SMEs in Bangladesh
Download SMEs in Bangladesh...
Chapter - 1 1.1 Introduction SMEs are recognized as engine of economic growth and employment generation for sustainable industrialization in both developed and developing countries of the world. In context of Bangladesh, there is no alternative of small and medium enterprises for rapid industrialization and national economic growth through lower capital investment and employment generation. Their absolute contribution to employment and GDP, SMEs offer significant economic and social advantages. By virtue of their local ownership they offer the possibility of greater involvement in the local community. They also offer a degree of choice that would not exist if SMEs were to be less significant. At present the contribution of this sub-sector to the GDP is about 5%. As has been reported in the Fifth Five-Year Plan of Bangladesh, the sector currently employs around 5 million people directly or indirectly, which accounts for almost 82% of the total industrial labor force (Majumdar & Choudhury, 2001). To run a business enterprise allocation of funds and their proper uses are very important. But most of our SMEs suffer from lack of necessary funds and their proper uses. If these enterprises can overcome these problems they may contribute more in our economy and provide more employment. Besides this, in our banking sector the micro credit becomes a very important instrument due to its higher rate of loan repayments. Many PCBs now go for providing micro credits as well as the NCBs, NGOs, Grameen Bank and other financial organizations. SMEs are the main customers of micro credits. Since its independence, Bangladesh has experienced more than its fair share of natural disasters and political instability. These have contributed to a very slow rate of economic growth and a per capita income of around US$220 per annum. Despite some degree of industrial development, most notably in the ready-made garments industry, Bangladesh is still predominantly an agrarian economy. The sector contributes 43 percent of the GDP and employs around 60 percent of the labor force. Despite having very fertile soil that can support up to three crops per year, labor productivity in the sector remains very low. Highly unequal land distribution continues to be a major problem with around 64 per cent of the population owning less than one acre of land. By most estimates, around 50 percent of the population still lives on or below the poverty line. Despite some reduction in the percentage of population living below the poverty line in recent years, the percentage of the population A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 1
considered to be the ‘hard-core’ poor (defined as those with a daily caloric intake of 1,805 or less) actually increased from 22 to 28 percent during that same period. The HDR’99 shows that per capita consumption of calories has fallen in 1970 from 2177 to 2105 in 1996 (Sarwer, 2002). A circulation of Bangladesh Bank in the last year states that all the commercial banks must have to open 20% of their total branches in the rural area. From this circulation it is clear that the Central Bank is giving emphasis on the rural banking i.e. micro credit. From this circulation it is clear that the Central Bank is giving emphasis on the rural banking i.e. micro credit.
1.2 Statement of the problem: In Bangladesh economy the small and medium enterprises play an important role. Actually they are the supporting concerns to the big industries and help to reach the goods and service to the final consumers and also produce goods and services with minimum cost by using local technology. Besides this, these business firms create a lot of employment opportunity; ensure the velocity of money and highest uses of domestic resources. The small and medium enterprises are mostly seen in villages and small towns as well as metropolitan cities. They mainly perform as the supplier of the current demand in the local market. But most of the SMEs’ are suffering from the lack of working capital. Banks are not interested to finance those enterprises due to the risk of default of the loans. Besides this the entrepreneurs cannot utilize the loans efficiently in most of the cases for various internal and external reasons. If these problems can be eliminated these enterprises can be contribute more in our economy. So it is demanded to find out the major causes that discourage the enterprises to take financial support from the banks. In this study I try to find out the strong reasons that affects to the growth and prospects of the SMEs in Bangladesh.
1.3 Objectives of the study: 1.3.1. Broad objective: To conduct a comprehensive study of SME sector in Bangladesh of its present state, prospects, issues and emerging challenges. 1.3.2 Specific objectives:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 2
In this paper I have tried to identify the factors that influence the development and growth of the SME sector of Bangladesh. Thus the specific objectives of the study are as follows: •
To appraise the present situation of SME in Bangladesh.
To identify the problems of SME in Bangladesh.
Problems to getting loans from banks and other financial institutions and sources,
Problems to utilization of these loans and other assets,
Find out the current ability of the firms to meet their current obligations.
Risk factors in financing these types of enterprises from the Banking side.
Chalk out how to overcome these problems.
To recommend solutions to overcome the problems.
1.4 Scope of the Study: Financing to SMEs i.e. micro credit is a very contemporary issue in our economy. The idea of micro credit was invented by Dr. Mohammad Yunus and he established Grameen Bank to impose his new thought. This new idea brings a tremendous change in the rural economy and the poor people of Bangladesh become able to improve their economic situation by taking loans from Grameen Bank. Many economist, statistician, social scientist and bankers conducted their research on micro credit. They use primary data, which reflect various aspects of the researches. Any other researcher can use those secondary data for his/her research. The data collection processes are going on frequently for the purpose of new researches. So, relevant recent secondary data and their analysis are available in any library and journal. These available secondary data mainly give me the scope to undertake this study. The range of this study is limited only in identification of the basic reasons those discourage the banks for financing to the small and medium entrepreneurs and the reasons that make the job difficult to take credits from the commercial banks to the small and medium entrepreneurs. The internal problem relating to management of the enterprise, which decrease the efficiency of the firm is not included in the study.
1.5 Significance of the study: Now a day, micro credit occupies its own position in the economy. The main customers of this micro credit are the owners of the small and medium enterprises. In a Least Developing Country, like ours, there are a number of SMEs operating their business and they contribute a good portion of GNP of the country. These enterprises are also a big source for A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 3
employment in rural and out-skirt as well as urban areas. But most of them are sunk in a lot of problems - financial problem is the most common and serious among them.
Limitations of the Study: Since this research is only for academic purpose, there were some limitations in this study. The main limitation of the study is that a limited area of rural economy has been covered here and they almost located adjacent districts to Dhaka City. Required data are not available due to most of the SMEs do ever or properly maintain accounting and financial statements. The entrepreneurs have no or very short accounting and financial knowledge. Evens they do not ever fill the importance of preserve the past accounting records. For these reasons, many important relevant data could not possible to collect. So it was difficult to bring out the real story behind it. Moreover the study cannot go for the depth due to time limitation and lack of relevant data. So the internal problems of the enterprises cannot be identified in this study. Some common limitations are mentioned below: 1. Discussion about the Small and Medium Enterprises is a vast subject, but only some selected areas are covered in the research paper. 2. The study is basically based on secondary data. 3. Time was enough but it was not possible to give full concentration in this regard due to continuous pressure from other courses.
Methodology of Information Collection: 1.4.1 Sources of Information: Information collected to furnish this report is both from primary and secondary in nature. The primary sources are: •
Practical Desk work
Face to face conversation with the officers.
Relevant file study as provided by the concerned officer.
Interviewing the officials of Banks, financial institutes other than banks and from the
unorganized money markets. The secondary sources are: •
Different Circulars issued by Head Office and Bangladesh Bank.
Different ‘procedure Manual’, published by SME Foundation.
Annual Reports of SME Foundation.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 4
Periodicals published by SME Foundation.
Publications obtained from different libraries and from Internet.
Different research papers.
The interest rates of different financial and non-financial institutes on the field
survey basis 1.4.2 Presentation of the study (‘Cauterization’): The first chapter deals with the background of the study, statement of the problem, the objective of the study, research methodology, scope of the study, significance of study, literature review, historical background and definition of SME. In the second chapter of this study deals with SME in Bangladesh, Present Scenario of SME, Characteristics of SME, Advantages of SME, Disadvantages of SME, Growth and structure of SMEs and SME Development in Bangladesh, The third chapter deals with SME Policy Issues, Policy Implications, SME Assistance Policies and Institutional Arrangements. The fourth chapter deals with Analytical Framework of SME, Contribution of SMEs to Employment and GDP, The Increasing Priority Placed on SME Development and Growth and Structural Transformation of SMEs. The fifth chapter deals with Contribution of Banks to SME Sector, Credit Products and Services Available for SMEs in Bangladesh, SME Banking in Bangladesh The sixth chapter deals with Comparative Analysis of SME Banking Products and Product Comparison of Eastern bank with BRAC bank and Bank Asia. The seventh chapter deals with Access to finance by SMEs, SME Financing in Bangladesh, Prospects of SME Financing, SME refinancing by Bangladesh Bank, Equity and Entrepreneurship Fund and Relationships between Government and SME. The eighth chapter deals with Constraints to SME Growth, Analysis of Constraints in the Context of Bangladesh, Legal, Regulatory, and Administrative Constraints, Financial Constraints, Major Industrial Constraints and An Integrated Approach to Addressing the Constraints The ninth chapter deals with Problems of SME Banking, Concluding Remarks and Proposed Agenda for Action and Create and Implement a SME Policy. The tenth chapter deals with Findings, Suggestions, Recommendations and Conclusion. Graphs are used to give a clear idea about some information with relevant tables in the Appendix at the end of the paper. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 5
1.8 Literature review: With respect to the SME sector of Bangladesh, foreign and national experts undertook some studies. Some of the notable ones are: Mr. Anil Sinha, General Manager, South Asia Enterprise Development Facility, Small and Medium Enterprise Foundation, IFC, Dhaka, Bangladesh states that the issue at hand is scaling up from micro to small and medium enterprise. It’s important to segment the various sectors that talking about. Between small and medium, there is a wide gap, even in the definition in Bangladesh. Small and medium are really two different aspects and need different products and services to serve these aspects. Dr. Sazzad Zaheer Senior Research Fellow, BIDS states that SME, it as commercial banks scaling down their operations and trying to reach out the smaller segment in the market with smaller sized loans with some additional supervision and other advisory services attached to that kind of financing. The issue of SME arose both from considerations on extending financial net and capturing the small and medium enterprises. But it also evolved in the context of developing an industrial development strategy. Md. Sayeed Hossain Senior vice President Merkantile Bank Ltd. states that SME has been considered as the thrust sector in the economic development of the country with growing importance from all walks of life. It is evident that, substantial increase in SME and Retail Credit portfolios along with commercial, corporate and institutional lending, would lead the banks to its higher trajectory of growth, minimizing the risk of lending through portfolio diversification. As such, most of the banks have taken up aggressive marketing policy to augment their exposure in SME and Retail Credit. Though SME concept is nothing new, as evident from the establishment of Bangladesh Small and Cottage Industries Corporation (BSCIC), but a fresh look into and endeavor to boosting the sector are still imperative. Bangladesh Bank re-finance scheme for SME is laudable. The role of IFC-SEDF for creating awareness among the entrepreneurs and banks/NBFIs to be more focused in SME deserve appreciation. Naeem Chowdhury, Ph. D.SME Policy Expert ADB’s TA Grant Team Ministry of Industry Government of Bangladesh explained that SMEs encourage entrepreneurial development and dispersal of the industries throughout the length and breadth of the country. It also generates a lot of employment opportunities and the capital cost per employee is very low. With the service sector contributing a major share to the GDP and as this sector relies on the SMEs, the scope for SME finance by the commercial banks has increased tremendously. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 6
The government is also committed to give a fillip to the sector through infrastructural development, skill developmental effort, technological up gradation and by expanding the role of Small Industries Development Bank of India in SME development. Bangladesh Better Business Forum (BBBF) Chowdhury, Nuimuddin and Ayub Miah, 2006. “Access to SME finance and the SMEs in Bangladesh: towards an informed consultation”, Uddin (2008) has stated that the economic efficiency and overall performance of the SMEs especially in the developing countries are considerably dependent upon macroeconomic policy environment and specific promotion policies pursued for their benefit. Chowdhury (2007) highlighted that in context of Bangladesh SME is characterized by Low capitalization and limited assets, geographical diversity and high mortality, poor credit knowledge, very limited access to formal source of credit, cash intensity in transactions, very limited record keeping habit, poor financial disclosure on account of tax issues, high risk perception has led to high borrowing costs. In a study about SME sector of Bangladesh Miah (2007) stated that the major constraints for SMEs are lack of adequate investment, lack of modern technology, high rate of interest on bank loans, irregular/inadequate supply of power, poor physical infrastructure and high transportation cost, poor information about market opportunities and requirements, inadequate availability of raw materials, lack of skilled technicians and workers, lack of research & development facilities, fierce competition, absence of effective and transparent legal system, difficulties in accessing technology, credit constraints, low access to business services, constraint of quality of human resources, low awareness, low lobbying capacity, rapid changes in policy environment. Ahmed, M. U. 2006. “The Small and Medium Enterprises (SMEs) in Bangladesh: An Overview of the Current Status” Ahmed (2006) observed that availability of finance is a major constraint to formation and growth of SMEs in Bangladesh. Banks are reluctant to expand their SME credit portfolio because they do not consider SME lending an attractive and profitable undertaking. This is so because SMEs are regarded as high risk borrowers because of their low capitalization, insufficient assets and their inability to comply with collateral requirements of the banks. Administrative costs are also higher because close monitoring and supervision the SME operation becomes necessary. Naima Nazneen Rikta, Assistant Director, Policy Analysis Unit (PAU), Bangladesh Bank observed that The growth of small and medium enterprises (SMEs) in terms of size and number has a multiplier effect on the national economy, specifically on employment, GDP growth, and poverty reduction in Bangladesh. In the past, the government attempted to A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 7
provide SMEs with access to finance by targeted lending; such as through directives that a certain share (e.g. 5 percent) of a bank's loan portfolio was to be set aside for small and cottage industry financing Micro Industries Development Assistance and Services (MIDAS) (2004): A study (2004) by Micro Industries Development Assistance and Services (MIDAS) revealed that sources of finance are mostly friends and family member in case of SME. MIDAS tried to identify the sources of funds of SMEs. These are: •
Sources of funds Percentage of finance
Informal sector 41%
Family members 20% (interest free)
4% (with interest)
Hallberg (2002): According to Hallberg (2002), a stable macro-economy, an open trade and investment regime, and a competitive financial sector are argued to be most essential ingredients for a vibrant private sector. But with a law and order situation below the optimum level, corruption well above the level of acceptance and unstable political situation, the domestic environment of Bangladesh does not come to any help, rather hinders the prosperity of SME in this country. Brahmanadam, G, N., RAI, H.L., Dakshina Murthy, D, “Financing Small Scale Sector”. The Role of Banks”, Indian Banking Today and Tomorrow, May, 1981- The above article was prepared on the role of banks in financing the SMEs in the year 1981. At those times the Indian banking was not all interested in financing the SMEs, because of their credit worthiness. Later due to changes in the industrial policy of India, the commercial banks came forward and made immense help to the growth of SMEs. This article was written before the economic reforms taken place. Here is a gap for more analysis about the role of the banks in the post economic reforms. Chopra, K.C., “Financing for The Decentralized Sector- Small and Medium Industries” The Banker, August, 2006 the above article prepared on the thesis, reveals the financing for the SMEs in the decentralized sector. This article helped me in selecting the path for my study on credit facilities for SMEs. The article vividly discussed about the possible ways to finance the SMEs in the decentralized sector like Agricultural based and Artisan based SMEs. Really there is a gap between the centralized and decentralized sectors in getting the A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 8
finance from the banks. The banks are very much lenient in providing loan facilities to the centralized sector. Jailal Saaw, “Growth of Small Scale Industries in India” Journal of industry and Trade, April – 2005 The growth of small and medium industries in India was discussed in the above article. The expected growth was not there because of lot of root causes to sickness and underdevelopment in the SME sector.
1.9 Historical background: According to the European Union (2003) SMEs are defined as enterprises which have at most 250 employees and an annual turnover not exceeding 50 million Euros. Further there is the distinction of small enterprises — they have fewer than 50 staff members and less than 10 million Euros turnover — and micro-enterprises (less than 10 persons and 2 million Euros turnover). According to the World Bank (2006) medium enterprises are defined as enterprises which have at most 300 employees and an annual turnover not exceeding 15 million US dollars. Further there is the distinction of small enterprises — they have fewer than 50 staff members and up to 3 million US dollars turnover — and micro-enterprises have up to 10 persons and $100,000 turnover. In the UK, sections 382 and 465 of the Companies Act 2006 define a SME for the purpose of accounting requirements. According to this a small company is one that has a turnover of not more than £5.6 million, a balance sheet total of not more than £2.8 million and not more than 50 employees. A medium-sized company has a turnover of not more than £22.8 million, a balance sheet total of not more than £11.4 million and not more than 250 employees. It is worth noting that even within the UK this definition is not universally applied. In the USA, the definition of small business is set by a government department called the Small Business Administration (SBA) Size Standards Office. The SBA uses the term “size standards” to indicate the largest a concern can be in order to still be considered a small business, and therefore able to benefit from small business targeted funding. The concern cannot be dominant in its field, on a national basis. It must also be independently owned and operated. Unlike the UK and the European Union which have simple definitions applied to all industries, the US has chosen to set size standards for each individual NAICS coded industry. This variation is intended to reflect industry differences in a better way. The most common size standards are A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 9
500 employees for most manufacturing and mining industries
100 employees for wholesale trade industries
$6 million of annual receipts for most retail and service industries
$28.5 million of annual receipts for most general & heavy construction industries
$12 million of receipts for all special trade contractors
$0.75 million of receipts for most agricultural industries
Breaking down the SME definition, Industry Canada defines a small business as one that has fewer than 100 employees (if the business is a goods-producing business) or fewer than 50 employees (if the business is a service-based business). A firm that has more employees than these cut-offs but fewer than 500 employees is classified as a medium-sized business. In India the Small Scale Industries (SSIs) are industrial undertaking in which the investment in fixed assets in plant and machinery, whether held on ownership terms or on lease or by hire purchase does not exceed Rs. 10 million. The Small Scale Service And Business (Industry related) Enterprises (SSSBEs) are industry related service and business enterprises with investment in fixed assets, excluding land and building up to Ps. 1 million. (Ministry of trade and Industry, Government of India) According to the SME bank of Pakistan, SME means an entity, ideally not a public limited company, which does not employ more than 205 persons (if it is manufacturing concern) and 50 persons (if it is trading/service concern) and also fulfills the following criteria of either ‘a’ and ‘c’ and ‘c’ or ‘b’ and ‘c’ as relevant; (a) A trading/service concern with total assets at cost excluding land and buildings up to Rs 50 million. (b) A manufacturing concern with total assets at excluding land and buildings up to Rs 100 million. (c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.
