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. heir absolute contribution to employment and !"#, SMEs offer
significant economic and social advantages. By virtue of their local ownership they offer
the possibility of greater involvement in the local community. hey also offer a degree of
choice that would not exist if SMEs were to be less significant. $t present the contribution
of this sub%sector to the !"# is about &'. $s has been reported in the (ifth (ive%)ear #lan
of Bangladesh, the sector currently employs around & million people directly or indirectly,
which accounts for almost *+' of the total industrial labor force ,Ma-umdar .
/houdhury, +0012.
o run a business enterprise allocation of funds and their proper uses are very important.
But most of our SMEs suffer from lac3 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 ban3ing sector the micro credit becomes a
very important instrument due to its higher rate of loan repayments. Many #/Bs now go
for providing micro credits as well as the 4/Bs, 4!5s, !rameen Ban3 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. hese have contributed to a very slow rate of economic
growth and a per capita income of around 6S7++0 per annum. "espite some degree of
industrial development, most notably in the ready%made garments industry, Bangladesh is
still predominantly an agrarian economy. he sector contributes 89 percent of the !"#
and employs around :0 percent of the labor force. "espite having very fertile soil that can
support up to three crops per year, labor productivity in the sector remains very low.
;ighly une<ual land distribution continues to be a ma-or problem with around :8 per cent
of the population owning less than one acre of land. By most estimates, around &0 percent
A Comprehensive Study on SMEs of Bangladesh: Constraints and
Prospects P a g e | 1
of the population still lives on or below the poverty line. "espite some reduction in the
percentage of population living below the poverty line in recent years, the percentage of
the population considered to be the =hard%core> poor ,defined as those with a daily caloric
inta3e of 1,*0& or less2 actually increased from ++ to +* percent during that same period.
he ;"?>@@ shows that per capita consumption of calories has fallen in 1@A0 from +1AA
to +10& in 1@@: ,Sarwer, +00+2.
$ circulation of Bangladesh Ban3 in the last year states that all the commercial ban3s must
have to open +0' of their total branches in the rural area. (rom this circulation it is clear
that the /entral Ban3 is giving emphasis on the rural ban3ing i.e. micro credit. (rom this
circulation it is clear that the /entral Ban3 is giving emphasis on the rural ban3ing i.e.
micro credit.
1.2 Statement of the problem:
In Bangladesh economy the small and medium enterprises play an important role. $ctually
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
opportunityB ensure the velocity of money and highest uses of domestic resources. he
small and medium enterprises are mostly seen in villages and small towns as well as
metropolitan cities. hey mainly perform as the supplier of the current demand in the local
mar3et. But most of the SMEs> are suffering from the lac3 of wor3ing capital. Ban3s are
not interested to finance those enterprises due to the ris3 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 ma-or causes that
discourage the enterprises to ta3e financial support from the ban3s.
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:
o conduct a comprehensive study of SME sector in Bangladesh of its present state,
prospects, issues and emerging challenges.
1.3.2 Specific objectives:
In this paper I have tried to identify the factors that influence the development and growth
of the SME sector of Bangladesh. hus the specific ob-ectives of the study are as followsC
o appraise the present situation of SME in Bangladesh.
o identify the problems of SME in Bangladesh.
#roblems to getting loans from ban3s and other financial institutions and sources,
#roblems to utilization of these loans and other assets,
(ind out the current ability of the firms to meet their current obligations.
?is3 factors in financing these types of enterprises from the Ban3ing side.
/hal3 out how to overcome these problems.
o recommend solutions to overcome the problems.
1.4 Scope of the Study:
(inancing to SMEs i.e. micro credit is a very contemporary issue in our economy. he idea
of micro credit was invented by "r. Mohammad )unus and he established !rameen Ban3
to impose his new thought. his new idea brings a tremendous change in the rural
economy and the poor people of Bangladesh become able to improve their economic
situation by ta3ing loans from !rameen Ban3. Many economist, statistician, social
scientist and ban3ers conducted their research on micro credit. hey use primary data,
which reflect various aspects of the researches. $ny other researcher can use those
secondary data for hisDher research. he data collection processes are going on fre<uently
for the purpose of new researches. So, relevant recent secondary data and their analysis are
available in any library and -ournal. hese available secondary data mainly give me the
scope to underta3e this study. he range of this study is limited only in identification of
the basic reasons those discourage the ban3s for financing to the small and medium
entrepreneurs and the reasons that ma3e the -ob difficult to ta3e credits from the
commercial ban3s to the small and medium entrepreneurs. he internal problem relating to
management of the enterprise, which decrease the efficiency of the firm is not included in
the study.
1.5 Sinificance of the study:
4ow a day, micro credit occupies its own position in the economy. he main customers of
this micro credit are the owners of the small and medium enterprises. In a Eeast
"eveloping /ountry, li3e ours, there are a number of SMEs operating their business and
they contribute a good portion of !4# of the country. hese enterprises are also a big
source for employment in rural and out%s3irt as well as urban areas. But most of them are
sun3 in a lot of problems % financial problem is the most common and serious among
them.
1. !imitations of the Study:
Since this research is only for academic purpose, there were some limitations in this study.
he main limitation of the study is that a limited area of rural economy has been covered
here and they almost located ad-acent districts to "ha3a /ity. ?e<uired data are not
available due to most of the SMEs do ever or properly maintain accounting and financial
statements. he entrepreneurs have no or very short accounting and financial 3nowledge.
Evens they do not ever fill the importance of preserve the past accounting records. (or
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 lac3 of relevant
data. So the internal problems of the enterprises cannot be identified in this study. Some
common limitations are mentioned belowC
1. "iscussion about the Small and Medium Enterprises is a vast sub-ect, but only some
selected areas are covered in the research paper.
+. he study is basically based on secondary data.
9. ime was enough but it was not possible to give full concentration in this regard due to
continuous pressure from other courses.
1." Methodology of Information Collection:
1.#.1 Sources of Information:
Information collected to furnish this report is both from primary and secondary in nature.
!he primary sources are:
#ractical "es3 wor3
(ace to face conversation with the officers.
?elevant file study as provided by the concerned officer.
Interviewing the officials of Ban3s, financial institutes other than ban3s and
from the unorganized money mar3ets.
!he secondary sources are:
"ifferent /irculars issued by ;ead 5ffice and Bangladesh Ban3.
"ifferent =procedure Manual>, published by SME (oundation.
$nnual ?eports of SME (oundation.
#eriodicals published by SME (oundation.
#ublications obtained from different libraries and from Internet.
"ifferent research papers.
he interest rates of different financial and non%financial institutes on the
field survey basis
1.4.2 "resentation of the study #$%auteri&ation'(:
he first chapter deals with the bac3ground of the study, statement of the problem) the
ob-ective of the study, research methodology, scope of the study, significance of study,
literature review, historical bac3ground and definition of SME.
In the second chapter of this study deals with SME in Bangladesh, #resent Scenario of
SME, /haracteristics of SME, $dvantages of SME, "isadvantages of SME, !rowth and
structure of SMEs and SME "evelopment in Bangladesh,
he third chapter deals with SME Policy Issues, #olicy Implications, SME $ssistance
#olicies and Institutional $rrangements.
he fourth chapter deals with $nalytical (ramewor3 of SME, /ontribution of SMEs to
Employment and !"#, he Increasing #riority #laced on SME "evelopment and !rowth
and Structural ransformation of SMEs.
he fifth chapter deals with /ontribution of Ban3s to SME Sector, /redit #roducts and
Services $vailable for SMEs in Bangladesh, SME Ban3ing in Bangladesh
he si*th chapter deals with /omparative $nalysis of SME Ban3ing #roducts and
#roduct /omparison of Eastern ban3 with B?$/ ban3 and Ban3 $sia.
he seventh chapter deals with $ccess to finance by SMEs, SME (inancing in
Bangladesh, #rospects of SME (inancing, SME refinancing by Bangladesh Ban3, E<uity
and Entrepreneurship (und and ?elationships between !overnment and SME.
he eihth chapter deals with /onstraints to SME !rowth, $nalysis of /onstraints in the
/ontext of Bangladesh, Legal, Regulatory, and Administrative Constraints, Financial
Constraints, Major Industrial Constraints and $n Integrated $pproach to $ddressing the
/onstraints
he ninth chapter deals with #roblems of SME Ban3ing, /oncluding ?emar3s and
#roposed $genda for $ction and /reate and Implement a SME #olicy.
he tenth chapter deals with (indings, Suggestions, ?ecommendations and /onclusion.
!raphs are used to give a clear idea about some information with relevant tables in the
$ppendix at the end of the paper.
1.* +iterature revie,:
Fith respect to the SME sector of Bangladesh, foreign and national experts undertoo3
some studies. Some of the notable ones areC
Mr. $nil Sinha, !eneral Manager, South $sia Enterprise "evelopment (acility, Small and
Medium Enterprise (oundation, I(/, "ha3a, 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 tal3ing 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. "r. Sazzad Gaheer Senior ?esearch
(ellow, BI"S states that SME, it as commercial ban3s scaling down their operations and
trying to reach out the smaller segment in the mar3et with smaller sized loans with some
additional supervision and other advisory services attached to that 3ind of financing. he
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 ;ossain Senior vice #resident Mer3antile Ban3 Etd. states that SME has been
considered as the thrust sector in the economic development of the country with growing
importance from all wal3s of life. It is evident that, substantial increase in SME and ?etail
/redit portfolios along with commercial, corporate and institutional lending, would lead
the ban3s to its higher tra-ectory of growth, minimizing the ris3 of lending through
portfolio diversification. $s such, most of the ban3s have ta3en up aggressive mar3eting
policy to augment their exposure in SME and ?etail /redit. hough SME concept is
nothing new, as evident from the establishment of Bangladesh Small and /ottage
Industries /orporation ,BS/I/2, but a fresh loo3 into and endeavor to boosting the sector
are still imperative. Bangladesh Ban3 re%finance scheme for SME is laudable. he role of
I(/%SE"( for creating awareness among the entrepreneurs and ban3sD4B(Is to be more
focused in SME deserve appreciation.
4aeem /howdhury, #h. ".SME #olicy Expert $"B>s $ !rant eam Ministry of Industry
!overnment 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.
Fith the service sector contributing a ma-or share to the !"# and as this sector relies on
the SMEs, the scope for SME finance by the commercial ban3s has increased
tremendously. he government is also committed to give a fillip to the sector through
infrastructural development, s3ill developmental effort, technological up gradation and by
expanding the role of Small Industries "evelopment Ban3 of India in SME development.
Bangladesh Better Business (orum ,BBB(2 /howdhury, 4uimuddin and $yub Miah,
+00:. H$ccess to SME finance and the SMEs in BangladeshC towards an informed
consultationI, 6ddin ,+00*2 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. /howdhury ,+00A2 highlighted that in context of Bangladesh
SME is characterized by Eow capitalization and limited assets, geographical diversity and
high mortality, poor credit 3nowledge, very limited access to formal source of credit, cash
intensity in transactions, very limited record 3eeping habit, poor financial disclosure on
account of tax issues, high ris3 perception has led to high borrowing costs.
In a study about SME sector of Bangladesh Miah ,+00A2 stated that the ma-or constraints
for SMEs are lac3 of ade<uate investment, lac3 of modern technology, high rate of interest
on ban3 loans, irregularDinade<uate supply of power, poor physical infrastructure and high
transportation cost, poor information about mar3et opportunities and re<uirements,
inade<uate availability of raw materials, lac3 of s3illed technicians and wor3ers, lac3 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 <uality of human resources, low awareness, low lobbying capacity,
rapid changes in policy environment.
$hmed, M. 6. +00:. !he Small and Medium Enter"rises #SMEs$ in Bangladesh% An
&vervie' o( the Current Status) $hmed ,+00:2 observed that availability of finance is a
ma-or constraint to formation and growth of SMEs in Bangladesh. Ban3s are reluctant to
expand their SME credit portfolio because they do not consider SME lending an attractive
and profitable underta3ing. his is so because SMEs are regarded as high ris3 borrowers
because of their low capitalization, insufficient assets and their inability to comply with
collateral re<uirements of the ban3s. $dministrative costs are also higher because close
monitoring and supervision the SME operation becomes necessary.
4aima 4azneen ?i3ta, $ssistant "irector, #olicy $nalysis 6nit ,#$62, Bangladesh Ban3
observed that he growth of small and medium enterprises ,SMEs2 in terms of size and
number has a multiplier effect on the national economy, specifically on employment, !"#
growth, and poverty reduction in Bangladesh. In the past, the government attempted to
provide SMEs with access to finance by targeted lendingB such as through directives that a
certain share ,e.g. & percent2 of a ban3Js loan portfolio was to be set aside for small and
cottage industry financing
Micro Industries "evelopment $ssistance and Services ,MI"$S2 ,+0082C $ study ,+0082
by Micro Industries "evelopment $ssistance and Services ,MI"$S2 revealed that sources
of finance are mostly friends and family member in case of SME. MI"$S tried to identify
the sources of funds of SMEs. hese areC
Sources of funds #ercentage of finance
Informal sector 81'
(amily members +0' ,interest free2
8' ,with interest2
4!5 +&'
Ban3 1*'
;allberg ,+00+2C $ccording to ;allberg ,+00+2, a stable macro%economy, an open trade
and investment regime, and a competitive financial sector are argued to be most essential
ingredients for a vibrant private sector. But with a law and order situation below the
optimum level, corruption well above the level of acceptance and unstable political
situation, the domestic environment of Bangladesh does not come to any help, rather
hinders the prosperity of SME in this country.
Brahmanadam, !, 4., ?$I, ;.E., "a3shina Murthy, ", H(inancing Small Scale SectorI.
he ?ole of Ban3sI, Indian Ban3ing oday and omorrow, May, 1@*1% he above article
was prepared on the role of ban3s in financing the SMEs in the year 1@*1. $t those times
the Indian ban3ing was not all interested in financing the SMEs, because of their credit
worthiness. Eater due to changes in the industrial policy of India, the commercial ban3s
came forward and made immense help to the growth of SMEs. his article was written
before the economic reforms ta3en place. ;ere is a gap for more analysis about the role of
the ban3s in the post economic reforms.
/hopra, K./., H(inancing for he "ecentralized Sector% Small and Medium IndustriesI
he Ban3er, $ugust, +00: the above article prepared on the thesis, reveals the financing
for the SMEs in the decentralized sector. his article helped me in selecting the path for
my study on credit facilities for SMEs. he article vividly discussed about the possible
ways to finance the SMEs in the decentralized sector li3e $gricultural based and $rtisan
based SMEs. ?eally there is a gap between the centralized and decentralized sectors in
getting the finance from the ban3s. he ban3s are very much lenient in providing loan
facilities to the centralized sector.
Lailal Saaw, H!rowth of Small Scale Industries in IndiaI Lournal of industry and rade,
$pril M +00& he growth of small and medium industries in India was discussed in the
above article. he expected growth was not there because of lot of root causes to sic3ness
and underdevelopment in the SME sector.
1.$ %istorical &ac'ground:
$ccording to the European 6nion ,+0092 SMEs are defined as enterprises which have at
most +&0 employees and an annual turnover not exceeding &0 million Euros. (urther there
is the distinction of small enterprises N they have fewer than &0 staff members and less
than 10 million Euros turnover N and micro%enterprises ,less than 10 persons and +
million Euros turnover2.
$ccording to the Forld Ban3 ,+00:2 medium enterprises are defined as enterprises which
have at most 900 employees and an annual turnover not exceeding 1& million 6S dollars.
(urther there is the distinction of small enterprises N they have fewer than &0 staff
members and up to 9 million 6S dollars turnover N and micro%enterprises have up to 10
persons and 7100,000 turnover.
In the 6K, sections 9*+ and 8:& of the /ompanies $ct +00: define a SME for the purpose
of accounting re<uirements. $ccording to this a small company is one that has a turnover
of not more than O&.: million, a balance sheet total of not more than O+.* million and not
more than &0 employees. $ medium%sized company has a turnover of not more than O++.*
million, a balance sheet total of not more than O11.8 million and not more than +&0
employees. It is worth noting that even within the 6K this definition is not universally
applied.
In the 6S$, the definition of small business is set by a government department called the
Small Business $dministration ,SB$2 Size Standards 5ffice. he SB$ uses the term Hsize
standardsI 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. he concern
cannot be dominant in its field, on a national basis. It must also be independently owned
and operated. 6nli3e the 6K and the European 6nion which have simple definitions
applied to all industries, the 6S has chosen to set size standards for each individual
4$I/S coded industry. his variation is intended to reflect industry differences in a better
way. he most common size standards are
&00 employees for most manufacturing and mining industries
100 employees for wholesale trade industries
7: million of annual receipts for most retail and service industries
7+*.& million of annual receipts for most general . heavy construction industries
71+ million of receipts for all special trade contractors
70.A& million of receipts for most agricultural industries
Brea3ing down the SME definition, Industry /anada defines a small business as one that
has fewer than 100 employees ,if the business is a goods%producing business2 or fewer
than &0 employees ,if the business is a service%based business2. $ firm that has more
employees than these cut%offs but fewer than &00 employees is classified as a medium%
sized business.
