_{Bijon is CEO of LightCastle Partners and works closely with development partners, corporates, startups and small businesses to create inclusive economic growth.}

Access to affordable capital has consistently been cited as one of the top three challenges by over 2,500 micro and small business entrepreneurs I have met in Bangladesh in the past decade.  For a country that has 60 banks, 35 non-bank financial institutions (NBFIs), and 760 microfinance organizations (MFIs)—this is unfortunate. So, where does this gap originate? 

The issue is often attributed to the high operating costs associated with the physical branch networks that MFIs must maintain to disburse, monitor, and collect loans. Additionally, there is a lack of appropriate product development, with short-term loans structured for monthly repayments that often do not align with the cash flow cycles of small businesses. Moreover, the absence of a comprehensive credit bureau—one that includes small business profiles and draws data from diverse sources—further exacerbates the problem.

This is where innovation in technology and financial instruments can play a pivotal role:

• Data to Credit Bridge: Technology enables us to capture and process data at unprecedented volumes and speeds. However, this requires three key elements: 
  
  a) Digitizing data at scale, starting from microfinance to payments. 
  b) A framework for data and the willingness to share it among MFIs, banks, NBFIs, and other potential data sources like Telcos. 
  c) Interoperability across platforms. 
  
  Imagine the possibilities if these elements were in place. A borrower who has taken a loan from MFI A could grant permission for that data to be automatically shared with Bank B, which could then access that information, along with data from other sources, to underwrite a new loan.  With the right algorithms, the system could generate personalized product recommendations and also serve as a marketing funnel, given other aspects of the user journey and transactions are digitized.

• Blended Financial Instruments: This technological solution is only effective if the financial instruments available to small businesses are appropriately designed.  For example, micro-entrepreneurs in agriculture often take microfinance loans to purchase livestock or agricultural inputs. However, these loans typically require immediate monthly repayments, even though the entrepreneurs may only reach liquidity at the end of the harvest period or after selling the livestock at the end of the season.  This maturity mismatch complicates product uptake. Moreover, small entrepreneurs often require additional support and value-added services, such as management guidance and access to markets. 
  
  A blended finance pool comprising various investors and financial instruments could provide considerable value. By ensuring transparency and allocating grants, equity, convertible notes, and debt according to the cost-income profile of the business at different stages, small enterprises can be supported in their journey toward becoming larger businesses.

• Safe Space to Experiment: These innovations will only be effective if regulations are simplified and adequate sandboxes are created to allow quick product launches and experimentation. For example, the establishment of a credit bureau that collects data from multiple sources and grants access to various financial institutions, or the development of frameworks that incentivize data sharing while protecting individual privacy, would likely require public-private partnerships. Enabling these innovations to flourish and ensuring a fair playing field for fintech companies will be crucial.

Technology has the potential to lower distribution and operating costs, thereby allowing micro and small businesses to access credit at affordable rates. However, the right infrastructure must be in place, and we must ensure that everyone has a fair opportunity to participate in this new ecosystem.