The SME industry still reels from multiple constraints. But despite setbacks, the sector offers immense potential and hope for those who aim to make it big in life
By Wafiur Rahman
Small and medium sized enterprises (SMEs) are playing increasingly important role as enginesof economic growth in many countries including ours. SMEs provide low cost employmentopportunities and render flexibility to the economy. Many of the SMEs are engaged in exportactivities suggesting that they are internationally competitive. Considering the importance ofSME sector in the economy of Bangladesh and understanding the constraints under which suchenterprises operate, it is evident that policies to support the development and growth of SMEsare necessary. In the policy strategies, smooth and sustainable development of SMEs all overthe country will be considered as one of the vehicles for poverty alleviation, and generation ofmore employment.
Nearly 11.3 million jobs are generated by non-farm establishments in Bangladesh, of which 73 % are created by micro enterprises. Focusing on the 10+ units, small units constitute 35.2 % of the employment, followed by medium and large units comprising 8.8 and 56.0 % respectively. In other words, SMEs employ 1.3 million people, constituting 44 % ofthe total 10+ units employment.
Official data and statistics overview
Although there were no exact data of SMEs available in the country until 2005, when first survey about SMEs was conducted. It was estimated that over 30 million people working in this sector with agriculture the major areas of SMEs as well as fishing and cottage industry is also being focused. Textile is a new entry for this sector and since 2007 this sector has taken lead over others with more than 20 thousand units of SMEs established to promote jobs and textile exports of Bangladesh. The government is also focusing on this sector with training, guidelines and financing facilities for growth of textile. This has been the major reason behind the Bangladesh rapid growth and boom in SMEs.
SMEs have a tremendous potential in empowering budding entrepreneurs and transforming society in Bangladesh. To target this sector’s huge potential, BRAC Bank Ltd introduced SME banking first time in 2001 and since then 46 SME/Agro Branches, 22 special centres and 152 branches and 399 SME unit offices were established in Bangladesh to support SMEs and untapped the potential at rapid pace.
In the last ten years BRAC Bank has become the largest bank of Bangladesh to support and finance small and medium enterprises while worldwide it is being rank at No 4. However this bank has the biggest ratio of defaulters in the country. Although strict loan policy is being implemented but due to some unavoidable circumstance some loans become bad business for the bank.
For BRAC Bank, Business risk, high interest rate, high defaulter rate, certain government policy changes are the major challenges over the years. The proposed part of the report tried to find out some steps could be initiated by BRAC Bank in order to overcome existing weakness. The bank need special training, low interest rate and a commitment for business success is needed in Bangladesh to change this trend.
Role of Bangladesh Bank
Bangladesh Bank has initiated a mega step to boost SME sector with the help of IDA and Asian Development Bank (ADB). Bangladesh Bank has already started many schemes and programmes to flourish this sector. In all big cities special counters have been created for SME and new soft loans were offered to youth from Taka 50,000 to Taka 50,000,000 (approximately US$641 –US$641,700) which has given a new spirit and commitment to unemployed youth to see this as a big opportunity for their own business. It is true that so far the role of bank has not created a big difference as the Bangladesh youth still looking for good salary jobs not for their own business.
Some experts believes that due to energy crises, law and order situation in Pakistan, over 30 thousand small and medium units were shifted to Bangladesh from Pakistani textile industry which has created healthy competition and rapid opportunities for the SMEs in Bangladesh in last 5 to 7 years.
Besides soft loans, Bangladesh Bank is also providing guidelines, risk assessments and training to selected youth for their new businesses in this areas where all basic facilities are already available to set up new business.
Major shift in Policies regarding SMEs
2010 has been the golden year in the history of Bangladesh for SMEs growth when every bank was asked to focus on SMEs development with soft loans and special counters at specific branches SMEs. Banks were asked by the government to ease formalities and conditions for youth to start their own business in different cities to boost economy and provide livelihood to unemployed youth.
Women entrepreneurs in focus
In the backdrop of recent recession and global circumstances, it has become essential to make women’s development possible and increase share of women in business activities. With the women empowerment Bangladesh want to transform its socio economic conditions at a rapid pace.
Under new policy of the Bangladesh Government, each bank has been advised to open special counters for women and finance the women business projects with Tk 2,500,000 (approximately US$32,000) on easy conditions and provide them all possible support to set up new business in their desired localities. Now banks and financial institution have been putting highest priority in receiving loan applications from women small and medium enterprises. The processing time is also reasonable for women applicants.
