Banks should team up with venture capital firms to fund startups

As tech startups in Bangladesh are deprived of bank loans, the financial sector should team up with venture capital firms to finance such companies, experts said yesterday.

Startups often take longer to provide returns, with many initially running on a loss due to rapid expansion and growth.

As a result, they cannot get loans from banks, said Shameem Ahsan, chairman of the Venture Capital and Private Equity Association of Bangladesh (VCPEAB).

Even Bangladesh Bank's initiative for startup funding through banks has not been successful, he added.

In 2021, the central bank issued a circular ordering all commercial banks to set aside 1 percent of their operating profit for startup funding. Later, the central bank said banks would have to set aside 1 percent of their net profits until 2026 to provide funds for startups.

However, industry people said they have not had any access to such finance.

"Banks are supposed to invest 1 percent of their operating profit in startups. However, as per our estimate, they have not invested even 2 percent of the amount they were supposed to so far," Ahsan claimed.

"Venture capital firms have the expertise to handle such funds. So, banks can disburse loans to startups through venture capital firms with flexible conditions for high returns in the long term," added Ahsan, who is also a former president of the Bangladesh Association of Software and Information Services (BASIS).

He was speaking at a policy dialogue, titled "Investment Climate for Smart Bangladesh", organised by the VCPEAB at Sheraton Dhaka.

Fahim Mashroor, another former president of BASIS, said one of the biggest challenges local small-and medium-sized tech firms face is that no bank wants to give them loans.

"Banks do not want to take any risk based on intangible assets like software as collateral. As a result, entrepreneurs need to source investments from their own funds. Around two-thirds of the profit of the companies is reinvested," he added.

Mashroor also said that if the government discontinues tax exemptions and begins to tax profits, investment in the IT business would be reduced and the sector's growth would stall.

"Every year, over 100,000 people are trained in IT from universities and government training programmes. If industry growth suffers, there will be a huge issue in absorbing this pool of trained graduates in the coming months and years," he added.

The income tax exemption period for the software and information technology services sector is set to expire next month.

Ahsan said decreased profitability and reinvestment of profits leads to lower valuations for startups.

This can potentially trigger the exit of foreign investors as well as discourage new foreign investment, which may result in further erosion of US dollar reserves.

He added that a higher tax burden on startups and technology companies would raise the cost of their services.

Salman F Rahman, the prime minister's private industry and investment adviser, said he planned to discuss the continuation of tax exemptions for the IT sector with the prime minister.

Instead of considering the withdrawal of the tax exemption, Rahman said they should explore options to provide additional incentives.

Zunaid Ahmed Palak, state minister for posts and telecommunications, also spoke at the event.