SMESPD Circular No. 02: Formation of Refinance Fund to Support Islamic Shariah-based Financing to Agro-based Industry, Small Enterprise (including Women Entrepreneurs) and New Entrepreneurs in Cottage, Micro and Small Enterprise Sector

Managing Director/Executive Director All Scheduled Islamic Banks and Financial Institutions of Bangladesh Head Office Dear Sir,

Regarding the formation of a refinance fund for Islamic Shariah-based financing in the sectors of 'Agro-based Industry', 'Small Enterprise (including Women Entrepreneurs)' and 'New Entrepreneurs in Cottage, Micro and Small Enterprise Sector'

To create employment in rural areas of the country and alleviate poverty, Bangladesh Bank has been providing refinancing facilities in eligible sectors to scheduled banks and financial institutions to promote balanced and organized industrial development through the establishment of agro-based industries, increasing financing in the small sector, and creating new entrepreneurs. With the aim of bringing dynamism to economic transactions and to increase the involvement of Islamic banks and financial institutions in financing, particularly in industrialization, agro-based product processing, the small enterprise sector, and new entrepreneurs, a refinance fund has been established at Bangladesh Bank through BRPD Circular No. 13 dated 18/09/2014 of the Banking Regulation and Policy Department. Under the aforementioned fund, refinancing facilities will be provided for financing in the sectors of 'Agro-based Industry', 'Small Enterprise (including Women Entrepreneurs)' and 'New Entrepreneurs in Cottage, Micro and Small Enterprise Sector'. Under the aforementioned fund, banks and financial institutions operating according to Islamic Shariah will be able to avail refinancing facilities for the following financing:

1. General Rules

1.1 Islamic Shariah-based banks and financial institutions interested in availing refinancing facilities must enter into a Participation Agreement (hereinafter referred to as 'Agreement') with the SME & Special Programs Department, Bangladesh Bank, Head Office.

1.2 Profit/Murabaha markup will be paid to participating institutions (hereinafter referred to as 'PIs') on the refinancing provided by them at the rate of the prevailing profit rate of the Mudaraba Savings Account of the respective participating institution or the prevailing bank rate, whichever is lower.

1.3 All participating institutions interested in availing refinancing facilities must duly fulfill the following criteria: (a) The classification-wise investment rate must be below 10%; (b) Must maintain capital adequacy at the rate prescribed by Bangladesh Bank; (c) Must duly follow the policy regarding the maximum limit of investment facility for a single customer or group (Single Borrower Limit); (d) Must ensure compliance with regulations regarding proper risk management and anti-money laundering (AML) and counter-terrorism financing (CFT).

1.4 All participating institutions must duly comply with the 'Guidelines for Islamic Banking Operations', 'Guidelines for Joint Islamic Banking', 'Guidelines for Islamic Joint Banking' and other applicable policies issued by Bangladesh Bank.

Page-2 SME & Special Programs Department Bangladesh Bank Head Office, Dhaka P.O. Box No. 325 SMESPD Circular No: 2 Date: 24 Ashwin 1421 9 October 2014

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1.5 The own rules and regulations, Shariah policy, and bank-customer relationship guidelines of the Islamic banks providing investment regarding investment recipient selection, investment approval, distribution, documentation, debt-equity ratio, Mudaraba, insurance against investment, proper use of investment, and supervision shall be determined. All liabilities for the recovery of distributed investments shall remain with the participating institution providing the investment.

1.6 Participating institutions may apply to Bangladesh Bank for fund assistance against approved investments on a monthly basis, along with copies of investment approval, customer's Mudaraba Agreement and other necessary documents. Applications for refinancing allocation must be submitted to Bangladesh Bank within 15 days after the end of each month. However, investments provided more than 60 days prior to the date of application for refinancing facility to Bangladesh Bank will not be considered for refinancing facility allocation.

1.7 Participating institutions interested in availing the aforementioned refinancing facilities must provide a Letter of Commitment (Letter of Undertaking) for each case prior to availing the refinancing facility.