1.9 Definition, Characteristics & Growth of Small and Medium Enterprises: 1.9.1 Definition of SME:
According to Small Business act 1934,” A business which is independently owned
and operated and not dominant in its field” is a Small Business. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 10
Bolton Report on the commission of the inquiry on Small Business firms,
1977,”Small firm is one that has a relatively small share profits market.” Stoner, Freeman, & Gilbert, 1995, “Small Business refers to business locally owned
and managed, often with very few employees working at a single location”. US Government, “A Small Business is one with fewer than 500 employees.”
According to executive committee for national economic development, “A Small Business one of which processes at least two of the following characteristics:
-Managers are the owners,
-Capital supplier and the owner is individual or a small group,
-Worker and the owners are local, market may not be so.
-Relatively smaller compared with the biggest unit of the industry [Sales, employees
etc.] From all of the above definitions we can make a general definition of SME. A business not dominating in its field, does not engage in any new marketing, workers are local, working at a single location, produced units are relatively small in size, and often all organized by the owner or his family members. Now-a-days there are a lot of SMEs are operating in verity of fields. We get our daily necessaries from the grocery shops. One takes food from a restaurant or from a first food shop. Some shops are selling cloths, books, electronics etc. Hair cutting saloon, laundry, automobile and electronic mechanic, travel agent all of them are serving us in different ways. A doctor, engineer or a lawyer give us different consultation services. 1.9.2 Some Other Definitions: Curtis E. Tate, Jr. and his co-authors in their book “Successful Small Business Management” (1982) define small business as “An organization with a name, a place of operations, an owner, and one or more workers other than the owner.”
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 11
The Federal Reserve Bank of USA says small business is one which “is independently owned and operated but is not dominant in its field.” In the Small Business Act of 1953, the US Congress gave the same definition of small business. 1.9.3. Definitions in the context of Bangladesh: “Small industry means an industrial establishment or unit which is run mainly by hired labor and not using mechanical motive power but does not normally employs more than 50 workmen and whose land, building and machinery does not exceed Tk.150, 00,000 in value in either case.” – E. Pakistan Small Industries Corporation Act of 1957. As per Industrial Policy 2010: Small Enterprise: Nature of
Value of asset (excluding land &
Manufacturing Trading Service
BDT 50000 to 10000000 BDT50000 to 5000000 BDT 50000 to 3000000
Maximum 60 Maximum 20 Maximum 30
BDT 500000 to
Nature of enterprise
Value of asset (excluding land
Manufacturing Trading Service
BDT 100000 to 5,0000000 BDT100000 to 30000000 BDT 100000 to 10000000
Maximum 300 Maximum 50 Maximum 75
BDT 1000000 to
Medium Enterprise: & building) 400000000
Small Segment: Value of fixed assets (except land & building) up to tk 15 million in case of manufacturing enterprise and maximum 25 workers in trading or service enterprise. Medium Segment: Value of fixed assets (except land & building) up to tk 100 million in case of manufacturing enterprise and maximum 100 workers in trading or service enterprise.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 12
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 13
Chapter - 2 2.1 SME in Bangladesh: Different countries and organizations define SME differently. The Government of Bangladesh has categorized SME into two broad classes: •
2.1.1. Manufacturing enterprise: Manufacturing enterprises can be divided into two categories; Small enterprise: an enterprise would be treated as small if, in current market prices, the replacement cost of plant, machinery and other parts/components, fixtures, support utility, and associated technical services by way of capitalized costs (of turn-key consultancy services, for example), etc, excluding land and building, were to up to Tk. 15 million; Medium enterprise: an enterprise would be treated as medium if, in current market prices, the replacement cost of plant, machinery and other parts/components, fixtures, support utility, and associated technical services by way of capitalized costs (of turn-key consultancy services, for example), etc, excluding land and building, were to up to Tk. 100 million; 2.1.2. Non-manufacturing activities (such as trading or other services): Non-manufacturing activities can be divided into two categories; Small enterprise: an enterprise should be treated as small if it has less than 25 workers, in full-time equivalents; Medium enterprise: an enterprise should be treated as small if it has between 25 and 100 employees. According to Bangladesh Bureau of Statistics different enterprises are defined as; Size Micro Small Medium Large
No. of employees 0-9 10-49 50-99 Above 99
The Ministry of Industries, Government of Bangladesh has been identified following 11 booster sectors; • Electronics and electrical • Software-development • Light engineering and metal-working A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 14
• Agro-processing/agro-business/plantation agriculture/ specialist farming/tissueculture • Leather-making and leather goods • Knitwear and ready-made garments • Plastics and other synthetics • Healthcare & diagnostics • Educational services • Pharmaceuticals/cosmetics/toiletries • Fashion-rich personal effects, wear and consumption goods.
2.2 Present Scenario of SME: In 2003 the International Consultancy Group (ICG) of the UK, in collaboration with the Micro Industries Development Assistance and Services (MIDAS), conducted the National Private Sector Survey of Enterprises in Bangladesh. The survey results drew the conclusion that there were approximately 6 million Small and Medium Enterprises (SMEs), which included enterprises with up to 100 workers employing a total of 31 million people, equivalent to 40 percent of the population of the country of age 15 years and above. The survey also found that the industrial structure of SMEs consisted of primarily wholesale and retail trade and repairs (40 per cent), production and sale of agricultural goods (22 percent), services (15 percent), and manufacturing only (14 per cent). Thus the survey brought out the fact that the large untapped potential for expansion in manufacture and production could be exploited (or contributing more significantly to the national economy. Another vital findings of the survey under discussion was that SMEs contributed BDT 741 ($ 12.5) billion i.e. nearly 25 per cent of the GDP (BDT 2,996 billion) in 2003. It is reflected from this survey that enterprises employing 2-5 workers contribute 51 percent share of the total SME contribution to the economy, followed by 26 percent by those having only one worker and 10 per cent by those having 6-10 workers. For LDCs like Bangladesh, SMEs are a highly cost-effective route for industrial development. It is observed from Table-1 that micro enterprises run by up to 10 workers contribute the most which is 86% of the total contribution from SMEs to GDP of Bangladesh. It is also observed that micro enterprises run by more than 21 workers contribute about 7% of total contribution from SME to GDP of Bangladesh. Table-2 provides the information regarding sector wise contribution of SMEs to GDP. It is reflected from the table that manufacturing sector contributes the highest contribution in A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 15
GDP i.e., 38%. It is also observed from the table that agriculture and wholesale and retail sector contribute more than 22 percent in the GDP of Bangladesh. Table-3 shows the growth pattern of SME. It is observed that during 2001-2002 to 20042005 in every financial year the growth rate of SME is about 7%. In 2005-2006 the growth rate was 9.21%. The highest growth was in 2006-2007 i.e., 10.28% Table-4 shows the growth pattern of manufacturing sector. It is observed that the average growth during 1972 to 2005 was 6.4%. During 2001-2002 to 2006-2007 the highest growth was in year 2006-07 i.e., 11.19%. It is also observed that during 2002-2003 to 2005-2006 in every financial year the growth of manufacturing sector was more than 6%.
2.3 Characteristics of SME: There are many characteristics of SME. Some of which are described in the following paragraph: Unity of Individuals and the Organization: The strength of small business is that individual employees retain their personal identities, yet support the unity of the organization. Employees understand and commit themselves to corporate objectives. High Individual Motivation: Individuals are highly motivated for further exertion and organizational development. Though pay for performance is a principal motivator in a small business, comfortable and social life related workplace plays a role of the social motivator. Owners as Managers: In most of the small businesses, owners are responsible for managing the firm. The employees are hired on owner’s discretion. Owners are responsible for taking any and all management decisions. Streamlined Communication: With simple and petit structure of the organization, good and effective communications are maintained with and among employees. This keeps the organization more susceptible to changes in the business arena. Supportive climate for Organizational Integration: Management including supervisors keeps close relations with subordinates. They offer training, encouragement and counseling to subordinates for problem solving. Employees are provided with challenging and enjoyable workplace. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 16
2.4 Advantages of SMEs: The SME has many advantages over its larger counterparts. It does not have access to huge resources, numerous employees strong financial backup, or the professional management of the big businesses, but it does possess some distinct advantages that are only its own. Because of small percentage of income that goes for overhead and non-revenue-producing activities, there are still some functions that can be performed more efficiently by small business enterprises than by large ones. Growth: Small business helps entrepreneurs develop as an individual and expand their personal abilities. Their growth might have been hampered had they been employed under the guidance of a supervisor in any other organization. Ambition also motivates entrepreneurs and makes them hang in there. Provides self-employment opportunities: Small business helps people provide job for themselves. Sometimes employment opportunities are limited in big industries. There are losing big firms that are frequently cutting back, closing plants, and lying off people. This creates unemployed people in society who are otherwise capable of performing various jobs. The area of small business can provide a much-needed source of new employment. This shows the important contribution the smaller firms are making to their respective notional economics. Flexibility: Large corporations often lack the flexibility of small business because of the complex organizational structure, established bureaucracies, and high overhead costs. Decision making in the small business frequently depends on only one or two persons. The management and the workforce in the small business may be more adaptable to change than those of the large corporation. They can react more quickly to changing market conditions or to modify a product for a customer more easily than could a large business. Better Inter-personnel Relationships: Both managers and staff in the small business are treated as individuals. Managers are given freedom and decision making and provided with variety of responsibilities. Staffs are encouraged to innovate there by reducing boredom in the workplace. Lines of communication are direct between owners and employees. Independence: Small businesses give its owners the liberty or independence to come go as they please. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 17
Owners of small business enterprises have a degree of freedom that are not customary for managers in most big corporations this freedom encourages self-motivation. Often this freedom of small business owners means the right to work harder and longer hours than they would if they were employees of big business. However, the psychological and financial satisfaction arising from enterprise ownership is powerful rewards for the risks of going into business for oneself. Quick decision: As the owner of the business does all in all of that particular concern, the owner does decision-making mostly. So the decision is taken relatively quickly because he or she does not have to discuss other people or superiors to take the decision.
2.5 Disadvantages of SMEs: The SME has their share of disadvantages too. These disadvantages have multiplied in the current years due to increased management problem in recent years. Inability to cope with growth: Sometimes, the factors that are advantageous to small business turn in to serious disadvantage when it is time to grow. Growth often requires the owner to give up certain authority. Similarly, growth also requires specialized management skills, which the owner may lack. Management problem: Effective and efficient management is very important for the smooth running of any kind of business. A new businessperson often has the knowledge and skill to produce a good but will lack the necessary kills of planning organizing, staffing, directing and controlling. Yet the small business owner is often forced to become a generalist in management since he or she can’t afford to employ a specialized person having necessary managerial skills. Also they do not give the subordinates enough responsibility to manage. Shortage of working capital: Shortage of working capital is the most predominant limitation of small business. For this limitation, they cannot take the advantage of economies of scale. They cannot take the advantage of discounts given for bulk purchases. This leads to the inability to cope up with their larger competitors in new facilities, equipment, tools, and methods. Lack of coordination:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 18
Another disadvantage is the lack of coordination between production and marketing. That is the failure to balance and coordinate these to critical functions. It is important for small business to keep judicious balance among: •
Having too few products so that the orders of potential customers have to be turned down.
Having too big inventory as to bear too much inventorying and maintenance cost.
Diversifying too fast. The advantage of diversification and the advantages of product specialization should be balanced.
Lack of effective selling techniques: Small businesses usually don’t have the access to specialized person at marketing. So, they lack in scientific market research, specialty advertising and personal selling. As a result sales are comparatively lower than the larger enterprises. Location of the head office and the accessibility does affect the sale to certain degree.
2.6 Growth and structure of SMEs: Available information suggests relatively rapid growth of SMEs in Bangladesh, especially since the 1990s. The data on the number of establishments show that small enterprises grew by 4.6 percent per year over the period FY78 to FY03, while medium enterprises grew by 6.4 percent during FY 82-FY 03. With special emphasis given to the development of SMEs, it is likely that these growth rates have continued and probably increased in recent years.7 The number of small enterprises increased to 55,916 in 2001 from 24,590 in 1981. As per the Economic Census 2001 and 2003 (BBS), the number of small enterprises stood at 74,629 which is 87 percent of the total number of enterprises, while the number of medium enterprises is 5,125 (6 percent). For large enterprises, the number is 5,673 which is 7 percent of the total number of enterprises The enterprises are concentrated in six broad categories: manufacturing including agrobased manufacturing; education; wholesale and retail trade; hotel and restaurant; finance, insurance and business services; and community, social and personal services. The distribution of SMEs over different categories shows that the share of small manufacturing enterprises in total small enterprises is nearly 35 percent while similar share of medium manufacturing enterprises is 45 percent (Table 3). The share within different SME’s is also changing over time (Table 4).
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 19
2.7 SME Development in Bangladesh: Historically, Bangladesh followed a development strategy in which private investment was controlled through a host of regulations involving investment sanctioning, credit disbursement, import licensing, foreign exchange allocation, etc. while these regulatory barriers thwarted private investment in general; the impact fell unevenly on SMEs. This was because of the relative inability of the SMEs to cope with the regulations compared to their large-scale counterparts. Thus, the policy regime was largely biased against the SMEs although, paradoxically, promoting SME development was a stated objective of successive governments. In a bid to render its industrial sector internationally competitive and to move towards greater efficiency in its production structure, Bangladesh implemented a number of economic reforms during the 1980's, underwritten by the familiar structural adjustment policy. This included deregulation of sanctioning procedure and relaxation of other regulatory barriers, easing of import procedure, reducing trade barriers, following a market oriented exchange rate policy, and implementation of fiscal, monetary and public enterprise reforms. These reforms helped remove a large part of the policy bias against SMEs that prevailed earlier. Recent studies confirm that these reforms had positive impacts reflected in a fairly rapid growth of the sector during the past decade. However, because of their structural weaknesses, the SMEs may need more pro-active policies for their development in addition to the further removal of the policy biases.
Chapter – 3 3.1. SME Policy Issues: 3.1.1. Public Development Outlay: A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 20
Although successive five-year plan documents have mentioned development of small, medium and cottage enterprises as priority area, public development expenditure in this sector has not been commensurate with this declared policy. Thus, in the Fourth Five Year Plan, the revised public allocation to this sector was Taka 2,016 million which was a meager 0.58 per cent of the total public development outlay in the plan. What is even worse, only about 69 per cent of this small allocation were actually invested during the plan period? In the current Fifth Five-Year Plan, the share of the sector in total public development expenditure has gone down even further. If the sector has to make much headway, there is need for substantial increase in public investment in the sector particularly in the area of training, extension, research, market promotion, etc.
A collaborative effort of the
government with business associations, non-governmental organizations NGOs and other development partners is recommended in such public outlays. 3.1.2. Trade Policy: During the past decade, substantial reforms have been carried out in the external trade regime of Bangladesh. The import procedure has been greatly eased and deregulated. Import tariffs have been lowered and quantitative restrictions virtually eliminated. All these have facilitated greater access of domestic producers to imported raw materials. This has particularly benefited SMEs as they were affected more adversely by the regulated trade regime. However, import liberalization has also exposed domestic producers to competition from foreign goods. To ensure a level playing field and to enable domestic SMEs to compete effectively with imports, the following policy concerns need to be addressed. •
Prior Announcement of Policy Changes: To enable domestic producers,
particularly the SMEs, to prepare themselves to face external competition there is need for adequate forewarning about impending policy direction. This is particularly true of trade policy measures. If the government makes prior announcements of its impending trade policy changes, particularly with respect to tariff schedules, investors will be aware of the degree of competition they will be facing with the changes and will make adjustments in their investment and production plans accordingly. •
Tariff Rationalization: To encourage domestic production, there should be
adequate gap between duty on raw materials and duty on finished products. In fixing duty on finished products, possible under-invoicing and dumping should be taken into account, as otherwise, effective duty rates on finished goods will turn out to be lower than that on raw materials in spite of the higher statutory rate on the finished item. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 21
Appropriate Tariff Valuation: To avert the problem of under-invoicing, a system of
tariff value has been put in place for certain categories of imports. There are complaints that these tariff values are often not in line with the going world price of these items which sometimes puts domestic producers at a relatively disadvantaged position.
3.1.3Fiscal Policy: •
Value Added Tax: The main components of indirect tax in Bangladesh are Value
Added Tax (VAT), Supplementary Duty and Excise Duty. VAT is imposed on producer, manufacturer, importer, exporter or service renderer under the Value Added Tax Act, 1991, on goods or specified services, at the rate of 15% at every stage of transfer. VAT paid against the input is adjustable against the VAT on output to be collected from the buyers and the net sum stands payable on delivery of goods or specified services to the VAT authority. Exemption is allowed to certain goods or service or certain taxpayers. All cottage industries, except those producing particular products, are exempted from VAT. But, manufacturer, producer or service renderer (other than cottage entrepreneurs), whose annual turnover does not exceed Taka 1.5 million are required to pay Turnover Tax at the rate of 2.5 per cent in lieu of 15 per cent VAT. This limit is too low for small industries. As a result, small industries are subjected to the same 15 per cent VAT as their large-scale counterparts. In addition, supplementary duty is imposed at variable rates on certain categories of consumption goods across all size categories. Finally, excise duty applies to a limited number of items irrespective of size classification. Thus, in terms of indirect taxes, there is virtually no differentiation between SMEs and their large-scale counterparts, which is considered inequitable by most SMEs. •
Tax Holiday: Similarly, there are no differentiated treatments of SMEs either with
respect to duty on capital machinery or direct taxes. There are provisions of tax holidays for enterprises of all size categories subject to rules and procedures set by the National Board of Revenue. To avail themselves of tax holiday, enterprises recommended by the relevant sponsoring agencies have to get the approval of the National Board of Revenue which is a cumbersome and lengthy process. The tax holiday, however, is not available to sole proprietorship enterprises which are the usual form of small and cottage industries in Bangladesh. •
Wealth Tax: Wealth tax is payable by an individual if his net wealth exceeds Taka
2.5 million. As per existing law, no wealth tax is payable by a company, the usual legal form
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 22
of a large industry. On the other hand, the legal form of small industries is usually sole proprietorship, and hence these enterprises have to pay wealth tax on their business capital. Thus, fiscal policy in Bangladesh is not particularly tailored to provide support to SMEs, which is pointed out by most SME entrepreneurs as a critical policy constraint hindering SME growth.
