Major Problems Faced by Businesses in Rural and Urban Bangladesh

Major Problems Faced by Businesses in Rural and Urban Bangladesh by Ashek Ishtiak Haq The ease of doing business in Bangladesh is not getting easier. The country has taken a big 18 place drop in the recently published Doing Business, 2008 survey; which ranked the country in the 107th position out of 178. Japan External Trade Organization’s (JETRO) 18th cost survey also agrees to the World Bank’s findings. The cost of investment has been found to be rising in the country. The country has become unattractive to the foreign investors due to the hidden costs associated with conducting a business. This two major reports finding is not something unexpected. Years of negligence and poor governance both from the public and private players has lead to this situation.

The distribution of branches of different bank segments Urban Branches Rural Branches

ig k n R a b lo G

Bangladesh's Ranking in Doing Business, 2008 180 160 140 120 100 80 60 40 20 0

National Commercial Banks Pribate Commercial Banks Foreign Commercial Banks Specialized Banks Total

ig k n R a b lo G

159 107 60

2,146 490 1,203 3,839

111

120

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Inadequate infrastructure facilities (power, water & gas): Infrastructure is always a big headache for the urban and rural businesses. To fuel her ambition of maintaining a growth rate of 7%, Bangladesh will need to add 2000 MW additional energy each year. In 2007 the peak demand for electricity stood at 4500 MW whereas generation was stagnated at 3,717 MW. The result is service disruptions and blackouts on almost every single day of the year. At 147 KWH Bangladesh has one of the lowest per capita electricity consumption in the South-East Asia. Only Nepal has lower consumption than Bangladesh

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Source: The World Bank The problems of Bangladeshi businesses are manifold. Poor access to credit: this is one factor that has been continued to be pointed out as one of the major reason

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1,238 1,295 49 155 2,737

Source: Bangladesh Bank Website

Ease of Doing Business 180 160 140 120 100 80 60 40 20 0

that is holding the local entrepreneurs back. It’s a nightmare for a fresh-blood to get access to credit. The 48 bank rich banking sector has 30 private commercial banks; most of them target the urban market. The private players are uninterested to move to the rural settings. But fortunately this is changing, due to the Bangladesh Bank regulations and strong remittance growth from the migrant workers these banks are finding the opportunity in this market and making a move for rural expansion. But the access to credit is not getting easier. The banks are not interested in providing credit to the small investors because of collateral issues and the high cost involved in processing the loans. The small investors also lack proper knowledge of how to access the financial institutions.

Ashek Ishtiak Haq, 01720 594959, email: [email protected]

with Bangladesh from the very beginning. Poor governance is one of the key points what makes the firm unattractive to investors. The existence of nepotism in the business circle is also something which makes a firm weak. It is a common trend among the business community to fill up the existing positions within the firm with their relatives who may not be suitable for the post. By separating ownership from management businesses can create a better and effective venture. Tax structure: The tax structure of Bangladesh offers little intensive for a business. According to the JETRO survey Bangladesh holds the second highest corporate tax rate among the Asian countries (even after the government has cut the rate to 37.5%). Water and gas is also in the same poor condition. This has caused the businesses to look for alternative and back-up services to support their businesses which in turn increase their operating cost significantly. With rising fuel cost the expense is putting real dent in their profit figures. The service disruption due to these shortages also causes severe problems. Lack of efficient distribution channels: Bangladesh has one of the flattest land structures in the world. The lack of obstacles (hills, desert etc) and presence of cheaper transportation option (waterway) makes the country any supply channel manager’s dream. But unfortunately the real picture is somewhat different. The businesses lose near 40% of the perishable items due to lack of efficient distribution channel. Lack of supply chain management knowledge, a weak transportation system, and corrupt road authorities are some factors that contribute to make the system inefficient. Imperfect market: Market imperfection bleeds the businesses specially the small players the most. Dominance of the middlemen in the value chain often cost price distortion. It is a common scenario for the product to be sold at a significant premium while the producers take on a huge loss. Lack of information and the control exercised by these forces cause severe problem for the local producers. Lack of governance: In a world bank online debate a commentator said, “Corporate governance is not only relevant but essential for low-income countries. The problem is not the stringency of rules but of the governors themselves”. Governance is a serious issue