In India the Small Scale Industries ,SSIs2 are industrial underta3ing 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 ?s. 10 million. he Small Scale Service $nd
Business ,Industry related2 Enterprises ,SSSBEs2 are industry related service and business
enterprises with investment in fixed assets, excluding land and building up to #s. 1
million. ,Ministry of trade and Industry, !overnment of India2
$ccording to the SME ban3 of #a3istan, SME means an entity, ideally not a public limited
company, which does not employ more than +0& persons ,if it is manufacturing concern2
and &0 persons ,if it is tradingDservice concern2 and also fulfills the following criteria of
either =a> and =c> and =c> or =b> and =c> as relevantB ,a2 $ tradingDservice concern with total
assets at cost excluding land and buildings up to ?s &0 million. ,b2 $ manufacturing
concern with total assets at excluding land and buildings up to ?s 100 million. ,c2 $ny
concern ,trading, service or manufacturing2 with net sales not exceeding ?s 900 million as
per latest financial statements.
1.- .efinition) %haracteristics / 0ro,th of Small and 1edium
2nterprises:
1.-.1 .efinition of S12:
$ccording to Small Business act 1@98,I $ business which is independently
owned and operated and not dominant in its fieldI is a Small Business.
Bolton ?eport on the commission of the in<uiry on Small Business firms,
1@AA,ISmall firm is one that has a relatively small share profits mar3et.I
Stoner, (reeman, . !ilbert, 1@@&, HSmall Business refers to business
locally owned and managed, often with very few employees wor3ing at a single
locationI.
6S !overnment, H$ Small Business is one with fewer than &00
employees.I
$ccording to executive committee for national economic development, H$ Small Business
one of which processes at least two of the following characteristicsC
%Managers are the owners,
%/apital supplier and the owner is individual or a small group,
%For3er and the owners are local, mar3et may not be so.
%?elatively smaller compared with the biggest unit of the industry PSales,
employees etc.Q
(rom all of the above definitions we can ma3e a general definition of SME. $ business not
dominating in its field, does not engage in any new mar3eting, wor3ers are local, wor3ing
at a single location, produced units are relatively small in size, and often all organized by
the owner or his family members.
4ow%a%days there are a lot of SMEs are operating in verity of fields. Fe get our daily
necessaries from the grocery shops. 5ne ta3es food from a restaurant or from a first food
shop. Some shops are selling cloths, boo3s, electronics etc. ;air cutting saloon, laundry,
automobile and electronic mechanic, travel agent all of them are serving us in different
ways. $ doctor, engineer or a lawyer give us different consultation services.
1.-.2 Some Other .efinitions:
/urtis E. ate, Lr. and his co%authors in their boo3 HSuccessful Small Business
ManagementI ,1@*+2 define small business as H$n organization with a name, a place of
operations, an owner, and one or more wor3ers other than the owner.I
he (ederal ?eserve Ban3 of 6S$ says small business is one which His independently
owned and operated but is not dominant in its field.I In the Small Business $ct of 1@&9,
the 6S /ongress gave the same definition of small business.
1.-.3. .efinitions in the conte*t of Banladesh:
HSmall 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
&0 wor3men and whose land, building and machinery does not exceed 3.1&0, 00,000 in
value in either case.I M E* Pa+istan Small Industries Cor"oration Act o( ,-./*
3s per 4ndustrial "olicy 2515:
Small 2nterprise:
6ature of
enterprise
7alue of asset #e*cludin land /
buildin(
1anpo,er !urnover
1anufacturin B" &0000 to 10000000 Maximum :0 B" &00000 to
+00000000
!radin B"&0000 to &000000 Maximum +0
Service B" &0000 to 9000000 Maximum 90
1edium 2nterprise:
6ature of enterprise 7alue of asset #e*cludin land
/ buildin(
1anpo,er !urnover
1anufacturin B" 100000 to &,0000000 Maximum 900 B" 1000000
to 800000000
!radin B"100000 to 90000000 Maximum &0
Service B" 100000 to 10000000 Maximum A&
Small Sement:
Ralue of fixed assets ,except land . building2 up to t3 1& million in case of manufacturing
enterprise and maximum +& wor3ers in trading or service enterprise.
1edium Sement:
Ralue of fixed assets ,except land . building2 up to t3 100 million in case of
manufacturing enterprise and maximum 100 wor3ers in trading or service enterprise.
Chapter - 2
2.1 SME in Bangladesh:
"ifferent countries and organizations define SME differently. he !overnment of
Bangladesh has categorized SME into two broad classesC
Manufacturing enterprise
4on%Manufacturing activities
2.1.1. 1anufacturin enterprise:
Manufacturing enterprises can be divided into two categoriesB
Small enterprise% an enterprise would be treated as small if, in current mar3et prices, the
replacement cost of plant, machinery and other partsDcomponents, fixtures, support utility,
and associated technical services by way of capitalized costs ,of turn%3ey consultancy
services, for example2, etc, excluding land and building, were to up to 3. 1& millionB
Medium enterprise: an enterprise would be treated as medium if, in current mar3et prices,
the replacement cost of plant, machinery and other partsDcomponents, fixtures, support
utility, and associated technical services by way of capitalized costs ,of turn%3ey
consultancy services, for example2, etc, excluding land and building, were to up to 3. 100
millionB
2.1.2. 6on8manufacturin activities #such as tradin or other services(:
4on%manufacturing activities can be divided into two categoriesB
Small enterprise: an enterprise should be treated as small if it has less than +& wor3ers, in
full%time e<uivalentsB
Medium enterprise: an enterprise should be treated as small if it has between +& and 100
employees.
$ccording to Bangladesh Bureau of Statistics different enterprises are defined asB
Si&e 6o. of employees
Micro 0%@
Small 10%8@
Medium &0%@@
Earge $bove @@
he Ministry of Industries, !overnment of Bangladesh has been identified following 11
booster sectorsB
Electronics and electrical
Software%development
Eight engineering and metal%wor3ing
$gro%processingDagro%businessDplantation agricultureD specialist farmingDtissue%
culture
Eeather%ma3ing and leather goods
Knitwear and ready%made garments
#lastics and other synthetics
;ealthcare . diagnostics
Educational services
#harmaceuticalsDcosmeticsDtoiletries
(ashion%rich personal effects, wear and consumption goods.
2.2 "resent Scenario of S12:
In +009 the International /onsultancy !roup ,I/!2 of the 6K, in collaboration with the
Micro Industries "evelopment $ssistance and Services ,MI"$S2, conducted the 4ational
#rivate Sector Survey of Enterprises in Bangladesh. he survey results drew the
conclusion that there were approximately : million Small and Medium Enterprises
,SMEs2, which included enterprises with up to 100 wor3ers employing a total of 91
million people, e<uivalent to 80 percent of the population of the country of age 1& years
and above. he survey also found that the industrial structure of SMEs consisted of
primarily wholesale and retail trade and repairs ,80 per cent2, production and sale of
agricultural goods ,++ percent2, services ,1& percent2, and manufacturing only ,18 per
cent2. hus 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. $nother vital findings of the survey under discussion was that
SMEs contributed B" A81 ,7 1+.&2 billion i.e. nearly +& per cent of the !"# ,B" +,@@:
billion2 in +009. It is reflected from this survey that enterprises employing +%& wor3ers
contribute &1 percent share of the total SME contribution to the economy, followed by +:
percent by those having only one wor3er and 10 per cent by those having :%10 wor3ers.
(or E"/s li3e Bangladesh, SMEs are a highly cost%effective route for industrial
development.
It is observed from able%1 that micro enterprises run by up to 10 wor3ers contribute the
most which is *:' of the total contribution from SMEs to !"# of Bangladesh. It is also
observed that micro enterprises run by more than +1 wor3ers contribute about A' of total
contribution from SME to !"# of Bangladesh.
able%+ provides the information regarding sector wise contribution of SMEs to !"#. It is
reflected from the table that manufacturing sector contributes the highest contribution in
!"# i.e., 9*'. It is also observed from the table that agriculture and wholesale and retail
sector contribute more than ++ percent in the !"# of Bangladesh.
able%9 shows the growth pattern of SME. It is observed that during +001%+00+ to +008%
+00& in every financial year the growth rate of SME is about A'. In +00&%+00: the growth
rate was @.+1'. he highest growth was in +00:%+00A i.e., 10.+*'
able%8 shows the growth pattern of manufacturing sector. It is observed that the average
growth during 1@A+ to +00& was :.8'. "uring +001%+00+ to +00:%+00A the highest
growth was in year +00:%0A i.e., 11.1@'. It is also observed that during +00+%+009 to
+00&%+00: in every financial year the growth of manufacturing sector was more than :'.
2.3 %haracteristics of S12:
here are many characteristics of SME. Some of which are described in the following
paragraphC
9nity of 4ndividuals and the Orani&ation:
he 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 ob-ectives.
:ih 4ndividual 1otivation:
Individuals are highly motivated for further exertion and organizational development.
hough pay for performance is a principal motivator in a small business, comfortable and
social life related wor3place plays a role of the social motivator.
O,ners as 1anaers:
In most of the small businesses, owners are responsible for managing the firm. he
employees are hired on owner>s discretion. 5wners are responsible for ta3ing any and all
management decisions.
Streamlined %ommunication:
Fith simple and petit structure of the organization, good and effective communications are
maintained with and among employees. his 3eeps the organization more susceptible to
changes in the business arena.
Supportive climate for Orani&ational 4nteration:
Management including supervisors 3eeps close relations with subordinates. hey offer
training, encouragement and counseling to subordinates for problem solving. Employees
are provided with challenging and en-oyable wor3place.
2.4 3dvantaes of S12s:
he SME has many advantages over its larger counterparts. It does not have access to
huge resources, numerous employees strong financial bac3up, 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.
0ro,th:
Small business helps entrepreneurs develop as an individual and expand their personal
abilities. heir growth might have been hampered had they been employed under the
guidance of a supervisor in any other organization. $mbition also motivates entrepreneurs
and ma3es them hang in there.
"rovides self8employment opportunitiesC
Small business helps people provide -ob for themselves. Sometimes employment
opportunities are limited in big industries. here are losing big firms that are fre<uently
cutting bac3, closing plants, and lying off people. his creates unemployed people in
society who are otherwise capable of performing various -obs. he area of small business
can provide a much%needed source of new employment. his shows the important
contribution the smaller firms are ma3ing to their respective notional economics.
;le*ibility:
Earge corporations often lac3 the flexibility of small business because of the complex
organizational structure, established bureaucracies, and high overhead costs. "ecision
ma3ing in the small business fre<uently depends on only one or two persons. he
management and the wor3force in the small business may be more adaptable to change
than those of the large corporation. hey can react more <uic3ly to changing mar3et
conditions or to modify a product for a customer more easily than could a large business.
Better 4nter8personnel <elationships:
Both managers and staff in the small business are treated as individuals. Managers are
given freedom and decision ma3ing and provided with variety of responsibilities. Staffs
are encouraged to innovate there by reducing boredom in the wor3place. Eines of
communication are direct between owners and employees.
4ndependence:
Small businesses give its owners the liberty or independence to come go as they please.
5wners of small business enterprises have a degree of freedom that are not customary for
managers in most big corporations this freedom encourages self%motivation. 5ften this
freedom of small business owners means the right to wor3 harder and longer hours than
they would if they were employees of big business. ;owever, the psychological and
financial satisfaction arising from enterprise ownership is powerful rewards for the ris3s of
going into business for oneself.
=uic> decision:
$s the owner of the business does all in all of that particular concern, the owner does
decision%ma3ing mostly. So the decision is ta3en relatively <uic3ly because he or she does
not have to discuss other people or superiors to ta3e the decision.
2.5 .isadvantaes of S12s:
he SME has their share of disadvantages too. hese disadvantages have multiplied in the
current years due to increased management problem in recent years.
4nability to cope ,ith ro,th:
Sometimes, the factors that are advantageous to small business turn in to serious
disadvantage when it is time to grow. !rowth often re<uires the owner to give up certain
authority. Similarly, growth also re<uires specialized management s3ills, which the owner
may lac3.
1anaement problem:
Effective and efficient management is very important for the smooth running of any 3ind
of business. $ new businessperson often has the 3nowledge and s3ill to produce a good
but will lac3 the necessary 3ills of planning organizing, staffing, directing and controlling.
)et 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 s3ills.
$lso they do not give the subordinates enough responsibility to manage.
Shortae of ,or>in capital:
Shortage of wor3ing capital is the most predominant limitation of small business. (or this
limitation, they cannot ta3e the advantage of economies of scale. hey cannot ta3e the
advantage of discounts given for bul3 purchases. his leads to the inability to cope up with
their larger competitors in new facilities, e<uipment, tools, and methods.
+ac> of coordination:
$nother disadvantage is the lac3 of coordination between production and mar3eting. hat
is the failure to balance and coordinate these to critical functions. It is important for small
business to 3eep -udicious balance amongC
;aving too few products so that the orders of potential customers have to be turned
down.
;aving too big inventory as to bear too much inventorying and maintenance cost.
"iversifying too fast. he advantage of diversification and the advantages of
product specialization should be balanced.
+ac> of effective sellin techni?ues:
Small businesses usually don>t have the access to specialized person at mar3eting. So, they
lac3 in scientific mar3et research, specialty advertising and personal selling. $s a result
sales are comparatively lower than the larger enterprises. Eocation of the head office and
the accessibility does affect the sale to certain degree.
2.@ 0ro,th and structure of S12s:
$vailable information suggests relatively rapid growth of SMEs in Bangladesh, especially
since the 1@@0s. he data on the number of establishments show that small enterprises
grew by 8.: percent per year over the period ()A* to ()09, while medium enterprises
grew by :.8 percent during () *+%() 09. Fith special emphasis given to the development
of SMEs, it is li3ely that these growth rates have continued and probably increased in
recent years.
A
he number of small enterprises increased to &&,@1: in +001 from +8,&@0 in
1@*1. $s per the Economic /ensus +001 and +009 ,BBS2, the number of small enterprises
stood at A8,:+@ which is *A percent of the total number of enterprises, while the number of
medium enterprises is &,1+& ,: percent2. (or large enterprises, the number is &,:A9 which
is A percent of the total number of enterprises
he enterprises are concentrated in six broad categoriesC manufacturing including agro%
based manufacturingB educationB wholesale and retail tradeB hotel and restaurantB finance,
insurance and business servicesB and community, social and personal services. he
distribution of SMEs over different categories shows that the share of small manufacturing
enterprises in total small enterprises is nearly 9& percent while similar share of medium
manufacturing enterprises is 8& percent ,able 92. he share within different SME>s is also
changing over time ,able 82.
2.A S12 .evelopment in Banladesh:
;istorically, 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 generalB the impact fell unevenly on SMEs. his
was because of the relative inability of the SMEs to cope with the regulations compared to
their large%scale counterparts. hus, the policy regime was largely biased against the
SMEs although, paradoxically, promoting SME development was a stated ob-ective 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 1@*0Js, underwritten by the familiar structural ad-ustment
policy. his included deregulation of sanctioning procedure and relaxation of other
regulatory barriers, easing of import procedure, reducing trade barriers, following a mar3et
oriented exchange rate policy, and implementation of fiscal, monetary and public
enterprise reforms.
hese reforms helped remove a large part of the policy bias against SMEs that prevailed
earlier. ?ecent studies confirm that these reforms had positive impacts reflected in a fairly
rapid growth of the sector during the past decade. ;owever, because of their structural
wea3nesses, 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 ssues:
3.1.1. Pu!lic "e#elopment $utlay:
$lthough 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. hus, in the (ourth (ive )ear
#lan, the revised public allocation to this sector was a3a +,01: million which was a
meager 0.&* per cent of the total public development outlay in the plan. Fhat is even
worse, only about :@ per cent of this small allocation were actually invested during the
plan periodS In the current (ifth (ive%)ear #lan, the share of the sector in total public
development expenditure has gone down even further. If the sector has to ma3e much
headway, there is need for substantial increase in public investment in the sector
particularly in the area of training, extension, research, mar3et promotion, etc. $
collaborative effort of the government with business associations, non%governmental
organizations 4!5s and other development partners is recommended in such public
outlays.
3.1.2. %rade Policy:
"uring the past decade, substantial reforms have been carried out in the external trade
regime of Bangladesh. he import procedure has been greatly eased and deregulated.
Import tariffs have been lowered and <uantitative restrictions virtually eliminated. $ll
these have facilitated greater access of domestic producers to imported raw materials. his
has particularly benefited SMEs as they were affected more adversely by the regulated
trade regime. ;owever, import liberalization has also exposed domestic producers to
competition from foreign goods. o ensure a level playing field and to enable domestic
SMEs to compete effectively with imports, the following policy concerns need to be
addressed.