Policy makers putting attention back on SMEs
The present government in the current National Budget reaffirmed its commitment to boosting the role of the Small and Medium Enterprises (SMEs) within the economic periphery of Bangladesh. In particular, it aimed to provide VAT exemptions to firms whose annual turnover remains below Tk70lakh (Tk7m). This is a positive initiative, given SMEs can play an instrumental role in the economic transformation of nations.
According to Ashikur Rahman, Senior Economist at Policy Research Institute, policymakers must pay attention to the lessons that one can draw from international experiences. ‘Our research at the PRI suggests that the performance of SMEs in terms of contribution to GDP, exports and employment is far below those achieved in the dynamic East Asian economies. A detailed review of cross-country experiences as well as case studies shows the potential of SMEs for development. The potential of SMEs in economic development is best demonstrated by the examples of Japan, Korea, Taiwan, Malaysia and China. SMEs have contributed admirably to employment, investment, value-addition and exports in these countries. Importantly, they have played a profound role in helping the emergence of a modern manufacturing sector in the concerned countries.’
To sum up: what are the main lessons for Bangladesh that one can draw from international experience? In view of the definitional differences where a small enterprise in one country is a large enterprise in another, it is difficult to aggregate all experiences for use in Bangladesh. Nevertheless, there are areas of experience where the policies and principles are applicable to Bangladesh’s context. Seen from this angle, several important lessons emerge. These include:
• The production sharing partnership agreements between large and small enterprises in Japan, Korea and Malaysia suggest a pattern of manufacturing development that merits serious attention of policy makers in developing countries including Bangladesh. This partnership has been particularly helpful in supporting the exports of SMEs.
• SMEs have been a fertile ground for learning and technology transfer, especially in China and Malaysia through strategic production sharing agreements with international firms. This is a major finding that has important policy bearing for Bangladesh. Getting connected to the international vertical production chains can provide a major impetus to upgrading SMEs in Bangladesh. This will also allow Bangladesh to entertain a diversified export base, which is fundamental for creating a resilient economy.
• A range of targeted support programmes (bicycle sector in the case of Taiwan) could be helpful in developing SMEs. These include programmes for financial support, technology transfer, skill development, industrial zones, and fiscal incentives.
• Institutions are very important to foster the growth of SMEs. These include dedicated government agencies and supportive legal framework. Japan’s experience is particularly illustrative of how strong institutional support can guide the development of SMEs.
• Monitoring and evaluation of performance of SMEs is essential. This is necessary in order to understand the constraints and gear public policy accordingly. It is also necessary to evaluate if the support programmes are achieving their intended objectives. Again, Japan’s experience in this regard is particularly instructive. Updated database on basic structure of SMEs and performance indicators is necessary to determine how SMEs are performing.
On the whole, the review of international experience with SMEs suggests that these enterprises have the capacity to boost inclusive development, especially in labour-intensive low income countries. Nevertheless, this requires sound policy and institutional support, and is unlikely to occur in an automatic or accidental manner.
The experience with SMEs in Bangladesh reveals that the country, till date, has fallen short in exploiting this avenue for fostering economic development. Moreover, given there is an acute shortage of a proper diagnostic research about the nature of the sector in Bangladesh and its major constraints, primarily due to the lack of availability of data, it remains beyond the scope of policymakers to pinpoint exact policy framework capable of creating supportive conditions for this sector.
In the absence of such knowledge, a prudent strategy is to meticulously isolate international experiences, some of which are summarised above, that can in principle transfer over to the Bangladesh situation.
SME Financing hits new record
The commercial banks and financial institutions (FIs) set a new record in lending to Small and Medium Enterprises (SMEs) disbursing Tk 1 lakh 910 crore in a single year, reports BSS. The impressive figure for 2014 represents a phenomenal increase in lending from the full spectrum of finance providers including state-owned banks, private banks, foreign banks and non-banking financial institutions. Of the total amount disbursed up to December 30 last year, banking sector laid out Tk 98 thousand 32 crore and 95 lakh when the FIs shared the rest Tk 2 thousand 877 crore and 20 lakh. The annual growth in SME lending was 13.34 %. ‘The central bank has expanded SME financing to create new entrepreneurs and employment opportunities in addition to empower women’, Bangladesh Bank (BB) Governor said earlier when he was talking about the objective of accelerating SME financing.
Last year banks provided loans to 5 lakh 41 thousand 41 hundred and 656 entrepreneurs, of which 42 thousand 730 were women, according to BB. A BB document also shows that the SME loan programme so far created around 1.5 million new employment opportunities across the country. ‘The banks and FIs increased their lending programme for SME sector as advised and encouraged by the central bank’, said general manager of SME and Special Programmes Department Swapan Kumar Roy. Roy said the quality of SME financing also improved due to constant and effective monitoring of the central bank. He said the loan recovery also increased phenomenally last year, which stood 64.95 % higher at Tk 69 thousand 172 crore at the end of December.