1.8 The principal amount of the refinancing provided along with profit, according to the return schedule, shall be deducted from the current account of the respective participating institutions kept at the Motijheel Office of Bangladesh Bank on the prescribed date.

1.9 Participating institutions shall preserve and provide necessary information/details from time to time as required by Bangladesh Bank regarding the proper use of the amount taken for refinancing facilities.

1.10 If any participating institution avails refinancing facilities under the aforementioned fund by providing false information, the amount taken in such manner shall be recovered in a lump sum from the current account of the respective participating institution kept at the Motijheel Office of Bangladesh Bank, along with double the prevailing profit rate of the Mudaraba Savings Account.

1.11 The aforementioned refinancing facilities shall apply only to approved investments after the issuance of this circular.

1.12 Islamic banks and financial institutions interested in availing refinancing facilities under the aforementioned fund must collect the sample of the necessary agreement, letter of commitment, and application for fund assistance from the SME & Special Programs Department of Bangladesh Bank.

2. Criteria for Financing in Agro-based Industry

2.1 100% fund facility will be provided for investments made by participating institutions under this fund.

2.2 The agro-based industry unit must be located outside the divisional headquarters and Narayanganj city.

2.3 The value of the existing fixed assets (excluding land and building) of the agro-based industry unit before financing must be 10 crore Taka or less.

2.4 Fund facilities under this fund shall apply for working capital, medium-term, and long-term investments. The tenure for working capital investment shall be 1 year, for medium-term investment 3 years, and for long-term investment 5 years.

2.5 The profit rate taken for customer-oriented investments under this fund shall not exceed the sum of the prevailing bank rate and the average profit rate of the Mudaraba Savings Account.

2.6 Participating institutions under this fund shall be provided with quarterly refinancing, which shall be repayable along with profit on a quarterly basis during the investment period of the principal financing, subject to being current and non-classified, and the non-classified principal status of the investment shall be recoverable.

2.7. Grace Period: For accounting convenience, a grace period of 3 months or 6 months, calculated in multiples of 3, may be provided.

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2.8 Investments made in the sectors listed in Annexure 'A' of this circular under agro-based industry shall be considered for refinancing facilities under this fund. If this list is updated from time to time, the industries listed in the updated list shall be eligible for financing under this fund.

3. Criteria for Financing in Small Enterprise Sector

3.1 Cottage, micro, and small industrial enterprises in the industry, service, and business sectors shall be considered eligible for investment under this fund according to the definition mentioned in SMESPD Circular No. 1 issued on 19 June 2011 or as amended from time to time.

3.2 Participating institutions shall be provided with a maximum of 100% refinancing facility by Bangladesh Bank for investments ranging from a minimum of 10 thousand Taka to a maximum of 50 lakh Taka per case for their approved working capital and term investments.

3.3 Participating institutions shall impose market-based profit rate/Murabaha on investments at the rate of customer-oriented bank-customer relationship. However, participating institutions must continue to make efforts to keep the profit rate collected from customers at the lowest possible level in the investments provided under this refinancing fund, giving maximum importance to social welfare.

3.4 Refinancing facilities under this fund shall be provided with priority if the customer is a woman entrepreneur, and in this case, the profit rate/Murabaha on investment shall not exceed the sum of the prevailing bank rate and the average profit rate of the Mudaraba Savings Account.

3.5 Financing under this fund shall be available for 1-year term working capital, up to 3 years medium-term investment, and up to 5 years term long-term investment.

3.6 Participating institutions under this fund shall be provided with quarterly refinancing, which shall be repayable along with profit on a quarterly basis during the investment period of the principal financing, subject to being current and non-classified, and the non-classified principal status of the investment shall be recoverable.

3.7. Grace Period: For accounting convenience, a grace period of 3 months or 6 months, calculated in multiples of 3, may be provided.

3.8 This refinancing facility shall not apply to investments provided in the agriculture sector, consumer investments, and personal investments.