3.2 Policy Implications: •
In recent years, SMEs have emerged as a new engine of growth in many developing
countries; and factor endowments and development potentials show that SMEs can also play a significant role in Bangladesh in promoting its poverty reduction agenda. This has been acknowledged in the country’s development and poverty reduction strategies; and policies and programs have been initiated to ensure unhindered growth of the SMEs. In this backdrop, this note has examined the growth and contribution of the SMEs to GDP and the national economy using available information. •
The SMEs in Bangladesh cover different sectors (mainly livestock, fishing and
poultry, industry and services) and the SMEs are growing over time. The analysis shows that during FY78-FY03, small enterprises grew by 4.6 percent per year, while medium enterprises grew by 6.4 percent during FY82-FY03. During FY03-FY06, the number of SMEs in different sectors increased by 5.2 percent. This growth matches the manufacturing sector growth and the share of small scale industries in the overall economy. •
The important concern relating to the SME sector is to ensure its speedy growth in
output, employment, and exports. For this, the country’s industrial strategy needs to be anchored in multi-layered subcontracting arrangements between the large enterprises and the SMEs and among the SMEs themselves. In this respect, much of the high productivity growth of SMEs would come from firms with robust potential for productivity growth and sub-sectors with significant subcontracting activity. For the purpose, the National Task Force has identified 11 sectors as booster sectors. In recent years, SME-centered activities in education, health, information technology, and food processing sectors have expanded rapidly in response to higher demands and there exists more potential for their future expansion. Innovation and searching for new markets are also important for sustaining the growth of existing SMEs and flourishing of new SMEs. Infrastructural bottlenecks, especially power, gas, and transport are significant deterrents to SME expansion and these should be effectively addressed for ensuring uninterrupted growth of SMEs.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 23
The analysis shows that SMEs have good potential of absorbing the country’s
expanded labor force. Employment generation grew at a yearly rate of 5.4 percent in small enterprises during 1991-2001; while it grew by 9.6 percent for the medium enterprises during 1982-2003. It is estimated that SMEs currently absorb almost 80 percent of the total employment in the industry sector and 23 percent of the country’s total labor force. Since creation of decent and productive employment opportunities for the expanding labor force is the key challenge for accelerating poverty reduction in the country, SMEs provide an excellent vehicle for absorbing the labor force, especially in SMEs of different booster sectors. 12 •
In terms of contribution to GDP, the share of SMEs is growing over time. The
estimates in this note put the contribution of SMEs at between 40 percent and 50 percent to total manufacturing output and between 20 percent and 25 percent to overall GDP. Labor productivity in the SMEs is found to be higher than that of large enterprises. The compulsion, however, is to further increase the labor productivity, for which sustained efforts of human capital development (training, education, and technical knowledge) are essential. •
Generally, SMEs require less capital to establish and operate relative to large
industries. The analysis shows that access to formal financing, especially bank financing, for SMEs has been increasing in recent years. However, despite the introduction of refinance facilities by the Bangladesh Bank, the supply of institutional finance still remains inadequate for the SMEs. Although several banks have opened special windows for catering to SME loan and some banks have introduced collateral free loan, it is important to develop and adhere to a common norm in bank-SME relationships so that the SMEs can access credit in a timely and efficient manner. Apart from catering to collateral free loans for SMEs, banks and NBFIs need to evolve and expand innovative financial product lines for SMEs to meet their diverse demands, such as raising funds through syndication and domestic factoring which have emerged as successful tools of SME financing in many countries. •
Like in many East Asian countries where SMEs have played key roles in promoting
rapid industrial and export growth, Bangladesh needs to adopt its own model of creating institutions and support mechanisms for SMEs covering government, private, and NGO sectors. In addition to finance, this should involve technical support system for providing technical extension services directly to the SMEs in which institutions like BSCIC, BSCIR, and other public and private sector agencies would play key roles in serving the SME sector. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 24
In order to be effective, targeting strategies can be used, such as using a system of ‘special designation’ to select SMEs that would receive priority in allocation of the support programs. Such special designations could include several categories such as promising SMEs program, technically advancing SMEs program, and the like. If necessary, SME sanctuaries could be established through which certain product lines would be reserved for SME production over a given period and preferential support would be given to SMEs producing import substitutes of technology-intensive imported components and products. The thrust would be to offer comprehensive sets of assistance programs to facilitate the SMEs to upgrade themselves, increase productivity, and improve competitiveness. The efforts could be built using a network approach to providing assistance in financing, production technology, management, R & D, environmental protection, and other areas. The network would include various government institutions, public and private financial institutions, professional groups, and relevant trade bodies and associations. The broad based package of assistance to SMEs could be administered under the networking approach. A local SME upgrading program could be introduced through creating a tripartite partnership among multinational corporations (MNCs), local SMEs, and the government under which MNCs would provide focused assistance to their suppliers to improve quality and operational efficiency. •
The scope of work of separate SME windows/dedicated desks for catering to SME
loan could be broadened to provide comprehensive SME related one stop services including financial counseling and resource availability, business development strategy and availability of support services, and marketing strategy and export linkages. If necessary, a SME training and marketing fund may be created to support training facilities and export promotion activities. •
For accelerating future growth and viability of the SMEs, technological innovation
and knowledge transfer, product diversification, and marketing services are the key areas where special attention are needed. The adoption of a comprehensive road map, jointly worked out for implementation through public-private collaboration, for technological and marketing services for the SMEs can go a long way in creating a competitive SME sector in the country with required export linkages. •
Finally, an important issue for SME development in Bangladesh is to set a vision
and adopt a pro-active SME promotion policy that would facilitate a rapid transition from traditional to relatively modern product categories along with higher capitalization and use A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 25
of better production technologies. This will help up scale the existing low productivity informal SMEs and deepen their links with mainstream growth seeking activities. As such, the development of SMEs in the country calls for a re-thinking of the present nature of micro credit interventions to address the second generation issues of credit up scaling and technology diffusion necessary to create sustained impact on poverty reduction.
3.3 SME Assistance Policies and Institutional Arrangements: The economic efficiency and overall performance of the SMEs are considerably dependent upon the macroeconomic policy environment and specific promotion policies pursued for their benefit. Examination of the policy environment and institutional support within which SMEs operate suggests that despite stated objectives of successive governments, the broad macro policy regime remains biased against SME development. Allocations of public sector investments, trade policies and taxation policies in particular have mostly been anti-SME development in character and contents (ADB, 2002). The specific promotional policies and support measures such as extension services, financial and physical support from the public sector agencies and the development partners have also not always been adequately effective. Weak and inefficient management and lack of proper implementation of the various policy support measures have rendered various assistance relate business advisory services, such as training, credit marketing and physical infrastructural facilities (through BSCIC’s Industrial Estates Programme), much less effective than desired. The private sector efforts through participation of MIDAS, BASIC and selected NGOs (especially GB, BRAC and Proshika) have not so for been adequate especially in SME promotion. SMEs because of their structural weaknesses, such as, scale barriers, inefficient management and weak technological capacities need pro-active policies and institutional support in addition to removal of existing policy biases. While getting the government out of business and greater participation of the private sector are now emphasized as key strategies for development, some public sector participation for desirable monitoring of selected essential public services such as, effective legal and judicial procedures, commercial contracts, and land settling arrangements and such will still be necessary. Analysis of the existing institutional support for SMEs reveals similar failings across the agencies with poor operational efficiency due to numerous structural and administrative and managerial bottlenecks. Discussion follows on some of the existing institutions of the country, which are working in the broad SME sector. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 26
Bangladesh Small & Cottage Industries Corporation (BSCIC): BSCIC has been acting as the state-run policy coordinator, service developer and distributor of facilities in the SME sector. A major responsibility of the Corporation has been to mobilize policy support for improving the economic environment, particularly for the benefit of the SMEs. Its services constitute inputs in the areas of land development (estate building) technology transfer, credit rationing, training, design development among other. Unfortunately, BSCIC could not perform as expected although its achievement in physical terms particularly in estate building over the past 40 years is impressive. Eighty-one percent of the developed plots (7069 out of 8763) have been allotted to the entrepreneurs as of October 2003. But only 2495 i.e. 30% of the plots have been used for actual industry building. One can see that there has been a lot of waste of public money in idle investments in BSCIC. BSCIC, therefore, urgently needs reforming. It can play its planned catalytic role in the SME sector only after reforming itself. With reference to reform, however, a word of caution is necessary. Experience suggests that under any reform program BSCIC or for that matter any state run organization in Bangladesh must not be given any regulatory or licensing role over the SME sector or on any private sector initiative. Bangladesh Industrial Technical Assistance Center (BITAC): Bangladesh Industrial Technical Assistance Center (BITAC) was set up by government as an autonomous body under the Ministry of Industries. Its mandate is to: (a) train industrial personnel to upgrade their skills; (b) render technical advice to industries; (c) disseminate modern know-how and improved techniques among industrial personnel; (d) manufacture and supply spare parts, tools and machines; and (e) develop equipment tools and processes. BITAC has since its birth played an important but limited role by facilitating transfer of technology to the industrial sector of the country besides developing human resources through its skill development training programs. However, it has suffered from chronic paucity of funds necessary for conducting training and modernization. This venerable organization with years of experience and goodwill should be reenergized and enabled to play its due role in the national economy. Bangladesh Council for Scientific & Industrial Research (BCSIR): Bangladesh Council for Scientific & Industrial Research (BCSIR) has also remained an underutilized organization in spite of its potential. Particularly, its regional establishments in Chittagong and Rajshahi should have been fully used to undertake research in locally available materials, which can be used as inputs by the SMEs. The agency’s research in the area of Soya foods and Spirulina for example has attracted attention of the public but there A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 27
has been no sustained effort by BCSIR to remain in the public view. Years of neglect and fund starvation have stifled the growth of BCSIR. To the best of our information it has no useful linkage with the SME sector. Ways need to be explored to find mutually beneficial cooperation between the two. Small & Medium Enterprise Foundation (SMEF): The SME Foundation is an independent center of excellence created and generously capitalized by the Government of Bangladesh to the tune of a total endowment fund. The main objective of SME Foundation is to implement SME Policies and strategies designed to achieve employment augmenting industrialization, develop entrepreneurship, alleviate poverty and accelerate pro-poor and inclusive economic growth. The Specific objectives are: •
Delivery of Business Development Services (BDS) to SMEs to support encourage
and strengthen growth and development of SME sector; •
Establishment of a comprehensive data and information based on the SMEs through
conducting surveys and studies for use by all SME Stakeholders •
Facilitate SME access to institutional services of finance including provision of
credit wholesaling services at concessional interest rates; •
Skill development and capacity building of the SME entrepreneurs through
providing training facilities; •
Facilitate development, adoption and dissemination of technology for ensuring
productivity and innovation of new products and process; •
Assist market development, market creation and market expansion at home and
aboard for supporting sales promotion and export for SME entrepreneurs Other Institutions: Over the years a number of semi government and private sector institutions have become active in the SME area. Some of these like the BASIC Bank, and just named BCSIR are in the public sector. But more importantly NASCIB, MIDAS, CARITAS, Kumudini, Banglacraft to name a few are some of the organizations, who have appeared in the private sector and are contributing to promotion and development of the SMEs particularly those in the traditional sector. However, more SMEs should be encouraged and assisted to form their own associations and build-up links with the national bodies. The major non-government private sector support agencies in the field of finance include a large number of non-government microfinance organizations (NGOs). Their work among A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 28
the landless & asset less poor through infusion of microfinance has activated millions of miniscule SMEs across the country.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 29
Chapter-4 4.1 Analytical Framework of SME: Market development is a broad concept which envelops a number of interconnected factors. In general, demand and supply characteristics associated with products determine their market prospects. Therefore, at the outset it may be convenient to sketch a conceptual framework with the underlying demand and supply-side factors exerting significant influences on the development of the market for SMEs. Figure 1 is such a diagrammatic representation of the framework.
Any market is characterized by the demand and supply side considerations. As presented in Figure 1, the demand for SME products can be thought of arising from consumers in domestic as well as foreign economies. On the supply side, firms will try to continue (or expand) the production of commodities for which markets already exist and they may also introduce new products. Now there are a number of factors that may affect the supply and
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 30
demand sides, for products produced by SMEs, either individually or through some interaction between them. First let us consider the demand side. Purchasing power of consumers is one of the most important demand side factors. Particularly if any SME is only supplying its products to the domestic economy, consumers’ purchasing power will determine the size of the market. For goods with fairly elastic demand, changes in their prices can also greatly affect demand. Since individuals SMEs are most likely to be price taker, they cannot exert any significant influence on price. At the aggregate level, improved productivity and/or large foreign supplies can result in lower price stimulating the demand. However, in the case of goods with price inelastic demand, movement in prices will only have a little effect. For such goods given the productivity any expansion of supply (either by domestic industry or by imports) will cause a fall in overall industry revenue and only an increase in demand will expand the market (in terms of total expenditures by consumers). Markets in poor countries are small and global markets can remove the constraint of lower purchasing power. Despite a fascinating academic debate, it is widely believed most export items supplied by poor countries like Bangladesh are faced with a highly elastic demand in international market and as a result it is the supply side factors rather than demand that determine export success. Trade policies of the trading partners can also significantly influence the demand. High tariffs, quantitative restrictions, subsidies, and other non-tariff and technical barriers can undermine the competitiveness and access of domestic SMEs in their markets. There are other instances, however, when such policies can also be beneficial. For example, it is widely regarded that Multi-fiber Arrangement (MFA) quotas in textiles and clothing imports of western developed countries facilitated the growth of RMG sector in Bangladesh (Rahman and Razzaque, 1998). Also, various trade preferences extended by the developed countries to be developing world have benefited the latter. Quality of products and services has become another import demand side factor particularly in the western developed countries. In many cases, suppliers need to demonstrate their capability in maintaining proper quality control for their products and services. Quality control, assurance and management systems, accreditation and certification, quality marks and labels, standardization, etc. are often considered as technical barriers to trade, especially with regard to international competitiveness and globalization, nevertheless they have emerged as important factors in global marketing of goods. Certain standards in the production of goods and services have been developed and are widely used to assure consumers of the quality of the products that they are purchasing. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 31
Timely delivery and availability of goods influence demand significantly. The consumption pattern of many products are related to seasonal cycle and as a result delayed or untimely supply may be of no use. On the other hand, goods must be available in the market for consumption and to be demanded. In today’s world marketing of goods is a determining factor for demand for many goods. Advertisement, brand names, and various means of popularizing products are indispensable components of business strategy. Finally, in recent times social campaigns by different pressure/lobbying groups seem to have had impact on demand. In the early- to mid-1990s lobbyists in the US made vigorous campaign to boycott RMG products of Bangladesh alleging that children were being ‘exploited’ in garment factories. On the supply side, SMEs will try to continue and expand the production of the goods for which markets already exist or introduce new products. Despite the significance of the demand side factors, many argue that supply side constraints are most important. Resource constraints such as lack of investible resources and working capital will certainly hamper production, which may be exacerbated by shortage of skilled workers. Unavailability of information not only inhibits firms introducing new products and exploring new markets but also entering into business. Besides, there are certain other factors that determine the competitiveness of SMEs and consequently survival in the market. While trade policies can promote some enterprises, others may be affected severely as a result of it.10 Physical infrastructure, transport cost; domestic environment, etc. may also be responsible for firm’s competitiveness. These factors will be discussed further in the next section. It needs to be mentioned here that the demand and supply side factors do not operate in isolation. Rather, they interact amongst themselves to aggravate the situation further. For example, weak physical infrastructure, hostile domestic environment, corruption, transport cost, and shortage of skilled workers may are likely to affect investment. Again, factors like domestic environment and corruption can aggravate such demand side constraints as timely delivery, availability, and social campaign.
