Bangladesh Bank Set to Create BDT 500Cr Fund For Startups and New Entrepreneurs

On Monday this week, Bangladesh Bank announced a BDT 500 crore startup fund to finance startups in the country. The decision was made in a meeting of the board of directors of the central bank, with the Bangladesh Bank Governor Fazle Kabir in the chair, and came at a time when a lot has been happening in Dhaka’s startup scene. 

The Government has taken several initiatives to support the nascent startup ecosystem in the country. This new refinancing scheme from the Bangladesh Bank adds to a growing support program for startups. 

Details: Entrepreneurs aged between 21 to 45 will be able to borrow up to BDT 10 million with 4% interest from the fund. 

• The term of the loan is 5 years and installments can be repaid every three or six months. 
• The maximum grace period for the loan will be one year.
• Women entrepreneurs: 10% of the fund will be allocated to women entrepreneurs.
• The fund will be constituted in the form of a refinance scheme — banks will first disburse loans to clients and the central bank will later reimburse the fund to banks. The scheduled banks will set up their own startup funds with 1% of their profit for the next 5 years. This will result in the formation of two funds: one is by the central bank and another is their own funds of scheduled banks. The model is similar to several refinancing schemes the Bangladesh Bank created in the past. 
• For 2021, the scheduled banks will be able to provide loans from both of the funds. Banks will have to create a separate policy for their own funds approved by the board of directors of the banks.

Definition of startup and other requirements: The definition of a startup, according to the policy, is the innovation and advancement of new products, services, technologies, and processes for the purpose of marketing. The ideas must be unique and creative. 

• The applicants must have a certificate of training on entrepreneurship from any government or appropriate institutions.
• The entrepreneurs must have to have the practical knowledge, experience and ability to manage new business. 

Non-disclosure agreement: If an entrepreneur shares his business idea with a bank to get a loan, the bank will be prohibited to disclose the idea regardless of whether they finance the business or not. 

Installments: The banks will have to disburse the loans in at latest 3 installments. 

Personal Guarantor: An entrepreneur can only borrow a loan from a bank for one project and a personal guarantor will be required. However, there can not be more than two guarantors.

NPL: If an entrepreneur fails to repay the loan, it will be classified under the existing policy, where banks have to keep 5% provision against classified loans, 20% against dubious loans, and 30% against bad loans.

Why this matters: Several scheduled banks have been testing waters in startup funding. But the nature of startup funding and the requirements for traditional bank loans often make it an incompatible match. Consequently, it did not produce any meaningful results. 

The new scheme from the Bangladesh Bank means startups can now access an alternative funding source that is flexible and comes without equity commitment. Done right, this will help improve the overall funding environment in Dhaka’s startup scene. 

Ruhul Kader contributed to this story.