4. Criteria for Financing New Entrepreneurs in Cottage, Micro and Small Sector

4.1 Brief explanation of concepts: (a) New Entrepreneur: Under this fund, 'New Entrepreneur' refers to those entrepreneurs who were not involved in any other business program prior to the proposed enterprise and who have not received any institutional financing/investment in previous business work. (b) Government and Non-Government Entrepreneur Development Institutions: Government Entrepreneur Development Institutions refer to SME Foundation, Directorate of Youth Development, Directorate of Women Affairs, BSCIC, and similar institutions, and legally established training providers established by them. On the other hand, Non-Government Entrepreneur Development Institutions refer to those established by legal law and having involvement, expertise, and recognition in entrepreneur development and training programs. For example, Dhaka Chamber of Commerce & Industry (DCCI), Institute of Distinguished Engineers Bangladesh (IDEB), Bangladesh Women Chamber of Commerce & Industry (BWCCI), National Association of Small and Cottage Industries of Bangladesh (NASICON), or other similar institutions. (c) Recognition: Entrepreneur development institutions must obtain recognition (Approval) from the SME & Special Programs Department of Bangladesh Bank to avail refinancing facilities for new entrepreneurs selected and trained by them under this refinancing fund. However, this recognition (Approval) does not guarantee financing/investment for the financing/investment of new entrepreneurs selected and trained by them. Banks and financial institutions shall provide financing/investment based on their own financing/investment risk consideration according to prevailing rules and regulations under the bank-customer relationship.

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4.2 Criteria for Financing: (a) Cottage, micro, and small industrial enterprises in the industry and service sectors shall be considered eligible for refinancing according to the definition mentioned in SMESPC Circular No. 1 issued on 19/06/2011. However, it is ensured that the beneficiary new entrepreneur under this refinancing fund must possess the following qualifications: (1) Must have appropriate technical education and knowledge regarding the proposed enterprise; (2) The age of the entrepreneur must be restricted between 18 to 45 years at the time of submitting the investment proposal; (3) Must be fully engaged in the proposed business/enterprise; (4) The new entrepreneur submitting the investment proposal must have a certificate of successful training in entrepreneur development, business management, product or service marketing, etc., or other technical subjects (product production, processing, machinery repair, etc.) from any government or non-government entrepreneur development institution recognized by Bangladesh Bank; (5) If a new entrepreneur capable of fulfilling the criteria mentioned in (a) to (c) has not undergone training from a government or non-government entrepreneur development institution, the participating institution may provide financing/investment after verifying the investment risk of the entrepreneur through its own risk management strategy, which shall be eligible for refinancing under this fund.

(b) Participating institutions shall provide a maximum of 100% refinancing facility for current and term investments as follows: (1) Maximum 10 lakh Taka for investments without collateral support; (2) Maximum 25 lakh Taka for investments with collateral support.

(c) In the case of investments without collateral support, participating institutions may take personal guarantee (Personal Guarantee), third-party guarantee (Third-Party Guarantee), or social guarantee from the new entrepreneur.

(d) The new entrepreneur must bear a minimum of 20% of the total project cost.

(e) The profit rate taken for customer-oriented investments under this fund shall not exceed the sum of the prevailing bank rate and the average profit rate of the Mudaraba Savings Account.

(f) Participating institutions under this fund shall be provided with quarterly refinancing, which shall be repayable along with profit on a quarterly basis during the investment period of the principal financing, subject to being current and non-classified, and the non-classified principal status of the investment shall be recoverable.

(g) Grace Period: For accounting convenience, a grace period of 3 months or 6 months, calculated in multiples of 3, may be provided.

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4.3 Other Criteria: Investments provided for the following enterprises shall get priority in the allocation of refinancing: (a) Women entrepreneurs; (b) Innovative and creative enterprises; (c) ICT sector; (d) Import substitution enterprises; (e) Export-oriented enterprises; (f) Enterprises related to the education of entrepreneurs trained in technical education.