4.2 Contribution of SMEs to Employment and GDP: The contribution of SMEs to employment, GDP, and other important economic aggregates is significant although it is difficult to measure many of these contributions and their changes over time due to paucity of data. 4.2.1 Employment:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 32
One significant advantage of SMEs in a labor abundant economy like Bangladesh is the huge employment generation potential of such enterprises due to labor intensive nature of most of the SME activities. The available information shows that the number of total employed labor force has been increasing over time in Bangladesh (Table 5). Between 1986 and 2006, the labor force grew by nearly 3 percent while employment grew by 2.6 percent. Over the period most of the employment growth took place in the SME sector (Tables 6 and 7). In the small enterprises, employment grew by 4.8 percent during 1978-1991 and by 5.5 percent during 1991-2001. Employment growth in the medium enterprises is estimated at 9.6 percent during 1988-2003. SEDF (2003) reports that between 80 percent and 85 percent of the total industrial employment and 23 percent of the country’s overall employment is accounted for by the SMEs. Mondol (2006) reports about 40 percent of the country’s total labor force is engaged in SMEs. 4.2.2 Output and value added: In general, the SMEs have more flexibility compared with large enterprises in terms of capital, labor, technological knowhow, and other dimensions of their operation. Uddin (2006) argues that SMEs are more efficient than the large scale enterprises. Some comparable data on gross output, value added, and profit of SMEs and large firms show that value added as percent of gross output is lower for SMEs than for large firms (Table 8). On the other hand, value added per worker and profit are higher for SMEs. Labor productivity (value added per worker) for SMEs is Tk. 96.7 thousand while it is Tk. 94.7 thousand for large firms. The contribution of SMEs to the country’s GDP varies with the contribution of SMEs to industrial output, the estimate of which differs widely across studies. The commonly quoted figures vary within 40 percent to 50 percent of the total manufacturing value added. According to ADB (2003), food and textile units including garments account for over 60 percent of the country’s registered SMEs. It is also maintained that the SMEs have undergone significant structural changes in terms of product composition, degree of capitalization, and penetration in order to adjust with changes in technology, market demand, and market 6 accesses brought about by globalization and market liberalization (Ahmed 2001, ADB 2001, and USAID 2001). The total contribution of SMEs to GDP at about Tk 741 billion in 2003 which is about a quarter of the country’s total GDP in the year (Table 9). The table also shows that enterprises having two to five workers contribute more than half of the contribution made by SMEs to GDP, followed by those having only one worker (26 percent) and those having six A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 33
to ten workers (10 percent). In the case of sectors, manufacturing SMEs contribute the highest proportion of 38 percent to GDP; followed by agricultural SMEs (24 percent) and SMEs in wholesale and retail trade and repair activities (23 percent) (Table 10). In this respect, cross-country figures show wide variation in the contribution of SMEs to GDP.
4.3 The Increasing Priority Placed on SME Development: The role of SMEs in providing productive employment and earning opportunities has emerged as an important concern among policy makers, donor agencies and researchers. This growing commitment towards the development of the SME sector is based largely on three core arguments3. First, SMEs enhance competition and entrepreneurship, and hence have external benefits on economy-wide efficiency, innovation and aggregate productivity growth. Thus direct government support of SMEs will help countries exploit the social benefits from greater competition and entrepreneurship. Second, SMEs are generally more productive than large firms, but financial market and other institutional failures impede SME development. Thus, pending financial and institutional improvements, direct government financial support to SMEs can boost economic growth and development. Third, SME expansion boosts employment more than large firm growth because SMEs are more labor intensive. From this perspective, subsidizing SMEs may represent a poverty alleviation tool. SMEs are considered to be the seedbed for the development of entrepreneurial skills and innovation. Small capital requirement makes easy entry and exit possible and private sector entrepreneurial activities have many important spillover and positive externality effects. However, liberalization of the economy along with rapid globalisation has posed severe challenges to SMEs not only in international markets but also in the domestic economy. Since SMEs are based on relatively small investment, their survival depends on readily available markets with easy access. In today’s world, market development is a much more challenging task, which requires coordinated efforts by individual business enterprises and the Government.
4.4 Place of SMEs in the National Economy of Bangladesh: A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 34
Any precise quantitative estimate of the importance of SMEs in Bangladesh economy is precluded by non-availability of comprehensive statistical information about these industries at the national level. Latest BSCIC estimates suggest that there are currently 55,916 small industries and 511,612 cottage industries excluding handlooms. Including handlooms, the number of cottage units shoots up to 600,000 units indicating numerical abundance of small and cottage industries (SCIs) in Bangladesh. The most recent private sector survey estimates the contribution of the micro, small, and medium enterprises (MSMEs) is 20-25% of GDP (Daniels, 2003).4 Quoting informal Planning Commission estimates, the SEDF puts the number of medium enterprises (undefined) to be around 20,000 and that of SCIs to be between 100,000 to 150,000. This wide variation in the BSCIC and Planning Commission estimates of the number of SMEs might be due to at least two reasons: (a) different definitions of SMEs and (b) different coverage of SME families. There is an urgent need for adopting and using a uniform set of definitions for SMEs by all government agencies to help formulation of proactive SME promotion policies. Regardless of the correct magnitude, SMEs undoubtedly play a very important role in the economy of Bangladesh in terms of output, employment, and private sector activities. They are quite predominant in the industrial structure of Bangladesh comprising over 90% of all industrial units. Together, the various categories of SMEs are reported to contribute between 80-85% of industrial employment and 23% of total civilian employment (SEDF, 2003)6. However, serious controversies surround their relative contribution to Bangladesh’s industrial output due to paucity of reliable information and different methods used to estimate the magnitude. The most commonly quoted figure by different sources (ADB, World Bank, Planning Commission and BIDS) relating to value added contributions of the SMEs is seen to vary between 45-50% of the total manufacturing value added. While SMEs are characteristically highly diverse and heterogeneous, their traditional dominance is in a few industrial sub-sectors such as food, textiles and light engineering and wood, cane and bamboo products. According to SEDF sources quoted from ADB (2003), food and textile units including garments account for over 60% of the registered SMEs. Various recent studies (Ahmed, M.U. 2001, ADB 2001, USAID 2001) show that SMEs have undergone significant structural changes in terms of product composition, degree of capitalization and market penetration in order to adjust to changes in technology, market demand and market access brought by globalization and market liberalization. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 35
4.5 Growth and Structural Transformation of SMEs: In terms of number of establishment, the SME sub-sector has exhibited notable dynamism. Table 1 presents the trend of SME sector growth. Available evidence (Ahmed M.U. et.al 1992) suggests that 60% of new industrial enterprises during 1980s were SMEs. Growth in SME employment seems to have been even better during the same period. The dismal performance in value added growth is explained by the weak and faulty database used by the Bangladesh Bureau of Statistics (BBS) to estimate the parameters. Indeed, when revised estimates of value addition in the SMEs are made using the new system of national accounts8, the annual compound rate of growth of value added (Table 2) by the SME sector not only shots up to 7.7% per annum during 1989/90 and 1994/95, it exceeds that of the large-scale industries during most of the 1990s.
Broadly four industry categories (food and allied products, textiles and apparels, and engineering and fabricated metal products) currently dominate the SME sector. In recent years, other industries which have grown in importance in the SME sector are light engineering, readymade garments, printing and publishing, wood and wood products, plastic products, electrical goods, electronics, artificial jewelry, wooden and steel furniture, television and radio assembling and soaps and detergents. The growth in new sectors is reflective of a structural change taking place in the SME sector from traditional to relatively modern product categories, perhaps with higher capitalization and use of better production techniques. Summarizing the findings of various major studies the SEDF lists the following important positive changes taking place in the situation of the SMEs in Bangladesh: •
SMEs have diversified their activities
Entry and exit into the sector has become easier
The RMG industry has contributed significantly to SME development by
providing them with orders for accessories and packaging materials •
The development of the footwear industry has increased subcontracts to SMEs
Small-scale entrepreneurship has grown significantly in agro-processing in general
and in poultry in particular.
Chapter 5 A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 36
5.1 Contribution of Banks to SME Sector: SME financing is a high risk service with low profit, discouraging the banking sector to extend loans to this sector. However, banks cannot ignore an emerging sector like SMEs. That is why; banks are continuously endeavoring to evolve appropriate model(s) of financing SMEs. Generally, banks provide both working and other than working capital financing to large and medium as well as small industries. Unfortunately, information regarding financial contribution by banks to this sector is not segregated. We have reviewed the contribution of different type of banks to this sector from 1991-2005 (June), published by Bangladesh Bank. It is clear that both working capital and other than working capital financing is higher in large and medium industries than that of small industries. Recently, working capital financing has been increased in large and medium as well as in small industries. That may be because of the recently formulated USD 30 million Small and Medium Enterprise Sector Development Project in Bangladesh Bank. A complete picture of the contribution by different banks is available in the Appendix B. However, in an earlier paper, we have shown that in terms of contribution to SCIs, nationalized commercial banks (NCBs) come first followed by private commercial banks (PCBs) and specialized banks (SBs). The reason behind the upward contribution of PCBs is that a fund of BDT 116.00 Crores under the Credit Agreement No. 1070-BAN (SF), signed between the GOB and ADB on 25 January 1991 (Siddiquee, 2003). Credit disbursements under the above credit scheme totaled BDT 95.33 Crores against 183 SCI projects on 8 October 1998. The growth rate of PCBs declined thereof. Under another credit guarantee scheme, Government released BDT 25.00 Crores to Bangladesh Bank for providing guarantee facility to investors in SCIs. However, the growth became quite sluggish in the year 2000 and 2001 because of the abeyance of new proposals under the scheme as per decision of the Ministry of Finance of 14 September 1999 (Bangladesh Bank Annual Report 2000-2001). Moreover, only the NCBs have extended credit to priority sectors in response to government directives that at least 5% of a bank’s loan portfolio be set aside for SCIs financing, although this is not sufficient. The contribution of PCBs in developing this sector is very meager. It seems that they even do not care for the government directives. For example, in 2001, NCBs have outstanding loans and advances of BDT 504.93 Crores in SCIs, which is 1.54% of total loans and advances outstanding, whereas PCBs have BDT 303.32 Crores (0.86% of total loans and advances outstanding) and SBs have BDT 110.74 Crores (1.02% of total loans and advances) (Siddiquee, 2003). A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 37
5.2 Credit Products and Services Available For SMEs in Bangladesh: SME financing is a new product in the range of services provided by banks. SME loan is different from other loans, not only because this is small in size, but also because its modalities are different. Nevertheless, to foster the growth of SME sector, various financial institutions now offer a wide range of products and services to SMEs in many countries. Unfortunately Bangladesh still has a scarcity of SME financing institutions or SME financing products and services. For example, two banks namely BASIC Bank (SME financing covers almost 100% of the loan portfolio) and BRAC Bank Limited (extends over 50% of the loan portfolio) are specifically devoted to SME financing. Other commercial banks are also open for SME finance, though their coverage is low. However, commercial banks should not be the only source of SME financing. There are other financial institutions, which finance SMEs worldwide, such as the SME Department of International Finance Corporation (IFC), World Bank Group. IFC has extended the SME financing facilities to Bangladesh through the South Asia Enterprise Development Facility (SEDF) along with the 13 local Partner Financial Institutions (PFIs). The PFIs include commercial banks (such as Arab Bangladesh bank Ltd., BRAC Bank Ltd., Dhaka Bank Ltd., Southeast Bank Ltd., and The City Bank Ltd.), leasing companies (e.g., Industrial Development and Leasing Company of Bangladesh Ltd. (IDLC) and United Leasing Company Ltd), and SME Banks. SEDF PFIs have subscribed to the concept of SME finance and have worked towards this. SEDF has already developed Credit Scoring modules at 7 PFIs. This enables these PFIs to reduce the time requested for screening SME loan applications. Moreover, a comprehensive risk grading framework has been developed for a PFI which enables the company to better manage its lending risks and adopt risk-based loan pricing policies. SEDF assists two PFIs in setting up separate SME departments. This includes establishing the appropriate strategy, organizational structure, operational processes and risk management. SEDF is also conducting a detailed segmentation study of the SME market in Bangladesh. The contribution of PFIs is summarized in Table 2. Depending on the entrepreneurs financing needs and the suitability of such financing to their ventures, a wide variety of products offered in the market. The products or instruments available globally for channeling funding to SMEs include but not limited to term loans, leasing, industrial hire-purchase for asset acquisition/business expansion, overdraft (OD), revolving credit, factoring, letter of credit (L/C), trust receipts, A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 38
bankers acceptance (BA), foreign exchange contracts, bills of exchange purchased, etc. for working capital needs, outward/inward bills for collection (OBC/IBC) for trade services and Bank Guarantee (BG), and Shipping Guarantee (SG) for different guarantee services. For example, IFC has developed products like Leasing, SME Risk Capital, Equity Funds and services like Credit lines, Credit bureaus etc. that can expedite the total process of SME financing. To enquire about the availability of SME financing products and services, we have surfed a number of commercial banks website as well as the websites of other financial institutions, such as IDLC of Bangladesh and IPDC of Bangladesh. We have found that some of them do provide some .innovative. Products and Services solely targeting SMEs, while others have repackaged some of their existing products as SME products. For example, •
BRAC Bank introduces. Anonno
The City Bank Ltd. has Cash Credit (Hypothecation), Cash Credit (Pledge), Secured
Overdraft, SOD Against Work Orders), •
Dutch Bangla Bank Ltd. has .Small Shop Financing Scheme., Overdraft, Cash Credit
Eastern Bank Ltd. has Current A/C, STD A/C, Fixed Deposit A/C, Overdraft/Cash
Credit, Demand loan, Time Loan, Term Loan, Letter of Credit, Import Loan, Guarantee, Local Bill Purchase, Foreign Bill Purchase), •
Prime Bank Ltd. introduces Small & Medium Enterprise (SME) Cell, which has
access to USAID funds; •
Pubali Bank Ltd. has mere Term Loan;
Social Investment Bank Ltd. has Special Credit Line for Small and Medium shop
owners; and South East Bank Ltd. has only Term Loan. Among the non-bank financial institutions (NBFIs), IDLC of Bangladesh mainly focus on SME financing by providing business solutions through financial products like business loan, machinery loan, double loan and lease finance. They have introduced .factoring first in the country. Among other sophisticated SME financing instruments, Industrial Promotion and Development Company (IPDC) of Bangladesh has introduced the first asset securitization in Bangladesh in 2004, followed by IDLC of Bangladesh with Asset Backed Securitized Zero Coupon Bonds of BDT 190 million in 2005 (Siddiquee, et. al., 2006).
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 39
Chapter 6 6.1 Access to finance by SMEs: As noted above, limited access to bank financing is one of the critical constraints of SMEs in Bangladesh. These enterprises have a limited scope to access the capital market for term A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 40
lending as well. As such, the SMEs are almost fully dependent on either own sources of finance or to formal banking sources. Although the large enterprises have a greater capacity to raise capital (term lending) from the capital market, they still depend heavily on bank financing for term loan as well as working capital. As a result, the SMEs are somewhat crowded out from the banking sources. The share of term lending and working capital for large scale and small scale industries is given below. It shows that the share of term lending in total advances for large industries lied within a range of 88 percent and 95 percent during the last 15 years with a consequent share for small scale industries lying between 2 percent and 5 percent. Similarly, the share of working capital financing for large industries was between 90 percent and 95 percent as against the share of 3 percent and 11 percent for small scale industries. In recent years, there seems to have taken place a change in the attitude of the commercial banks as reflected in higher loan disbursement to SMEs. Loan disbursement to SMEs by scheduled banks registered a growth of 5.8 percent during June 2006 to December 2007; with loan disbursement to small enterprises rising by 6.3 percent and to medium enterprises by 5.4 percent (Table 12). For ensuring smooth and efficient loan disbursement to SMEs, some private commercial banks have created special windows for them.
6.2 SME Financing in Bangladesh: It has been observed that banks usually do not express interest towards SME financing. The reason behind this conservativeness is higher operational cost, but less return and high risk associated with the SME financing. Due to small loan size, the operational cost is higher and they require intensive monitoring and supervision. The main reason of higher risk is that small and medium entrepreneurs are highly unlikely to comply with the collateral requirements as typically they do not have immovable properties. With the excuse of collateral sometimes banks and Non-Bank Financial Institutions (NBFIs) are reluctant to finance SMEs. But when steps taken by the Government and International Agencies have identified SMEs as a priority sector, the government, in cooperation with Bangladesh Bank and different development partners, has initiated a number of measures with a view to making financial services easily available to this sector. As part of such measures, recently the Bangladesh Bank has introduced a scheme of BDT one billion to offer refinancing facility to scheduled banks and financial institutions against their loans to SMEs (MOF, 2005). Besides, World Bank, under Enterprises Growth and Bank Modernization Program (EGBMP), has provided USD 10 million, and ADB, under SME Sector Development A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 41
Program (SMESDP), has approved USD 30 million loans in order to extend credit facilities to SME entrepreneurs. (ADB,2005). Due to support of the Government and donor agencies, the disbursement of loan in SME sector is increasing. The following table-1 illustrates the refinancing facility given to banks and NBFIs till April, 2005. In pursuing the important of SMEs, recently a number of commercial banks, NBFIs and NGOs/MFIs have come forward with special initiatives of different types. Agrani Bank has launched Employment Generation Project for the Rural Poor (EGPRP) and Small Enterprises Development Project (SEDP) in collaboration with some International Agencies. A few banks such as the BRAC Bank and the Eastern Bank are currently rendering a special service named SME banking. Leasing companies are also offering attractive products for SMEs. The Microfinance industry has made a remarkable growth in Bangladesh over the last one decade. Some large MFIs like Grameen Bank, BRAC, ASA and PROSHIKA are offering Microenterprise loan to their graduate clients3. The following Table-2 demonstrates the sharp growth of micro enterprise loan made by 4 leading MFIs (Grameen Bank, BRAC, ASA and PROSHIKA). During the period from 2001 to 2005 total yearly micro-enterprise lending increased by an amazing 2000 percent from BDT 703.94 million to BDT 15161.24 million. More or less the same trend is believed to be true of all the MFIs. Along with large NGOs/MFIs, many medium and small MFIs are also offering Microenterprise products to their graduated clients. Usually the scheduled banks have a common practice of providing loan for small and cottage industries. The loan activities of schedule banks related to small and a cottage industry is presented by Table-3. The Table suggests that banks are gradually becoming more inclined to small enterprise financing. The zero figures for FCBs do not necessarily downplay the role of Foreign Commercial Banks in SME financing. They merely indicate the non-existence of loan made by the FCBs in the specific name of small and cottage industries. Indeed several foreign banks are now engaged in SME banking.
