1.

1 Origin
Dr. M. A. BaquiKhaliliy, Professor, Finance Department, Faculty of Business Studies, University of Dhaka has assigned a report to the students of Finance department as a course requirement of Finance & Development. This report is prepared to comply with that instruction.

1.2 Objective
Objectively obtaining the knowledge oriented with practical working level is obvious to be efficient. Our mission is to create effective field of knowledge on Access to Finance to relate us with the practical field of the finance , economy & growth.

1.3 Methodology
In the organization Chapter, much information has been collected from the primary sources. Data are also collected from secondary sources such as from different published articles, journals, web sites etc. All the data collected for reporting purpose are systematically.

1.4 Limitation
Past and present information that are confidential could not be accurately obtained. In such cases, we have relied upon certain assumptions, which are only amateur estimates. As many of the analysis on the obtained data are based on our sole interpretation, there may be some biases, as lack of knowledge and depth of understanding might have hindered our ability to produce an absolutely authentic and meaningful report.

Page | 1

The challenges of high population growth, constant food shortages, recurring naturaldisasterand high aid-dependence, limited production of tradable, widespread poverty and low levelsof human development were compounded by the dislocations caused by the war of liberation.Against that backdrop, the prospect of Bangladesh economy appeared rather bleak. Against the benchmark trend GDP growth rate of 3.2 percent during 1950- 1970, Bangladesh achieved a reasonably steady annual rate of growth of over 4 percent duringthe first two decades of her independence and was successful in moving into the higher growthtrajectory of nearly 5 percent during 1990s. The economy of Bangladesh continue to demonstrate considerable resilience during FY2008-09 despite the twin shocks arising from global recessions and the adverse effects of the consecutive floods and the cyclone-Sidar of the last fiscal year (FY2007-08). The economy is estimated to have grown at a rate of 5.9 percent, slightly below the growth rate (6.2 percent) of FY2007-08. The key feature of the economic performance during FY2008-09 is the strong recovery in agriculture sector coupled with moderate growth in industry and service sector. The economy achieved a trend growth rate of 5.8 percent during 2000-2009. On the face of it, the rise in per capita income seems to have resulted in significant decline in thelevel of absolute poverty. Household income survey showed incidence of income-poverty to bearound 40 percent in 2005 against 58.8 per cent in 199192. Bangladesh also achievedimpressive successes in the broad area of human development as reflected in the aggregatemeasure of human development index and human poverty index. In a labor surplus economy like Bangladesh the nexus between growth and equity is largelydetermined by the evolving pattern of structural changes of the economy. The pace at whichsurplus labor from agriculture is siphoned-off depends on how labor intensive is the growthoutside agriculture, particularly in the manufacturing sector, which often shoulders keyresponsibility in carrying the economy forward. The employment intensity of manufacturing growth and its spatial attributes are expected to be closely linked with the size structure of the sector. Faced with factor

Page | 2

prices closer to theirsocial opportunity costs, smaller enterprises are often more efficient users of resource and tend to bemore labor intensive in labor surplus economies. Low capital, skill and technology content alsoenable the smaller enterprises to be geographically more dispersed. These attributes thus renderthese enterprises more supportive of poverty reducing development strategies. Bangladesh Bank continued to pursue cautious and accommodative monetary policy stance during FY2008-09. The, year-on-year growth of broad money during FY2008-09 reached 19.2 percent from 17.6 percent in FY2007-08, mainly driven by the increase of net foreign asset of banking system (26.7 percent), while the growth in net domestic assets of banking system was 17.8 percent. Year-on-year growth in domestic credit was 16.0 percent during FY2008-09 which is well below from 20.9 percent during FY2007-08. Private sector credit growth was 14.2 percent in FY2008-09 which is significantly lower than the year-on-year growth of 24.9 percent in previous fiscal year. The reserve money recorded year-on-year increase of 31.5 percent in FY2008-09, both driven by the increase of net foreign assets (31.1 percent) and net domestic assets (32.0 percent) of Bangladesh Bank.