4.4 Responsibilities of Institutions Conducting Entrepreneur Development and Training: (a) Government and non-government institutions involved in entrepreneur development and training must apply for recognition (Approval) to the SME & Special Programs Department. The following documents and papers must be submitted with the application: (1) In the case of non-government institutions, registration of the institution and annual reports of the last 3 years; (2) Detailed description of the institution's entrepreneur development program; (3) Training module; (4) Description of the institution's expertise.

(b) Entrepreneur development institutions and organizations already selected and recognized in the context of SMESPD Circular No. 1 dated 26/06/2014 shall automatically be considered as recognized entrepreneur development institutions under this fund.

(c) Recognized entrepreneur development institutions and organizations must establish an online or other advisory service (Guidance Center).

(d) Recognized entrepreneur development institutions and organizations must make efforts to establish virtual or physical incubators for entrepreneurs.

(e) Recognized entrepreneur development institutions and organizations must conduct a close monitoring program for interested new entrepreneurs selected and trained by them as new entrepreneurs for 3 years after receiving investment. During this period, refresher courses must be organized at least semi-annually. Through this, the business progress of new entrepreneurs should be understood and necessary advice should be given regarding future course of action. Businesspeople established in such monitoring programs may be invited as mentors.

4.5 Incentives for Participating Institutions Availing Refinancing Facilities Reasonable expenses for non-financial services (training, marketing, advisory services, etc.) provided to new entrepreneurs by participating institutions availing refinancing under this fund may be considered as expenses under the 'Advisory Service Fee' (ASF) head. However, this expense shall not exceed 1% of the total investment in this head.

Please accept the assurances of our highest consideration.

Yours faithfully, (Md. Masum Patwary) General Manager Phone: 9530502

Annexure-'A' List of Agro-based Industries 01. Industries producing processed fruit foods (jam, jelly, juice, pickle, sherbet, syrup, sauce, etc.); 02. Processing of fruits (tomato, mango, pear, sugarcane, jackfruit, lychee, pineapple, coconut, etc.), vegetables, pulses; 03. Preparation of bread and biscuits, semolina, lacha, chanachur, noodles, etc.; 04. Preparation of flour, wheat flour, semolina; 05. Processing of mushrooms and spirulina; 06. Industries producing starch, glucose, dextrose, and other starch products; 07. Dairy processing (milk pasteurization, condensed milk, ice cream, condensed milk, sweets, paneer, ghee, butter, chocolate, curd, etc.); 08. Industries producing processed food from potatoes (chips, potato flakes, starch, etc.); 09. Industries producing various mixed spices; 10. Edible oil refining and hydrogenation industries; 11. Salt processing industry; 12. Processing and freezing of prawns and other fish; 13. Industries producing herbal and herbal cosmetics; 14. Industries producing Unani and Ayurvedic medicines; 15. Industries producing balanced feed for ducks, chickens, cattle, and fish; 16. Processing and preservation of seeds; 17. Preparation of jute products (e.g., rope, thread, jute, bags, carpet, jute sandals, etc.); 18. Industries producing silk garments; 19. Establishment of machinery supporting agricultural product production, repair, etc.; 20. Preparation of rice, paddy, broken rice, bran, etc.; 21. Fragrant rice; 22. Tea processing industry; 23. Industries producing coconut oil (if local coconut is used); 24. Processing of rubber tape, lac; 25. Cold storage (processing and preservation of food potatoes, seed potatoes, fruits, vegetables produced by farmers); 26. Making/production of furniture from wood, bamboo, and cane (excluding cottage industry); 27. Flower preservation and export organizations; 28. Meat processing organizations; 29. Making of organic fertilizer, mixed fertilizer, granular urea, etc.; 30. Making of bio-pesticides, neem-produced pesticides, etc.; 31. Projects for bee farming/honey production; 32. Projects for making rubber products; 33. Jute Corporation; 34. Industries producing mustard oil (if local mustard is used); 35. Projects for producing biogas and electricity from paddy husk, poultry and cow dung; 36. Industries producing edible oil from rice husk; 37. Poultry and dairy industries.