Prior &nnouncement o' Policy Changes: o enable domestic producers,
particularly the
SMEs, to prepare themselves to face external competition there is need for ade<uate
forewarning about impending policy direction. his is particularly true of trade policy
measures. If the government ma3es 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 ma3e ad-ustments in their
investment and production plans accordingly.
%ari'' (ationali)ation: o encourage domestic production, there should be
ade<uate gap between duty on raw materials and duty on finished products. In fixing duty
on finished products, possible under%invoicing and dumping should be ta3en 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.
&ppropriate %ari'' *aluation: o avert the problem of under%invoicing, a system
of tariff value has been put in place for certain categories of imports. here 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.
3.1.3+iscal Policy:
*alue &dded %a,: he main components of indirect tax in Bangladesh are Ralue
$dded ax ,R$2, Supplementary "uty and Excise "uty. R$ is imposed on producer,
manufacturer, importer, exporter or service renderer under the Ralue $dded ax $ct, 1@@1,
on goods or specified services, at the rate of 1&' at every stage of transfer. R$ paid
against the input is ad-ustable against the R$ on output to be collected from the buyers
and the net sum stands payable on delivery of goods or specified services to the R$
authority. Exemption is allowed to certain goods or service or certain taxpayers.
$ll cottage industries, except those producing particular products, are exempted from R$.
But, manufacturer, producer or service renderer ,other than cottage entrepreneurs2, whose
annual turnover does not exceed a3a 1.& million are re<uired to pay urnover ax at the
rate of +.& per cent in lieu of 1& per cent R$. his limit is too low for small industries. $s
a result, small industries are sub-ected to the same 1& per cent R$ as their large%scale
counterparts. In addition, supplementary duty is imposed at variable rates on certain
categories of consumption goods across all size categories.
(inally, excise duty applies to a limited number of items irrespective of size classification.
hus, in terms of indirect taxes, there is virtually no differentiation between SMEs and
their large%scale counterparts, which is considered ine<uitable by most SMEs.
%a, -oliday: Similarly, there are no differentiated treatments of SMEs either with
respect to duty on capital machinery or direct taxes. here are provisions of tax holidays
for enterprises of all size categories sub-ect to rules and procedures set by the 4ational
Board of ?evenue. o avail themselves of tax holiday, enterprises recommended by the
relevant sponsoring agencies have to get the approval of the 4ational Board of ?evenue
which is a cumbersome and lengthy process. he tax holiday, however, is not available to
sole proprietorship enterprises which are the usual form of small and cottage industries in
Bangladesh.
.ealth %a,: Fealth tax is payable by an individual if his net wealth exceeds a3a
+.& million. $s per existing law, no wealth tax is payable by a company, the usual legal
form of a large industry. 5n 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.
hus, 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 "olicy 4mplications:
In recent years, SMEs have emerged as a new engine of growth in many
developing countriesB and factor endowments and development potentials show that SMEs
can also play a significant role in Bangladesh in promoting its poverty reduction agenda.
his has been ac3nowledged in the country>s development and poverty reduction
strategiesB and policies and programs have been initiated to ensure unhindered growth of
the SMEs. In this bac3drop, this note has examined the growth and contribution of the
SMEs to !"# and the national economy using available information.
he SMEs in Bangladesh cover different sectors ,mainly livestoc3, fishing and
poultry, industry and services2 and the SMEs are growing over time. he analysis shows
that during ()A*%()09, small enterprises grew by 8.: percent per year, while medium
enterprises grew by :.8 percent during ()*+%()09. "uring ()09%()0:, the number of
SMEs in different sectors increased by &.+ percent. his growth matches the
manufacturing sector growth and the share of small scale industries in the overall
economy.
he important concern relating to the SME sector is to ensure its speedy growth in
output, employment, and exports. (or 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. (or the purpose, the 4ational as3
(orce 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 mar3ets are also important for sustaining the
growth of existing SMEs and flourishing of new SMEs. Infrastructural bottlenec3s,
especially power, gas, and transport are significant deterrents to SME expansion and these
should be effectively addressed for ensuring uninterrupted growth of SMEs.
he analysis shows that SMEs have good potential of absorbing the country>s
expanded labor force. Employment generation grew at a yearly rate of &.8 percent in small
enterprises during 1@@1%+001B while it grew by @.: percent for the medium enterprises
during 1@*+%+009. It is estimated that SMEs currently absorb almost *0 percent of the
total employment in the industry sector and +9 percent of the country>s total labor force.
Since creation of decent and productive employment opportunities for the expanding labor
force is the 3ey 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. 1+
In terms of contribution to !"#, the share of SMEs is growing over time. he
estimates in this note put the contribution of SMEs at between 80 percent and &0 percent
to total manufacturing output and between +0 percent and +& percent to overall !"#.
Eabor productivity in the SMEs is found to be higher than that of large enterprises. he
compulsion, however, is to further increase the labor productivity, for which sustained
efforts of human capital development ,training, education, and technical 3nowledge2 are
essential.
!enerally, SMEs re<uire less capital to establish and operate relative to large
industries. he analysis shows that access to formal financing, especially ban3 financing,
for SMEs has been increasing in recent years. ;owever, despite the introduction of
refinance facilities by the Bangladesh Ban3, the supply of institutional finance still
remains inade<uate for the SMEs. $lthough several ban3s have opened special windows
for catering to SME loan and some ban3s have introduced collateral free loan, it is
important to develop and adhere to a common norm in ban3%SME relationships so that the
SMEs can access credit in a timely and efficient manner. $part from catering to collateral
free loans for SMEs, ban3s and 4B(Is 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.
Ei3e in many East $sian countries where SMEs have played 3ey 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
4!5 sectors. In addition to finance, this should involve technical support system for
providing technical extension services directly to the SMEs in which institutions li3e
BS/I/, BS/I?, and other public and private sector agencies would play 3ey roles in
serving the SME sector. 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 li3e. 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. he thrust would be to offer comprehensive sets of assistance
programs to facilitate the SMEs to upgrade themselves, increase productivity, and improve
competitiveness. he efforts could be built using a networ3 approach to providing
assistance in financing, production technology, management, ? . ", environmental
protection, and other areas. he networ3 would include various government institutions,
public and private financial institutions, professional groups, and relevant trade bodies and
associations. he broad based pac3age of assistance to SMEs could be administered under
the networ3ing approach. $ local SME upgrading program could be introduced through
creating a tripartite partnership among multinational corporations ,M4/s2, local SMEs,
and the government under which M4/s would provide focused assistance to their
suppliers to improve <uality and operational efficiency.
he scope of wor3 of separate SME windowsDdedicated des3s 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 mar3eting strategy and export lin3ages. If
necessary, a SME training and mar3eting fund may be created to support training facilities
and export promotion activities.
(or accelerating future growth and viability of the SMEs, technological innovation
and 3nowledge transfer, product diversification, and mar3eting services are the 3ey areas
where special attention are needed. he adoption of a comprehensive road map, -ointly
wor3ed out for implementation through public%private collaboration, for technological and
mar3eting services for the SMEs can go a long way in creating a competitive SME sector
in the country with re<uired export lin3ages.
(inally, 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
of better production technologies. his will help up scale the existing low productivity
informal SMEs and deepen their lin3s with mainstream growth see3ing activities. $s such,
the development of SMEs in the country calls for a re%thin3ing 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 S12 3ssistance "olicies and 4nstitutional 3rranements:
he 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 ob-ectives of successive governments, the
broad macro policy regime remains biased against SME development. $llocations of
public sector investments, trade policies and taxation policies in particular have mostly
been anti%SME development in character and contents ,$"B, +00+2. he 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 ade<uately effective. Fea3 and inefficient management and lac3 of
proper implementation of the various policy support measures have rendered various
assistance relate business advisory services, such as training, credit mar3eting and physical
infrastructural facilities ,through BS/I/>s Industrial Estates #rogramme2, much less
effective than desired. he private sector efforts through participation of MI"$S, B$SI/
and selected 4!5s ,especially !B, B?$/ and #roshi3a2 have not so for been ade<uate
especially in SME promotion. SMEs because of their structural wea3nesses, such as, scale
barriers, inefficient management and wea3 technological capacities need pro%active
policies and institutional support in addition to removal of existing policy biases.
Fhile getting the government out of business and greater participation of the private
sector are now emphasized as 3ey strategies for development, some public sector
participation for desirable monitoring of selected essential public services such as,
effective legal and -udicial procedures, commercial contracts, and land settling
arrangements and such will still be necessary. $nalysis 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 bottlenec3s.
"iscussion follows on some of the existing institutions of the country, which are wor3ing
in the broad SME sector.
Banladesh Small / %ottae 4ndustries %orporation #BS%4%(:
BS/I/ has been acting as the state%run policy coordinator, service developer and
distributor of facilities in the SME sector. $ ma-or responsibility of the /orporation 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 building2 technology transfer, credit rationing, training, design development among
other. 6nfortunately, BS/I/ could not perform as expected although its achievement in
physical terms particularly in estate building over the past 80 years is impressive. Eighty%
one percent of the developed plots ,A0:@ out of *A:92 have been allotted to the
entrepreneurs as of 5ctober +009. But only +8@& i.e. 90' of the plots have been used for
actual industry building. 5ne can see that there has been a lot of waste of public money in
idle investments in BS/I/. BS/I/, therefore, urgently needs reforming. It can play its
planned catalytic role in the SME sector only after reforming itself. Fith reference to
reform, however, a word of caution is necessary. Experience suggests that under any
reform program BS/I/ 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.
Banladesh 4ndustrial !echnical 3ssistance %enter #B4!3%(:
Bangladesh Industrial echnical $ssistance /enter ,BI$/2 was set up by government as
an autonomous body under the Ministry of Industries. Its mandate is toC ,a2 train industrial
personnel to upgrade their s3illsB ,b2 render technical advice to industriesB ,c2 disseminate
modern 3now%how and improved techni<ues among industrial personnelB ,d2 manufacture
and supply spare parts, tools and machinesB and ,e2 develop e<uipment tools and
processes. BI$/ 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 s3ill development training programs. ;owever, it has suffered from
chronic paucity of funds necessary for conducting training and modernization. his
venerable organization with years of experience and goodwill should be reenergized and
enabled to play its due role in the national economy.
Banladesh %ouncil for Scientific / 4ndustrial <esearch #B%S4<(:
Bangladesh /ouncil for Scientific . Industrial ?esearch ,B/SI?2 has also remained an
underutilized organization in spite of its potential. #articularly, its regional establishments
in /hittagong and ?a-shahi should have been fully used to underta3e research in locally
available materials, which can be used as inputs by the SMEs. he agency>s research in
the area of Soya foods and Spirulina for example has attracted attention of the public but
there has been no sustained effort by B/SI? to remain in the public view. )ears of neglect
and fund starvation have stifled the growth of B/SI?. o the best of our information it has
no useful lin3age with the SME sector.
Fays need to be explored to find mutually beneficial cooperation between the two.
Small / 1edium 2nterprise ;oundation #S12;(:
he SME (oundation is an independent center of excellence created and generously
capitalized by the !overnment of Bangladesh to the tune of a total endowment fund. he
main ob-ective of SME (oundation is to implement SME #olicies and strategies designed
to achieve employment augmenting industrialization, develop entrepreneurship, alleviate
poverty and accelerate pro%poor and inclusive economic growth. he Specific ob-ectives
areC
"elivery of Business "evelopment Services ,B"S2 to SMEs to support
encourage and strengthen growth and development of SME sectorB
Establishment of a comprehensive data and information based on the SMEs
through conducting surveys and studies for use by all SME Sta3eholders
(acilitate SME access to institutional services of finance including
provision of credit wholesaling services at concessional interest ratesB
S3ill development and capacity building of the SME entrepreneurs through
providing training facilitiesB
(acilitate development, adoption and dissemination of technology for
ensuring productivity and innovation of new products and processB
$ssist mar3et development, mar3et creation and mar3et expansion at home
and aboard for supporting sales promotion and export for SME entrepreneurs
Other 4nstitutions:
5ver the years a number of semi government and private sector institutions have become
active in the SME area. Some of these li3e the B$SI/ Ban3, and -ust named B/SI? are in
the public sector. But more importantly 4$S/IB, MI"$S, /$?I$S, 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. ;owever, more SMEs should be encouraged and assisted to form
their own associations and build%up lin3s with the national bodies.
he ma-or non%government private sector support agencies in the field of finance include a
large number of non%government microfinance organizations ,4!5s2. heir wor3 among
the landless . asset less poor through infusion of microfinance has activated millions of
miniscule SMEs across the country.
Chapter-/
4.1 3nalytical ;rame,or> of S12:
Mar3et development is a broad concept which envelops a number of interconnected
factors.
In general, demand and supply characteristics associated with products determine their
mar3et prospects. herefore, at the outset it may be convenient to s3etch a conceptual
framewor3 with the underlying demand and supply%side factors exerting significant
influences on the development of the mar3et for SMEs. (igure 1 is such a diagrammatic
representation of the framewor3.
$ny mar3et is characterized by the demand and supply side considerations. $s presented
in (igure 1, the demand for SME products can be thought of arising from consumers in
domestic as well as foreign economies. 5n the supply side, firms will try to continue ,or
expand2 the production of commodities for which mar3ets already exist and they may also
introduce new products. 4ow there are a number of factors that may affect the supply and
demand sides, for products produced by SMEs, either individually or through some
interaction between them. (irst let us consider the demand side.
#urchasing power of consumers is one of the most important demand side factors.
#articularly if any SME is only supplying its products to the domestic economy,
consumers> purchasing power will determine the size of the mar3et. (or goods with fairly
elastic demand, changes in their prices can also greatly affect demand. Since individuals
SMEs are most li3ely to be price ta3er, they cannot exert any significant influence on
price. $t the aggregate level, improved productivity andDor large foreign supplies can
result in lower price stimulating the demand. ;owever, in the case of goods with price
inelastic demand, movement in prices will only have a little effect. (or such goods given
the productivity any expansion of supply ,either by domestic industry or by imports2 will
cause a fall in overall industry revenue and only an increase in demand will expand the
mar3et ,in terms of total expenditures by consumers2. Mar3ets in poor countries are small
and global mar3ets can remove the constraint of lower purchasing power. "espite a
fascinating academic debate, it is widely believed most export items supplied by poor
countries li3e Bangladesh are faced with a highly elastic demand in international mar3et
and as a result it is the supply side factors rather than demand that determine export
success.
rade policies of the trading partners can also significantly influence the demand. ;igh
tariffs, <uantitative restrictions, subsidies, and other non%tariff and technical barriers can
undermine the competitiveness and access of domestic SMEs in their mar3ets. here are
other instances, however, when such policies can also be beneficial. (or example, it is
widely regarded that Multi%fiber $rrangement ,M($2 <uotas in textiles and clothing
imports of western developed countries facilitated the growth of ?M! sector in
Bangladesh ,?ahman and ?azza<ue, 1@@*2. $lso, various trade preferences extended by
the developed countries to be developing world have benefited the latter.
Tuality 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 <uality control for their products and
services. Tuality control, assurance and management systems, accreditation and
certification, <uality mar3s 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 mar3eting of
goods. /ertain standards in the production of goods and services have been developed and
are widely used to assure consumers of the <uality of the products that they are
purchasing.
imely delivery and availability of goods influence demand significantly. he
consumption pattern of many products are related to seasonal cycle and as a result delayed
or untimely supply may be of no use. 5n the other hand, goods must be available in the
mar3et for consumption and to be demanded. In today>s world mar3eting of goods is a
determining factor for demand for many goods. $dvertisement, brand names, and various
means of popularizing products are indispensable components of business strategy.
(inally, in recent times social campaigns by different pressureDlobbying groups seem to
have had impact on demand. In the early% to mid%1@@0s lobbyists in the 6S made vigorous
campaign to boycott ?M! products of Bangladesh alleging that children were being
=exploited> in garment factories.
5n the supply side, SMEs will try to continue and expand the production of the goods for
which mar3ets already exist or introduce new products. "espite the significance of the
demand side factors, many argue that supply side constraints are most important. ?esource
constraints such as lac3 of investible resources and wor3ing capital will certainly hamper
production, which may be exacerbated by shortage of s3illed wor3ers. 6navailability of
information not only inhibits firms introducing new products and exploring new mar3ets
but also entering into business. Besides, there are certain other factors that determine the
competitiveness of SMEs and conse<uently survival in the mar3et. Fhile trade policies
can promote some enterprises, others may be affected severely as a result of it.10 #hysical
infrastructure, transport costB domestic environment, etc. may also be responsible for
firm>s competitiveness. hese 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. ?ather, they interact amongst themselves to aggravate the situation further. (or
example, wea3 physical infrastructure, hostile domestic environment, corruption, transport
cost, and shortage of s3illed wor3ers may are li3ely to affect investment. $gain, factors
li3e domestic environment and corruption can aggravate such demand side constraints as
timely delivery, availability, and social campaign.
