𝐑𝐞𝐭𝐡𝐢𝐧𝐤𝐢𝐧𝐠 𝐂𝐨𝐥𝐥𝐚𝐭𝐞𝐫𝐚𝐥-𝐁𝐚𝐬𝐞𝐝 𝐋𝐞𝐧𝐝𝐢𝐧𝐠 𝐭𝐨 𝐄𝐦𝐩𝐨𝐰𝐞𝐫 𝐁𝐡𝐮𝐭𝐚𝐧’𝐬 𝐄𝐧𝐭𝐫𝐞𝐩𝐫𝐞𝐧𝐞𝐮𝐫𝐬

…𝒂𝒍𝒕𝒆𝒓𝒏𝒂𝒕𝒊𝒗𝒆 𝒇𝒊𝒏𝒂𝒏𝒄𝒊𝒏𝒈 𝒎𝒆𝒕𝒉𝒐𝒅𝒔 𝒎𝒂𝒚 𝒑𝒂𝒗𝒆 𝒕𝒉𝒆 𝒘𝒂𝒚 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒄𝒍𝒖𝒔𝒊𝒗𝒆 𝒆𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝒈𝒓𝒐𝒘𝒕𝒉

By Tashi Tshewang

Small and Medium Enterprises (SMEs) are widely recognized as vital drivers of economic diversification and employment generation in Bhutan. Despite their potential, SMEs face significant challenges in accessing formal credit, primarily due to the banking sector’s stringent collateral requirements. Banks typically demand fixed, tangible assets such as land or property as security for loans. This practice disproportionately affects emerging entrepreneurs- particularly youth and startups- who may possess innovative business ideas but lack substantial physical assets.

In the absence of fixed assets, many young entrepreneurs with promising ventures find themselves at a dead-end, unable to translate their ideas into reality. Consequently, many viable businesses remain unrealized, hindering the growth and dynamism of Bhutan’s economy.

The reliance on collateral-based lending practices has created a financing environment where only families with considerable assets are favorably positioned to secure loans. This model is particularly disadvantageous for SMEs operating in sectors like technology, services, and modern agriculture, where intangible assets and innovative concepts are the primary capital. Moreover, the procedural complexities and bureaucratic hurdles associated with loan applications further exacerbate the issue, discouraging potential entrepreneurs from pursuing financial assistance.

Recognizing these challenges, initiatives such as the National Credit Guarantee Scheme (NCGS) have been introduced to improve access to finance for underserved segments. The NCGS aims to provide collateral-free loans to startups and SMEs, fostering a more inclusive financial ecosystem. However, the effectiveness of such programs hinges on their implementation and the willingness of financial institutions to adopt more flexible lending practices.

For Bhutan to realize its vision of a diversified and resilient economy, it is imperative to reform existing financial frameworks. This includes adopting more inclusive lending models that recognize the value of intangible assets, simplifying loan application processes, and nurturing a culture of innovation and entrepreneurship. By doing so, Bhutan can unlock the full potential of its private sector, driving sustainable economic growth and development.

A shopkeeper in Thimphu shared, “I remember the day I walked into the bank, filled with hope and determination. I had a clear plan for my pan shop, a detailed budget, and the drive to make it succeed. But the loan officer barely glanced at my documents before asking, ‘Do you have any property to offer as collateral?’ When I said no, his demeanor changed. He told me, ‘Without assets, we can’t process your loan.’ I felt crushed. It was as if my dreams didn’t matter because I didn’t own land or a house.”

This highlights a systemic issue in Bhutan’s financial sector, where traditional banking practices heavily rely on tangible assets as collateral. Such requirements often exclude aspiring entrepreneurs who lack substantial property, thereby stifling innovation and economic diversification.

Ugyen Choedra, a student at Murdoch University, shared, “I was really interested in starting a shoe business and discussed it with my father. He encouraged me to get a loan if possible. The bank appreciated my business idea, but obtaining a loan wasn’t easy. The repayment schedule made me feel I might not be able to pay on time, so I decided not to take the risk. People often say that taking risks leads to success, but without a financial background, such risks can have serious consequences. I realized that to start my business, I needed assets or sufficient funds. This realization led me to pursue further studies abroad, where I could enhance my education and earn money to support my business ambitions.”

Such experiences reflect the challenges young entrepreneurs in Bhutan face. Despite having viable business ideas, the lack of financial backing and rigid loan structures deter many from pursuing their entrepreneurial dreams.
Tulasi Maya Mongar, a grocery owner, recounted, “Starting my grocery shop was a significant challenge. Initially, securing a loan seemed impossible due to the lack of substantial assets. Despite these obstacles, I managed to establish my business independently, relying on personal savings and determination.”

This is a common issue for aspiring entrepreneurs in Bhutan, where limited access to formal financing forces individuals to depend on personal resources, often insufficient for business expansion.

She added, “As the shop began to grow and show potential, a microfinance institution recognized this progress and extended a loan, which greatly aided in expanding my operations.”

Such support from microfinance institutions is instrumental in fostering small businesses. By offering tailored financial products, these institutions can bridge the gap for entrepreneurs who lack traditional collateral, promoting economic development at the grassroots level.

Karma Dorji, a villager from Mongar, shared, “I have always dreamed of starting a small organic farm in my village. When I heard about the government’s Economic Stimulus Plan offering collateral-free loans at a 4% interest rate, I was thrilled. I began preparing my business plan and gathering the necessary documents to apply.”

The Economic Stimulus Plan (ESP) was introduced to invigorate Bhutan’s economy by providing accessible financing options. However, its implementation has faced challenges, particularly concerning eligibility criteria and bureaucratic processes.

He added, “However, when I approached the Bhutan Development Bank for additional funding, I was informed that to qualify for certain loans, I needed to have at least five acres of land as collateral. This requirement was disheartening, as I don’t own that much land. It felt like a significant barrier to realizing my dream. Later, during a community meeting, I learned about microfinance institutions. I was surprised to discover that these organizations offer collateral-free loans, specifically tailored for individuals like me who may not meet all the criteria set by traditional banks.”

While programs like the ESP aim to be inclusive, their execution often falls short, necessitating alternative solutions like microfinance to bridge the gap.

Microfinance institutions offer collateral-free loans tailored for individuals lacking traditional assets. These organizations aim to empower entrepreneurs by providing accessible financing options and fostering economic development in underserved communities.

For Bhutan to truly harness the potential of its private sector and drive economic diversification, it is imperative to move beyond traditional collateral-based lending. Embracing alternative financing models and reforming existing credit systems can pave the way for a more inclusive and vibrant entrepreneurial ecosystem.