quality structure has been implemented
throughout the organization. BRAC Bank Limited has taken many initiatives to reaffirm
their commitment to service quality and customer satisfaction. “Joy of Banking” has been
the initiative to make banking a joyful experience for both our guests and our personnel.
We have promoted the same through our campaigns that reiterated our commitment to
service quality. We are happy to report that ‘mystery shopping surveys’ carried out
independently by reputed market-survey company have revealed a marked improvement
in our service quality standards.

In recognition of our outstanding contribution in the banking sector of Bangladesh, last

year BRAC Bank Limited received the prestigious 9th DHL-Daily Star Best Business
Award in the “Best Financial Institution” category. We have also received “Certificate of
Merit” from the Institute of Chartered Accountants of Bangladesh for the 9th ICAB
National Awards for best Published Accounts and Reports 2008.

In line with our Triple-Bottom-Line approach, your Bank undertook various CSR
activities last year. These activities spanned from health-care to supporting the cultural
heritage of the country to supporting education-growth. As a bank committed to
sustainable business, BRAC Bank has become a prestigious member of the Global
Alliance for Banking on Values (GABV)-the only bank from South-Asia to be part of this
international coalition. Global Alliance for banking on Values promotes ‘ethical
banking’. It is part of a larger societal movement toward more social and environmental
responsibility in the financial sector. This movement includes ethical investment, socially
responsible investment, corporate social responsibility, and is also related to such
movements as the fair trade movement, ethical consumerism, boycotting, etc. Ethical
banks share a common set of principles, the most prominent being transparency and
social and/or environmental aim of the projects they finance, Our annual report itself-as
you can see-reinforces our care for the environment. Every small step will make this
world greener by at least on more leaf: your bank seeks your continued support on this
journey.

43
We strongly believe that 2010 will be another good year for BRAC Bank Limited. By
adopting and implementing the most modern technology as well as having a dedicated &
skilled management, we will be able to bring sustainable growth with improved asset
quality that will maximize value for all the stakeholders.

I thank all my colleagues on the Board of Directors for their consistent guidance, support
and leadership. The management and staff of BRAC Bank Limited deserve a heartfelt
appreciation for their fervent dedication and hard work.

I am also grateful to all the regulatory boodles like the Bangladesh Bank, the Securities
and Exchange Commission, the Registrar of Joint Stock Companies and Firms, Dhaka
Stock Exchange and Chittagong Stock Exchange Limited, Central Depository
Bangladesh Ltd. for all their support.

Finally, I thank you all once again for placing you trust in us. I am confident, with your
support and cooperation, we will continue to strive to uphold the placed in us by all our
stakeholders.

Mr. Muhammad A. (Rumee) Ali

Chairman

Corporate Vision
Building profitable and socially responsible financial institution focused on Market and
Business with Growth potential, thereby assisting BRAC and stakeholders to build a just,
enlightened, healthy democratic and poverty free Bangladesh”.
Corporate Mission
Core
Sustained
Valuesgrowth in Small & Medium Enterprise sector

Continuous low-cost depsit Growth with controlled growth in retail assets.

Corporate Assets to be funded through self-liability mobilization. Growth in Assets through

syndications and investment in faster growing sectors.

Continuous endeavor to increase non-funded income

Keep our debt charges at 2% to maintain a steady profitable growth

Achieve efficient synergies between the bank’s branches, SME unit offices and BRAC field
offices for delivery of remittance and Bank’s other products and services

Manage various lines of business in a full controlled environment with no compromise on

service quality

Keep a divers, far flung team fully controlled environment with no compromise on service
quality

Keep a diverse, far flung team fully motivated and driven towards materializing the bank’s
44
vision into reality
Our Strength emanates from our owner - BRAC. This means, we will hold the following
values and will be guided by BRAC as we do our work.

45
Value the fact that one is a member of the BRAC family

Creating an honest, open and enabling environment

Have a strong customer focus and build relationships based on integraty, superior service and
mutual benefit

Strive for profit & sound growth

Work as team to serve the best interest of our owners

Relentless in pursuit of business innovation and improvement

Value and respect people and make decisions based on merit

Base recognition and reward on performance

Responsible, trustworthy and law-abiding in all that we do.

Mr. Syed Mahbubur Rahman

Managing Director & CEO

Mr. Mohammad Mr. Rais Uddin Ahmad Mr. Nabil Mustafizur

46
 Mamdudur Company Secretary & Rahman
Rashid Head of Legal, Regulatory & Chief Credit Officer
Deputy Managing Internal Control
Director

Mr. Syed Faridul Ms. Tahniyat Ahmed Mr. Firoz Ahmed Khan Mr. Mohammed
Islam Karim Head of Retail Banking Rahmat Pasha
Head of SME Head of Human Resources Head of Treasury
Banking Division & Financial Institutions

Mr. Khwaja Mr. Shah Alam Bhuiyan Mr. Md. Sarwar Ahmed Mr. Zeeshan Kingshuk
Shahriar Head of Operations Head of IAM – SME & Huq
Head of Cash & Acting Head of Retail Banking Head of Corporate Affairs
Management Operational
Custodial Services Risk Management
Probashi Banking

SME Banking
BRAC Bank, being the youngest bank, took a step to break away from usual tradition and
tapped into the true suburb entrepreneurial initiatives.
Today, with over 10,000 crores of loans disbursed till date, BRAC Bank is country’s
largest SME financier that has made more than 265,000 dreams come true!

SME Banking

47
 Deposit Products
Prapti Current Account
Loan Products
Anonno Rin
Apurbo Rin
Aroggo Rin
"Prapti Current Account" an interest bearing
Digoon Rin current account. This account ensures the profitable
Prothoma Rin and easy transaction facilities for Businesses.
Eligibility
Durjoy
Any institution can open this account in the name of the Institution
Trade Plus
Opening balance only BDT. 5,000 only.
Business Equity Loan Features
Interest
Proshar Rin bearing current account

Bizness
Up toLoan
4% interest on daily balance
Suppliers
FREEFinance
Smart ATM Card with BDT-100,000 withdrawn facility (per day) from ATM & BDT- 300,000
from POS

No upfront relationship fees

No inter-city or intra-city online transaction charges

No Relationship fee will be charged if half yearly average is BDT 25,000, along with free cheque
book.

Anonno is a term loan for small scaled business

Product Type
Equated Monthly Installment & Single Installment
Loan Ceiling
BDT 3 lac to below 10 lac
Tenure
EMI-12 to 36 months Single Installment- 3 to 9 months
Loan amount
Required loan amount + up front installment(if any)+ all fees and charges with applicable VAT
Interest Rate
17.8% for New Loan
17.25% for 1st time repeat (if applicable)
17.00% for 2nd time repeat & so on (if applicable)
Loan processing Fees
2.5% of base loan amount+ VAT
Security

48