BB latest data also showed that the major share of the total disbursed SME loan goes to business, with receiving Tk 62 thousand 767 crore and 18 lakh or 62.20 % of the total lending to SME. Industrial sector got the second highest amount of loan of Tk 30 thousand 246 crore and 20 lakh, which was nearly 30.0 % of the total disbursement.
Challenges so far
Historically, Bangladesh followed a development strategy in which privateinvestment was controlled through a host of regulations involving investmentsanctioning, credit disbursement, import licensing, foreign exchange allocation, etc.While these regulatory barriers thwarted private investment in general, the impact fellunevenly on SMEs. This was because of the relative inability of the SMEs to cope withthe regulations compared to their large-scale counterparts. Thus, the policy regime waslargely biased against the SMEs although, paradoxically, promoting SME developmentwas a stated objective of successive governments.
Although successive five-year plan documents have mentioned development ofsmall, medium and cottage enterprises as priority area, public development expenditurein this sector has not been commensurate with this declared policy. Thus, in the FourthFive Year Plan, the revised public allocation to this sector was Taka 2,016 million whichwas a meager 0.58 % of the total public development outlay in the plan. What iseven worse, only about 69 % of this small allocation were actually invested duringthe plan period. In the current Fifth Five-Year Plan, the share of the sector in total publicdevelopment expenditure has gone down even further. If the sector has to make muchheadway, there is need for substantial increase in public investment in the sectorparticularly in the area of training, extension, research, market promotion, etc. Acollaborative effort of the government with business associations, non-governmentalorganizations NGOs and other development partners is recommended in such publicoutlays.
During the past decade, substantial reforms have been carried out in the externaltrade regime of Bangladesh. The import procedure has been greatly eased andderegulated. Import tariffs have been lowered and quantitative restrictions virtuallyeliminated. All these have facilitated greater access of domestic producers to importedraw materials. This has particularly benefited SMEs as they were affected more adverselyby the regulated trade regime.
However, import liberalization has also exposed domestic producers tocompetition from foreign goods. To ensure a level playing field and to enable domesticSMEs to compete effectively with imports, the following policy concerns need to beaddressed.
Prior Announcement of Policy Changes: To enable domestic producers, particularly theSMEs, to prepare themselves to face external competition there is need for adequateforewarning about impending policy direction. This is particularly true of trade policymeasures. If the government makes prior announcements of its impending trade policychanges, particularly with respect to tariff schedules, investors will be aware of thedegree of competition they will be facing with the changes and will make adjustments intheir investment and production plans accordingly.
Tariff Rationalization: To encourage domestic production, there should be adequate gapbetween duty on raw materials and duty on finished products. In fixing duty on finishedproducts, possible under-invoicing and dumping should be taken into account, asotherwise, effective duty rates on finished goods will turn out to be lower than that onraw materials in spite of the higher statutory rate on the finished item.
Appropriate Tariff Valuation: To avert the problem of under-invoicing, a system oftariff value has been put in place for certain categories of imports. There are complaintsthat these tariff values are often not in line with the going world price of these itemswhich sometimes puts domestic producers at a relatively disadvantaged position.
Trade License: Investors are required to procure trade license from local governmentbodies by paying statutory fees. The process involves unnecessary delays, harassmentand side payments. The procedure needs to be simplified and the issuance of the licensemade automatic subject to payment of requisite fees and declaration by the investor thatthe proposed investment is in conformity with the rules and regulations and zoningrestrictions of the local government authority.
Registration under Factories Act: According to the Factories Act 1965, allmanufacturing units employing 10 or more workers are required to be registered with theoffice of the Chief Inspector of Factories and Establishments. The job of the FactoryInspector is to oversee the working condition and safety measures in the factory. Inpractice, the regulation has proved to be a major source of delay, harassment andunofficial payments for the investors particularly for those in the SME sub-sector as theexisting regulations do not differentiate between different size categories with respect tosafety and working conditions requirements. To relieve the investors of these problemsthe requirements relating to safety and working conditions should be defined separatelyand realistically for the SMEs and the discretionary powers of the Inspector should beminimized. Registration should be automatic once the investor has declared that therequirements have been complied with.
Clearance from the Department of Environment: All industries are also required toobtain a certificate from the Department of Environment in respect of proper arrangementfor anti-pollution and safety measures. Here again, the requirements should be clearlystated for the type and size categories of industry and the investor should be allowed togo ahead with investment on the basis of the undertaking that the requirements will becomplied with.