4.2 %ontribution of S12s to 2mployment and 0.":
he contribution of SMEs to employment, !"#, 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 2mployment:
5ne significant advantage of SMEs in a labor abundant economy li3e Bangladesh is the
huge employment generation potential of such enterprises due to labor intensive nature of
most of the SME activities. he available information shows that the number of total
employed labor force has been increasing over time in Bangladesh ,able &2. Between
1@*: and +00:, the labor force grew by nearly 9 percent while employment grew by +.:
percent. 5ver the period most of the employment growth too3 place in the SME sector
,ables : and A2. In the small enterprises, employment grew by 8.* percent during 1@A*%
1@@1 and by &.& percent during 1@@1%+001. Employment growth in the medium
enterprises is estimated at @.: percent during 1@**%+009. SE"( ,+0092 reports that
between *0 percent and *& percent of the total industrial employment and +9 percent of
the country>s overall employment is accounted for by the SMEs. Mondol ,+00:2 reports
about 80 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 3nowhow, and other dimensions of their operation. 6ddin
,+00:2 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 ,able
*2. 5n the other hand, value added per wor3er and profit are higher for SMEs. Eabor
productivity ,value added per wor3er2 for SMEs is 3. @:.A thousand while it is 3. @8.A
thousand for large firms.
he contribution of SMEs to the country>s !"# varies with the contribution of SMEs to
industrial output, the estimate of which differs widely across studies. he commonly
<uoted figures vary within 80 percent to &0 percent of the total manufacturing value
added. $ccording to $"B ,+0092, food and textile units including garments account for
over :0 percent of the country>s registered SMEs. It is also maintained that the SMEs have
undergone significant structural changes in terms of product composition, degree of
capitalization, and penetration in order to ad-ust with changes in technology, mar3et
demand, and mar3et : accesses brought about by globalization and mar3et liberalization
,$hmed +001, $"B +001, and 6S$I" +0012.
he total contribution of SMEs to !"# at about 3 A81 billion in +009 which is about a
<uarter of the country>s total !"# in the year ,able @2. he table also shows that
enterprises having two to five wor3ers contribute more than half of the contribution made
by SMEs to !"#, followed by those having only one wor3er ,+: percent2 and those
having six to ten wor3ers ,10 percent2. In the case of sectors, manufacturing SMEs
contribute the highest proportion of 9* percent to !"#B followed by agricultural SMEs
,+8 percent2 and SMEs in wholesale and retail trade and repair activities ,+9 percent2
,able 102. In this respect, cross%country figures show wide variation in the contribution of
SMEs to !"#.
4.3 !he 4ncreasin "riority "laced on S12 .evelopment:
he role of SMEs in providing productive employment and earning opportunities has
emerged as an important concern among policy ma3ers, donor agencies and researchers.
his growing commitment towards the development of the SME sector is based largely on
three core arguments9.
;irst) SMEs enhance competition and entrepreneurship, and hence have external benefits
on economy%wide efficiency, innovation and aggregate productivity growth.
hus 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 mar3et and
other institutional failures impede SME development. hus, pending financial and
institutional improvements, direct government financial support to SMEs can boost
economic growth and development.
!hird, SME expansion boosts employment more than large firm growth because
SMEs are more labor intensive. (rom this perspective, subsidizing SMEs may represent a
poverty alleviation tool.
SMEs are considered to be the seedbed for the development of entrepreneurial s3ills and
innovation. Small capital re<uirement ma3es easy entry and exit possible and private
sector entrepreneurial activities have many important spillover and positive externality
effects. ;owever, liberalization of the economy along with rapid globalisation has posed
severe challenges to SMEs not only in international mar3ets but also in the domestic
economy. Since SMEs are based on relatively small investment, their survival depends on
readily available mar3ets with easy access. In today>s world, mar3et development is a
much more challenging tas3, which re<uires coordinated efforts by individual business
enterprises and the !overnment.
4.4 "lace of S12s in the 6ational 2conomy of Banladesh:
$ny precise <uantitative estimate of the importance of SMEs in Bangladesh economy is
precluded by non%availability of comprehensive statistical information about these
industries at the national level.
Eatest BS/I/ estimates suggest that there are currently &&,@1: small industries and
&11,:1+ cottage industries excluding handlooms. Including handlooms, the number of
cottage units shoots up to :00,000 units indicating numerical abundance of small and
cottage industries ,S/Is2 in Bangladesh. he most recent private sector survey estimates
the contribution of the micro, small, and medium enterprises ,MSMEs2 is +0%+&' of !"#
,"aniels, +0092.8 Tuoting informal #lanning /ommission estimates, the SE"( puts the
number of medium enterprises ,undefined2 to be around +0,000 and that of S/Is to be
between 100,000 to 1&0,000. his wide variation in the BS/I/ and #lanning /ommission
estimates of the number of SMEs might be due to at least two reasonsC ,a2 different
definitions of SMEs and ,b2 different coverage of SME families. here is an urgent need
for adopting and using a uniform set of definitions for SMEs by all government agencies
to help formulation of pro%active SME promotion policies.
?egardless of the correct magnitude, SMEs undoubtedly play a very important role in the
economy of Bangladesh in terms of output, employment, and private sector activities.
hey are <uite predominant in the industrial structure of Bangladesh comprising over @0'
of all industrial units. ogether, the various categories of SMEs are reported to contribute
between *0%*&' of industrial employment and +9' of total civilian employment ,SE"(,
+0092:. ;owever, serious controversies surround their relative contribution to
Bangladesh>s industrial output due to paucity of reliable information and different methods
used to estimate the magnitude. he most commonly <uoted figure by different sources
,$"B, Forld Ban3, #lanning /ommission and BI"S2 relating to value added
contributions of the SMEs is seen to vary between 8&%&0' of the total manufacturing
value added.
Fhile 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. $ccording to SE"( sources <uoted from $"B
,+0092, food and textile units including garments account for over :0' of the registered
SMEs. Rarious recent studies ,$hmed, M.6. +001, $"B +001, 6S$I" +0012 show that
SMEs have undergone significant structural changes in terms of product composition,
degree of capitalization and mar3et penetration in order to ad-ust to changes in technology,
mar3et demand and mar3et access brought by globalization and mar3et liberalization.
4.5 0ro,th and Structural !ransformation of S12s:
In terms of number of establishment, the SME sub%sector has exhibited notable dynamism.
able 1 presents the trend of SME sector growth. $vailable evidence ,$hmed M.6. et.al 1@@+2
suggests that :0' of new industrial enterprises during 1@*0s were SMEs. !rowth in SME
employment seems to have been even better during the same period. he dismal performance
in value added growth is explained by the wea3 and faulty database used by the Bangladesh
Bureau of Statistics ,BBS2 to estimate the parameters. Indeed, when revised estimates of value
addition in the SMEs are made using the new system of national accounts*, the annual
compound rate of growth of value added ,able +2 by the SME sector not only shots up to
A.A' per annum during 1@*@D@0 and 1@@8D@&, it exceeds that of the large%scale industries
during most of the 1@@0s.
Broadly four industry categories ,food and allied products, textiles and apparels, and
engineering and fabricated metal products2 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 -ewelry, wooden and steel furniture, television
and radio assembling and soaps and detergents. he growth in new sectors is reflective of a
structural change ta3ing place in the SME sector from traditional to relatively modern product
categories, perhaps with higher capitalization and use of better production techni<ues.
Summarizing the findings of various ma-or studies the SE"( lists the following important
positive changes ta3ing place in the situation of the SMEs in BangladeshC
SMEs have diversified their activities
Entry and exit into the sector has become easier
he ?M! industry has contributed significantly to SME development by
providing them with orders for accessories and pac3aging materials
he 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 0
5.1 %ontribution of Ban>s to S12 Sector:
SME financing is a high ris3 service with low profit, discouraging the ban3ing sector to
extend loans to this sector. ;owever, ban3s cannot ignore an emerging sector li3e SMEs.
hat is whyB ban3s are continuously endeavoring to evolve appropriate model,s2 of
financing SMEs. !enerally, ban3s provide both wor3ing and other than wor3ing capital
financing to large and medium as well as small industries. 6nfortunately, information
regarding financial contribution by ban3s to this sector is not segregated. Fe have
reviewed the contribution of different type of ban3s to this sector from 1@@1%+00& ,Lune2,
published by Bangladesh Ban3. It is clear that both wor3ing capital and other than
wor3ing capital financing is higher in large and medium industries than that of small
industries. ?ecently, wor3ing capital financing has been increased in large and medium as
well as in small industries. hat may be because of the recently formulated 6S" 90
million Small and Medium Enterprise Sector "evelopment #ro-ect in Bangladesh Ban3. $
complete picture of the contribution by different ban3s is available in the $ppendix B.
;owever, in an earlier paper, we have shown that in terms of contribution to S/Is,
nationalized commercial ban3s ,4/Bs2 come first followed by private commercial ban3s
,#/Bs2 and specialized ban3s ,SBs2. he reason behind the upward contribution of #/Bs
is that a fund of B" 11:.00 /rores under the /redit $greement 4o. 10A0%B$4 ,S(2,
signed between the !5B and $"B on +& Lanuary 1@@1 ,Siddi<uee, +0092. /redit
disbursements under the above credit scheme totaled B" @&.99 /rores against 1*9 S/I
pro-ects on * 5ctober 1@@*. he growth rate of #/Bs declined thereof. 6nder another
credit guarantee scheme, !overnment released B" +&.00 /rores to Bangladesh Ban3 for
providing guarantee facility to investors in S/Is. ;owever, the growth became <uite
sluggish in the year +000 and +001 because of the abeyance of new proposals under the
scheme as per decision of the Ministry of (inance of 18 September 1@@@ ,Bangladesh
Ban3 $nnual ?eport +000%+0012. Moreover, only the 4/Bs have extended credit to
priority sectors in response to government directives that at least &' of a ban3>s loan
portfolio be set aside for S/Is financing, although this is not sufficient. he contribution of
#/Bs in developing this sector is very meager. It seems that they even do not care for the
government directives. (or example, in +001, 4/Bs have outstanding loans and advances
of B" &08.@9 /rores in S/Is, which is 1.&8' of total loans and advances outstanding,
whereas #/Bs have B" 909.9+ /rores ,0.*:' of total loans and advances outstanding2
and SBs have B" 110.A8 /rores ,1.0+' of total loans and advances2 ,Siddi<uee, +0092.
5.2 %redit "roducts and Services 3vailable ;or S12s in
Banladesh:
SME financing is a new product in the range of services provided by ban3s. SME loan is
different from other loans, not only because this is small in size, but also because its
modalities are different. 4evertheless, to foster the growth of SME sector, various
financial institutions now offer a wide range of products and services to SMEs in many
countries. 6nfortunately Bangladesh still has a scarcity of SME financing institutions or
SME financing products and services. (or example, two ban3s namely B$SI/ Ban3
,SME financing covers almost 100' of the loan portfolio2 and B?$/ Ban3 Eimited
,extends over &0' of the loan portfolio2 are specifically devoted to SME financing. 5ther
commercial ban3s are also open for SME finance, though their coverage is low.
;owever, commercial ban3s should not be the only source of SME financing. here are
other financial institutions, which finance SMEs worldwide, such as the SME "epartment
of International (inance /orporation ,I(/2, Forld Ban3 !roup.
I(/ has extended the SME financing facilities to Bangladesh through the South $sia
Enterprise "evelopment (acility ,SE"(2 along with the 19 local #artner (inancial
Institutions ,#(Is2. he #(Is include commercial ban3s ,such as $rab Bangladesh ban3
Etd., B?$/ Ban3 Etd., "ha3a Ban3 Etd., Southeast Ban3 Etd., and he /ity Ban3 Etd.2,
leasing companies ,e.g., Industrial "evelopment and Eeasing /ompany of Bangladesh
Etd. ,I"E/2 and 6nited Eeasing /ompany Etd2, and SME Ban3s. SE"( #(Is have
subscribed to the concept of SME finance and have wor3ed towards this. SE"( has
already developed /redit Scoring modules at A #(Is. his enables these #(Is to reduce the
time re<uested for screening SME loan applications. Moreover, a comprehensive ris3
grading framewor3 has been developed for a #(I which enables the company to better
manage its lending ris3s and adopt ris3%based loan pricing policies. SE"( assists two #(Is
in setting up separate SME departments. his includes establishing the appropriate
strategy, organizational structure, operational processes and ris3 management. SE"( is
also conducting a detailed segmentation study of the SME mar3et in Bangladesh. he
contribution of #(Is is summarized in able +. "epending on the entrepreneurs financing
needs and the suitability of such financing to their ventures, a wide variety of products
offered in the mar3et. he products or instruments available globally for channeling
funding to SMEs include but not limited to term loans, leasing, industrial hire%purchase for
asset ac<uisitionDbusiness expansion, overdraft ,5"2, revolving credit, factoring, letter of
credit ,ED/2, trust receipts, ban3ers acceptance ,B$2, foreign exchange contracts, bills of
exchange purchased, etc. for wor3ing capital needs, outwardDinward bills for collection
,5B/DIB/2 for trade services and Ban3 !uarantee ,B!2, and Shipping !uarantee ,S!2 for
different guarantee services. (or example, I(/ has developed products li3e Eeasing, SME
?is3 /apital, E<uity (unds and services li3e /redit lines, /redit bureaus etc. that can
expedite the total process of SME financing.
o en<uire about the availability of SME financing products and services, we have surfed
a number of commercial ban3s website as well as the websites of other financial
institutions, such as I"E/ of Bangladesh and I#"/ of Bangladesh. Fe have found that
some of them do provide some .innovative. #roducts and Services solely targeting SMEs,
while others have repac3aged some of their existing products as SME products. (or
example,
B?$/ Ban3 introduces. $nonno
he /ity Ban3 Etd. has /ash /redit ,;ypothecation2, /ash /redit ,#ledge2,
Secured 5verdraft, S5" $gainst For3 5rders2,
"utch Bangla Ban3 Etd. has .Small Shop (inancing Scheme., 5verdraft, /ash
/redit ,;ypothecation2
Eastern Ban3 Etd. has /urrent $D/, S" $D/, (ixed "eposit $D/, 5verdraftD/ash
/redit, "emand loan, ime Eoan, erm Eoan, Eetter of /redit, Import Eoan, !uarantee,
Eocal Bill #urchase, (oreign Bill #urchase2,
#rime Ban3 Etd. introduces Small . Medium Enterprise ,SME2 /ell, which has
access to 6S$I" fundsB
#ubali Ban3 Etd. has mere erm EoanB
Social Investment Ban3 Etd. has Special /redit Eine for Small and Medium shop
ownersB and South East Ban3 Etd. has only erm Eoan.
$mong the non%ban3 financial institutions ,4B(Is2, I"E/ of Bangladesh mainly focus on
SME financing by providing business solutions through financial products li3e business
loan, machinery loan, double loan and lease finance. hey have introduced .factoring first
in the country. $mong other sophisticated SME financing instruments, Industrial
#romotion and "evelopment /ompany ,I#"/2 of Bangladesh has introduced the first
asset securitization in Bangladesh in +008, followed by I"E/ of Bangladesh with $sset
Bac3ed Securitized Gero /oupon Bonds of B" 1@0 million in +00& ,Siddi<uee, et. al.,
+00:2.
Chapter 1
@.1 3ccess to finance by S12s:
$s noted above, limited access to ban3 financing is one of the critical constraints of SMEs
in Bangladesh. hese enterprises have a limited scope to access the capital mar3et for term
lending as well. $s such, the SMEs are almost fully dependent on either own sources of
finance or to formal ban3ing sources. $lthough the large enterprises have a greater
capacity to raise capital ,term lending2 from the capital mar3et, they still depend heavily
on ban3 financing for term loan as well as wor3ing capital. $s a result, the SMEs are
somewhat crowded out from the ban3ing sources. he share of term lending and wor3ing
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 ** percent and @&
percent during the last 1& years with a conse<uent share for small scale industries lying
between + percent and & percent. Similarly, the share of wor3ing capital financing for large
industries was between @0 percent and @& percent as against the share of 9 percent and 11
percent for small scale industries.
In recent years, there seems to have ta3en place a change in the attitude of the commercial
ban3s as reflected in higher loan disbursement to SMEs. Eoan disbursement to SMEs by
scheduled ban3s registered a growth of &.* percent during Lune +00: to "ecember +00AB
with loan disbursement to small enterprises rising by :.9 percent and to medium
enterprises by &.8 percent ,able 1+2. (or ensuring smooth and efficient loan disbursement
to SMEs, some private commercial ban3s have created special windows for them.
