The World Bank is set to extend long-term low-cost loans to private sector firms, including those from garments, footwear and light engineering sectors, in a bid to brighten the country's stagnant investment scenario.

A $300 million fund is likely to be provided to Bangladesh, the approval for which is due from the multilateral lender's board in the first week of June.

The rate of interest on the loan would be LIBOR plus 3-4 percent and the credit would be given for five years.

The WB said the country is in want of long-term financing that is critical for investment and growth -- and the gap needs to be filled.

At present, there is a “significant demand” for long-term financing by eligible and bankable firms, the supply for which has not been matched by the market.

Market analysis and discussions with stakeholders indicated that one of the major impediments to expansion of long-term financing is the absence of supply of such financing.

For instance, last year, only 30-35 of the 6,000 such firms managed dollar-based long-term financing, the lender said.

While those firms were large in size, the multilateral lender is looking to reach out to mid-sized firms through the programme. Part of the problem at present is the absence of long-term deposit instruments in the financial institutions, which the project seeks to address through technical assistance to develop long-term deposit instruments and the pension market.

Information asymmetries and the banks' lack of capacity and risk aversion, which further exacerbates the limited supply of long-term finance, will also be tackled through the sector wide technical assistance.

The programme will require a total of $350 million and the government will contribute with $50 million.

Of the amount, $291 million will be used for supporting long-term financing for the private sector, $1.25 million for technical assistance such that the firms go on to develop as competitive institutions, $50 million for strengthening the financing market infrastructure, and $5 million for strengthening the capacity of the regulator. The proposed project is particularly looking to increase the long-term bank financing for the manufacturing sector, especially those involved in exports, and small and medium enterprises.

The programme is expected to have a positive impact on the overall growth of firms, economic growth, employment and poverty reduction. The long-term finance line will be channelled by the Bangladesh Bank.

The credit line will provide banks with access to longer-term resources for on-lending to firms. It will help firms access the term lending (expected average of five years) that is required for capital formation and technological upgrade, facilitating the growth, productivity and competitiveness of firms.