6.3 Prospects of SME Financing: SME has been considered as the thrust sector in the economic development of the country with growing importance from all walks of life. It is evident that, substantial increase in SME and Retail Credit portfolios along with commercial, corporate and institutional lending, would lead the banks to its higher trajectory of growth, minimizing the risk of A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 42
lending through portfolio diversification. As such, most of the banks have taken up aggressive marketing policy to augment their exposure in SME and Retail Credit. Though SME concept is nothing new, as evident from the establishment of Bangladesh Small and Cottage Industries Corporation (BSCIC), but a fresh look into and endeavour to boosting the sector are still imperative. Bangladesh Bank re-finance scheme for SME is laudable. The role of IFC-SEDF for creating awareness among the entrepreneurs and banks/NBFIs to be more focused in SME deserve appreciation. Un-employment problem is a growing concern all over the world more particularly in developing countries, and the panacea to the setback mostly lies in massive development of labor incentive SME sector. SME in many cases can be set up at domestic and household level contributing to cost cutting. Family members may also participate in the process. Bangladesh is highly resourceful with so many seasonal fruits and also lots of agricultural products. Pineapple and mango are best used to produce jam/jelly/juice etc under SME. Tomato sauce and potato chips are popularly used all over the world. SME is most suited for processing the items. If we can add more quality to the products and ensure proper marketing, tremendous demand will be created in domestic and export market. Within the purview of WTO the world is growing to turn into a single entity/state where movement of goods and capital has been made free. Hence, the country having advantages of producing any particular item over others should have monopoly market for the product. Availing the opportunity of WTO our entrepreneurs and government should come up to produce quality goods at a competitive cost where we have comparative advantages. In RMG industries (knit) circular machines are used for knitting of the items. The circular machines can also be set at household level to perform job works to feed RMG industries for ultimate export of T/Polo Shirts etc. This is a subcontracting system where RMG industries supply yarns to the entrepreneurs having circular machines. The system has already been introduced in Dhaka and Narayangonj areas with growing demand. Shoe making by small industries as job works of big shoe companies like BATA is a glaring example of SME product. BATA supplies raw materials to lots of small factories at household level in Dhaka city and gets the product (shoes) completed through subcontract system. This is a real kind of integration of small and medium industries with big ones and once such integration takes place, the pace of industrial growth of the country will automatically set in. Lending in SME sector helps the banks to derive higher spread over corporate ones. Profit margin in corporate business houses is relatively getting lower due to stiff competition in the A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 43
market. They remain in the profit track increasing the sales volume only, having the advantage of big investment. Bangladesh Bank has fixed SME loan limit at Tk 2.00 lac to 50.00 lac and thereby risk is distributed among millions of customers which entails lower rate of classification than big loans where all eggs are put in a few baskets. As such, most of the banks have undertaken aggressive marketing policy to increase exposure in SME and Retail Credit to minimize lending risk through portfolio diversification.
6.4 SME Refinancing Scheme of Bangladesh Bank: In view of the limited access of SMEs to credit facilities from the formal banking system, Bangladesh Bank has opened a window of SME refinancing facilities for the commercial banks and the non-bank financial institutions (NBFIs) so that they can accommodate a larger amount of SME financing for which BB earmarked a refinance scheme fund of Tk. 3 billion which has recently been raised to Tk. 5 billion. Since its inception, banks and NBFIs have been availing the refinance scheme and till March 2008, the refinanced amount was Tk. 6.21 billion which was Tk. 1.24 billion at the end of April 2005. As against this refinanced amount, the banks and NBFIs distributed loans to 7,598 beneficiary enterprises, which were 2,192 in 2005. It may be mentioned that the banks and NBFIs are required to maintain 2 percent general provision against unclassified SME loan which has recently been reduced by BB to 1 percent. In order to ensure a greater flow of funds to the SME sector, BB has issued some pragmatic guidelines for the banks and NBFIs. These financial institutions are required to fix yearly loan disbursement target for SMEs of which at least 40 percent should go to small enterprises and the rest to medium enterprises. In addition, dedicated desks are to be opened for small and medium entrepreneurs. Women entrepreneurs, who are talented, courageous, and creative, have been playing a pioneering role in the SME sector, especially in agriculture, RMGs, handicrafts, furniture, and the poultry sector, despite facing many hurdles such as bureaucratic and institutional deficiencies, difficulties in accessing information relating to service facilities including institutional and marketing support, and limited access to bank finance and high lending rates in establishing and running their businesses. In order to promote women entrepreneurship, SME Foundation has constituted a forum titled ‘National Women Entrepreneurs Forum (NWEF)’ and commenced credit operations to provide credit to SME A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 44
entrepreneurs at a low rate of interest. In order to expand the participation of women in SMEs and provide greater support to women entrepreneurs, BB has enhanced the minimum allocation under its various refinance schemes (ADB, BB, and EGBMP) from a level of 10 percent to 15 percent, of which 40 percent has been kept for women SME entrepreneurs. Apart from this, BB has taken several other measures to support women entrepreneurs: 1
• Banks and NBFIs have been directed to settle the loan process with highest priority
within a minimum time upon receiving loan applications from women entrepreneurs. 2
• Each bank and NBFI shall open ‘Women Entrepreneur’s Dedicated Desk’
(WEDD) which would be serviced preferably by female officers trained in SME financing. 3
• The WEDD shall provide other related services including guidance in project
formulation and implementation, assistance in processing loan application, and other banking services. 4
• The banks and NBFIs have been advised to adopt transparent business strategy and
guidelines for sanctioning loans so that loan application and selection process for women entrepreneurs becomes easy, efficient, and less time consuming.
6.5 Equity and Entrepreneurship Fund: In order to encourage investments especially in risky but prospective agro-based, food processing and IT sector industries, the Equity and Entrepreneurship Fund (EEF) was established through budgetary allocation of the government. Initially, the government allocated Tk. one billion in FY01 for EEF and BB was entrusted with the responsibility of administering the fund. Since its inception, a wide range of enterprises have availed the EEF, most of which are SMEs. The major sectors include: poultry and feed, fish hatchery, shrimp hatchery, cattle and goat feeding, meat processing, fruit processing, wood processing, and software development. Until March 2008, a total of 247 entrepreneurs received Tk 4,677.5 million from the EEF. The disbursement to fisheries and fish cultivation sub-sector was the highest followed by software development, poultry and fish feed, grandparent hatchery, potato flask, and fruit processing. Total disbursement, however, shows a declining trend in recent years mainly due to low demands from participating banks and financial institutions (Table 13). The above developments indicate that financing from formal sources to SMEs is growing at a faster rate in recent years. Since access to finance is one of the key constraints of the SMEs, it is expected that higher flow of institutional credit would enable the SME sector to A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 45
expand at a faster pace with positive impact on growth acceleration and employment generation in the country.
6.6 Credit Wholesaling Program of SME Foundation: SMEF wholesales credits by channelizing fund to the targeted SMEs through Banks and Non-Banks Financial Institutes (Partner Financial Institutions, PFIs). So it is important as well as a precondition to involve and attract the PFIs on credit wholesaling program. SMEF would offer some incentives to PFIs and main of these are: 1. Single Digit rate of Interest for the wholesaling funds so that the PFIs is able
enjoy a good margin and at the same time lending rates to SMEs are lowered. 2. Easy terms and conditions for the CWS program so that the PFIs can comply with minimum effort. 3. Training of PFI staffs on SME related courses. Using various institutions like BIM, BIBM, etc. SMEF may offer relevant training courses to the PFI employees for their skill development in relevant and required areas. 4. Various Technical assistances to PFIS for capacity building and efficiency development. SMEF may offer assistance for capacity building in terms of technology, processes, credit management and product development 5. Based on PFIs experiencing issues and problems, SMEF would offer advocacy to various relevant authorities with appropriate recommendations.
6.7 Relationships between Government and SME: A second point is how we may increase the share of SME participating in the provision of goods and services to the public sector, as it is common practice in many countries. A typical SME in Pakistan caters to the domestic private sector. It is noted that fewer than 4% are supplying to the government sector. Some of the issues are related to tough bargaining price (36%) and supplies on credit (34%) and other are related to absence of rules on how to the public sector should increase its procurement from SME. Taxation: Findings & Observations Lack of awareness about the taxation system (58%-income tax, 44%-sales tax) Perception about tax agencies (32-36% said that fines and harassments are the major
factors) A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 46
Complexity in procedures results in high cost of compliance Tax policy is biased in favor of large-scale enterprises Timeframes for various procedures are neither followed nor implemented Source: ILO - SMEDA report Labor Issues: Findings & Observations Lack of proper mechanism and implementation machinery Inefficient labor judicial system
Lack of awareness about laws & policies amongst SMEs Predatory inspection system Large number of overlapping laws (56 Labour laws–inclusive of sector specific)
Laws not run in consonance with advancement in industries Perception about Social Welfare; limited coverage and efficacy of the social safety net Finance:
It has been observed that 57% of new investment for Small and Medium Enterprises
and 67% of working capital finance come from internal finance or retained earnings; only about 7% of funds for investment or working capital come from banks or other financial institutions. Even suppliers’ credit rivals the contribution of the banks as a source of working capital (4.5%). Another survey concludes that SME are indeed being rationed out of the credit market, rather than merely exhibiting a lower demand for credit. Technology Transfer and Up-gradation:
In our country, growth oriented exporting firms still have problems sourcing quality
inputs due to the lack of a network of reliable suppliers. This adds to their transaction costs. Likewise, the SME are not large enough to furnish sufficient demand to be an incentive for a big high quality input supplier. Market and Industry Information:
Access to market and industry information is one of the keys to develop successful
business strategies. Frequently, business and trade associations are able to provide their members with such services. By associating with like institutions in foreign countries, they are also able to establish links and obtain information on foreign markets. Literacy: A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 47
The evidence reveals that SME find it extremely difficult to grow because of their
inability to delegate to soundly trained staff. The day, the small businessman feels comfortable to delegate, SME start progressing. Law and Order:
Law and order situation in Pakistan has always been regarded as worrisome. One
survey reports that one in five respondents report that the business was the target of at least one crime during 2002. Another assessment suggests that businesses in NWFP spend 4.5%, Sindh and Punjab 1-2% of their revenue on security. One in four SME consider law and order to be a severe problem. Intellectual Property Rights:
Intellectual Property Rights (IPR) is a vital issue that needs to be looked into. It has
been observed that many developing countries, with the help of a change in their IP systems and laws, are able to attract Foreign Direct Investment (FDI) in the Research and Development (R&D) especially in the industrial and scientific field. Therefore, promotion and protection of intellectual property spurs economic growth, creates new jobs and industries, enhancing the quality and enjoyment of life. Infrastructure:
Basic physical infrastructure is a prerequisite to growth and development. Power
outages and access to connections are considered an irritant which significantly affects the productivity of firms in Pakistan. It is estimated that a typical business in Pakistan loses 5.6% in annual sales revenue due to just this single factor. GOVT. Initiatives for SME Development:
Small and Medium Enterprise Development Authority (SMEDA)
Small and Medium Enterprise Center (SMEC)
Small and Medium Enterprise Foundation (SMEF)
One Village One Product (OVOP)
National Technical Education and Vocational Training Authority (NTEVTA)
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 48
Chapter 7 7.1 Constraints to SME Growth: It is important to understand the operational strengths and weaknesses of the SME sector for pragmatic policy making and effective implementation of such policies. Given the heterogeneity in the type, composition and characteristics of SME facilities, it is exceedingly difficult to generalize operational constraints. However, common constraints include: • Lack of modern technology • Lack of adequate investments A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 49
• Irregular/inadequate supply of power • High rate of interest on bank loans • Inadequate availability of raw materials • Absence of clear-cut government policies • Fierce competition • Lack of skilled technicians and workers • Lack of research and development facilities. In addition, lack of institutional credit, non-availability of working capital, low levels of technology, low productivity, and lack of marketing facilities and market access problems are major bottlenecks to SME growth in Bangladesh. In the recent years, domestic law and order conditions, unreliable power supply and stiff competition both in domestic and international markets seem to have been the added dimensions to the SME operational bottlenecks. However, systematic and in-depth studies based on sufficiently large samples are needed to precisely identify the operational woes of the different categories of the SMEs.
7.2 Analysis of Constraints in the Context of Bangladesh: Quality and Standards: Bangladesh has failed to ensure the quality of products and services to consumers not only in the domestic market but also in international markets. There is no national quality policy and adequate support systems that provide assistance to all enterprises to understand the principles of quality and to develop quality consciousness in business behavior. Currently, the Bangladesh Standards and Testing Institution (BSTI) formulate national standards of industrial, food, and chemical products. However, the most important problem is that BSTI lacks credibility and importers from North America and Europe do not accept certificates issued by it (Haque, 2003). The other crucial problem is that while BSTI can impose restriction on marketability of local products if they fail to comply with standards, there is no such provision for imported goods. This puts locally produced goods at a disadvantageous position visà- vis competing imports (Feria, et al., 2003). Marketing: SMEs in Bangladesh, especially the small enterprises, do not have enough marketing capability and network. An overwhelming majority of small firms do not have resources to be invested in marketing. Advertisement is an important determinant of demand but SMEs A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 50
in Bangladesh in most cases are not in a position to use this as a marketing tool. Exportoriented SMEs have very little marketing activities and most of them try to survive by linking up with multinational buyers or setting up subcontracting relationships with them. In the domestic market, SMEs are confronted with cheap imports and are hard pressed to hold on to their market share. Also, a lack of resources and skills make it difficult for SMEs to take advantage of market promotional activities. Investment and Working Capital: One of the most important problems affecting supply is the access to finance. SMEs need finance to enable them undertake productive investment in order to expand their business, to introduce new products, and to market them. Various survey and micro studies in Bangladesh have identified access to finance as the main problem facing the SMEs. In the most recent private enterprise survey (Daniels, 2003), as many as 58% of the surveyed businesses report the problem of lack of investment funds and 35% also mention the problem of lack of operating funds. Banks are shy to lend to SME activities, as they do not consider them as attractive and profitable undertakings (Hossain, 1998; Bhattacharya, 2000; and Sia, 2003). SMEs are also regarded as high risk borrowers because of their low capitalization, insufficient assets, and high Restrictive trade policy such as overvalued exchange rate, high tariffs, quantitative restrictions, etc. will create an anti-export bias and as such SMEs in the export-oriented sectors will be affected mortality rates (Sia, 203) and consequently, they are not offered any attractive deals in terms of loans and interest rate. SMEs in the export sector also have the problem of access to working capital and there is no credit insurance policy for them. Shortage of Skilled Workers: Although Bangladesh is a labor abundant country, shortage of skilled workforce is perceived to be a major constraint for manufacturing production. This problem is particularly acute for medium scale export oriented enterprises. Manufacturing goods now overwhelmingly dominate Bangladesh’s export basket, but a significant proportion of it comprises very low domestic value addition because of limited backward linkage in the RMG sector, which will require skilled manpower. Therefore, supply capacity is preconditioned by availability of skilled workers.
Lack of entrepreneurship and management skills: Most owner-managers and entrepreneurs often lack wider managerial skills that hinder their long-term success. Strategic planning, medium to long-term vision, marketing, commitment A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 51
to quality, knowledge of quality systems, communicating in foreign languages, cash-flow management, information technology are a few critical elements of management required to meet challenges of the market economy, especially in the international market environment. In such a complex setting since it is not possible for an individual to muster all of these qualities, firms make division of labor. There is some evidence in the context of the developed countries that formal management training can reduce the failure rates of small enterprises (OECD, 2002). However, smaller firms are less likely than larger enterprises to provide training to its workers and managers and are less aware of the benefits they would obtain from management training and few see training as a strategic tool. Besides, there is also a lack of facilities for such training. Physical Infrastructure: The state of physical infrastructure is weak in Bangladesh. It is evidenced that in countries with poor infrastructure, business must devote more resources to such tasks as acquiring information, procuring inputs, and getting their products to market (World Bank and BEI, 2003). There are two dimensions of poor infrastructure – one is the unavailability of a certain service or utility (such as telephone, water, electricity, roads and highways, etc.) and the other is the unreliability of the services provided. In Bangladesh there are problems on both fronts and together undermines the competitiveness of SMEs. Transport costs: The World Bank-BEI (2003) enterprise level survey finds transport to be a bigger problem in Bangladesh than in some comparator countries. Three factors interact to accentuate this problem. First, the recent research works on economic geography and international trade suggest that unfavorable geographical locations (e.g. distance) increase the costs of both export and import trade relative to countries with more favorable geographical characteristics. A 10-percentage point increase in transport costs is found to reduce trade volumes by about 20 per cent (Limao and Venables, 2001). Bangladesh must be more competitive in the manufacturing process to offset 12 Credit insurance is the insurance against the risk of non-payment by the buyers in the importing countries. The geographical disadvantage of being farther away from its North American and EU markets compared too many other competitors. Inefficient and corrupt ports and inland transportation increase the cost of production substantially. Under this circumstance, many SMEs will find it extremely difficult to compete in the global market. Import-competing SMEs that rely on imported raw materials for their production may also be equally affected. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 52
Trade Policy and Incentives: Bangladesh’s trade policy underwent a radical change particularly in the decade of the 1990s. Liberalization of industrial and trade regimes along with globalization are likely to have had significant effects on Bangladesh’s SMEs (Ahmed, 2002; Bhattacharya et. al., 2000). Over the past decade there has been a significant change in the world trade regime. The WTO agreements limit the use of certain trade measures as quantitative restrictions and subsidies. WTO agreements not only cover the traditional goods sector, but also new sectors like services and intellectual property rights. There is a tendency for considering these newly included sectors as constraints to trade prospects of a poor country like Bangladesh. Long-run economic prosperity will critically hinge upon turning the challenges of globalization into opportunities. Besides, there are certain benefits of trade agreements. For example, one salient feature of SMEs is that they often rely on indigenous techniques of production which are based on genuine innovation. Now if they can be protected with intellectual property rights, this may generate substantial business opportunities for SMEs. There is evidence in the context of developing countries that innovations from small enterprises have resulted in large-scale businesses. Information: Lack of information is a major constraint to market development of Bangladesh’s SMEs. Firms need all kinds of information: with regard to setting up a business, accessing finance, fulfilling government requirements, developing markets, and finding markets. Trade information is more than ever an element of competitiveness due mainly to three reasons: (i) Assessing market trends and characteristics, (ii) understanding the market and new market access conditions, and (iii) identifying new market opportunities and potential trading partners. The Internet has introduced a new way of doing business especially in the field of commercial operations – selling and buying, advertisement, servicing and training. The number of enterprises using Internet to market their products and services is rapidly increasing and more and more SMEs are becoming aware of the potential of this new technique. Poon and Jevons (1997) therefore appositely view that Internet has created unpredictable and unprecedented opportunities for SMEs and they can access to certain markets similar way as large enterprises and are able to engage international marketing which otherwise could have been unaffordable due to huge amount of resources required. The use Internet at the private enterprise level is still very low in Bangladesh and there is a serious lack of infrastructure in this regard. Amongst others, the dissemination of information is badly affected A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 53
as result of little use of Internet. It is often the case that since the private enterprises does not have the appropriate and adequate information (e.g., they are unaware of the rules and regulations and compliance requirements), government agencies monitoring the business practices take undue advantages (Haque, 2003).
