SMEs have the Lowest Loan Default Rate: A Deep Dive into the NBFI IPDC

IPDC Finance is one of the key NBFIs behind the financing of various industries in Bangladesh. It has played a pivotal role in the establishment of many noteworthy institutions, such as Apollo Hospital and Westin.
We talked with Mominul Islam, former MD and CEO of IPDC Finance, who served from 2012 to January 2024. He told us that IPDC finance has had an impact in two sectors, namely small and medium enterprise financing (SMEs) and housing loans. “SMEs don’t have tangible assets and digital recordkeeping. Hence, they couldn’t get loans due to a lack of collateral.” The solution came via supply chain financing. When the SMEs sold items to large manufacturers or corporations, they’d record the transactions digitally, which would help in loan underwriting.

“One of our key initiatives was creating a blockchain in supply chain finance, which not only had the financing functionality but also had the entire supply chain management embedded into the system.” stating that it keeps track of both the finance and the supply chain management and that people receive, for example, within half an hour of a request, the fund gets credited to their account. “We have a wing called IPDC Dana that helps in microretailer financing with the help of British American Tobacco, Uniliever, and Syngenta ”. Adding that “we have over 100,000 retailers onboarded on our digital platform,” IPDC now has a 50% market share of the local factoring business. But according to the IFC, only 2-2.5% of the market has been effectively utilized. Necessary regulations similar to the ones in India would help grow this sector.”
Further adding that the issue of getting trade licenses is hard for SMEs, stressing that it should be free and efficient for SMEs.
He said that IPDC Finance is working outside Dhaka and Chittagong to finance homes, giving loans running 5–15 lakhs to people needing affordable housing (shopkeepers, 3rd–4th grade government employees). He added that “we’ve collaborated with HDFC India and have sent people there to be trained.” Our neighbor India has a booming metropolitan finance sector, but before IPDC,no one started it.
Bangladesh has an untapped market for socially beneficial financing. And he has talked about the integration of youth and women in IPDC. Stating that magenta was chosen as the color due to the corporate culture of “Ucchash,”
Bangladesh is currently not doing the best economically, with FOREX reserves plummeting to $16 billion. IPDC’s primary wing was financing corporations,which should’ve taken a turn due to the economic slowdown. Of course, Mr. Mominul isn’t worried about that. “Currently, about 40% of IPDC’s portfolio is in corporate finance, with the rest being in SMEs and housing. When I joined, 100% of it was in corporate finance.” He added that the current macroclimate is going through a downturn for corporations and for SMEs. Stating that policy timing and implementations were often mismatched, mainly due to post-COVID geopolitical situations. “We are going through a global geopolitical issue where countries are focusing domestically. The global issue of technological disruptions, COVID, has put pressure on us.”
Unfortunately, this means that policymakers won’t be able to 100% mitigate the shocks, but they can help alleviate the situation, he added. Of course, combative measures against rising interest rates will redirect funds to productive sectors.
IPDC’s roots were in the DEG of Germany and the IFC of the World Bank group. “In the 80s, we had two financial institutions, Bangladesh Shilpa Bank and Bangladesh Reen Shangstha, which weren’t helpful corporate finance-wise. “The Aga Khan Fund for International Development, the Commonwealth Fund of the UK, and the Bangladeshi Government played a pivotal role in industrialization,” he said. “They helped not only in terms of finance but also in terms of key machinery supplies and local industries.”.
He also emphasized the role of these organizations in the development of corporate finance at the rudimentary levels and their roles in the development of IDLC. The Korean leasing company and bank too.
IPDC is also a bank that has a green banking segment. However,the current global trend has taken a downturn for ESG and, in turn, green investing, with the market falling from $35 trillion in 2020 to $30 trillion in 2023. “Bangladesh Bank has mandates in terms of what portion of investment has to be in ESG financing. While we aren’t really reliant on external funding, some organizations like JICA and ADB”. He emphasized the need for public-private cooperation to work on climate finance but stressed that there must be some catalytic input from policymakers, without which the private sector won’t be motivated to go forward with this.
Mr. Mominul Islam, of course, is a six-sigma lean trained in the UK. “I had it when I was working at American Express. It is an advanced process methodology for data-driven interventions to solve customers’ problems.” He talked about completing projects for American Express both in Bangladesh and globally and how that shaped his way of problem solving. “It has a huge application for process streamlining.” He added that it has had an impact on not just the functions but also the working culture of IPDC. And the IPDC has grown 14 times since his tenure.
IPDC’s core business is still financing. Bangladesh has the second-highest loan default rate in Southeast Asia, at 11.76%. Mr. Mominul stated that the legal framework doesn’t punish the defaulters,perpetuating the behavior. Fortunately, IPDC is currently at a default rate of 5% (it was 3% pre-COVID), or 37%, or 15%. “We made sure that IPDC doesn’t make the same mistake twice,and we have appropriate risk management for the products and segments that we’re trying to finance.” He stated that the two segments that IPDC focuses on have had the lowest NPL, including during times of COVID. “Supply chain financing had a zero default rate.”
IPDC is still the second-largest financial company in Bangladesh by market valuation but has lost 24% of its share price since its peak of 76.2 taka in mid-2022. Mr. Monin stated that the major shareholders of IPDC, the Bangladesh government, and BRAC aren’t worried about short-term share price dips and want proper socioeconomic growth while still maintaining profitability. “IPDC’s share price going up is a byproduct of our management.”
Bangladesh has the challenge of a 12% unemployment rate (according to BBS, with other sources mentioning 60%), while not having a skilled labor force remains an issue. “Attracting, retaining, and developing skilled human resources remains the single biggest issue at IPDC, Mr. Mominul remarked. He emphasized that the education system lacks an emphasis on problem-solving skills or working as a team. “Most textbooks have case studies from the US, and students are unaware of local issues,” emphasizing the importance of self-learning,critical thinking, and industry-academia collaboration during the 4th Industrial Revolution. “We need to develop good human resources for proper utilization of the hospitality industry.”
Bangladesh has unfortunately been lagging behind in the startup sector, having only two unicorns (startups valued at over 1 billion USD) in contrast with India, which has 112. He said that the primary reason behind the global rise in startups was low interest rates. “We’ve had historically low interest rates over the last four decades. Bangladeshi startups have often blindly copied ideas from abroad and suffer from the problem of a lack of preparation. The education system has been inadequate in terms of preparing entrepreneurs right after graduation. He recommended a few years of corporate experience before starting a startup to learn the necessary technical,critical reasoning, and teamwork skills,further adding that the global euphoria is dying down for startups and that when the ecosystem gets better, institutions like IPDC will be willing to extend help.
Bangladesh is no newcomer to the overreliance on the RMG sector, with it contributing to 70% of total exports,and unfortunately, demand is slowing. Mr. Mominul had a few insights in terms of diversification. “The first thing is agroprocessing for food security. The other is technology.” He also talked about potential sectors that need developing, mainly the blue economy (resources extracted from the sea) and sending more skilled labor abroad for remittance: “We can earn the same amount if we send 1/10th of the current remittance earners if they were caregivers.” Emphasizing the proper accountability for abuse and other issues.
“I’m very confident in the leadership team that’s coming up. Resisting the short term and focusing on the long-term potential of the market is key.”