Ex-ante Evaluation (for Japanese ODA Loan)
1.
Name of the ProjectCountry:
The People’s Republic of Bangladesh
Project:
Financial Sector Project for the Development of Small and Medium-sizedEnterprises (SMEs)
Loan Agreement: May 18, 2011
Loan Amount:
5 billion yen
Borrower:
The Government of the People’s Republic of Bangladesh
2.

Background and Necessity of the Project(1) Current State and Issues regarding the Development of SMEs and the Financial Sector inBangladesh
In recent years, Bangladesh has been maintaining a high rate of economic growth at 6%
annually and is expected to show steady growth in the future. After the economic crisis in2008, on the other hand, some decline and stagnation were seen in garment exports andremittances from overseas Bangladeshi workers that have been supporting the past economic
growth. In order to aim at steady growth, productivity improvements and the expansion ofincomes in the future, it will be necessary to diversify industries led by further enhancementof the manufacturing sector and expand domestic private investment.
The small and medium-sized enterprises (SMEs) in Bangladesh are said to generate 25% ofthe GDP on the basis of their added value and provide about 31 million jobs. They also
account for about 60% of the total output of the manufacturing industry, and their sounddevelopment is expected to play a greater role in economic growth and poverty reduction in
Bangladesh. On the other hand, such factors as the insufficient power supply, corruption,accessibility to land and finance, etc., are constraining investments in Bangladesh. In
particular, the access to land and financial services have been considered the most serious
constraints on SMEs.
In Bangladesh, financial services, in particular bank lending, has concentrated on large
enterprises over a certain scale, whereas financial services to micro and cottage enterprises
owned by the poor in many cases have been provided by microfinancing institutions, whichhave lately tended to increase in number and volume. However, SMEs that are positioned in
between those two (they are referred to as the “missing middle”) are subordinate in terms ofaccess to finance. The amount of funds allocated to them is low compared to theircontribution to the Bangladesh economy on a value added basis and, in particular, themedium- and long-term funds they require for facility investments have not been sufficientlyprovided. The factors inhibiting SMEs from borrowing from banks and financial institutions
include stringent collateral requirements that rely excessively on land, high levels of interest
rates, short lending periods, complicated loan procedures, etc.
In recognition of these issues, the Government of Bangladesh have taken a number ofmeasures, including the establishment of the Small and Medium-sized Enterprise Foundation(SMEF) in 2006, the expansion of financing scheme to promote fund supply (RefinanceScheme) via the central bank, the Bangladesh Bank (BB), by receiving donor support fromthe World Bank (WB) and the Asian Development Bank (ADB).

1(2) Development Policies for the Development of SMEs and the Financial Sector in
Bangladesh and the Priority of the Project
The development of SMEs has been raised as a primary issue for economic growth in thePoverty Reduction Strategy Paper (PRSP), which is positioned as a top priority in the national
development strategy, the National Strategy for Accelerated Poverty Reduction II, which wasrecently revised, and the Outline Perspective Plan (OPP) of Bangladesh 2010-2021: Making
Vision 2021 a Reality. Furthermore, a cabinet decision was made in September 2010 on therevised version of the Industrial Policy originally established in 2005, in which the need for aRefinance Scheme and other policy support for SMEs were pointed out. In addition to theexpansion of the Refinance Scheme as mentioned above, the BB, which had been assuming
the role of a supplier of funds, also created a department exclusively in charge of SMEs inDecember 2009 and announced a financing policy and program for SMEs in March 2010.
(3) Japan and JICA’s Policy and Operations for the Development of SMEs and the FinancialSector.
In the light of Japan’s Country Assistance Program for Bangladesh (May 2006), JICA has
positioned the development of SMEs and the financial sector in Bangladesh as a priority area
for the “private sector development” among development issues pertaining to “economicgrowth,” which is one of the priority sectors for aid.
JICA has not so far provided specialized support for the development of SMEs and thefinancial sector in Bangladesh. In the area of private sector development, however, studies ongrowth for export diversification, the dispatch of experts to the Board of Investment in
Bangladesh, and the Rural Development Credit Program for the Grameen Bank, etc., havebeen supported.
(4) Other Donors’ Activities
The following donors have mainly provided support for the development of SMEs in
Bangladesh and many other donors have participated in this support:• ADB and WB (IDA): Providing support credit rationing for local SMEs and female
entrepreneurs through the Refinance Scheme via the BB.
• International Finance Corporation (IFC) and UK Department for InternationalDevelopment (DFID): Providing support to build credit information systems for SMEs
within the BB.
• In addition to the above, European donors and the United States Agency for International
Development (USAID) have provided support to build a value chain for SMEs.
(5) Necessity of the Project
The Government of Bangladesh has positioned the development of SMEs as a priority sector
for the development of its industries. The role of SMEs is considered likely to expand further
in the future in order for the promotion of industrialization and exports led by themanufacturing sector of the country. On the other hand, the financial sector, mainly banks, iscurrently concentrated on lending for large enterprises and the short-term lending for working
capital needed for the commercial sector. In consequence, they have failed to meet thedemand for funds for the medium- and long-term facility investments of SMEs. Therefore, thesupply of medium- and long-term funds for SMEs has a significant role in terms of economic
growth and poverty reduction in Bangladesh. The Project is aimed at the improved access tofinance for SMEs in Bangladesh through financial support via a Two-Step Loan, and it is also
in line with the priority area specified in foreign aid policy of Japan and JICA. Thus, thenecessity and relevance of JICA’s assistance to this project are high.