Legal and regulatory framework: Creating an appropriate and effective legal and regulatory framework is an important precondition for the establishment of a legitimate private sector. The absence of an effective and transparent legal system discourages small firms in exploring into risky ventures of business. There are a number of redundant formal requirements to start and run business that create high compliance costs and become barriers to SME development, growth and market entry. These barriers are further exacerbated if administrative procedures to implement regulation are inefficient or cumbersome. Domestic environment: There is no denying that irrespective of the size – small or large – the performance of firms is affected by business environment. A stable macro-economy, an open trade and investment regime, and a competitive financial sector are argued to be most essential ingredients for a vibrant private sector (Hallberg, 2002). However, all this will work well if institutions function efficiently in an enabling environment. Feria et al. (2003) have identified a number of major issues that inhibit an enabling environment for SME businesses in Bangladesh. These are: (i) the absence of clear guidelines that would provide all future directions and programmes, (ii) an outdated legal and regulatory framework that is no longer responsive to the present needs, (iii) a tax regime that serves more as a disincentive for business, and (iv) a general failure in the bureaucratic system that increases the cost of doing business. Apart from the listed factors above, corruption is pervasive in Bangladesh and the country ranks worse on measure of corruption than its neighbours. It has been found that almost half of the private enterprises in Bangladesh recognize corruption as a major or very severe obstacle (World Bank-BEI, 2003).
7.3 Legal, Regulatory, and Administrative Constraints: As mentioned earlier, policy reforms of the past decade have brought about substantial relaxation in the investment sanctioning procedure. No prior approval is now required for investments involving own finance. However, there is scope for further improvement in the following procedural aspects relating to investment regulations: A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 54
Trade License: Investors are required to procure trade license from local government bodies by paying statutory fees. The process involves unnecessary delays, harassment and side payments. The procedure needs to be simplified and the issuance of the license made automatic subject to payment of requisite fees and declaration by the investor that the proposed investment is in conformity with the rules and regulations and zoning restrictions of the local government authority. Registration under Factories Act: According to the Factories Act 1965, all manufacturing units employing 10 or more workers are required to be registered with the office of the Chief Inspector of Factories and Establishments. The job of the Factory Inspector is to oversee the working condition and safety measures in the factory. In practice, the regulation has proved to be a major source of delay, harassment and unofficial payments for the investors particularly for those in the SME sub-sector as the existing regulations do not differentiate between different size categories with respect to safety and working conditions requirements. To relieve the investors of these problems the requirements relating to safety and working conditions should be defined separately and realistically for the SMEs and the discretionary powers of the Inspector should be minimized. Registration should be automatic once the investor has declared that the requirements have been complied with. Clearance from the Department of Environment: All industries are also required to obtain a certificate from the Department of Environment in respect of proper arrangement for anti-pollution and safety measures. Here again, the requirements should be clearly stated for the type and size categories of industry and the investor should be allowed to go ahead with investment on the basis of the undertaking that the requirements will be complied with. Registration with Sponsoring Agency: Registration with sponsoring agencies such as the Bangladesh Small and Cottage Industries Corporation (BSCIC), Board of Investment (BOI) or Bangladesh Export Processing Zone Authority (BEPZA) is voluntary unless an enterprise wants to avail itself of government incentives. To keep track of private investment in various sub-sectors, it would be useful to make registration with the sponsoring agency mandatory. However, to relieve the investors of possible hassles, registration procedure should be simplified requiring minimum information to be provided by the investor, and registration should not be held up until the proof of investment has been produced as the current practice appears to be. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 55
Contract Enforcement and Resolution: This is a constraint, which is faced by both large and small firms. Inadequacy in the system for contract enforcement and resolution arises from archaic legal system where procedure of adjudication is long drawn out and cumbersome and the system is corrupt. As a result it is not difficult to delay a scheduled date for hearing. SMEs with low sustaining power often lose out in the long drawn out court battle.
7.4 Financial Constraints: Access to Finance: SMEs encounter great difficulties while rising fixed and working capital because of the reluctance of banks to provide loans to SMEs. Banks are shy to lend to SMEs because of high processing and monitoring costs of loans to SMEs. The loan application forms for investment financing from banks are long, tedious, and redundant. Since the removal of the interest rate subsidy without the removal of interest band, financial institutions find little incentive to lend to SMEs. SMEs find it difficult to use non real estate assets as collateral to obtain loans from the banks. In the past, the government has attempted to provide SMEs with access to finance through targeted lending. There was a government directive that 5 per cent of a bank's loan portfolio be set aside for small and cottage industry financing. A new bank, namely, the Bank of Small and Cottage Industries (BASIC) was set up in 1988 with the objective of financing the small and cottage industries. There were also attempts to channelize fund received from international agencies such as the Asian Development Bank (ADB) to the sector through private banks. There were provisions of favorable debt equity ratio, special interest rates and credit guarantee scheme. The central bank also issued directives to both public and private commercial banks regarding working capital loans, use of standardized documentation procedure and time limits for credit sanctioning and loan disbursement. Notwithstanding all these arrangements for financing of SMEs, the actual delivery of institutional credit to this sector has been grossly inadequate. The following seem to be the key factors inhibiting flow of institutional finance to the sector. Project Preparation and Evaluation: The first problem entrepreneurs’ face in seeking institutional finance is with regard to preparation of the project proposal. In spite of directives from the central bank to follow standardized procedure, the loan application process has still remained lengthy and cumbersome. The entrepreneur often lacks the ability to formulate a proper project proposal. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 56
Even when he prepares the proposal drawing on outside expert services, there is no guarantee that the proposal will be evaluated properly as the financial institutions themselves lack adequate capability for proper project evaluation. Collateral Requirements: One of the main factors that have hampered flow of institutional finance into SMEs is banks' pre-occupation with collateral based lending. Traditionally banks have used fixed asset ownership, particularly land ownership as the basis for judging credit-worthiness. This puts SMEs at a relative disadvantage, as large entrepreneurs are often able to get around the problem because of their influence and contacts by putting up collateral of dubious valuation. The solution to this problem lies in banks seeking deposit relationship with owners of SMEs and using cash flow rather than asset ownership as the criterion for creditworthiness. An expanded credit guarantee scheme will have to play a vital role in this regard.
Bureaucracy and Corruption: Because of lack of proper autonomy and accountability the public sector financial institutions are beset with inflexibility, inefficiency, political interventions and corruption. Since the performance of the bank officials is not properly evaluated they lack the incentive to bring a large number of suitable borrowers, particularly those in the SME sector, within the fold of institutional financing. They adopt a passive and inflexible attitude towards the borrowers either to avoid the risk of making an inappropriate lending or to force the borrower to make side payments for more favorable handling of the loan application. Until necessary reforms in the public financial institutions are carried out, the SMEs will continue to bear the brunt of this institutional malice.
7.5 Major Industrial Constraints – A Historical Perspective (198898): There is a growing literature on various constraints that have impeded the growth of SMEs in Bangladesh. Many of the constraints presently encountered have been discussed in the preceding section. In this section, a summary of the findings from selected studies, during the 1988-98 periods, is being presented. Major Findings:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 57
Over the years, various studies have been conducted to identify constraints encountered by entrepreneurs in the industrial sector. A summary of the ranking of the problems from selected studies over the 1988-98 periods is presented in this section. Table 1 provides the ranking of the top eight problems according to the recently completed survey of eight SME subsectors under the JOBS program. The subsectors include: Steel Furniture, Small Metal Works and Light Engineering, Electrical Small Goods, Plastic Products, Specialized Handloom, Bakeries, Textile Dyeing and Printing, and Footwear. According to Table 1, electricity, credit, and law and order are respectively the three top ranked problems followed by legal barriers, excess competition, and dearth of technical assistance. Relative ranking under selected past studies of the top eight problems, identified under JOBS, is presented in Table 2. As evidenced in Table 2, points are awarded only if a problem was ranked as one of the top five under each of the respective studies (5 = most serious). A summation of the scores from the various studies reveals that credit and working capital have consistently remained as the major bottlenecks to industrial growth in Bangladesh. Electricity problem is also ranked close to credit as a serious problem at present and in the past. Unavailability and/or high price of raw material, poor law and order conditions and legal barriers are cited as serious problems, but not as highly as credit and power.
7.6 An Integrated Approach to Addressing the Constraints: Developed countries have been supporting small enterprises for a long time. All OECD countries have developed appropriate institutions and support measures to service the needs of the SMEs. Box 7 below outlines some of these measures as available in the US and EU. SMEs are assisted not just because they are small, but because of their capability to be efficient, innovative and their ability to compete in the national marketplace, as well as internationally. Given the discussions in the previous section, the need for providing effective support for in developing markets of Bangladesh’s SMEs cannot be overemphasized. By analyzing the worldwide experience, UNECE (2002) concludes that the establishment of a coherent national policy towards SMEs is very difficult. There is no standardized model arising from the market economies that can be applied for developing the private and SME sector in Bangladesh. Nevertheless, the integrated approach to SME development suggested by UNECE to a number of East European countries may deserve
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 58
serious consideration. This approach calls for devising appropriate measures at three levels, as listed below: (i) Strategic level (policy making); (ii) Institutional level (support institutions); and (iii) Enterprise level (entrepreneurs and business entities). The most important feature of the integrated approach is that it aims at providing a comprehensive support mechanism. Considering the problems faced by SMEs in Bangladesh, we can relate various desired actions to the three levels of the integrated approach. First, let us consider the enterprise level. There is no denying that the ultimate success in business depends on the efficiency of individual firms. Such constraints to market development as entrepreneurial and managerial skills will have to be developed at the enterprise level. But then institutions must play a vital role as facilitators. Training courses for improving the managerial and entrepreneurial skills, human resource development schemes, supporting firms in maintaining quality and standards, information gathering and their analysis, operation of an effective and supportive legal and regulatory framework, etc. are the areas where the role of institutions is indispensable. Finally, at the highest level the policy makers with inputs from stakeholders should design appropriate short-, medium-, and long-term strategies to promote SMEs and private sector.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 59
Chapter 8 8.1 Problems of SME Banking: However, the growth of SME is not exempted from the setback as appended below: SME loan is basically term financing and repaid on installment basis, but historically the business people in our country are accustomed to and prefer continuous loan (cash credithypo, overdraft etc) causing slow pace of disbursement of SME loans. A lion's share of SME loans (80%) is availed of for trading purpose, instead of manufacturing/service industries. Eventually, the purpose of SME loans to support the economic development of the country may not be served properly. As per Bangladesh Bank policy, provision on unclassified SME loans is maintained at a higher rate (2%) than the corporate and commercial lending (1%) which appears to be contradictory to the spirits of the programme. SME loan is predominantly supervisory credit and requires more manpower to conduct supervision, monitoring and recovery works and as such, big chunk of profit is not possible overnight. Besides, the private sector banks are more profit oriented and prefer financing to big and corporate customers towards achieving year on year increased profit target. As per Bangladesh Bank guidelines, SME is broadly categorized in 3 sectors: a) manufacturing, b) trading and c) service. While manufacturing A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 60
and service sectors are prioritized allowing almost 100% re-finance but trading sector hardly gets 20% refinance, though it constitutes more than 80% of total SME portfolio. Besides, refinance has to be claimed on quarterly basis and replenishment is made after one month and above. As such, refinance package may not be so attractive to the banks. Boosting of manufacturing and service sector no doubt is imperative for economic development of the country. If we look at the performance of manufacturing and service sectors the following weaknesses may be observed: a) Marketing is a big problem for SME products caused for lack of competitiveness with large industries endowed with the advantage of strong marketing network and price competitiveness due to the big volume of production capacity. b) Our workers lack technical knowledge to produce quality items. For example, jam/jelly/juice produced in our country has no qualitative match with the imported ones, even with the mango juice and jam/jelly of Bhutan though mango is not abundantly grown in Bhutan. Fortunately, various kinds of fruits are grown abundantly in different parts of our country but unfortunately, we cannot avail the opportunity to produce quality jam/jelly/juice from those produce. c) Protection of infant industries should be the important criteria for industrialization in any country including Bangladesh. But unfortunately our infant industries lack such protection entailing slowed down pace of industrial development. At present SME sector is facing a lot of problems in Bangladesh. Some major problems are as follows; •
In Bangladesh scarcity of raw materials hinder the ability of SME to be export oriented and limits its ability to reach more advanced stages of international business. •
High employee turnover:
Due to limited growth of SME most of the skilled employees leave SMEs. Levy (2003) observed that SMEs are knowledge creators but poor at knowledge retention. •
Absence of modern technology:
One of the main barriers for the development of SME in Bangladesh is inadequate technologies. Many SMEs have failed to adopt modern technology. •
Poor physical infrastructure:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 61
Inadequate supply of necessary utilities like electricity, water, roads and highways hinder the growth of SME sector. Moreover unfavorable geographical conditions increase the transportation cost. •
Availability of finance hinders the growth of SMEs in Bangladesh. Bangladeshi bank considers SMEs as high risk borrowers because of their inability to comply with the bank’s collateral requirements. Only about 15-20% of the owners of SMEs own any immovable property. Bankers issue loan on the basis of ownership of immovable property as collateral risk. As a result it automatically excludes rest 80% SME’s from the list of privileged clients of the banks. Whatever collateral SME’s can manage gets used up in talking the term loan leaving them with no means to seek working capital loans from banks. Because of low access to institutional financing SME’s rely on inefficient financing services from informal sources. •
Lack of uniform definition:
In Bangladesh the definition of SME has changed overtime in different industrial policy announced by the government in different year. Absence of uniform definition makes the formulation and implementation of SME policy difficult. •
Lack of information:
Miah (2006) has observed that SMEs have very limited use of information technology (IT). Accounting package is used by 1-2% of the SMEs. The use of computers is revealed by say 15% of the SMEs, while the use of the Internet for business purposes applies to say 8-10% of SMEs. •
Lack of entrepreneurship skills:
Conservative attitude towards risk, lack of vision, ability to make plan and implementing those hinder the growth of SME in Bangladesh. •
Participation of women entrepreneurs:
Equality of opportunity is a major problem for SME. Female entrepreneurs are treated discriminately. They are not well represented in business organization. Government does not provide adequate institutional assistance for women entrepreneurs. •
Access to Market and lack of awareness regarding the importance of marketing
tool: For SME, owing a retail space is very expensive in the major cities in Bangladesh. As a result many customers are not interested to buy products and services from SMEs. Because A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 62
they can’t judge the quality until they physically examined the product. Most of the cases SMEs in Bangladesh are not able to use the Integrated Marketing Communication (IMC) tools. But these tools play the role of important stimulus to motivate the customers and retain them. The country does not have enough marketing capability and resources to invest in marketing. •
Wang (1995) observed that the inadequate government supports are top ranking constraints for SMEs. Unnecessary layers of Bureaucracy and red-taps reduce the competitiveness of SME and raising the cost of transactions and operations. •
Absence of transparent legal system:
The absence of an effective and transparent legal system discourages SMEs in exploring into risky ventures of business. There are a number of unnecessary formal requirements to start and run business that create high compliance costs and become barriers to SME development, growth and market entry. •
Lack of commitment to innovation and customer satisfaction:
Ernesto (2005) stated that to keep in pace with international competition, firms of all size are challenged to improve and innovate their products processes constantly. But in Bangladesh SMEs are still not relating the importance of satisfying and retaining customers by offering novel and desired benefits. •
Lack of quality assurance:
Govt. has failed to frame a national quality policy, provide adequate support systems and establish a national quality certification authority. As a consequence SME of Bangladesh has failed to ensure the quality of their products and services both in local and international market. •
Lack of research and development facilities:
It is observed that investment in R&D is still negligible in. •
Fierce competition with the cheaper foreign goods:
Fierce competition with the cheaper goods of China, Taiwan, Korea, India, and Thailand also pose threat to SME in Bangladesh.