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Source: JETRO (2007) Lack of connectivity: The world has moved on to connect itself to the World Wide Web whereas Bangladesh is lagging far behind. Across the world innovative business are emerging using a clicks and mortar business model. They are leveraging the full potential of the World Wide Web. As the access to high-speed internet connection becoming cheaper by the day around the world the story is quite different for Bangladesh. Businesses have to pay a handsome amount in fact one of the world steepest fees to get access to the web. But the scenario is changing in the consumer front. Consumers now have access to the web through their cell. There is a huge opportunity to cater to the foreign customers by displaying the product in the web. But the high-speed internet connectivity is yet to reach the acceptable standard.

Ashek Ishtiak Haq, 01720 594959, email: [email protected]

Bureaucratic hassle: Bureaucracy and red-tapism has taken its toll for Bangladesh business environment. Opening a business on an average takes 74 days. Getting a license takes a staggering 252 days. Political instability: According to a UNDP research strike has led to 3-4% GDP losses during the 1990s. There are about 611 strikes during 1995 to 2002. This creates immense burden on the business firms as the shops often get vandalized during strike violence.

Source: JETRO (2007) Lack of proper business knowledge: Most of the entrepreneurs of Bangladesh apply the traditional hit and miss approach with their businesses. They have little institutional knowledge and have little access to training as very few organizations offer quality facility. In absence of know-how relating to general accounting, branding, taxation, law etc the businesses tend to miss the opportunity that the regulatory environment offers. Internet can play a vital role here for knowledge dissemination but the access to the net is not that easy. Corruption: There is very little to add in this point since there is so much uproar from every kind of media about how corrupt the country is. Corruption is probably one of the biggest problems faced by the organizations. The recent drive against corruption is encouraging but unfortunately this is focused around the urban centres whereas the rural corruption is still rampant. Poor law and order situation: Having a sound law and order situation help flourish business. But the situation has deteriorated over the years. Recent drive to improve the situation has helped but it has done damage to the business communities’ confidence. Frequent policy changes: Policies formulated get changed with the government. As there is serious antagonism between the main two parties, they tend to undo the work done by their predecessors. This causes pain to the business community as the high investment projects require serious policy consideration and longer payback period and such changes can create havoc for the project.

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Natural Disasters: Sheer density of the country’s population- 2,639 people per square mile- makes any natural disaster a crisis. Among the time magazines list of top 10 natural disasters of 2007 Bangladesh is the only country to be featured twice. These disasters disrupt supply chain, damage business and create untold suffering for the consumers. Skilled labor: Bangladesh may be the land of cheap labor but they are also unskilled. The training institutions are not sufficient to provide the quality labor force the businesses need. Quality of raw-materials: The material used to make a product lacks consistent quality. The country has to go miles to achieve the structured type of business that we find common in the developed world. Modern quality techniques found wanting in the manufacturing sector of the country. But as the businesses get more sophisticated they will need quality materials. As the recent quality scare in China proves business has lot more to lose (e.g. quick execution) than their business. William Shakespeare in Julius Caeser wrote “the fault, dear Brutus, is not in our stars- but in ourselves.” The statement is allegorical for Bangladesh. Except for natural calamities all the problems mentioned here are caused by our own fault. This is also a thing of hope as the most of the problems are caused by man-made reasons, they can be solved with proper persuasion. References: The World Bank (2008), “Doing Business, 2008”. JETRO (2008), “The 18th Survey of Investment-Related Cost Comparison in Major Cities and Regions in Asia.” AT

Capital

(2008),

“Bangladesh

Investment, Opportunity”

Ashek Ishtiak Haq, 01720 594959, email: [email protected]

2015:

Growth,

KATALYST (2003), “National Private-Sector Survey of Enterprises in Bangladesh, 2003” KATALYST (2006), “Meeting the Challenges in SME Development in Bangladesh: Special Reference to Government’s Budgetary Measures”

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Ashek Ishtiak Haq, 01720 594959, email: [email protected]