Page | 3

Bangladesh economy remained predominantly agrarian during the first two decades of herindependence with agriculture (including fishery, livestock and forestry) accounting for almost37 percent of GDP in 1988-89. The decline in the share of agriculture accelerated during 1990s which Coincided with the intensified phase of policy reform. The decline in the share of agriculture accelerated during 1990s whichcoincided with the intensified phase of policy reform. Thus, in terms of composition of GDP, the structuraltransformation of Bangladesh economy since early 1990s seems like a transition from agricultureto industry rather than to service. Sectoral Composition (%) of GDP 1978-2009

Year 1978-79 1988-89 1998-99 2008-09

Agriculture 44.9 37.1 25.3 20.6

Industry 18.2 17.1 25.7 29.7

Service 36.9 45.8 49.0 49.7

All 100 100 100 100

1978-79

1988-89

Agriculture

Industry

Service

Agriculture

Industry

Service

Page | 4

2008-09

1998-99

Agriculture

Industry

Service

Agriculture

A second major structural change in Bangladesh economy has been the transition to a more openeconomy, particularly following the liberalization measures

undertaken during early 1990s. Exports rose from $1718 million in 1990-91 to $6467 million in 2000-01 indicating ayearly compound growth of 14.2 percent. Similar trends are observed with regard to imports andremittance. The openness of the economy shown by total external trade as a percentage of GDPincreased from 21 percent in 1980-81 to 42.6 percent in 2008-09.The composition of the export basket has also undergone significant changes during this period. In 1981-82, raw jute and jute goods were the dominant export items accounting for 16.2 percent and 46.5 percent respectively of total exports. Woven garments accounted for a tiny1.1 percent of total exports and there was no export of knitwear in that year. In 1991-92, the share of raw jute and jute goods in total exports came down to 4.3 percent and 6.4 percentrespectively while the share of woven garment went up to 53.4 percent. This was the first year ofknitwear export and accounted for 5.9 percent of total export. In 2008-09, one finds a verydifferent picture with knitwear accounting for 41.3 percent of export followed by woven garmentaccounting for 38 percent of exports. The combined export of raw jute and jute goods stood atless than 3 per cent of total exports. During this period the share of manufactured goods in total exports rose significantly while that of primary goods registered

Page | 5

commensurate decline.Bangladesh, thus, seems to have made successful transition from resource based export toprocess based exports, although exports remains precariously dependent on one item, namely,readymade garments. Trend In The Openness Of The Economy

Description Export (Million $) Yearly export growth (%) Import (Million $) Yearly import growth (%) Remittance (Million $) Yearly remittance growth (%) Export as % of GDP Import as % of GDP Remittance as % of GDP Openness of the economy

1980-81 710 --2282 --381 --5.0 16.0 2.7 21.0

1990-91 1718 9.2 3510 4.4 764 7.2 7.3 15.0 3.3 22.3

2000-01 6467 14.2 9364 10.3 1882 9.4 13.7 19.9 4.0 36.9

2008-09 15565 11.6 22507 11.6 9689 22.7 17.4 25.2 10.8 42.6

Yearly Growth
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990-91 Yearly export growth (%) 2000-01 Yearly import growth (%) 2008-09 Yearly remittance growth (%)

Page | 6

% of GDP
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990-91 Export as % of GDP 2000-01 Import as % of GDP 2008-09 Remittance as % of GDP

A third aspect of structural change in Bangladesh has been with regard to the relative role of the public and private sector. Policies towards private sector development underwent significant changes during the first three decades of independence. These changes were often closely associated with political changes in the country.The strategy of public sector led industrialization was abandoned after the political change in1975 and the stage was set for the pursuit of mixed economy strategy with simultaneous emphasis on public and private sector. After the political change in 1981, the New Industrial Policy was announced in 1982 which marked a clear shift towards private sector led industrialization strategy. All subsequent governments adhered to this strategy of letting the private sector play the leading role in industrialization. In line with this strategy, privatization of public enterprises has been pursued and policies have been reformed to facilitate private sector growth resulting in secular decline in the share of public enterprises in industrial value added and employment. There have also been some changes in the composition of the industrial sector. Manufacturing has all along been the dominant component of the industrial sector

Page | 7

and it share in GDP increased from about 10 percent in 1988-89 to nearly 18 percent in 2008-09. However, its share in industrial output registered some decline as mining, construction and utilities experienced significant gains following deregulation of investment and inflow of foreign investment in some of these subsectors. Changing Composition of the Industrial Sector In terms of GDP Share 1978-2009

Yearly 1978-79 1988-89 1998-99 2008-09

Shares In GDP (%)