@.2 S12 ;inancin in Banladesh:
It has been observed that ban3s usually do not express interest towards SME financing.
he reason behind this conservativeness is higher operational cost, but less return and high
ris3 associated with the SME financing. "ue to small loan size, the operational cost is
higher and they re<uire intensive monitoring and supervision. he main reason of higher
ris3 is that small and medium entrepreneurs are highly unli3ely to comply with the
collateral re<uirements as typically they do not have immovable properties. Fith the
excuse of collateral sometimes ban3s and 4on%Ban3 (inancial Institutions ,4B(Is2 are
reluctant to finance SMEs. But when steps ta3en by the !overnment and International
$gencies have identified SMEs as a priority sector, the government, in cooperation with
Bangladesh Ban3 and different development partners, has initiated a number of measures
with a view to ma3ing financial services easily available to this sector. $s part of such
measures, recently the Bangladesh Ban3 has introduced a scheme of B" one billion to
offer refinancing facility to scheduled ban3s and financial institutions against their loans to
SMEs ,M5(, +00&2. Besides, Forld Ban3, under Enterprises !rowth and Ban3
Modernization #rogram ,E!BM#2, has provided 6S" 10 million, and $"B, under SME
Sector "evelopment #rogram ,SMES"#2, has approved 6S" 90 million loans in order to
extend credit facilities to SME entrepreneurs. ,$"B,+00&2. "ue to support of the
!overnment and donor agencies, the disbursement of loan in SME sector is increasing.
he following table%1 illustrates the refinancing facility given to ban3s and 4B(Is till
$pril, +00&.
In pursuing the important of SMEs, recently a number of commercial ban3s, 4B(Is and
4!5sDM(Is have come forward with special initiatives of different types. $grani Ban3
has launched Employment !eneration #ro-ect for the ?ural #oor ,E!#?#2 and Small
Enterprises "evelopment #ro-ect ,SE"#2 in collaboration with some International
$gencies. $ few ban3s such as the B?$/ Ban3 and the Eastern Ban3 are currently
rendering a special service named SME ban3ing. Eeasing companies are also offering
attractive products for SMEs. he Microfinance industry has made a remar3able growth in
Bangladesh over the last one decade. Some large M(Is li3e !rameen Ban3, B?$/, $S$
and #?5S;IK$ are offering Microenterprise loan to their graduate clients9. he
following able%+ demonstrates the sharp growth of micro enterprise loan made by 8
leading M(Is ,!rameen Ban3, B?$/, $S$ and #?5S;IK$2.
"uring the period from +001 to +00& total yearly micro%enterprise lending increased by an
amazing +000 percent from B" A09.@8 million to B" 1&1:1.+8 million. More or less
the same trend is believed to be true of all the M(Is. $long with large 4!5sDM(Is, many
medium and small M(Is are also offering Microenterprise products to their graduated
clients.
6sually the scheduled ban3s have a common practice of providing loan for small and
cottage industries. he loan activities of schedule ban3s related to small and a cottage
industry is presented by able%9.
he able suggests that ban3s are gradually becoming more inclined to small enterprise
financing. he zero figures for (/Bs do not necessarily downplay the role of (oreign
/ommercial Ban3s in SME financing. hey merely indicate the non%existence of loan
made by the (/Bs in the specific name of small and cottage industries. Indeed several
foreign ban3s are now engaged in SME ban3ing.
@.3 "rospects of S12 ;inancin:
SME has been considered as the thrust sector in the economic development of the country
with growing importance from all wal3s of life. It is evident that, substantial increase in
SME and ?etail /redit portfolios along with commercial, corporate and institutional
lending, would lead the ban3s to its higher tra-ectory of growth, minimizing the ris3 of
lending through portfolio diversification. $s such, most of the ban3s have ta3en up
aggressive mar3eting policy to augment their exposure in SME and ?etail /redit. hough
SME concept is nothing new, as evident from the establishment of Bangladesh Small and
/ottage Industries /orporation ,BS/I/2, but a fresh loo3 into and endeavour to boosting
the sector are still imperative. Bangladesh Ban3 re%finance scheme for SME is laudable.
he role of I(/%SE"( for creating awareness among the entrepreneurs and ban3sD4B(Is
to be more focused in SME deserve appreciation.
6n%employment problem is a growing concern all over the world more particularly in
developing countries, and the panacea to the setbac3 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. (amily members may also participate in the
process.
Bangladesh is highly resourceful with so many seasonal fruits and also lots of agricultural
products. #ineapple and mango are best used to produce -amD-ellyD-uice etc under SME.
omato sauce and potato chips are popularly used all over the world. SME is most suited
for processing the items. If we can add more <uality to the products and ensure proper
mar3eting, tremendous demand will be created in domestic and export mar3et.
Fithin the purview of F5 the world is growing to turn into a single entityDstate where
movement of goods and capital has been made free. ;ence, the country having advantages
of producing any particular item over others should have monopoly mar3et for the
product. $vailing the opportunity of F5 our entrepreneurs and government should come
up to produce <uality goods at a competitive cost where we have comparative advantages.
In ?M! industries ,3nit2 circular machines are used for 3nitting of the items. he circular
machines can also be set at household level to perform -ob wor3s to feed ?M! industries
for ultimate export of D#olo Shirts etc. his is a subcontracting system where ?M!
industries supply yarns to the entrepreneurs having circular machines. he system has
already been introduced in "ha3a and 4arayangon- areas with growing demand. Shoe
ma3ing by small industries as -ob wor3s of big shoe companies li3e B$$ is a glaring
example of SME product. B$$ supplies raw materials to lots of small factories at
household level in "ha3a city and gets the product ,shoes2 completed through subcontract
system. his is a real 3ind of integration of small and medium industries with big ones and
once such integration ta3es place, the pace of industrial growth of the country will
automatically set in.
Eending in SME sector helps the ban3s to derive higher spread over corporate ones. #rofit
margin in corporate business houses is relatively getting lower due to stiff competition in
the mar3et. hey remain in the profit trac3 increasing the sales volume only, having the
advantage of big investment.
Bangladesh Ban3 has fixed SME loan limit at 3 +.00 lac to &0.00 lac and thereby ris3 is
distributed among millions of customers which entails lower rate of classification than big
loans where all eggs are put in a few bas3ets. $s such, most of the ban3s have underta3en
aggressive mar3eting policy to increase exposure in SME and ?etail /redit to minimize
lending ris3 through portfolio diversification.
@.4 S12 <efinancin Scheme of Banladesh Ban>:
In view of the limited access of SMEs to credit facilities from the formal ban3ing system,
Bangladesh Ban3 has opened a window of SME refinancing facilities for the commercial
ban3s and the non%ban3 financial institutions ,4B(Is2 so that they can accommodate a
larger amount of SME financing for which BB earmar3ed a refinance scheme fund of 3.
9 billion which has recently been raised to 3. & billion. Since its inception, ban3s and
4B(Is have been availing the refinance scheme and till March +00*, the refinanced
amount was 3. :.+1 billion which was 3. 1.+8 billion at the end of $pril +00&. $s
against this refinanced amount, the ban3s and 4B(Is distributed loans to A,&@* beneficiary
enterprises, which were +,1@+ in +00&. It may be mentioned that the ban3s and 4B(Is are
re<uired to maintain + percent general provision against unclassified SME loan which has
recently been reduced by BB to 1 percent.
In order to ensure a greater flow of funds to the SME sector, BB has issued some
pragmatic guidelines for the ban3s and 4B(Is. hese financial institutions are re<uired to
fix yearly loan disbursement target for SMEs of which at least 80 percent should go to
small enterprises and the rest to medium enterprises. In addition, dedicated des3s are to be
opened for small and medium entrepreneurs.
Fomen entrepreneurs, who are talented, courageous, and creative, have been playing a
pioneering role in the SME sector, especially in agriculture, ?M!s, handicrafts, furniture,
and the poultry sector, despite facing many hurdles such as bureaucratic and institutional
deficiencies, difficulties in accessing information relating to service facilities including
institutional and mar3eting support, and limited access to ban3 finance and high lending
rates in establishing and running their businesses. In order to promote women
entrepreneurship, SME (oundation has constituted a forum titled =4ational Fomen
Entrepreneurs (orum ,4FE(2> and commenced credit operations to provide credit to
SME entrepreneurs at a low rate of interest. In order to expand the participation of women
in SMEs and provide greater support to women entrepreneurs, BB has enhanced the
minimum allocation under its various refinance schemes ,$"B, BB, and E!BM#2 from a
level of 10 percent to 1& percent, of which 80 percent has been 3ept for women SME
entrepreneurs. $part from this, BB has ta3en several other measures to support women
entrepreneursC
1 U Ban3s and 4B(Is have been directed to settle the loan process with highest
priority within a minimum time upon receiving loan applications from women
entrepreneurs.
+ U Each ban3 and 4B(I shall open =Fomen Entrepreneur>s "edicated "es3>
,FE""2 which would be serviced preferably by female officers trained in SME financing.
9 U he FE"" shall provide other related services including guidance in pro-ect
formulation and implementation, assistance in processing loan application, and other
ban3ing services.
8 U he ban3s and 4B(Is 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.
@.5 2?uity and 2ntrepreneurship ;und:
In order to encourage investments especially in ris3y but prospective agro%based, food
processing and I sector industries, the E<uity and Entrepreneurship (und ,EE(2 was
established through budgetary allocation of the government. Initially, the government
allocated 3. one billion in ()01 for EE( and BB was entrusted with the responsibility of
administering the fund. Since its inception, a wide range of enterprises have availed the
EE(, most of which are SMEs. he ma-or sectors includeC poultry and feed, fish hatchery,
shrimp hatchery, cattle and goat feeding, meat processing, fruit processing, wood
processing, and software development.
6ntil March +00*, a total of +8A entrepreneurs received 3 8,:AA.& million from the EE(.
he disbursement to fisheries and fish cultivation sub%sector was the highest followed by
software development, poultry and fish feed, grandparent hatchery, potato flas3, and fruit
processing. otal disbursement, however, shows a declining trend in recent years mainly
due to low demands from participating ban3s and financial institutions ,able 192.
he 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 3ey constraints of the
SMEs, it is expected that higher flow of institutional credit would enable the SME sector
to expand at a faster pace with positive impact on growth acceleration and employment
generation in the country.
@.@ %redit Bholesalin "roram of S12 ;oundation:
SME( wholesales credits by channelizing fund to the targeted SMEs through Ban3s and
4on%Ban3s (inancial Institutes ,#artner (inancial Institutions, #(Is2. So it is important as
well as a precondition to involve and attract the #(Is on credit wholesaling program.
SME( would offer some incentives to #(Is and main of these areC
1. Single "igit rate of Interest for the wholesaling funds so that the #(Is is able
en-oy a good margin and at the same time lending rates to SMEs are lowered.
+. Easy terms and conditions for the /FS program so that the #(Is can comply
with minimum effort.
9. raining of #(I staffs on SME related courses. 6sing various institutions li3e
BIM, BIBM, etc. SME( may offer relevant training courses to the #(I employees for their
s3ill development in relevant and re<uired areas.
8. Rarious echnical assistances to #(IS for capacity building and efficiency
development. SME( may offer assistance for capacity building in terms of technology,
processes, credit management and product development
&. Based on #(Is experiencing issues and problems, SME( would offer advocacy
to various relevant authorities with appropriate recommendations.
@.A <elationships bet,een 0overnment and S12:
$ 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. $
typical SME in #a3istan caters to the domestic private sector. It is noted that fewer than
8' are supplying to the government sector. Some of the issues are related to tough
bargaining price ,9:'2 and supplies on credit ,98'2 and other are related to absence of
rules on how to the public sector should increase its procurement from SME.
!a*ation:
;indins / Observations
Eac3 of awareness about the taxation system ,&*'%income tax, 88'%sales tax2
#erception about tax agencies ,9+%9:' said that fines and harassments are the
ma-or factors2
/omplexity in procedures results in high cost of compliance
ax policy is biased in favor of large%scale enterprises
imeframes for various procedures are neither followed nor implemented
SourceC IE5 % SME"$ report
+abor 4ssues:
;indins / Observations
Eac3 of proper mechanism and implementation machinery
Inefficient labor -udicial system
Eac3 of awareness about laws . policies amongst SMEs
#redatory inspection system
Earge number of overlapping laws ,&: Eabour lawsMinclusive of sector specific2
Eaws not run in consonance with advancement in industries
#erception about Social FelfareB limited coverage and efficacy of the social safety
net
;inance:
It has been observed that &A' of new investment for Small and Medium
Enterprises and :A' of wor3ing capital finance come from internal finance or retained
earningsB only about A' of funds for investment or wor3ing capital come from ban3s or
other financial institutions. Even suppliers> credit rivals the contribution of the ban3s as a
source of wor3ing capital ,8.&'2. $nother survey concludes that SME are indeed being
rationed out of the credit mar3et, rather than merely exhibiting a lower demand for credit.
!echnoloy !ransfer and 9p8radation:
In our country, growth oriented exporting firms still have problems sourcing
<uality inputs due to the lac3 of a networ3 of reliable suppliers. his adds to their
transaction costs. Ei3ewise, the SME are not large enough to furnish sufficient demand to
be an incentive for a big high <uality input supplier.
1ar>et and 4ndustry 4nformation:
$ccess to mar3et and industry information is one of the 3eys to develop successful
business strategies. (re<uently, business and trade associations are able to provide their
members with such services. By associating with li3e institutions in foreign countries, they
are also able to establish lin3s and obtain information on foreign mar3ets.
+iteracy:
he evidence reveals that SME find it extremely difficult to grow because of their
inability to delegate to soundly trained staff. he day, the small businessman feels
comfortable to delegate, SME start progressing.
+a, and Order:
Eaw and order situation in #a3istan has always been regarded as worrisome. 5ne
survey reports that one in five respondents report that the business was the target of at
least one crime during +00+. $nother assessment suggests that businesses in 4F(# spend
8.&', Sindh and #un-ab 1%+' of their revenue on security. 5ne in four SME consider law
and order to be a severe problem.
4ntellectual "roperty <ihts:
Intellectual #roperty ?ights ,I#?2 is a vital issue that needs to be loo3ed into. It has
been observed that many developing countries, with the help of a change in their I#
systems and laws, are able to attract (oreign "irect Investment ,("I2 in the ?esearch and
"evelopment ,?."2 especially in the industrial and scientific field. herefore, promotion
and protection of intellectual property spurs economic growth, creates new -obs and
industries, enhancing the <uality and en-oyment of life.
4nfrastructure:
Basic physical infrastructure is a prere<uisite to growth and development. #ower
outages and access to connections are considered an irritant which significantly affects the
productivity of firms in #a3istan. It is estimated that a typical business in #a3istan loses
&.:' in annual sales revenue due to -ust this single factor.
0O7!. 4nitiatives for S12 .evelopment:
Small and Medium Enterprise "evelopment $uthority ,SME"$2
SME Ban3
Small and Medium Enterprise /enter ,SME/2
Small and Medium Enterprise (oundation ,SME(2
5ne Rillage 5ne #roduct ,5R5#2
4ational echnical Education and Rocational raining $uthority ,4ER$2
Chapter 2
A.1 %onstraints to S12 0ro,th:
It is important to understand the operational strengths and wea3nesses of the SME sector
for pragmatic policy ma3ing and effective implementation of such policies. !iven the
heterogeneity in the type, composition and characteristics of SME facilities, it is
exceedingly difficult to generalize operational constraints. ;owever, common constraints
includeC
U Eac3 of modern technology
U Eac3 of ade<uate investments
U IrregularDinade<uate supply of power
U ;igh rate of interest on ban3 loans
U Inade<uate availability of raw materials
U $bsence of clear%cut government policies
U (ierce competition
U Eac3 of s3illed technicians and wor3ers
U Eac3 of research and development facilities.
In addition, lac3 of institutional credit, non%availability of wor3ing capital, low levels of
technology, low productivity, and lac3 of mar3eting facilities and mar3et access problems
are ma-or bottlenec3s 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 mar3ets seem to have been the added dimensions to the SME operational
bottlenec3s. ;owever, 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.
A.2 3nalysis of %onstraints in the %onte*t of Banladesh:
=uality and Standards:
Bangladesh has failed to ensure the <uality of products and services to consumers not only
in the domestic mar3et but also in international mar3ets. here is no national <uality
policy and ade<uate support systems that provide assistance to all enterprises to
understand the principles of <uality and to develop <uality consciousness in business
behavior. /urrently, the Bangladesh Standards and esting Institution ,BSI2 formulate
national standards of industrial, food, and chemical products.
;owever, the most important problem is that BSI lac3s credibility and importers from
4orth $merica and Europe do not accept certificates issued by it ,;a<ue, +0092. he other
crucial problem is that while BSI can impose restriction on mar3etability of local
products if they fail to comply with standards, there is no such provision for imported
goods. his puts locally produced goods at a disadvantageous position visV% vis competing
imports ,(eria, et al*, +0092.
1ar>etin:
SMEs in Bangladesh, especially the small enterprises, do not have enough mar3eting
capability and networ3. $n overwhelming ma-ority of small firms do not have resources to
be invested in mar3eting. $dvertisement is an important determinant of demand but SMEs
in Bangladesh in most cases are not in a position to use this as a mar3eting tool. Export%
oriented SMEs have very little mar3eting activities and most of them try to survive by
lin3ing up with multinational buyers or setting up subcontracting relationships with them.