2

3.

Project Description(1) Project Objectives
The objective of the Project is to improve the financial intermediation for, and the increase in
the production and investments of, SMEs in Bangladesh, by providing the medium- andlong-term funds through the participating financial institutions (PFIs) and strengthening thecapacity of PFIs, thereby contributing to sound development of the country’s industry andeconomy as well as employment generation.
(2) Project Site/Target Area: Throughout Bangladesh(3) Project Components
1) Loans for the development of SMEs: provision of medium- and long-term funds for
SMEs through PFIs.
2) Consulting services (support for the Project management and support for strengthening
the capacity of PFIs, etc.)(4) Estimated Project Cost (Loan Amount)
7,097 million yen (the amount of the yen loan is 5 billion yen)(5) Schedule
It is scheduled to take place between May 2011 and March 2016 (59 months in total). The
Project will be completed at the time of the final disbursement of the Two-Step Loan
(expected to be in March 2016)(6) Project Implementation Structure1) Borrower: The Government of the People’s Republic of Bangladesh
2) Executing Agency: Ministry of Finance. However, the BB will carry out the actual
implementation of the Project on commission from the Ministry of Finance.
(7) Environmental and Social Consideration / Poverty Reduction / Social Development
1) Environmental and Social Consideration:a) Categorization: FIb) Reasons for Categorization: The Project is classified as Category FI under the “JBIC
Guidelines for Environmental and Social Considerations (established in April 2002)”
since funding for the Project is provided though financial intermediaries, thesub-projects cannot be specified prior to JICA’s approval of the funding, and these
sub-projects are expected to have a potential impact on the environment.
c) Others / Monitoring: In the Project, the BB, which will actually implement theProject, and PFIs will confirm the environmental and social considerations inaccordance with the relevant domestic laws of Bangladesh and the above Guidelines,and actions required according to the relevant category will be taken for eachsub-project. No Category A sub-projects are expected to be implemented.
2) Promotion of Poverty Reduction: None.
3) Promotion of Social Development: Consulting services of the Project provide support
for training and promotional activities, etc., to promote financing to women
entrepreneurs.

3(8) Other Schemes and Collaboration with Other Donors: The need for technical knowledge
by the end users will be confirmed through the monitoring of the Two-Step Loan and thepossibility of technical assistance will be considered.
(9) Other Important Issues: None4.

Targeted Outcomes(1) Quantitative effects
1) Performance Indicators (Operation and Effect Indicators)
Indicator
Sales turnover of the benefited SMEs
(million Tk.)
Profit of the benefited SMEs
(million Tk.)
Total loan outstanding of the PFIs
to the SMEs
(million Tk.)
Ratio of SME lending in total loan
outstanding of the PFIs (%)

Data collected upon theapplication of sub-loans

Target (2018)[Expected level 2 years
after project completion]
Expansion from the baseline
figureSame as above

Same as above

Date collected upon the PFI
accreditation

Expansion from the baselinefigure

Same as above

Same as above

Baseline(Before sub-loan finance)

2) Internal Rate of Return: Not calculated(2) Qualitative Effects
Improvements in the capabilities of financial institutions to lend to SMEs, improvements inaccess to funds for SMEs, job creation and the development of the private sector
5.
External Factors and Risk Control
None6.
Lessons Learned from Past ProjectEx-post evaluations of past similar projects have noted that consideration should be given tothe definition of the eligible SMEs. In relation with this Project, the definition of SMEs has
been changed under the Industrial Policy approved by the Cabinet in September 2010, and it
has been confirmed that the Ministry of Finance, Ministry of Industries and the BB will
uniformly apply the definition adopted in the Industrial Policy (2010) in future government
policies and the BB plans to issue a circular in line with the definition.
Furthermore, the lesson has been learned from the ex-post evaluation of past similar projects
that, in cases where a plural number of intermediary agencies (financial institutions) are
involved in parallel in financial intermediary loans, it is effective to design the financing sothat each institution can handle the implementation flexibly in accordance with the demand
for funds and the scale of operations of each target end user, not restricting uniformly its
eligibility and loan conditions. Based on such lessons, flexibility in the terms and conditions
for lending, etc., will be assured in the Project.

47.

Plan for Future Evaluation(1) Indicators to be used
1) Sales turnover of the benefited SMEs (million Tk.)
2) Profit of the benefited SMEs (million Tk.)
3) Total loans outstanding of the PFIs to SMEs
4) Ratio of SME lending in total loan outstanding of the PFIs (%)(2) Timing: 2 years after project completion5