8.2 Concluding Remarks and Proposed Agenda for Action: The contribution of SMEs in Bangladesh’s economy cannot be overemphasized. Currently, SMEs are confronted with a number of problems that impede the development of their
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 63
markets. To conclude this paper, we point out a number of factors that may be considered to help SMEs to overcome various problems. •
The current definition of SMEs, as provided in the latest Industrial Policy, is quite broad. Given the resource constraint, it may not be possible to provide adequate fiscal and financial assistance to all enterprises included in SMEs. Besides, there is also need for a uniform definition of SMEs, as currently the Bangladesh Bureau of Statistics (BBS), Ministry of Industries, Planning Commission, and the National Board of Revenue have different definitions. •
Business Support Centers:
There is a need for developing business support centers or business development services. They include a wide variety of non-financial services such as labor and management training, extension, consultancy, counseling, marketing and information services, technology development and diffusion, and mechanisms to improve business linkages through sub-contracting and business clusters. Currently, BSCIC provides some of theses services but there are concerns that it has failed to play an important role in promoting SMEs particularly in the district outside Dhaka. The business development centers should ideally be working as storehouse of all kinds of information for SMEs from how to set up a business to evolving opportunities in the international markets. Absence of proper information dissemination programme from public services institutions is a serious problem now and it must be overcome with the help of support centers. In this regard, the private sector can play an effective role. Business development services must be demand-side oriented and capable of adapting to users’ needs. Competition amongst business services providers (BSPs) should also be maintained. •
Clusters and sub-contracting: There is evidence that clustering and networking can help SMEs boost their
competitiveness. Clusters are sectorial and geographical concentration of SMEs, faced with common opportunities and threats. Collaborative action between regionally concentrated firms and between firms and supporting local private and public institutions has become a key factor in meeting the challenges of increasing competition in both domestic and export markets. Business networks and industry clusters are seen to be a powerful means for overcoming the size constraints of SME and for succeeding in an ever more competitive market environment. Collaborative actions involving SME and large firms, supporting private and public institutions and local and regional governments, offer new opportunities A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 64
for developing specific locational advantages and the competitive strengths of clustered firms. It may be useful to identify a number of potential sectors as “thrust sector” and then incentives can be provided for the development of clustering in these sectors. Select clusters may also be supported with easy access to credit and other services. Sub-contracting by a large enterprise often help promote the development of SMEs. Therefore, such enterprises with significant forward and backward linkages involving the operation of small businesses may be provided with incentives. •
To set up an Exclusive EPZ for SMEs:
Creation of a separate export processing zone (EPZ) for SMEs (and particularly for SMEs) may attract foreign direct investment in many export oriented small enterprises. EPZ-firms also receive attractive fiscal and financial incentives, which may enhance the competitiveness of SMEs. Some products that are predominantly manufactured in small enterprises (and also in micro and informal sectors) such as handicrafts, bamboo, cane products, silk and silk products, have great potential for export provided adequate promotional measures are undertaken (Bhattacharya et al. 2002). Export-oriented SMEs should also be supported for setting up offices and showrooms abroad, and for taking part in international trade fairs. •
Support for Innovation and Technology Development:
Most SMEs are characterized by indigenous technology and they are involved in improving their existing production techniques and processes. If innovation does not take place in an indigenous sector, enterprises become uncompetitive. When production processes or technology are indigenous in nature it may not be possible to support them with imported technology or expertise As a result, support for SME technology development in the OECD and in the emerging markets is given by the governments. Usually, technology research institutes and universities play an important role in the improvement of indigenous innovations. In the context of Bangladesh as well, an interaction between SME needs and research institutes may thus be mutually beneficial and can help improve the competitiveness of domestic enterprises. •
Access to Credit:
Access to credit is a big problem for SME market development. And whenever the credit is available the interest rate is high and is at par with that of loans for large enterprises. SMEs will need some support in ensuring an improved access to credit with a lower interest rate. Export-oriented SMEs should also be supported with the services of an Export Credit A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 65
Agency to mitigate their risk of exporting and help facilitate the provision of working capital from banks and other financial institutions. •
Quality and Standards:
Quality is an integral part of international competitiveness worldwide. There is a need for national quality policy, which should define the goals and the actions of the country towards quality. Such policy has to be explicitly explained, harmonized with international needs and knowledge, accepted and applied by governments as well as by non-governmental organizations in order to increase the competitiveness of national products and services, to facilitate the dynamic diffusion of quality culture, to strengthen the quality infrastructure and, finally, to support international trade. The certification of quality systems allows enterprises to show that they fulfill the requirements of globalized market economies. The Government can promote quality awareness and help SMEs in safeguarding the required quality through National Quality Assurance Schemes. The national standardization authority should focus more on the adoption of international standards in order to increase the competitiveness of the indigenous companies in the world markets. •
Training facilities for developing entrepreneurial and managerial skills are not adequate in the country. Public-private sector partnership and cooperation is required to extend these facilities. •
Shortage of skilled workers is a general problem associated with industrial development in the country. This is also a constraint for increasing the domestic value added (i.e. developing backward and forward linkages) in the existing export content. In the long-run, the level (and quality) of education will determine the skill composition of the workforce. In the short-run, however, it will be essential to provide for various practical training programmes so that certain specialized industry requirements can be fulfilled. •
The state of physical infrastructure is weak in Bangladesh and long-term investment will be required to make any improvement in this regard. In the short run exclusive SME industrial parks and EPZs with adequate infrastructure facilities may mitigate the problem of weak infrastructure. •
Transport costs have become an important element of international competitiveness. Various competitors of Bangladesh are geographically located close to important world centers of A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 66
commercial activities and thus are in an advantageous position compared to her. Apart from the structural factor of geographical location, the sea-ports of Bangladesh are terribly inefficient which increases the cost of doing business and erodes the competitive advantage of local industries. Inland transportation is also subject to such problems as illegal toll collection, bad road communication, congestion, and frequent disruption due to political programme and labor unrest. Therefore, if efficiency in the operation of the ports is ensured and inland transportation are made easy and free of all troubles, SMEs will be extremely benefited. This will also act as a permanent incentive for doing business in the country. •
Legal and Regulatory Framework:
There is a pervasive lack of confidence in the legal and regulatory framework of the country which characterized by weak and non-transparent administrative and judicial systems, lack of information, lack of accountability of the public sector institutions, and unfriendly attitude of the regulatory bodies. Weak legal procedures discourage private sector activities and make the investors unsecured. It is therefore important to introduce a business friendly legal and regulatory framework. •
Domestic Environment and integrated approach:
Market development of SMEs requires addressing the demand and supply side constraints which can best be addressed by creating a SME-enabling environment. An enabling economic environment comprises sound macroeconomic and structural policies, good infrastructure, fair policy of competition, and efficiently functioning institutions. Therefore, an integrated approach to SME development incorporating efforts at policy-making, institutional, and enterprise levels will be most efficient way of supporting the private sector.
8.3 Create and Implement an SME Policy: Given heavy reliance of the national economy on the SMEs for generating employment and income especially for the poor in the rural areas, development of entrepreneurship, new business creation and development of intersectional linkages the SMEs should be declared as a ‘priority sector’ and backed by formulation of a proactive SME development policy The government should define a secure and stable policy for SMEs. Ironically, SMEs in Bangladesh have developed and survived in an environment having no policy. Development of a predictable, user friendly and stable policy regime for the SMEs should be priority work of the government. In order to frame a targeted policy for SMEs data collection needs to be done. A sufficiently large sample survey should be carried out to generate a benchmark A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 67
national level database both for accurate estimation of the SME contributions to the national economy and for formulation of comprehensive policies for the sector. A uniform set of definitions should be designed and used by all pertinent agencies (i.e. BBS, Ministry of Industries/BSCIC, Planning Commission and NBR) with respect to classification of enterprises by size. In this context, a well-thought out decision is needed to ascertain whether “SME” is the correct term to identify ‘Small’, ‘Cottage’ and ‘micro’ industries in Bangladesh. In the proposed SME development policies, provisions should be made to develop separate and specialized institutions in three areas: (a) finance, (b) technology and (c), skill development, in addition to rationalizing the existing policies and institutions. In this context, a strategic ‘Public-private Sector’ partnership and cooperation should be carefully developed keeping in view the current emphasis on fostering industrial development through private enterprises systems. Existing regulatory and promotional agencies (i.e. BSCIC, BOI) will be important stakeholders in implementing the country’s SME policy. Regulatory corporations should be given full independence within the approved budget. They should not be policed for every aspect of their operations. As long as they stay within the budget limits they should be fully independent. But their performance should be evaluated against given freedom and punished or rewarded as necessary. •
Thrust Sectors and Linkages
Within the SME sector, the fast growing sub-sectors exhibiting greater dynamism and prospects for sustained future growth should be declared as ‘thrust sector’ and supported by adequate incentives on a priority basis. Special endeavors are needed to develop the culture of utilizing horizontal and vertical linkage opportunities and contracting. Strong legislation is needed to ensure that the deals between contracting parties are fair and there is provision for strong measures to prevent breach of contract. Subcontracting can open avenues for development of backward and forward linkages and provide huge opportunity for the SMEs. One way for SMEs to attain sufficient scale to earn contracts is through clustering. Clustering and networking can help SMEs boost their competitiveness. Clusters are sectoral and geographical concentration of SMEs, faced with common opportunities and threats. Business networks and industry clusters are a powerful means for overcoming the size constraints of SME and for succeeding in an ever more competitive market environment. Collaborative actions involving SME and large firms, supporting private and public A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 68
institutions and local and regional governments, offer new opportunities for developing specific locational advantages and the competitive strengths of clustered firms. •
A final area that should be examined in the SME policy is the governments NGO policies with respect to NGOs undertaking commercial enterprises. SMEs complain of facing discriminatory competition from the commercial activities of some large NGOs. However, smaller SMEs may be receiving valuable assistance in the form of training and market information from the NGOs. The feeling in trade and industry circles is that NGOs should be promoting small businesses and not becoming competitors themselves, which may crowd out private enterprises. More research and dialogue on the role of NGOs in promoting SMEs is necessary. •
Create an enabling environment for SMEs
An enabling economic environment comprises sound macroeconomic and structural policies, good infrastructure, fair policy of competition, and efficiently functioning institutions. •
Legal and Regulatory Framework:
There is a pervasive lack of confidence in the legal and regulatory framework of the country which is characterized by weak and non-transparent administrative and judicial systems, lack of information, lack of accountability of the public sector institutions, and unfriendly attitude of the regulatory bodies. Weak legal procedures discourage private sector activities and make the investors unsecured. It is therefore important to introduce a business friendly legal and regulatory framework. •
Product quality is an integral part of international competitiveness worldwide. There is a need for national quality policy, which should define the goals and the actions of the country towards quality. Such policy has to be explicitly explained, harmonized with international needs and knowledge, accepted and applied by governments as well as by non-governmental organizations in order to increase the competitiveness of national products and services, to facilitate the dynamic diffusion of quality culture, to strengthen the quality infrastructure and, finally, to support international trade. The certification of quality systems allows enterprises to show that they fulfill the requirements of globalized market economies. The Government can promote quality awareness and help SMEs in safeguarding the required A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 69
quality through National Quality Assurance Schemes. The national standardization authority should focus more on the adoption of international standards in order to increase the competitiveness of the indigenous companies in the world markets. •
Import tariffs have been lowered and quantitative restrictions virtually eliminated. Import liberalization has also exposed domestic producers to competition from cheaper foreign goods. Since subsidies and all kinds of compensatory paybacks would be unacceptable under WTO obligations, only the non-monetary but vitally important gains from an SME friendly regulatory environment and liberal policy regime can compensate for the trade loss. To encourage domestic production, there should be attractive gap between import duty on raw materials and finished products in favor of the former. Also, to enable domestic producers, particularly the SMEs, to prepare themselves to face external competition there is need for adequate forewarning about impending policy direction. If the government makes prior announcements of its impending trade policy changes, particularly with respect to tariff schedules, investors will be aware of the degree of competition they will be facing and will make cautionary adjustments in their investment and production plans. •
Clear, implementable, laid-down rules bound by specific timeframes and electronically recorded exchanges (where possible) are a must in all Government regulating offices. •
Supply of power, gas, water, and telephone should be uninterrupted and obtaining connections hassle free. Quality of essential services will have a critical place in the development and growth of SMEs. •
Transport costs have become an important element of international competitiveness. Various competitors of Bangladesh are geographically located close to important world centers of commercial activities and thus are in an advantageous position compared to her. Apart from the structural factor of geographical location, the sea-ports of Bangladesh are terribly inefficient which increases the cost of doing business and erodes the competitive advantage of local industries. Inland transportation is also subject to such problems as illegal toll collection, bad road communication, congestion, and frequent disruption due to political programmes and labor unrest. •
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 70
There is a great need for improving different aspects of financial services for SMEs, such as seed money, leasing, venture capital and investment funding. There is a lack of availability of long-term loans for SMEs. Interest rates are still high and exchange rate risks are considerable. All these factors limit the development of SMEs. Finance, both short and long term, should therefore be provided at market cost. One of the main factors that have hampered the flow of institutional finance into SMEs is banks’ pre-occupation with collateral. Traditionally banks have used fixed asset ownership, particularly land ownership, as the basis for judging creditworthiness. Innovative and flexible credit instruments can be developed for the SMEs if the regulatory framework now under consideration by Bangladesh Bank allows such innovation. The central bank should seriously hear the views of the SME sector and the NGOs in this regard and frame rules in their favor. Banks are shy to lend to SMEs because of high processing and monitoring costs of loans to SMEs. A new bank, namely the Bank of Small Industries & Commerce (BASIC) was set up in 1988 with the objective of financing the small and cottage industries. There were also attempts to redirect funds received from international agencies such as the Asian Development Bank (ADB) to the sector through private banks. These policy interventions did not succeed. The Basic Bank has shifted its position to the typical retail bank mode leaving the SME sector as underserved as before. Basic Bank needs to be brought back to its original role of a facilitator and financier for the SMEs. Export-oriented SMEs should also be supported with the services of an Export Credit Agency to mitigate their risk of exporting and help facilitate the provision of working capital from banks and other financial institutions.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 71
Chapter- 9 9.1 Findings: Shortage of working capital has been found the top most problem for the SMEs from our study. Other specific findings of the study are given below: •
Majority of small enterprises belongs to the lower classes of investment/capital range and they do not require locational amenities (say, availability of high-tech essential services, port facilities, etc). They can flourish in non-metropolitan / rural areas if they get credit and minimum infrastructural and institutional facilities.
Again sources of finance for most of the enterprises are the owners and their families. Only few of them take institutional loans and others go for non-institutional loans.
SMEs with larger capital employ more persons and follow the division of labor. Enterprises under manufacturing group employ comparatively larger proportion of employees in upper hierarchy.
Small size enterprises create employment with relatively smaller amount of capital and then comparatively more efficient in capital utilization.
Rate of gross profit margin is highest in agro-based enterprises. Whereas manufacturing enterprises show the discouraging figures.
The SMEs who go for loans, most of them pay a hiking price to the NGOs and money lenders because loan processing is easier than that of the Banks and it is less time consuming also.
Sole proprietorship and own & family based sources of finance dominate the ownership and financing patterns of small and medium enterprises.
It is revealed that most small enterprises in our country are bound to rely on their own savings or that of their relatives and friends and sometimes have to go to the moneylenders for loans that are available at hiking price. However, inadequate finance causes under-utilization of capacity and leads many other problems. Banks and financial institutes may take initiatives for liberal credit policy for financing small rural enterprises to overcome their problems.
Most of the SMEs do not hold sufficient fixed assets to provide security for taking loans. Banks may also consider their moveable assets (say, inventory or receivables) side by side fixed assets as security for providing loans to this sector.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 72
The Bank Loan Policy (both public and privet sector) should be linked with the industrial policy of the country. There should be an allocation of fund in the loan portfolio of banks to supplement the Government Development plan (Five Year Plan for example).
The bankers may provide a guide line - How to prepare a project proposal - so that any eligible project cannot be rejected only for the reason of proper documentation and information.
Necessary training is needed for the bankers on micro credit. Maybe this ought to consist selection of projects, project risk analysis, and advice to the entrepreneurs and so on.
The small rural enterprises could mobilize untapped resources of capital and skill in the rural areas if bank loans and institutional support back them.
For up-gradation of the existing plant, increasing the capacity utilization and establishing the new unit, not only banks, but also leasing companies can help the SMEs by expanding their network in the rural areas. Leasing companies should change their tendency to finance only the well-established large units or to cluster their activities around the big cities.
The banks can nominate other organizations that can provide technical support, advice and also monitoring to the SMEs after sanction the fund. One organization can be nominated for operation for a single area in a particular location.
Financing the small rural enterprises can open the avenues of counseling and other ancillary services to the rural bank branches to earn more income.
Rural banking is totally different from the urban banking. Small credit occupies almost whole part of the rural banking. So special training is required for the bankers to make micro credit fruitful.
Many new entrepreneurs are coming in the Ago-based business. If the banks and other financial institutions give financial support to these new entrepreneurs many other entrepreneurs may be interested to come into this business.
In many countries the Government provided labor-training institute to supply skilled labor forces to the industries. But in our country Government effort in this case is not sufficient. Skilled labor force is an asset not only for the individual firm but also for the industry and the country's economy. It increases the productivity and efficiency of the
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 73
firm. The bakers have to consider the number of total skilled and semi-skilled labors during the scrutiny of a project proposal.