Share of MFG 0.01 0.00 1.00 1.25 18.23 17.10 25.69 29.70 67.2 57.8 60.7 59.9

Manufacturing Construction Utility Mining Industry in Industry (%) 12.25 9.89 15.60 17.78 5.69 6.18 7.67 9.13 0.28 1.03 1.42 1.57

Share of MFG in Industry (%)

70 65

67.2

60.7 60 55 50 1978-79 1988-89 1998-99 57.8

59.9

2008-09

Share of MFG in Industry (%)

Page | 8

Changing Composition of the Industrial Sector in terms of Employment 1995-2006

Yearly 1995-96 2005-06

Employment (million Persons) Manufacturing 3.5 5.2 Construction 1.0 1.5 Utility 0.1 0.1 Mining 0.0 0.1 Industry 4.6 6.9

Share of MFG in Industry (%) 76.1 75.4

As shown in Table, manufacturing employment increased from 3.5 million in 199596 to 5.2 million in 2005-06 registering a yearly compound growth of 4 percent. According to the national income data, manufacturing value added increased at an annual compound rate of 6.6 percent during the same 10 year period. This would imply an employment elasticity of nearly 0.61 with respect to value addition, which suggests that recent manufacturing growth in Bangladesh has been moderately employment-intensive.

Page | 9

The contribution of the industry sector to the economy of Bangladesh has been increasing day by day. In FY1980-81, the contribution of the broad industry sector to real GDP was 17.31 percent which has increased to 29.73 percent in FY2008-09. The broad industry sector includes four sub-sectors mining & quarrying, manufacturing, construction and electricity, gas & water supply. Among these subsectors, the contribution of the manufacturing sector is the highest. According to the provisional estimate of national income, in FY2008-09, the contribution of the manufacturing sector to GDP is 17.78 percent, which ismarginally higher than that of the previous year. However, being affected by the global economic crisis, the growth rate of the manufacturing sector has declined to 5.92 percent (estimated) in FY2008-09, which is 1.29 percent lower than that of the previous fiscal year. The size and growth performance of the manufacturing sector in the countrys GDP from FY2000-01 to FY2008-09 is shown in Table below: Size & Growth Rate of Manufacturing Sector
Types Small & Cottage Medium-Large 2000-01 9267.4 (6.6) 23130.2 (7.0) 32397.6 (6.7) 2001-02 9980.1 (7.7) 24194.1 (4.6) 34174.2 (5.5) 2002-03 10699.6 (7.2) 25780.8 (6.6) 36480.4 (6.8) 2003-04 11496.5 (7.45) 27572.3 (6.95) 39068.8 (7.1) 2004-05 12408.5 (7.9) 29860.5 (8.3) 42269.0 (8.2) 2005-06 13551.5 (9.2) 33268.2 (11.4) 46819.7 (10.8) 2006-07 14865.1 (9.7) 36507.1 (9.7) 51372.2 (9.7) 2007-08 15920.0 (7.1) 39157.2 (7.3) 55077.2 (7.2) 2008-09 16969.1 (6.6) 41370.2 (5.7) 58339.3 (5.9)

Total

The above table reveals that products of both Medium-Large Industry as well as Small and Cottage Industry are increasing gradually. The vision of the draft Industrial Policy, 2010 is that Bangladesh will have, by 2021, a dominant industrial sector where manufacturing will account for at least 30 percent of the gross domestic product (GDP) with a capacity to absorb 20 percent of the workforce. The structure of the industrial sector will be consistent with the comparative advantage of the economy, which will make the sector globally competitive. The industrial sector of Bangladesh will have a dominant export orientation. Significant diversification of the export base will be achieved both with respect to

Page | 10

product composition and market destination. There will be a complete graduation from resource based export to process based export and the skill and technology content of export will be markedly higher to ensure higher degree of value addition. To further strengthen the process of industrialization, the Government has identified the Small and Medium Enterprise (SME) as a priority sector. To attract foreign investment, facilities for the potential investors have been enhanced in the new industrial policy which is expected to be finalized by January, 2010. Cottage, small and medium industries will be an important component of the industrial landscape playing a critical role in decentralized employment generation, womens entrepreneurship development and poverty alleviation.