In the domestic mar3et, SMEs are confronted with cheap imports and are hard pressed to
hold on to their mar3et share. $lso, a lac3 of resources and s3ills ma3e it difficult for
SMEs to ta3e advantage of mar3et promotional activities.
4nvestment and Bor>in %apital:
5ne of the most important problems affecting supply is the access to finance. SMEs need
finance to enable them underta3e productive investment in order to expand their business,
to introduce new products, and to mar3et them. Rarious 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 ,"aniels, +0092, as many as &*' of the surveyed
businesses report the problem of lac3 of investment funds and 9&' also mention the
problem of lac3 of operating funds. Ban3s are shy to lend to SME activities, as they do not
consider them as attractive and profitable underta3ings ,;ossain, 1@@*B Bhattacharya,
+000B and Sia, +0092. SMEs are also regarded as high ris3 borrowers because of their low
capitalization, insufficient assets, and high ?estrictive trade policy such as overvalued
exchange rate, high tariffs, <uantitative restrictions, etc. will create an anti%export bias and
as such SMEs in the export%oriented sectors will be affected mortality rates ,Sia, +092 and
conse<uently, 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 wor3ing capital and there is
no credit insurance policy for them.
Shortae of S>illed Bor>ers:
$lthough Bangladesh is a labor abundant country, shortage of s3illed wor3force is
perceived to be a ma-or constraint for manufacturing production. his problem is
particularly acute for medium scale export oriented enterprises. Manufacturing goods now
overwhelmingly dominate Bangladesh>s export bas3et, but a significant proportion of it
comprises very low domestic value addition because of limited bac3ward lin3age in the
?M! sector, which will re<uire s3illed manpower. herefore, supply capacity is
preconditioned by availability of s3illed wor3ers.
+ac> of entrepreneurship and manaement s>ills:
Most owner%managers and entrepreneurs often lac3 wider managerial s3ills that hinder
their long%term success. Strategic planning, medium to long%term vision, mar3eting,
commitment to <uality, 3nowledge of <uality systems, communicating in foreign
languages, cash%flow management, information technology are a few critical elements of
management re<uired to meet challenges of the mar3et economy, especially in the
international mar3et environment. In such a complex setting since it is not possible for an
individual to muster all of these <ualities, firms ma3e division of labor. here is some
evidence in the context of the developed countries that formal management training can
reduce the failure rates of small enterprises ,5E/", +00+2. ;owever, smaller firms are
less li3ely than larger enterprises to provide training to its wor3ers 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 lac3 of facilities for such training.
"hysical 4nfrastructure:
he state of physical infrastructure is wea3 in Bangladesh. It is evidenced that in countries
with poor infrastructure, business must devote more resources to such tas3s as ac<uiring
information, procuring inputs, and getting their products to mar3et ,Forld Ban3 and BEI,
+0092. here are two dimensions of poor infrastructure M one is the unavailability of a
certain service or utility ,such as telephone, water, electricity, roads and highways, etc.2
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.
!ransport costs:
he Forld Ban3%BEI ,+0092 enterprise level survey finds transport to be a bigger problem
in Bangladesh than in some comparator countries. hree factors interact to accentuate this
problem. (irst, the recent research wor3s on economic geography and international trade
suggest that unfavorable geographical locations ,e.g. distance2 increase the costs of both
export and import trade relative to countries with more favorable geographical
characteristics. $ 10%percentage point increase in transport costs is found to reduce trade
volumes by about +0 per cent ,Eimao and Renables, +0012. Bangladesh must be more
competitive in the manufacturing process to offset 1+ /redit insurance is the insurance
against the ris3 of non%payment by the buyers in the importing countries. he geographical
disadvantage of being farther away from its 4orth $merican and E6 mar3ets compared
too many other competitors. Inefficient and corrupt ports and inland transportation
increase the cost of production substantially. 6nder this circumstance, many SMEs will
find it extremely difficult to compete in the global mar3et. Import%competing SMEs that
rely on imported raw materials for their production may also be e<ually affected.
!rade "olicy and 4ncentives:
Bangladesh>s trade policy underwent a radical change particularly in the decade of the
1@@0s. Eiberalization of industrial and trade regimes along with globalization are li3ely to
have had significant effects on Bangladesh>s SMEs ,$hmed, +00+B Bhattacharya et* al*,
+0002. 5ver the past decade there has been a significant change in the world trade regime.
he F5 agreements limit the use of certain trade measures as <uantitative restrictions
and subsidies. F5 agreements not only cover the traditional goods sector, but also new
sectors li3e services and intellectual property rights. here is a tendency for considering
these newly included sectors as constraints to trade prospects of a poor country li3e
Bangladesh. Eong%run economic prosperity will critically hinge upon turning the
challenges of globalization into opportunities. Besides, there are certain benefits of trade
agreements. (or example, one salient feature of SMEs is that they often rely on indigenous
techni<ues of production which are based on genuine innovation. 4ow if they can be
protected with intellectual property rights, this may generate substantial business
opportunities for SMEs. here is evidence in the context of developing countries that
innovations from small enterprises have resulted in large%scale businesses.
n'ormation:
Eac3 of information is a ma-or constraint to mar3et development of Bangladesh>s SMEs.
(irms need all 3inds of informationC with regard to setting up a business, accessing
finance, fulfilling government re<uirements, developing mar3ets, and finding mar3ets.
rade information is more than ever an element of competitiveness due mainly to three
reasonsC
,i2 $ssessing mar3et trends and characteristics, ,ii2 understanding the mar3et and new
mar3et access conditions, and ,iii2 identifying new mar3et opportunities and potential
trading partners. he Internet has introduced a new way of doing business especially in the
field of commercial operations M selling and buying, advertisement, servicing and training.
he number of enterprises using Internet to mar3et their products and services is rapidly
increasing and more and more SMEs are becoming aware of the potential of this new
techni<ue. #oon and Levons ,1@@A2 therefore appositely view that Internet has created
unpredictable and unprecedented opportunities for SMEs and they can access to certain
mar3ets similar way as large enterprises and are able to engage international mar3eting which
otherwise could have been unaffordable due to huge amount of resources re<uired. he use
Internet at the private enterprise level is still very low in Bangladesh and there is a serious lac3
of infrastructure in this regard. $mongst others, the dissemination of information is badly
affected as result of little use of Internet. It is often the case that since the private enterprises
does not have the appropriate and ade<uate information ,e.g., they are unaware of the rules
and regulations and compliance re<uirements2, government agencies monitoring the business
practices ta3e undue advantages ,;a<ue, +0092.
3egal and regulatory 'rame4or5:
/reating an appropriate and effective legal and regulatory framewor3 is an important
precondition for the establishment of a legitimate private sector. he absence of an
effective and transparent legal system discourages small firms in exploring into ris3y
ventures of business. here are a number of redundant formal re<uirements to start and run
business that create high compliance costs and become barriers to SME development,
growth and mar3et entry. hese barriers are further exacerbated if administrative
procedures to implement regulation are inefficient or cumbersome.
"omestic en#ironment:
here is no denying that irrespective of the size M small or large M the performance of
firms is affected by business environment. $ 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 ,;allberg, +00+2. ;owever, all this will wor3 well
if institutions function efficiently in an enabling environment. (eria et al* ,+0092 have
identified a number of ma-or issues that inhibit an enabling environment for SME
businesses in Bangladesh.
hese areC ,i2 the absence of clear guidelines that would provide all future directions and
programmes, ,ii2 an outdated legal and regulatory framewor3 that is no longer responsive
to the present needs, ,iii2 a tax regime that serves more as a disincentive for business, and
,iv2 a general failure in the bureaucratic system that increases the cost of doing business.
$part from the listed factors above, corruption is pervasive in Bangladesh and the country
ran3s 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 ma-or or very
severe obstacle ,Forld Ban3%BEI, +0092.
2.3 3egal6 (egulatory6 and &dministrati#e Constraints:
$s mentioned earlier, policy reforms of the past decade have brought about substantial
relaxation in the investment sanctioning procedure. 4o prior approval is now re<uired for
investments involving own finance. ;owever, there is scope for further improvement in
the following procedural aspects relating to investment regulationsC
%rade 3icense:
Investors are re<uired to procure trade license from local government bodies by paying
statutory fees. he process involves unnecessary delays, harassment and side payments.
he procedure needs to be simplified and the issuance of the license made automatic
sub-ect to payment of re<uisite 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.
(egistration under +actories &ct:
$ccording to the (actories $ct 1@:&, all manufacturing units employing 10 or more
wor3ers are re<uired to be registered with the office of the /hief Inspector of (actories
and Establishments. he -ob of the (actory Inspector is to oversee the wor3ing condition
and safety measures in the factory. In practice, the regulation has proved to be a ma-or
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 wor3ing conditions re<uirements. o relieve the
investors of these problems the re<uirements relating to safety and wor3ing conditions
should be defined separately and realistically for the SMEs and the discretionary powers
of the Inspector should be minimized. ?egistration should be automatic once the investor
has declared that the re<uirements have been complied with.
Clearance 'rom the "epartment o' En#ironment:
$ll industries are also re<uired to obtain a certificate from the "epartment of Environment
in respect of proper arrangement for anti%pollution and safety measures. ;ere again, the
re<uirements 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 underta3ing
that the re<uirements will be complied with.
(egistration 4ith Sponsoring &gency:
?egistration with sponsoring agencies such as the Bangladesh Small and /ottage
Industries /orporation ,BS/I/2, Board of Investment ,B5I2 or Bangladesh Export
#rocessing Gone $uthority ,BE#G$2 is voluntary unless an enterprise wants to avail itself
of government incentives. o 3eep trac3 of private investment in various sub%sectors, it
would be useful to ma3e registration with the sponsoring agency mandatory. ;owever, to
relieve the investors of possible hassles, registration procedure should be simplified
re<uiring 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.
Contract En'orcement and (esolution:
his is a constraint, which is faced by both large and small firms. Inade<uacy in the
system for contract enforcement and resolution arises from archaic legal system where
procedure of ad-udication is long drawn out and cumbersome and the system is corrupt. $s
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.
2./ +inancial Constraints:
&ccess to +inance:
SMEs encounter great difficulties while rising fixed and wor3ing capital because of the
reluctance of ban3s to provide loans to SMEs. Ban3s are shy to lend to SMEs because of
high processing and monitoring costs of loans to SMEs. he loan application forms for
investment financing from ban3s 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 ban3s. In the past, the government has attempted to
provide SMEs with access to finance through targeted lending. here was a government
directive that & per cent of a ban3Js loan portfolio be set aside for small and cottage
industry financing. $ new ban3, namely, the Ban3 of Small and /ottage Industries
,B$SI/2 was set up in 1@** with the ob-ective of financing the small and cottage
industries. here were also attempts to channelize fund received from international
agencies such as the $sian "evelopment Ban3 ,$"B2 to the sector through private ban3s.
here were provisions of favorable debt e<uity ratio, special interest rates and credit
guarantee scheme. he central ban3 also issued directives to both public and private
commercial ban3s regarding wor3ing capital loans, use of standardized documentation
procedure and time limits for credit sanctioning and loan disbursement.
4otwithstanding all these arrangements for financing of SMEs, the actual delivery of
institutional credit to this sector has been grossly inade<uate. he following seem to be the
3ey factors inhibiting flow of institutional finance to the sector.
Pro7ect Preparation and E#aluation:
he first problem entrepreneurs> face in see3ing institutional finance is with regard to
preparation of the pro-ect proposal. In spite of directives from the central ban3 to follow
standardized procedure, the loan application process has still remained lengthy and
cumbersome. he entrepreneur often lac3s the ability to formulate a proper pro-ect
proposal. 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 lac3 ade<uate capability for proper pro-ect evaluation.
Collateral (e8uirements:
5ne of the main factors that have hampered flow of institutional finance into SMEs is
ban3sJ pre%occupation with collateral based lending. raditionally ban3s have used fixed
asset ownership, particularly land ownership as the basis for -udging credit%worthiness.
his 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. he solution to this problem lies in ban3s see3ing deposit relationship
with owners of SMEs and using cash flow rather than asset ownership as the criterion for
credit%worthiness. $n expanded credit guarantee scheme will have to play a vital role in
this regard.
Bureaucracy and Corruption:
Because of lac3 of proper autonomy and accountability the public sector financial
institutions are beset with inflexibility, inefficiency, political interventions and corruption.
Since the performance of the ban3 officials is not properly evaluated they lac3 the
incentive to bring a large number of suitable borrowers, particularly those in the SME
sector, within the fold of institutional financing. hey adopt a passive and inflexible
attitude towards the borrowers either to avoid the ris3 of ma3ing an inappropriate lending
or to force the borrower to ma3e side payments for more favorable handling of the loan
application. 6ntil necessary reforms in the public financial institutions are carried out, the
SMEs will continue to bear the brunt of this institutional malice.
2.0 Ma7or ndustrial Constraints & -istorical Perspecti#e
91:;;-:;<:
here 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 1@**%@* periods, is being presented.
Ma7or +indings:
5ver the years, various studies have been conducted to identify constraints encountered
by entrepreneurs in the industrial sector. $ summary of the ran3ing of the problems from
selected studies over the 1@**%@* periods is presented in this section. able 1 provides the
ran3ing of the top eight problems according to the recently completed survey of eight
SME subsectors under the L5BS program. he subsectors includeC Steel (urniture, Small
Metal For3s and Eight Engineering, Electrical Small !oods, #lastic #roducts, Specialized
;andloom, Ba3eries, extile "yeing and #rinting, and (ootwear. $ccording to able 1,
electricity, credit, and law and order are respectively the three top ran3ed problems
followed by legal barriers, excess competition, and dearth of technical assistance.
?elative ran3ing under selected past studies of the top eight problems, identified under
L5BS, is presented in able +. $s evidenced in able +, points are awarded only if a
problem was ran3ed as one of the top five under each of the respective studies ,& W most
serious2. $ summation of the scores from the various studies reveals that credit and
wor3ing capital have consistently remained as the ma-or bottlenec3s to industrial growth
in Bangladesh. Electricity problem is also ran3ed close to credit as a serious problem at
present and in the past. 6navailability andDor 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.
A.@ 3n 4nterated 3pproach to 3ddressin the %onstraints:
"eveloped countries have been supporting small enterprises for a long time. $ll 5E/"
countries have developed appropriate institutions and support measures to service the
needs of the SMEs. Box A below outlines some of these measures as available in the 6S
and E6. SMEs are assisted not -ust because they are small, but because of their capability
to be efficient, innovative and their ability to compete in the national mar3etplace, as well
as internationally. !iven the discussions in the previous section, the need for providing
effective support for in developing mar3ets of Bangladesh>s SMEs cannot be
overemphasized. By analyzing the worldwide experience, 64E/E ,+00+2 concludes that
the establishment of a coherent national policy towards SMEs is very difficult. here is no
standardized model arising from the mar3et economies that can be applied for developing
the private and SME sector in Bangladesh. 4evertheless, the integrated approach to SME
de#elopment suggested by 64E/E to a number of East European countries may deserve
serious consideration. his approach calls for devising appropriate measures at three
levels, as listed belowC
#i( Strategic level ,policy ma3ing2B
#ii( Institutional level ,support institutions2B and
#iii( Enterprise level ,entrepreneurs and business entities2.
he most important feature of the integrated approach is that it aims at providing a
comprehensive support mechanism. /onsidering the problems faced by SMEs in
Bangladesh, we can relate various desired actions to the three levels of the integrated
approach. (irst, let us consider the enterprise level. here is no denying that the ultimate
success in business depends on the efficiency of individual firms. Such constraints to
mar3et development as entrepreneurial and managerial s3ills will have to be developed at
the enterprise level. But then institutions must play a vital role as facilitators. raining
courses for improving the managerial and entrepreneurial s3ills, human resource
development schemes, supporting firms in maintaining <uality and standards, information
gathering and their analysis, operation of an effective and supportive legal and regulatory
framewor3, etc. are the areas where the role of institutions is indispensable. (inally, at the
highest level the policy ma3ers with inputs from sta3eholders should design appropriate
short%, medium%, and long%term strategies to promote SMEs and private sector.
Chapter ;
C.1 "roblems of S12 Ban>in:
;owever, the growth of SME is not exempted from the setbac3 as appended belowC
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 credit%
hypo, overdraft etc2 causing slow pace of disbursement of SME loans.
$ lionJs share of SME loans ,*0'2 is availed of for trading purpose, instead of
manufacturingDservice industries. Eventually, the purpose of SME loans to support the
economic development of the country may not be served properly.