Registration with Sponsoring Agency: Registration with sponsoring agencies such as theBangladesh Small and Cottage Industries Corporation (BSCIC), Board of Investment(BOI) or Bangladesh Export Processing Zone Authority (BEPZA) is voluntary unless anenterprise wants to avail itself of government incentives. To keep track of privateinvestment in various sub-sectors, it would be useful to make registration with thesponsoring agency mandatory. However, to relieve the investors of possible hassles,registration procedure should be simplified requiring minimum information to beprovided by the investor, and registration should not be held up until the proof ofinvestment has been produced as the current practice appears to be.
Contract Enforcement and Resolution: This is a constraint, which is faced by both largeand small firms. Inadequacy in the system for contract enforcement and resolution arisesfrom archaic legal system where procedure of adjudication is long drawn out andcumbersome and the system is corrupt. As a result it is not difficult to delay a scheduleddate for hearing. SMEs with low sustaining power often lose out in the long drawn outcourt battle.
Collateral Requirements: One of the main factors that have hampered flow ofinstitutional finance into SMEs is banks’ pre-occupation with collateral based lending.Traditionally banks have used fixed asset ownership, particularly land ownership as thebasis for judging credit-worthiness. This puts SMEs at a relative disadvantage, as largeentrepreneurs are often able to get around the problem because of their influence andcontacts by putting up collateral of dubious valuation. The solution to this problem lies inbanks seeking deposit relationship with owners of SMEs and using cash flow rather thanasset ownership as the criterion for credit-worthiness. An expanded credit guaranteescheme will have to play a vital role in this regard.
Bureaucracy and Corruption: Because of lack of proper autonomy and accountabilitythe public sector financial institutions are beset with inflexibility, inefficiency, politicalinterventions and corruption. Since the performance of the bank officials is not properlyevaluated 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 adopta passive and inflexible attitude towards the borrowers either to avoid the risk of makingan inappropriate lending or to force the borrower to make side payments for morefavorable handling of the loan application. Until necessary reforms in the public financialinstitutions are carried out, the SMEs will continue to bear the brunt of this institutionalmalice.
Major Findings: Over the years, various studies have been conducted to identifyconstraints encountered by entrepreneurs in the industrial sector. A summary of theranking of the problems from selected studies over the 1988-98 period is presented in thissection. The subsectorsinclude: Steel Furniture, Small Metal Works and Light Engineering, Electrical SmallGoods, Plastic Products, Specialized Handloom, Bakeries, Textile Dyeing and Printing,and Footwear. Electricity, credit, and law and order arerespectively the three top ranked problems followed by legal barriers, excess competition,and dearth of technical assistance.
In conclusion
A well developed SME sector is a pre-requisite to attaining higher growth of large-scale industry and the services sector as well. According to a CIDA report, quoted by a national daily in its issue on August 1, 2010, there are about 6.0 million SMEs in Bangladesh, which contribute about 50 % of the country’s industrial output, employing about 80 % of its industrial labour force. SMEs are labour intensive and also need less capital. They are also significant contributors to backward linkage to heavy industries. About 60 to 65 % of SMEs are located outside the metropolitan areas of Dhaka and Chittagong, having easy access to labour and more conducive physical environment. Business costs are thus low in these areas. Therefore, SMEs grow overtime and contribute to enterprise creation, private entrepreneurship development and employment generation.
While the overall contribution of SMEs to the national economy is easily recognized, opinions differ on the extent of the contribution of this sector. Various categories of SMEs together contribute 80 to 85 % of industrial employment and 25 % of total civilian employment. Apart from employment generation, SMEs also contribute significantly to the creation of value added in manufacturing activity. Figures quoted by different sources ADB (2002), WB (2003), Planning Commission (2008) and BIDS (1998) on value added contributions of the SMEs are closely similar, varying between 45-50 % of the total manufacturing value added.
Despite their pre-eminence, SMEs have not been able to grow to their full potential in the country due to various constraints, such as the lack of medium and long-term credit, limited access to market opportunities, technology, expertise and information, lack of suitable incentives, inefficient and limited outreach of government services, and weak capacity among SME entrepreneurs in managing functional areas of business.
Implementation of employment and income generation and poverty reduction programmes and strategies has been a systematic and continuous effort in Bangladesh. Rapid and sustainable growth of SMEs is undoubtedly an important vehicle for accelerating national economic growth, which is an indispensable condition for raising employment and reducing poverty in the economy.