Small and Medium Enterprises (SMEs)

Small and Medium Enterprises (SMEs), by producing exportable surpluses of commodities together with local value additions and creation of employment opportunities, can make significant contribution to the economy of Bangladesh. Although financing of SMEs in off-farm rural economic activities are largely dependent on equity financing from personal and family savings, currently banks and financial institutions are also coming forward to provide finance to this sector. As the large potential of employment generation by SMEs has attracted attention of the policy makers, a range of initiatives for channeling loans to SMEs are being taken. The Government has taken up programs to provide financial assistance to expand SMEs through commercial banks. Alongside the disbursement of loans, since FY2004-05, Bangladesh Bank has taken up a scheme of Tk.100 crore for refinancing the scheduled banks and financial institutions as revolving fund. Recently, the scheme has been widened with an enhanced allocation of Tk.600 crore. Up to June 2009, Tk.716.44 crore has been disbursed among different scheduled banks and financial institutions for refinancing potential entrepreneurs. In addition to this, IDA has provided US$10 million and the Government of Bangladesh has provided Tk.112.32 crore through Enterprises Growth and Bank Modernization Project (EGBMP). With the stipulated revolving fund of Tk.224.50 crore up to June 2009, refinancing facilities have been provided to different

Page | 11

scheduled banks and financial institutions. Moreover, in an attempt to provide incentives to the sector, ADB has been providing an additional US$30 million to Bangladesh Bank. These resources would contribute both in employment generation as well as in enhancing the purchasing power of the poor. Up to June 2009, Bangladesh Bank has disbursed Tk.334.25 crore for refinancing of thisprograme. Detailed refinancing of Bangladesh Bank to various financial institutions and banks is shown at Table Summary Information on SME Refinancing (up to June 2009)
Refinancing Source Bangladesh Bank IDA ADB Total Amount Refinanced (In Crore Tk.) Working Capital 178.48 61.51 138.68 378.68 Mid Term Loan 336.40 96.40 112.82 545.62 Long Term Loan 201.56 66.59 52.75 320.90 Total Loan 716.44 224.50 304.25 1245.20 Loan 1724 899 728 3351 No. Of beneficiary Enterprises Industrial Commercial Loan 4150 1220 1864 7234 Service 1127 358 331 1816 Total 7001 2477 2923 12401

Total Loan

304.25

716.44 224.5

Bangladesh Bank

IDA

ADB

Page | 12

Summary information on SME Refinancing from Bangladesh Bank (up to June 2009)
Name of Banks / NonBank Financial Institution refinanced. Bank Non-Bank Financial Institution Total Amount Refinanced (In Crore Tk.) Working Capital 158.02 20.47 178.48 Mid Term Loan 147.28 189.11 336.40 Long Term Loan 48.45 153.11 201.56 Total Loan 353.75 362.70 716.44 Loan 881 843 1724 No. Of beneficiary Enterprises Industrial Commercial Loan 3330 820 4150 Service 327 800 1127 Total 4538 2463 7001

SME Refinancing by Bangladesh Bank

362.7

353.75

Bank

Non-Bank Financial Institution

Summary information on SME Refinancing from IDA (up to June 2009)

Name of Banks / NonBank Financial Institution Refinanced. Bank Non-Bank Financial Institution Total Amount Refinanced (In Crore Tk.) Working Capital 55.46 6.05 61.51 Mid Term Loan 65.23 31.17 96.40 Long Term Loan 15.01 51.58 66.59 Total Loan 135.70 88.81 224.50 Loan 673 226 899 No. Of beneficiary Enterprises Industrial Commercial Loan 1140 80 1220 Service 76 282 358 Total 1889 588 2477

Page | 13

SME Refinancing From IDA

88.81 135.7

Bank

Non-Bank Financial Institution

Summary Information on SME Refinancing from ADB (up to June 2009)

Name of Banks / NonBank Financial Institution Refinanced. Bank Non-Bank Financial Institution Total Amount Refinanced (In Crore Tk.) Working Capital 138.52 0.16 138.68 Mid Term Loan 74.43 38.89 112.82 Long Term Loan 31.05 21.69 52.75 Total Loan 244 60.25 304.25 No. Of beneficiary Enterprises Industrial Loan 591 137 728 Commercial Loan 1679 185 1864 Service 151 180 331 Total 2421 502 2923