$s per Bangladesh Ban3 policy, provision on unclassified SME loans is maintained at a
higher rate ,+'2 than the corporate and commercial lending ,1'2 which appears to be
contradictory to the spirits of the programme. SME loan is predominantly supervisory
credit and re<uires more manpower to conduct supervision, monitoring and recovery
wor3s and as such, big chun3 of profit is not possible overnight. Besides, the private sector
ban3s are more profit oriented and prefer financing to big and corporate customers
towards achieving year on year increased profit target. $s per Bangladesh Ban3
guidelines, SME is broadly categorized in 9 sectorsC a2 manufacturing, b2 trading and c2
service. Fhile manufacturing and service sectors are prioritized allowing almost 100' re%
finance but trading sector hardly gets +0' refinance, though it constitutes more than *0'
of total SME portfolio. Besides, refinance has to be claimed on <uarterly basis and
replenishment is made after one month and above. $s such, refinance pac3age may not be
so attractive to the ban3s. Boosting of manufacturing and service sector no doubt is
imperative for economic development of the country. If we loo3 at the performance of
manufacturing and service sectors the following wea3nesses may be observedC
a2 Mar3eting is a big problem for SME products caused for lac3 of competitiveness with
large industries endowed with the advantage of strong mar3eting networ3 and price
competitiveness due to the big volume of production capacity.
b2 5ur wor3ers lac3 technical 3nowledge to produce <uality items. (or example,
-amD-ellyD-uice produced in our country has no <ualitative match with the imported ones,
even with the mango -uice and -amD-elly of Bhutan though mango is not abundantly grown
in Bhutan. (ortunately, various 3inds of fruits are grown abundantly in different parts of
our country but unfortunately, we cannot avail the opportunity to produce <uality
-amD-ellyD-uice from those produce.
c2 #rotection of infant industries should be the important criteria for industrialization in
any country including Bangladesh. But unfortunately our infant industries lac3 such
protection entailing slowed down pace of industrial development.
$t present SME sector is facing a lot of problems in Bangladesh. Some ma-or problems
are as followsB
(esource scarcity:
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.
-igh employee turno#er:
"ue to limited growth of SME most of the s3illed employees leave SMEs. Eevy ,+0092
observed that SMEs are 3nowledge creators but poor at 3nowledge retention.
&!sence o' modern technology:
5ne of the main barriers for the development of SME in Bangladesh is inade<uate
technologies. Many SMEs have failed to adopt modern technology.
Poor physical in'rastructure:
Inade<uate supply of necessary utilities li3e electricity, water, roads and highways hinder
the growth of SME sector. Moreover unfavorable geographical conditions increase the
transportation cost.
+inancial constraints:
$vailability of finance hinders the growth of SMEs in Bangladesh. Bangladeshi ban3
considers SMEs as high ris3 borrowers because of their inability to comply with the
ban3>s collateral re<uirements. 5nly about 1&%+0' of the owners of SMEs own any
immovable property. Ban3ers issue loan on the basis of ownership of immovable property
as collateral ris3. $s a result it automatically excludes rest *0' SME>s from the list of
privileged clients of the ban3s. Fhatever collateral SME>s can manage gets used up in
tal3ing the term loan leaving them with no means to see3 wor3ing capital loans from
ban3s. Because of low access to institutional financing SME>s rely on inefficient financing
services from informal sources.
3ac5 o' uni'orm de'inition:
In Bangladesh the definition of SME has changed overtime in different industrial policy
announced by the government in different year. $bsence of uniform definition ma3es the
formulation and implementation of SME policy difficult.
3ac5 o' in'ormation:
Miah ,+00:2 has observed that SMEs have very limited use of information technology
,I2. $ccounting pac3age is used by 1%+' of the SMEs. he use of computers is revealed
by say 1&' of the SMEs, while the use of the Internet for business purposes applies to say
*%10' of SMEs.
3ac5 o' entrepreneurship s5ills:
/onservative attitude towards ris3, lac3 of vision, ability to ma3e plan and implementing
those hinder the growth of SME in Bangladesh.
Participation o' 4omen entrepreneurs:
E<uality of opportunity is a ma-or problem for SME. (emale entrepreneurs are treated
discriminately. hey are not well represented in business organization. !overnment does
not provide ade<uate institutional assistance for women entrepreneurs.
&ccess to Mar5et and lac5 o' a4areness regarding the importance o' mar5eting
tool:
(or SME, owing a retail space is very expensive in the ma-or cities in Bangladesh. $s a
result many customers are not interested to buy products and services from SMEs.
Because they can>t -udge the <uality until they physically examined the product. Most of
the cases SMEs in Bangladesh are not able to use the Integrated Mar3eting
/ommunication ,IM/2 tools. But these tools play the role of important stimulus to
motivate the customers and retain them. he country does not have enough mar3eting
capability and resources to invest in mar3eting.
Bureaucracy:
Fang ,1@@&2 observed that the inade<uate government supports are top ran3ing
constraints for SMEs. 6nnecessary layers of Bureaucracy and red%taps reduce the
competitiveness of SME and raising the cost of transactions and operations.
&!sence o' transparent legal system:
he absence of an effective and transparent legal system discourages SMEs in exploring
into ris3y ventures of business.
here are a number of unnecessary formal re<uirements to start and run business that
create high compliance costs and become barriers to SME development, growth and
mar3et entry.
3ac5 o' commitment to inno#ation and customer satis'action:
Ernesto ,+00&2 stated that to 3eep 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.
3ac5 o' 8uality assurance:
!ovt. has failed to frame a national <uality policy, provide ade<uate support systems and
establish a national <uality certification authority. $s a conse<uence SME of Bangladesh
has failed to ensure the <uality of their products and services both in local and
international mar3et.
3ac5 o' research and de#elopment 'acilities:
It is observed that investment in ?." is still negligible in.
+ierce competition 4ith the cheaper 'oreign goods:
(ierce competition with the cheaper goods of /hina, aiwan, Korea, India, and hailand
also pose threat to SME in Bangladesh.
C.2 %oncludin <emar>s and "roposed 3enda for 3ction:
he contribution of SMEs in Bangladesh>s economy cannot be overemphasized. /urrently,
SMEs are confronted with a number of problems that impede the development of their
mar3ets. o conclude this paper, we point out a number of factors that may be considered
to help SMEs to overcome various problems.
"e'inition:
he current definition of SMEs, as provided in the latest Industrial #olicy, is <uite broad.
!iven the resource constraint, it may not be possible to provide ade<uate 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 ,BBS2,
Ministry of Industries, #lanning /ommission, and the 4ational Board of ?evenue have
different definitions.
Business Support Centers:
here is a need for developing business support centers or business development services.
hey include a wide variety of non%financial services such as labor and management
training, extension, consultancy, counseling, mar3eting and information services,
technology development and diffusion, and mechanisms to improve business lin3ages
through sub%contracting and business clusters. /urrently, BS/I/ 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 "ha3a. he business development centers should
ideally be wor3ing as storehouse of all 3inds of information for SMEs from how to set up
a business to evolving opportunities in the international mar3ets. $bsence 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. /ompetition amongst business
services providers ,BS#s2 should also be maintained.
Clusters and su!-contracting:
here is evidence that clustering and networ3ing can help SMEs boost their
competitiveness. /lusters are sectorial and geographical concentration of SMEs, faced
with common opportunities and threats. /ollaborative action between regionally
concentrated firms and between firms and supporting local private and public institutions
has become a 3ey factor in meeting the challenges of increasing competition in both
domestic and export mar3ets. Business networ3s 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 mar3et environment. /ollaborative actions involving SME and large
firms, supporting private and public institutions and local and regional governments, offer
new opportunities for developing specific locational advantages and the competitive
strengths of clustered firms. It may be useful to identify a number of potential sectors as
Hthrust sectorI 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. herefore, such enterprises with significant forward and bac3ward lin3ages
involving the operation of small businesses may be provided with incentives.
!o set up an 2*clusive 2"D for S12s:
/reation of a separate export processing zone ,E#G2 for SMEs ,and particularly for SMEs2
may attract foreign direct investment in many export oriented small enterprises. E#G%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 sectors2 such as handicrafts, bamboo, cane
products, sil3 and sil3 products, have great potential for export provided ade<uate
promotional measures are underta3en ,Bhattacharya et al. +00+2. Export%oriented SMEs
should also be supported for setting up offices and showrooms abroad, and for ta3ing part
in international trade fairs.
Support for 4nnovation and !echnoloy .evelopment:
Most SMEs are characterized by indigenous technology and they are involved in
improving their existing production techni<ues and processes. If innovation does not ta3e
place in an indigenous sector, enterprises become uncompetitive. Fhen production
processes or technology are indigenous in nature it may not be possible to support them
with imported technology or expertise $s a result, support for SME technology
development in the 5E/" and in the emerging mar3ets is given by the governments.
6sually, 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.
&ccess to Credit:
$ccess to credit is a big problem for SME mar3et development. $nd 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 /redit $gency to mitigate their ris3 of exporting and help facilitate the provision of
wor3ing capital from ban3s and other financial institutions.
=uality and Standards:
Tuality is an integral part of international competitiveness worldwide. here is a need for
national <uality policy, which should define the goals and the actions of the country
towards <uality. Such policy has to be explicitly explained, harmonized with international
needs and 3nowledge, 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 <uality culture, to strengthen the <uality
infrastructure and, finally, to support international trade. he certification of <uality
systems allows enterprises to show that they fulfill the re<uirements of globalized mar3et
economies. he !overnment can promote <uality awareness and help SMEs in
safeguarding the re<uired <uality through 4ational Tuality $ssurance Schemes. he
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 mar3ets.
%raining +acilities:
raining facilities for developing entrepreneurial and managerial s3ills are not ade<uate in
the country. #ublic%private sector partnership and cooperation is re<uired to extend these
facilities.
S5illed .or5'orce:
Shortage of s3illed wor3ers is a general problem associated with industrial development in
the country. his is also a constraint for increasing the domestic value added ,i.e.
developing bac3ward and forward lin3ages2 in the existing export content. In the long%run,
the level ,and <uality2 of education will determine the s3ill composition of the wor3force.
In the short%run, however, it will be essential to provide for various practical training
programmes so that certain specialized industry re<uirements can be fulfilled.
Physical n'rastructure:
he state of physical infrastructure is wea3 in Bangladesh and long%term investment will
be re<uired to ma3e any improvement in this regard. In the short run exclusive SME
industrial par3s and E#Gs with ade<uate infrastructure facilities may mitigate the problem
of wea3 infrastructure.
%ransport Costs:
ransport costs have become an important element of international competitiveness.
Rarious competitors of Bangladesh are geographically located close to important world
centers of commercial activities and thus are in an advantageous position compared to her.
$part 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 sub-ect to such problems as
illegal toll collection, bad road communication, congestion, and fre<uent disruption due to
political programme and labor unrest. herefore, 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. his will also act as a permanent incentive for doing business in the
country.
3egal and (egulatory +rame4or5:
here is a pervasive lac3 of confidence in the legal and regulatory framewor3 of the
country which characterized by wea3 and non%transparent administrative and -udicial
systems, lac3 of information, lac3 of accountability of the public sector institutions, and
unfriendly attitude of the regulatory bodies. Fea3 legal procedures discourage private
sector activities and ma3e the investors unsecured. It is therefore important to introduce a
business friendly legal and regulatory framewor3.
"omestic En#ironment and integrated approach:
Mar3et development of SMEs re<uires addressing the demand and supply side constraints
which can best be addressed by creating a SME%enabling environment. $n enabling
economic environment comprises sound macroeconomic and structural policies, good
infrastructure, fair policy of competition, and efficiently functioning institutions.
herefore, an integrated approach to SME development incorporating efforts at policy%
ma3ing, institutional, and enterprise levels will be most efficient way of supporting the
private sector.
C.3 %reate and 4mplement an S12 "olicy:
!iven 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 lin3ages the SMEs should be
declared as a =priority sector> and bac3ed by formulation of a proactive SME development
policy he government should define a secure and stable policy for SMEs. Ironically,
SMEs in Bangladesh have developed and survived in an environment having no policy.
"evelopment of a predictable, user friendly and stable policy regime for the SMEs should
be priority wor3 of the government. In order to frame a targeted policy for SMEs data
collection needs to be done. $ sufficiently large sample survey should be carried out to
generate a benchmar3 national level database both for accurate estimation of the SME
contributions to the national economy and for formulation of comprehensive policies for
the sector. $ uniform set of definitions should be designed and used by all pertinent
agencies ,i.e. BBS, Ministry of IndustriesDBS/I/, #lanning /ommission and 4B?2 with
respect to classification of enterprises by size. In this context, a well%thought out decision
is needed to ascertain whether HSMEI is the correct term to identify =Small>, =/ottage> and
=micro> industries in Bangladesh.
In the proposed SME development policies, provisions should be made to develop
separate and specialized institutions in three areasC ,a2 finance, ,b2 technology and ,c2, s3ill
development, in addition to rationalizing the existing policies and institutions. In this
context, a strategic =#ublic%private Sector> partnership and cooperation should be carefully
developed 3eeping in view the current emphasis on fostering industrial development
through private enterprises systems.
Existing regulatory and promotional agencies ,i.e. BS/I/, B5I2 will be important
sta3eholders in implementing the country>s SME policy. ?egulatory corporations should
be given full independence within the approved budget. hey should not be policed for
every aspect of their operations. $s 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.
!hrust Sectors and +in>aes
Fithin 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 ade<uate incentives on a priority basis. Special endeavors are needed to develop the
culture of utilizing horizontal and vertical lin3age 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 bac3ward and forward lin3ages and provide huge opportunity
for the SMEs. 5ne way for SMEs to attain sufficient scale to earn contracts is through
clustering. /lustering and networ3ing can help SMEs boost their competitiveness. /lusters
are sectoral and geographical concentration of SMEs, faced with common opportunities
and threats. Business networ3s and industry clusters are a powerful means for overcoming
the size constraints of SME and for succeeding in an ever more competitive mar3et
environment. /ollaborative actions involving SME and large firms, supporting private and
public institutions and local and regional governments, offer new opportunities for
developing specific locational advantages and the competitive strengths of clustered firms.
60O %ompetition
$ final area that should be examined in the SME policy is the governments 4!5 policies
with respect to 4!5s underta3ing commercial enterprises. SMEs complain of facing
discriminatory competition from the commercial activities of some large 4!5s. ;owever,
smaller SMEs may be receiving valuable assistance in the form of training and mar3et
information from the 4!5s. he feeling in trade and industry circles is that 4!5s should
be promoting small businesses and not becoming competitors themselves, which may
crowd out private enterprises. More research and dialogue on the role of 4!5s in
promoting SMEs is necessary.
%reate an enablin environment for S12s
$n enabling economic environment comprises sound macroeconomic and structural
policies, good infrastructure, fair policy of competition, and efficiently functioning
institutions.
+eal and <eulatory ;rame,or>:
here is a pervasive lac3 of confidence in the legal and regulatory framewor3 of the
country which is characterized by wea3 and non%transparent administrative and -udicial
systems, lac3 of information, lac3 of accountability of the public sector institutions, and
unfriendly attitude of the regulatory bodies. Fea3 legal procedures discourage private
sector activities and ma3e the investors unsecured. It is therefore important to introduce a
business friendly legal and regulatory framewor3.
=uality "olicy:
#roduct <uality is an integral part of international competitiveness worldwide. here is a
need for national <uality policy, which should define the goals and the actions of the
country towards <uality. Such policy has to be explicitly explained, harmonized with
international needs and 3nowledge, 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 <uality culture, to strengthen
the <uality infrastructure and, finally, to support international trade. he certification of
<uality systems allows enterprises to show that they fulfill the re<uirements of globalized
mar3et economies. he !overnment can promote <uality awareness and help SMEs in
safeguarding the re<uired <uality through 4ational Tuality $ssurance Schemes. he
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 mar3ets.
!rade policy:
Import tariffs have been lowered and <uantitative restrictions virtually eliminated. Import
liberalization has also exposed domestic producers to competition from cheaper foreign
goods. Since subsidies and all 3inds of compensatory paybac3s would be unacceptable
under F5 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. o encourage domestic production, there should be attractive gap between import
duty on raw materials and finished products in favor of the former. $lso, to enable
domestic producers, particularly the SMEs, to prepare themselves to face external
competition there is need for ade<uate forewarning about impending policy direction. If
the government ma3es 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 ma3e cautionary ad-ustments in their investment
and production plans.
<eulatory constraints:
/lear, implementable, laid%down rules bound by specific timeframes and electronically
recorded exchanges ,where possible2 are a must in all !overnment regulating offices.
4nfrastructure:
Supply of power, gas, water, and telephone should be uninterrupted and obtaining
connections hassle free. Tuality of essential services will have a critical place in the
development and growth of SMEs.
!ransportation cost:
ransport costs have become an important element of international competitiveness.
Rarious competitors of Bangladesh are geographically located close to important world
centers of commercial activities and thus are in an advantageous position compared to her.
$part 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 sub-ect to such problems as
illegal toll collection, bad road communication, congestion, and fre<uent disruption due to
political programmes and labor unrest.