9.2 Suggestions: Extension of credit facility, no doubt, is a necessary condition to boost SME and Bangladesh Bank refinance scheme is also the timely approach. But these are not the sufficient conditions; rather promotion, facilitation, marketing supports and protection of infant industry are imperative in a state of merger and acquisition all over the world. Marketing of SME products should be facilitated and given highest priority where both private sector and the government should take the lead. The traditional attitude of the bankers to earn more profit shall have to be changed to contribute to economic development of the country promoting SME. Bangladesh Bank may implement a 'one third' policy of lending i.e. one third of total credit exposures of a bank should be in corporate, one third in retail and one third in consumer. Refinance may also be allowed on monthly basis extending up to 50% for trading. The government may also help motivate the bankers to change their attitude from corporate to SME customers allowing tax rebate for financing in SME sectors. Though, Bangladesh Small and Cottage Industries Corporation (BSCIC) has been established long back to promote small and cottage industries of the country, but could not be made so effective, rather the organization is now on the verge of closure. Since BSCIC has wide network all over the country with established set up, it may be well integrated with today's SME concept to start the journey of industrialization afresh and so to save both time and money in the process. The government should also come up with pragmatic policies and take appropriate measures to support and patronize SME as a thrust sector with more incentive package like subsidy in water, gas, electricity, export benefits etc. Above all, the basic concept for industrialization which lies in the integration of SME with big industries shall have to be implemented with highest national priority. In order to overcome the above mentioned problems the following suggestions are recommended; • Government must have to take adequate measures to ensure the uninterrupted supply of raw materials for SME. • Government needs to take appropriate measures to fix the minimum salary/wages of
the employees of SME. That will help to minimize the employee turnover. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 74
Government and financial institution may provide adequate finance for
modernization and technological advancement. • Development of infrastructure is essential for the optimum growth of SME. So
government of Bangladesh needs to take appropriate policy strategy for the infrastructure development of Bangladesh. • Government, financial institutions and Non-Government Organizations (NGOs)
may take necessary steps to ensure uninterrupted financial support to the prospective SMEs in Bangladesh. •
Due to the absence of uniform definition the policy formulation and
implementations are not possible. Government should take initiative to develop a uniform definition of each category of SMEs. • Govt. of Bangladesh should take the initiative to develop web pages exclusively for
SME and an integrated SME database. It will reduce the barriers to SME access to global market. • In order to ensure the retention of skilled workforce the government should make
the entrepreneurial career attractive by minimizing the uncertainty. •
In order to encourage women entrepreneurship govt. may; involve women
entrepreneurs in policy formulation and implementation, arrange funds for women entrepreneurs, provide necessary training to women entrepreneurs in rural and urban area of Bangladesh. • SME foundation may take appropriate marketing tools to popularize their products. • For minimizing red tapes and accelerating the growth of SME government may
provide one roof service under the SME foundation. • Appropriate legal framework is necessary to ensure the development of SME of
Bangladesh. • In this era of intense competition continuous planning and quality improvement act
as a prerequisite for the survival of SMEs. In order to improve the quality SMEs can follow the Just in Time (JIT) philosophy and use Total Quality Management (TQM) and can ensure the improvement of quality and productivity at a time. • Government should establish a credible certification authority especially for SMEs.
So those, this sector can obtain a technical evaluation of the quality of their products within a shortest possible time. The certification of the authority should be worldwide accepted.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 75
Govt. may also provide assistance to SMEs during the certification process and promote the importance of product certification for international acceptance among the SMEs. • Research and Development (R&D) is must for the development and growth of
SME. So government must have to invest in R&D for ensuring the intensification of SME of Bangladesh. • Restriction may be imposed on import of SMEs’ products which are available in
9.3 Recommendations: Microfinance has been considered a good strategy for poverty alleviation. On the other hand, SME has been considered as thrust sector which contributes in to the macroeconomic growth. But for the country’s overall macroeconomic growth and economic development bridging the Microfinance and SME is very important. If the bridging could be done in a proper way then the Microfinance would be a very effective tool for SME development and through this process the SME sector could gradually become large industry. The following recommendations are very important for Microfinance and SME development and bridging the gap between them. Uplifting Microfinance clients: Although the Microfinance sector has been operating successfully over the last three decades and it has been considered as effective tool for poverty alleviation, still there is a big challenge for the sector to uplift the clients to successful entrepreneurs. Managerial skill development training: It is true that most of our enterprise clients do not have enough managerial skills. So managerial skill development training for enterprise clients should be organized. The MFIs could take responsibilities of their respective Microenterprise clients and the Federation of Bangladesh Chamber of Commerce and Industries (FBCCI) or other organization like the upcoming SME Foundation or donor/international agencies like South Asia Enterprise Development Facilities (SEDF) could take responsibility of training for SME sector. Enhancing Technical Knowledge: The MFIs should take the responsibility to provide technical knowledge development training like bookkeeping and accounts keeping, product costing and pricing etc. to their clients. The same training could also be organized for SME sector. Enterprise development training: A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 76
It is universal that entrepreneurship capacity is inherent and everybody cannot become entrepreneur. But training sometimes could make people successful entrepreneur. Enterprise development training is extremely important for Microfinance clients to upscale them to successful entrepreneurs. Business Development Services (BDS): It is found from a study that marketing assistance is the greatest need for all size of enterprises. BDS is important to improve the performance, services and expand market of SMEs (USAID, 2001). The BDS is an integrated approach where skill development training, management and marketing training and enterprise development training are included. So BDS is essential for SME development of the country. Backward and Forward Linkage: It is obvious that for any industrial development both backward and forward linkage is essential. In Bangladesh, the backward and forward linkage facilities has not developed substantially to provide support to the large industry as well as SMEs. The backward linkage facilities are important for both large industries and SMEs. If the backward linkage facilities develop, then the production cost would be less and our products could be sold in competitive price in both domestic and foreign market. In most of the cases the SMEs act as backward linkage for large industry. Although forward linkage is not very essential for the large industry, but it is crying need for SMEs; because SMEs do not have adequate information, linkage, marketing skills, and capital for marketing their products. Sometimes, SMEs need to sell their products in low price with small profit margin. If the forward linkage for SMEs could be established then the profit margin of SMEs will be higher. In this respect, the government, FBCCI, NGOs/MFIs and donor agencies should come forward. Training of MFIs staffs: Although the Microfinance sector has reached a maturity stage over the last three decades, but the capacity of operational level staffs has not enhanced to that extent. Moreover, still the sector has been facing the problem the lack of professional staffs. It is observed that in most of the cases due to lack of capacity and expertise, the MFIs staffs are not interested to provide Microenterprise loan with the fear of delinquency and increasing portfolio at risks. Moreover, they don’t have enough skill for monitoring and providing necessary supports to their Microenterprise clients. So training of MFIs staffs is required. Besides, the MFIs should recruit professional staffs and experts from private sector. Ensure Insurance coverage facilities: A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 77
The most of the SMEs of this country are not covered by insurance. There are two reasons behind this, overlooking from both supply and demand side, one is the insurance companies usually ignores these SMEs and the other is the owners of these SMEs either are not aware about insurance or inadequate knowledge about insurance or due to fund constraint they couldn’t afford insurance facilities. It is observed that usually when disaster or adversity occurs then many SMEs either shut down or become sick or go to liquidation. If there is mandatory insurance for these SMEs, then these SMEs could be revived after any disaster. Linkage opportunity with mainstream financial institutions: It is important for Microenterprise clients of MFIs. The MFIs should take initiatives to upscale their Microenterprise clients to SME level and provide necessary support to link these clients with mainstream financial institutions. Increase Public Development Expenditures: The government should have a clear policy for public development expenditures and increase it especially for SME sector. If the sector has to make much headway, there is need for substantial increase in public investment in the sector particularly in the area of training, extension, research, market promotion, etc. A collaborative effort of the government with business associations, nongovernmental organizations NGOs and other development partners is recommended in such public outlays. SME friendly trade policy to be undertaken: It is true that to cope with globalization the government has been undertaking various trade policies. But the trade policy should be reformed in such a way that SME sector will not be affected. Appropriate tariff rationalization and valuation: Tariff should be rationalized in such a way that the SME sector will not be affected. Besides, proper monitoring of valuation of imported goods to be taken into account. So that the possibilities of dumping would be reduced that would be helpful for sustainable growth of SME sector. Tax holiday and incentive: Along with foreign investors and also large investors, the SME sector should also be given substantial tax holiday and tax incentive facilities for their sustainable growth. SME friendly legal and regulatory framework: The government needs to consider SME sector during enacting any legal and regulatory framework. The government should reduce the legal barriers and create enabling regulatory framework for the SME sector. A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 78
Expand Transportation facilities: To reduce the transportation cost the government can undertake initiative to increase water and railway transportation facilities. If the government expand water and railway transportation facilities then the SME sector will be benefited by reducing their transportation costs. Availability of investment fund and working capital: It is obvious that the SME sector is facing tremendous shortage of investment fund and working capital. Although the Bangladesh bank has undertaken initiatives for SME financing but still it is not adequate enough for this large sector. Moreover, the mainstream financial institutions should also come forward and instead of conservative attitude they need to become more flexible in SME financing. Congenial Domestic Business and Political Environment: It is a long term process and needs greater commitment and cooperation of different groups like political parties, businessman, students, labors, bureaucrats and civil society. If congenial domestic business and political environment could be ensured then along with large industry the SME sector will also develop.
9.4 Conclusion: Small and medium enterprises (SMEs) act as a vital player for the economic growth, poverty alleviation and rapid industrialization of the developing countries like Bangladesh. SMEs are significant in underlying country’s economic growth, employment generation and accelerated industrialization. Government of Bangladesh has highlighted the importance of SME in the Industrial Policy-2005. SME has identified by the Ministry of Industries as a ‘thrust sector’. As the SME sector is labor intensive, it can create more employment opportunities. For this reason government of Bangladesh has recognized SME as a poverty alleviation tool. SME also foster the development of entrepreneurial skills and innovation. Along with poverty alleviation SME can reduce the urban migration and increased cash flow in rural areas. As a result it will enhance the standard of living in rural areas. Performance of SMEs in Bangladesh is significantly found below the level of international standard. Although government of Bangladesh has taken some initiative to ensure the growth of SME but those steps are not enough at all. But government shows its positive attitude towards this sector. Bangladesh government should continue to give more focuses on some areas, such as arrangement of finance, provide infrastructure facilities, frame appropriate legal framework, establish national quality policy etc. From the sequence of our analysis it seems that for the A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 79
economic development of Bangladesh SME can play a vital role. We are quite optimistic that if the above mentioned suggestions are implemented then the growth of SME sector in Bangladesh will be accelerated. A vibrant SME sector is considered as one of the principal driving forces in the development of a market economy. They stimulate private ownership and entrepreneurial skills, and are flexible and can adapt quickly to changing market demand and supply situations, generate employment, help diversify economic activity, and make a significant contribution to exports and trade. Even in the developed market economies SMEs account for a large share in output and employment. There are many constraints in developing the SME sector in Bangladesh. Several studies have identified different constraints, ranging from access to credit to marketing their products and services. However, access to credit is considered as the main constraint. Commercial banks are found reluctant to extend credit to the SME sector. The main reasons are high risk and monitoring cost. To meet the challenge and reduce the perceived risk in lending to SME sector, the Bangladesh Bank has embarked on a program to expand and redesign the existing refinance window of Bangladesh Bank into Small Enterprise Fund (SEF). However, it was thought that the introduction of .Credit Guarantee/Insurance Scheme or adequate refinancing facilities by the Bangladesh Bank may be of substantial help in increasing the participation of the commercial banks in SME financing. Private Banks cannot be expected to undertake this type of financing as additional costs and high risk involved. On the other hand, NCBs that cater to a variety of sectors, from large industries to SMEs will not also be expected to give special attention that SME financing calls for. The lending institutions should be encouraged to emphasize on the relationship lending technologies, which is based on soft information. The soft information may include the character and reliability of the SME.s owner based on direct contact over time by the institution’s loan officer; the payment and receipt history of the SME gathered from the past provision of loans, deposits, or other services to the SME by the institution; or the future prospects of the SME garnered from past communications with SME.s suppliers, customers, or neighboring businesses. Monitoring of the banking sector in the aspects of loans and advances disbursement should be streamlined as nobody is following government directives. We need to develop various credit products and services, such as credit lines, risk sharing activities, leasing, credit scoring and expert decisions, and efficient credit bureaus. Banking norms and attitudes towards SME financing should be changed as because small enterprises differ considerably from the traditional clientele and do not conform to the norms detailed in the manual of banking norms and procedures. So, it needs a concerted effort of different financial A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 80
institutions, such as Bangladesh Bank, BSCIC, NCBs, PCBs, SBs or even insurance companies to make SME financing a success.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 81
Ahmad, Q. K (1984). Rural Industries Study Project (RISP): An Introduction, The
Bangladesh Development Studies, Vol. XII, No. 1 and 2, Special Issue on Rural Industrialization in Bangladesh. 2.
Ahmed, Momtaz Uddin (2006). SME Policymaking Process – A digression on the real
issue, The Daily Star, Thursday, February 16, pp. 38 3.
Ahmed, Momtaz Uddin. et al. (1992). Small and Medium Scale Enterprises in
Industrial Development, Academic Publishers, Dhaka 4.
Ahmed, Momtaz Uddin (1984). Financing Rural Industries in Bangladesh, The
Bangladesh Development Studies, Vol. XII, No. 1 and 2, Special Issue on Rural Industrialization in Bangladesh. 5.
Asian Development Bank (2004). Report and Recommendation of the President to the
Board of Directors on Proposed Loans and Technical Assistance Grant to the People’s Republic of Bangladesh for the Small and Medium Enterprise Sector Development Program, Retrieved from World Wide Web: www.adb.org/Documents/RRPs/BAN/rrp-ban35225.pdf 6.
Bangladesh Bank (2000-2001). Annual Report, Dhaka
Bangladesh Small and Cottage Industries Corporation (BSCIC), (1997-’98). Annual
Report, Dhaka 8.
Berger, Allen N. and Udell, Gregory F (2004). A More Complete Conceptual
Framework for SME Finance, World Bank Conference on Small and Medium Enterprises: Overcoming Growth Constraints World Bank, Retrieved from World Wide Web: http://siteresources.worldbank.org/INTFR/Resources/475459-1107891190953/661910-11 08584820141/Financing_Framework_berger_udell.pdf 9.
Berger, Allen N., Miller, Nathan H., Petersen, Mitchell A., Rajan, Raghuram G., Stein,
JeremyC. (2005). Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks, Journal of Financial Economics, Vol. 76, pp 237-269 10.
Bhattacharya, D., Faiz, N., and Zohir, S. (2000). Policy for Employment Generation in
the Informal Sector of Bangladesh - A Study Prepared for the International Labor Office, Centre for Policy Dialogue, Dhaka.
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 82
Cookson, Forrest (1999). Credit Information in the Bangladesh Financial System, Job
Opportunities and Business Support (JOBS) Program, Institutional Reform and the Informal Sector (IRIS), University of Maryland at College Park, USA, Retrieved from World Wide Web: http:// www.jobsproject.orgcontent/publication/Credit%20Information %
%20the%20Bangladesh% 20Financial%20System.pdf 12.
Daniels, Lisa (2003). Report on the National Private Sector Survey of Enterprises in
Bangladesh, International Consulting Group, Melbourne, Australia, Retrieved from World Wide Web: http://adb.org/Documents/RRPs/BAN/rrp-ban-35225.pdf 13.
Dhar, P.N., and Lydall, H.F. (1961). The Role of Small Enterprise in Indian Economic
Development, New York: Asia Publishing House, USA. 14.
Government of Bangladesh (2004). Economic Review, Ministry of Finance, Dhaka
Government of Bangladesh (1999). The Industrial Policy, Ministry of Industries,
Government of Bangladesh (1998). Fifth Five Year Plan, Ministry of Planning, Dhaka
Hossain, Nazmul. (1998). Constraints to SME Development in Bangladesh, Job
Opportunities and Business Support (JOBS) Program, Retrieved from World Wide Web:http://scholar.google.com/url?sa=U&q=http:// 128.8. 56.108/ iris-data /docs/bd1.pdf 18.
International Year of Microcredit (2005). Retrieved from World Wide Web: http://www.yearofmicrocredit.org/
Islam, Mohammad Nazmul, Arefin, Kamrul, and Hossain, Md. Motaher (2005). Small
Business Financing: Problems Analysis and Overcome Strategies, Journal of Business Research, Vol. 7, June, pp. 91-102 20.
Meagher, Patrick (1998). Secured Finance for SMEs in Bangladesh, Job Opportunities
and Business Support (JOBS) Program, Institutional Reform and the Informal Sector (IRIS),University of Maryland at College Park, Retrieved from World Wide Web:http://www.iris.umd.edu/download.aspx?ID=4e2062e9-a64b-4868-8823-7d63 8b4810e1 21.
Mintoo, Abdul Awal (2004). SMEs in Bangladesh, Asia-Pacific Tech Monitor,
September-October, pp. 44-56. 22.
Sarder, Jahangir Hossain (1995). Small Enterprise Development in Bangladesh: A
Case study of Nature and Effectiveness of Support Service, Ph.D. Thesis, Stirling: University of Stirling
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 83
Schiffer, Mirjam (2001). Firm Size and the Business Environment: Worldwide Survey
Results,The World Bank and International Finance Corporation (IFC), Washington D.C. USA 24.
Sia, M. T. (2003), “SME Finance”, Paper Prepared for the Asian Development Bank,
Denationalized Commercial Bank’s Contribution in Developing Small & Cottage Industries (SCIs) in Bangladesh, Working Paper, Jahangirnagar University, Savar, Dhaka 26.
Siddiquee, Mohammad Moniruzzaman, Hossain, Mohammad Farhad, and Islam, K.
M.Zahidul. Asset Securitization in Bangladesh: Practices and Impediments, The Cost and Management, March-April, 2006 (Forthcoming). 27.
Sinha, Anil (2004). Symposium on Making SME Finance Profitable - IFC’s
Experience in Facilitating SME Finance, South Asia Enterprise Development Facility (SEDF), IFC South Asia Region, Colombo, Sri Lanka, Retrieved from World Wide Web:http://www.ifc.org/ifcext/southasia.nsf/AttachmentsByTitle/SMEFinalAgenda/ $FILE/SME+Symposium-+Final+ Agenda.pdf 28.
Task Force Report on Bangladesh Development Strategies for the 1990s, Policies for
Development (1991), Volume 1, University Press Limited, Dhaka
Appendices A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 84
Appendix: 1 Definition of SMEs
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 85
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 86
Appendix: 2 Present Scenario of SME:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 87
Appendix: 3 Growth and structure of SMEs :
Appendix: 4 Contributions of SMEs to Employment and GDP: A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 88
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 89
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 90
Appendix: 5 Growths and Structural Transformation of SMEs:
Appendix: 6 SME Constraints and Industrial Problems:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 91
Appendix: 7 Contributions of Banks in SME Sector:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 92
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 93
Appendix: 8: Finance by SME:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 94
Appendix 9: SME Financing in Bangladesh:
A Comprehensive Study on SMEs of Bangladesh: Constraints and Prospects P a g e | 95