SME in Bangladesh

A Brief Overview of SMEs in Bangladesh: Challenges and the way forward

Small and Medium Enterprises (SMEs) are the backbone of world economies, constituting about 90% of businesses and providing more than 50% of employment globally (World Bank). They stimulate innovation, encourage entrepreneurship and play a vital role in diversifying economies, fostering competitiveness and providing resilience in the face of economic hurdles.

SMEs in Bangladesh:

In Bangladesh, SMEs consist of Cottage, Micro, Small and Medium Enterprises (CMSMEs), constituting a significant portion of the industrial landscape. According to the Planning Division, Bangladesh, CMSMEs make up 90% of industrial units and 80% of industrial employment and contribute 45% to manufacturing value added. SMEs are growing by roughly 6% annually. Despite their significance, CMSMEs in Bangladesh contribute only 25% to the GDP, whereas in countries like Indonesia, they contribute 59%, 52% in Sri Lanka, 45% in Vietnam, 58% in Cambodia, and 40 % in Pakistan (LightCastle). However, the country aspires to increase CMSMEs' GDP contribution to 32% from 25% by 2024 (SME Policy 2019).

Bangladesh's strategies vis-a vis its SME sector are designed to bolster growth. Bangladeshi SMEs are a unique combination of tradition and innovation. Many businesses take advantage of the country's skilled workers to make unique handcrafted products, while the family-run model nurtures a strong work ethic and adaptability. Such SMEs are resourceful, employing local materials and innovative methods, becoming tech-savvy and using social media to reach a worldwide audience. This combination positions them for exciting future growth.

Government support for SMEs:

The Bangladesh government recognizes the critical role of SMEs and supports them accordingly, which is evidenced by the implementation of various initiatives in the sector. These are:

• Supportive legislation (like Credit Guarantee Department (CGD)) that was passed on July 4, 2022 to provide credit guarantees against collateral-free or partial collateralized loans/ investments disbursed to cottage, micro, small and medium enterprises (CMSMEs), the founding of effective institutions (i.e., the Bangladesh Small and Cottage Industries Corporation (BSCIC), SME Foundation, etc.) and provision of business and finance services as outlined in SME Policy 2019. The five-year plans, prospective plans and government industrial policy also highlighted SME development initiatives. More important, the government also undertook cluster-based initiatives for a sustainable SME sector.
• Governmental organizations under the Ministry of Industries in Bangladesh, the Bangladesh Small and Cottage Industries (BSIC), the SME Foundation, Joyeeta, etc. are involved in SMEs' development, with special focus on female entrepreneurs.
• Facilitating businesses through digital platforms (like EKSHOP) for trade expansion and providing training to entrepreneurs and their staff to navigate challenges.
• Special actions in need, for example, the governmental launch of a BDT 200 billion financial stimulus package in 2020 to support the CMSME sector amidst the COVID-19 pandemic. The third phase of the stimulus package began on July 2022-Jun 2023. Tk 3,174 crore was disbursed to some 27,434 entrepreneurs in nine months, which is 15.87% of the target in the third phase of the stimulus package, with loan disbursement decreasing in this stage for specific reasons. For example, a company seeking to avail up to the allowed 30% of its working capital loan limit from the stimulus fund in the first phase of disbursement would have little opportunity to get a fresh loan in the second and third phases. This explains why many borrowers are not granted loans despite their wishes. In the first phase (May 2020 to June 2021), a total of Tk 32,703 crore was disbursed, which is 81.76% of the target for that period, and in the second phase (July 2021 to June 2022), Tk12,703 crore was disbursed, which is 38.50% of the target.

International aspirations of SMEs:

A remarkable development in terms of foreign expansion has been observed in the Bangladeshi SME landscape. Although there's cautious optimism on ramping up, many businesses are still apprehensive. Here follows a breakdown:

Handicrafts: Many SMEs specialize in handcrafted items or cater to specific local needs, offering a unique selling proposition in the global marketplace.

Leather Goods: Bangladesh boasts a flourishing leather sector that produces high-end wallets, shoes and purses.

Jamdani and Muslin cloth: Bangladesh has a rich textile legacy, and two fabrics in particular are notable for their beauty and craftsmanship: Jamdani and Muslin. Both are woven masterpieces with particular features that have piqued the interest of textile connoisseurs worldwide.

Processed Food Products: Bangladesh has a thriving processed food industry, which contributes significantly to the country's economy. This sector converts raw agricultural products into convenient, shelf-stable food goods for home and foreign markets. Bangladesh already exports processed food products (like dried foods, spices, frozen foods, etc.) to over 70 countries, including the US, Canada, UK and Middle Eastern nations (Processed food export | The Financial Express).

Challenges faced by CMSMEs:

Though CMSMEs are the driving force behind economic activities in Bangladesh, the sector still faces problems in managing such businesses.

First, lack of proper information, for example, like that on licensing procedures and compliances, knowledge about the market, government policies, tax and value-added tax (VAT), financing procedures, marketing strategies, etc.

Second, a lack of business diversification, like limited market access, concentration on the local market, and single products

Third, CMSMEs have minimum access to infrastructure, utility services and road connectivity compared to large enterprises.

Fourth, they are unable to cover the costs of research and development of new products, and they continue to produce primary goods, conventionally conduct business, thus losing ground to competition globally in terms of productivity.

Fifth, lack of access to finance is one of Bangladeshi SMEs' biggest hurdles in conducting business operations and in scaling up. The SME funding gap in Bangladesh is 19% of its GDP (IFC), and 39.26% of MSMEs are financially constrained. Roughly 20% of total loans by banks go to SMEs, with 9% of total trade finance going to them (BIBM)). CMSMEs use unskilled or semi-skilled personnel and participate less in training programs like those imparting product-specific manufacturing skills, bookkeeping skills and management skills, owing to funding constraints, which lowers productivity. 

Recommendations:

To unlock the global potential of SMEs, Bangladesh requires a comprehensive strategy, incorporating the following measures:

1. Access to finance: Improvements in this aspect are essential to incorporate policies for unbanked and underprivileged cottage and micro-enterprises to make them bankable. Upon recommendation from the appropriate trade bodies, banks may offer loans to MSMEs without collateral. Subsidized services in utilities, road connectivity and transportation should be provided through any provision of the national industrial policy, the SME policy or any other country policy. 
2. Technological transformation: By integrating technology, organizations can not only broaden their market presence but also optimize processes and increase productivity. Regulatory compliance, like getting licenses and paying fees, should be enabled online as well.
3. Product diversification: Bangladesh needs to work harder for diversification from traditional and conventional products.
4. Focus on exports and global markets: The country needs to focus on the export market and think globally. To this end, adopting global certification on standardization and  emphasizing brand recognition are essential.
5. Need-based training: Product-related training programs must be coordinated, and funds from the government and intentional donor may be allocated for such targeted programs.

The development of CMSMEs is also critical to meeting the government's long-term goals of becoming a middle-income country, implementing SDGs 2030 and becoming a developed country by 2041. It is apparent that enabled access to finance, technology orientation, a focus on the international market, need-based training and best practices are important to improving the entrepreneurial capacity and scale-up performance of CMSMEs in general.

Authors:

Altap Hossen is an economist, and Mohammad Musleh Uddin is a MEL expert. They are based in Dhaka, Bangladesh.