;inancial services:
here is a great need for improving different aspects of financial services for SMEs, such
as seed money, leasing, venture capital and investment funding. here is a lac3 of
availability of long%term loans for SMEs. Interest rates are still high and exchange rate
ris3s are considerable. $ll these factors limit the development of SMEs. (inance, both
short and long term, should therefore be provided at mar3et cost. 5ne of the main factors
that have hampered the flow of institutional finance into SMEs is ban3s> pre%occupation
with collateral. raditionally ban3s have used fixed asset ownership, particularly land
ownership, as the basis for -udging creditworthiness. Innovative and flexible credit
instruments can be developed for the SMEs if the regulatory framewor3 now under
consideration by Bangladesh Ban3 allows such innovation. he central ban3 should
seriously hear the views of the SME sector and the 4!5s in this regard and frame rules in
their favor. Ban3s are shy to lend to SMEs because of high processing and monitoring
costs of loans to SMEs. $ new ban3, namely the Ban3 of Small Industries . /ommerce
,B$SI/2 was set up in 1@** with the ob-ective of financing the small and cottage
industries. here were also attempts to redirect funds received from international agencies
such as the $sian "evelopment Ban3 ,$"B2 to the sector through private ban3s. hese
policy interventions did not succeed. he Basic Ban3 has shifted its position to the typical
retail ban3 mode leaving the SME sector as underserved as before. Basic Ban3 needs to be
brought bac3 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 /redit $gency to
mitigate their ris3 of exporting and help facilitate the provision of wor3ing capital from
ban3s and other financial institutions.

Chapter- :
-.1 ;indins:
Shortage of wor3ing capital has been found the top most problem for the SMEs from our
study. 5ther specific findings of the study are given belowC
Ma-ority of small enterprises belongs to the lower classes of investmentDcapital
range and they do not re<uire locational amenities ,say, availability of high%tech essential
services, port facilities, etc2. hey can flourish in non%metropolitan D rural areas if they get
credit and minimum infrastructural and institutional facilities.
$gain sources of finance for most of the enterprises are the owners and their
families. 5nly few of them ta3e 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.
?ate of gross profit margin is highest in agro%based enterprises. Fhereas
manufacturing enterprises show the discouraging figures.
he SMEs who go for loans, most of them pay a hi3ing price to the 4!5s and
money lenders because loan processing is easier than that of the Ban3s 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 hi3ing price. ;owever, inade<uate finance
causes under%utilization of capacity and leads many other problems. Ban3s and financial
institutes may ta3e 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 ta3ing
loans. Ban3s may also consider their moveable assets ,say, inventory or receivables2 side
by side fixed assets as security for providing loans to this sector.
he Ban3 Eoan #olicy ,both public and privet sector2 should be lin3ed with the
industrial policy of the country. here should be an allocation of fund in the loan portfolio
of ban3s to supplement the !overnment "evelopment plan ,(ive )ear #lan % for example2.
he ban3ers may provide a guide line % ;ow to prepare a pro-ect proposal % so
that any eligible pro-ect cannot be re-ected only for the reason of proper documentation
and information.
4ecessary training is needed for the ban3ers on micro credit. Maybe this ought to
consist selection of pro-ects, pro-ect ris3 analysis, and advice to the entrepreneurs and so
on.
he small rural enterprises could mobilize untapped resources of capital and s3ill
in the rural areas if ban3 loans and institutional support bac3 them.
(or up%gradation of the existing plant, increasing the capacity utilization and
establishing the new unit, not only ban3s, but also leasing companies can help the SMEs
by expanding their networ3 in the rural areas. Eeasing companies should change their
tendency to finance only the well%established large units or to cluster their activities
around the big cities.
he ban3s can nominate other organizations that can provide technical support,
advice and also monitoring to the SMEs after sanction the fund. 5ne organization can be
nominated for operation for a single area in a particular location.
(inancing the small rural enterprises can open the avenues of counseling and
other ancillary services to the rural ban3 branches to earn more income.
?ural ban3ing is totally different from the urban ban3ing. Small credit occupies
almost whole part of the rural ban3ing. So special training is re<uired for the ban3ers to
ma3e micro credit fruitful.
Many new entrepreneurs are coming in the $go%based business. If the ban3s 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 !overnment provided labor%training institute to supply
s3illed labor forces to the industries. But in our country !overnment effort in this case is
not sufficient. S3illed labor force is an asset not only for the individual firm but also for
the industry and the countryJs economy. It increases the productivity and efficiency of the
firm. he ba3ers have to consider the number of total s3illed and semi%s3illed labors
during the scrutiny of a pro-ect proposal.
-.2 Suestions:
Extension of credit facility, no doubt, is a necessary condition to boost SME and
Bangladesh Ban3 refinance scheme is also the timely approach. But these are not the
sufficient conditionsB rather promotion, facilitation, mar3eting supports and protection of
infant industry are imperative in a state of merger and ac<uisition all over the world.
Mar3eting of SME products should be facilitated and given highest priority where both
private sector and the government should ta3e the lead.
he traditional attitude of the ban3ers to earn more profit shall have to be changed to
contribute to economic development of the country promoting SME. Bangladesh Ban3
may implement a Jone thirdJ policy of lending i.e. one third of total credit exposures of a
ban3 should be in corporate, one third in retail and one third in consumer. ?efinance may
also be allowed on monthly basis extending up to &0' for trading. he government may
also help motivate the ban3ers to change their attitude from corporate to SME customers
allowing tax rebate for financing in SME sectors.
hough, Bangladesh Small and /ottage Industries /orporation ,BS/I/2 has been
established long bac3 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 BS/I/
has wide networ3 all over the country with established set up, it may be well integrated
with todayJs SME concept to start the -ourney of industrialization afresh and so to save
both time and money in the process.
he government should also come up with pragmatic policies and ta3e appropriate
measures to support and patronize SME as a thrust sector with more incentive pac3age
li3e subsidy in water, gas, electricity, export benefits etc. $bove 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
recommendedB
!overnment must have to ta3e ade<uate measures to ensure the uninterrupted
supply of raw materials for SME.
!overnment needs to ta3e appropriate measures to fix the minimum salaryDwages
of the employees of SME. hat will help to minimize the employee turnover.
!overnment and financial institution may provide ade<uate finance for
modernization and technological advancement.
"evelopment of infrastructure is essential for the optimum growth of SME. So
government of Bangladesh needs to ta3e appropriate policy strategy for the infrastructure
development of Bangladesh.
!overnment, financial institutions and 4on%!overnment 5rganizations ,4!5s2
may ta3e necessary steps to ensure uninterrupted financial support to the prospective
SMEs in Bangladesh.
"ue to the absence of uniform definition the policy formulation and
implementations are not possible. !overnment should ta3e initiative to develop a uniform
definition of each category of SMEs.
!ovt. of Bangladesh should ta3e the initiative to develop web pages exclusively
for SME and an integrated SME database. It will reduce the barriers to SME access to
global mar3et.
In order to ensure the retention of s3illed wor3force the government should ma3e
the entrepreneurial career attractive by minimizing the uncertainty.
In order to encourage women entrepreneurship govt. mayB 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 ta3e appropriate mar3eting tools to popularize their
products.
(or minimizing red tapes and accelerating the growth of SME government may
provide one roof service under the SME foundation.
$ppropriate legal framewor3 is necessary to ensure the development of SME of
Bangladesh.
In this era of intense competition continuous planning and <uality improvement
act as a prere<uisite for the survival of SMEs. In order to improve the <uality SMEs can
follow the Lust in ime ,LI2 philosophy and use otal Tuality Management ,TM2 and
can ensure the improvement of <uality and productivity at a time.
!overnment should establish a credible certification authority especially for
SMEs. So those, this sector can obtain a technical evaluation of the <uality of their
products within a shortest possible time. he certification of the authority should be
worldwide accepted. !ovt. may also provide assistance to SMEs during the certification
process and promote the importance of product certification for international acceptance
among the SMEs.
?esearch and "evelopment ,?."2 is must for the development and growth of
SME. So government must have to invest in ?." for ensuring the intensification of SME
of Bangladesh.
?estriction may be imposed on import of SMEs> products which are available in
Bangladesh.
-.3 <ecommendations:
Microfinance has been considered a good strategy for poverty alleviation. 5n 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. he following recommendations are very important for
Microfinance and SME development and bridging the gap between them.
>pli'ting Micro'inance clients:
$lthough 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 s5ill de#elopment training:
It is true that most of our enterprise clients do not have enough managerial s3ills. So
managerial s3ill development training for enterprise clients should be organized. he M(Is
could ta3e responsibilities of their respective Microenterprise clients and the (ederation of
Bangladesh /hamber of /ommerce and Industries ,(B//I2 or other organization li3e the
upcoming SME (oundation or donorDinternational agencies li3e South $sia Enterprise
"evelopment (acilities ,SE"(2 could ta3e responsibility of training for SME sector.
Enhancing %echnical ?no4ledge:
he M(Is should ta3e the responsibility to provide technical 3nowledge development
training li3e boo33eeping and accounts 3eeping, product costing and pricing etc. to their
clients. he same training could also be organized for SME sector.
Enterprise de#elopment training:
It is universal that entrepreneurship capacity is inherent and everybody cannot become
entrepreneur. But training sometimes could ma3e people successful entrepreneur.
Enterprise development training is extremely important for Microfinance clients to upscale
them to successful entrepreneurs.
Business "e#elopment Ser#ices 9B"S<:
It is found from a study that mar3eting assistance is the greatest need for all size of
enterprises. B"S is important to improve the performance, services and expand mar3et of
SMEs ,6S$I", +0012. he B"S is an integrated approach where s3ill development
training, management and mar3eting training and enterprise development training are
included. So B"S is essential for SME development of the country.
Bac54ard and +or4ard 3in5age:
It is obvious that for any industrial development both bac3ward and forward lin3age is
essential. In Bangladesh, the bac3ward and forward lin3age facilities has not developed
substantially to provide support to the large industry as well as SMEs. he bac3ward
lin3age facilities are important for both large industries and SMEs. If the bac3ward
lin3age facilities develop, then the production cost would be less and our products could
be sold in competitive price in both domestic and foreign mar3et. In most of the cases the
SMEs act as bac3ward lin3age for large industry. $lthough forward lin3age is not very
essential for the large industry, but it is crying need for SMEsB because SMEs do not have
ade<uate information, lin3age, mar3eting s3ills, and capital for mar3eting their products.
Sometimes, SMEs need to sell their products in low price with small profit margin. If the
forward lin3age for SMEs could be established then the profit margin of SMEs will be
higher. In this respect, the government, (B//I, 4!5sDM(Is and donor agencies should
come forward.
%raining o' M+s sta''s:
$lthough 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 lac3 of professional staffs. It is observed that in
most of the cases due to lac3 of capacity and expertise, the M(Is staffs are not interested
to provide Microenterprise loan with the fear of delin<uency and increasing portfolio at
ris3s. Moreover, they don>t have enough s3ill for monitoring and providing necessary
supports to their Microenterprise clients. So training of M(Is staffs is re<uired. Besides,
the M(Is should recruit professional staffs and experts from private sector.
Ensure nsurance co#erage 'acilities:
he most of the SMEs of this country are not covered by insurance. here are two reasons
behind this, overloo3ing 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 inade<uate 3nowledge 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 sic3 or go to
li<uidation. If there is mandatory insurance for these SMEs, then these SMEs could be
revived after any disaster.
3in5age opportunity 4ith mainstream 'inancial institutions:
It is important for Microenterprise clients of M(Is. he M(Is should ta3e initiatives to
upscale their Microenterprise clients to SME level and provide necessary support to lin3
these clients with mainstream financial institutions.
ncrease Pu!lic "e#elopment E,penditures:
he government should have a clear policy for public development expenditures and
increase it especially for SME sector. If the sector has to ma3e much headway, there is
need for substantial increase in public investment in the sector particularly in the area of
training, extension, research, mar3et promotion, etc. $ collaborative effort of the
government with business associations, nongovernmental organizations 4!5s and other
development partners is recommended in such public outlays.
SME 'riendly trade policy to !e underta5en:
It is true that to cope with globalization the government has been underta3ing various
trade policies. But the trade policy should be reformed in such a way that SME sector will
not be affected.
&ppropriate tari'' rationali)ation and #aluation:
ariff 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 ta3en into account. So
that the possibilities of dumping would be reduced that would be helpful for sustainable
growth of SME sector.
%a, holiday and incenti#e:
$long 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 'riendly legal and regulatory 'rame4or5:
he government needs to consider SME sector during enacting any legal and regulatory
framewor3. he government should reduce the legal barriers and create enabling
regulatory framewor3 for the SME sector.
E,pand %ransportation 'acilities:
o reduce the transportation cost the government can underta3e 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.
&#aila!ility o' in#estment 'und and 4or5ing capital:
It is obvious that the SME sector is facing tremendous shortage of investment fund and
wor3ing capital. $lthough the Bangladesh ban3 has underta3en initiatives for SME
financing but still it is not ade<uate 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 "omestic Business and Political En#ironment:
It is a long term process and needs greater commitment and cooperation of different
groups li3e 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.
-.4 %onclusion:
Small and medium enterprises ,SMEs2 act as a vital player for the economic growth,
poverty alleviation and rapid industrialization of the developing countries li3e Bangladesh.
SMEs are significant in underlying country>s economic growth, employment generation
and accelerated industrialization. !overnment of Bangladesh has highlighted the
importance of SME in the Industrial #olicy%+00&. SME has identified by the Ministry of
Industries as a =thrust sector>. $s the SME sector is labor intensive, it can create more
employment opportunities. (or this reason government of Bangladesh has recognized
SME as a poverty alleviation tool. SME also foster the development of entrepreneurial
s3ills and innovation. $long with poverty alleviation SME can reduce the urban migration
and increased cash flow in rural areas. $s a result it will enhance the standard of living in
rural areas. #erformance of SMEs in Bangladesh is significantly found below the level of
international standard. $lthough government of Bangladesh has ta3en 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 framewor3, establish national <uality policy etc. (rom the
se<uence of our analysis it seems that for the economic development of Bangladesh SME
can play a vital role. Fe are <uite optimistic that if the above mentioned suggestions are
implemented then the growth of SME sector in Bangladesh will be accelerated. $ vibrant
SME sector is considered as one of the principal driving forces in the development of a
mar3et economy. hey stimulate private ownership and entrepreneurial s3ills, and are
flexible and can adapt <uic3ly to changing mar3et demand and supply situations, generate
employment, help diversify economic activity, and ma3e a significant contribution to
exports and trade. Even in the developed mar3et economies SMEs account for a large
share in output and employment. here are many constraints in developing the SME sector
in Bangladesh. Several studies have identified different constraints, ranging from access to
credit to mar3eting their products and services. ;owever, access to credit is considered as
the main constraint. /ommercial ban3s are found reluctant to extend credit to the SME
sector. he main reasons are high ris3 and monitoring cost. o meet the challenge and
reduce the perceived ris3 in lending to SME sector, the Bangladesh Ban3 has embar3ed on
a program to expand and redesign the existing refinance window of Bangladesh Ban3 into
Small Enterprise (und ,SE(2. ;owever, it was thought that the introduction of ./redit
!uaranteeDInsurance Scheme or ade<uate refinancing facilities by the Bangladesh Ban3
may be of substantial help in increasing the participation of the commercial ban3s in SME
financing. #rivate Ban3s cannot be expected to underta3e this type of financing as
additional costs and high ris3 involved. 5n the other hand, 4/Bs 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. he lending institutions should be encouraged to emphasize
on the relationship lending technologies, which is based on soft information. he soft
information may include the character and reliability of the SME.s owner based on direct
contact over time by the institution>s loan officerB the payment and receipt history of the
SME gathered from the past provision of loans, deposits, or other services to the SME by
the institutionB or the future prospects of the SME garnered from past communications
with SME.s suppliers, customers, or neighboring businesses. Monitoring of the ban3ing
sector in the aspects of loans and advances disbursement should be streamlined as nobody
is following government directives. Fe need to develop various credit products and
services, such as credit lines, ris3 sharing activities, leasing, credit scoring and expert
decisions, and efficient credit bureaus. Ban3ing 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 ban3ing
norms and procedures. So, it needs a concerted effort of different financial institutions,
such as Bangladesh Ban3, BS/I/, 4/Bs, #/Bs, SBs or even insurance companies to
ma3e SME financing a success.

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Appendices
3ppendi*: 1 .efinition of S12s
3ppendi*: 2 "resent Scenario of S12:
3ppendi*: 3 0ro,th and structure of S12s :
Appendi(: # %ontributions of S12s to 2mployment and 0.":
3ppendi*: 5 0ro,ths and Structural !ransformation of S12s:
3ppendi*: @ S12 %onstraints and 4ndustrial "roblems:
3ppendi*: A %ontributions of Ban>s in S12 Sector:
$ppendixC *C (inance by SMEC
$ppendix @C SME (inancing in BangladeshC

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