SME Refinancing from ADB

60.25 244

Bank

Non-Bank Financial Institution

Page | 14

Table shows that up to June 2009, Bangladesh Bank and IDA have distributed Tk.940.94 croreas refinancing to 17 banks and 22 non-bank financial institutions. It may be mentioned that the fund has been disbursed (by the mentioned banks and financial institutions) to a total of 9478 SMEs earlier as loan. Out of the total loan, Tk.239.99 crore has been provided as working capital, Tk.432.79 crore as mediumterm loan and Tk.268.15 crore as long-term loan. Bangladesh Small and Cottage Industries Corporation (BSCIC) Bangladesh Small and Cottage Industries

Corporation (BSCIC) promotes small and cottage industries in the private sector as well as provides necessary services and facilities to the private entrepreneurs. In FY2008-09, the number of small and cottage industrial units established under direct and indirect assistance of BSCIC is 6,020 and 4,691 respectively. The total amount of investment made in these units is Tk.2,445.99crore. Of the total investment, Tk.1,544.68 crore has been financed as loan assistance by bank, BSCIC and other financial institutions, Tk.675.44 crore came as entrepreneurs equity and the restTk.225.87 crore has been invested from entrepreneurs own fund.

Page | 15

Rapid industrialization is a sine qua non for achieving desired level of economic development of an agro-based developing country. For this purpose, the

Government continued its efforts to 115 achieve this goal by providing loans and other ancillary supports to promote SMEs alongside the large-scale industries. The disbursement and recovery of the industrial loan was Tk.65,001croreand Tk.52,900 crore respectively in FY2008-09 which is 8.13 percent and 24.55 percent higher respectively than those of the previous fiscal year. The table below shows year wise disbursement and recovery of loan during FY1995-96 to FY2008-09.
Fiscal Year 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Disbursement Working capital 3675.69 6979.75 6599.03 7905.49 10681.74 13382.19 13765.12 15671.46 18703.10 22175.78 28448.53 31651.32 39963.49 45028.28 Term loan 1230.44 1200.00 1120.34 1330.10 1627.26 3057.07 3505.15 3961.99 6675.99 8704.52 9650.02 12394.78 20150.82 19972.69 total 4906.13 8179.75 7711.37 9235.59 12309.00 16439.46 17270.27 19633.45 25379.09 30880.30 38098.55 44046.10 60114.31 65000.97 Working capital 3402.88 5692.70 5409.72 5281.65 7200.13 9777.47 9683.34 12283.21 15435.00 18189.65 22975.95 23790.54 28849.60 36597.89 Recovery Term loan 519.69 887.19 859.43 1093.39 1653.34 2795.10 3212.97 3835.12 4963.44 8546.98 6759.52 9068.45 13624.20 16302.48 total 3922.57 6579.89 6269.15 6374.96 8853.47 12572.57 12851.31 16118.33 20398.44 26736.63 29735.47 32858.99 42473.80 52900.37

Page | 16

Industrial Loan
25000

20000

15000

10000

5000

Disbursement

Recovery

Page | 17

Contribution To GDP
Based on the data available up to December 2008 and also taking into consideration the trend of production, the growth rate of this sector is provisionally estimated for FY 2008-09. A brief analysis of the performance of this sector is given below: Production of large and medium scale manufacturing industries, in particular readymade garments, knitwear, cotton textile, pharmaceuticals, plastic products, wood products, iron and steel, ceramic, cement, electronics goods, transport equipment etc. showed moderate growth in the first half of FY 2008-09. Readymade garments and knitwear showed substantial growth in the 1st and 2nd quarter of FY 2008-09 compared to corresponding period of the previous year. But due to global recession it is assumed that the growth rate will decline in the 2nd half of FY 2008-09. The performance of other major industries also registered significant growth except frozen food, sugar, tanning and finished leather, fertilizer, petroleum product, and engineering products. Small and cottage industries showed an upward trend in production during the first half of FY 2008-09 over the same period of the previous year. Quantum Index of Industrial Production (QIP) which has been estimated for estimating value added of large and medium scale industries showed a growth of 5.65 percent in FY2008-09. The Quarterly Index of Industrial Production for small scale manufacturing industries also showed significant growth. This sub-sector contributes about 25-30 percent of the total output of the manufacturing sector. The productions of this sub-sector mostly depend on indigenous raw materials and are generally immune to external shocks. It is expected that the small scale industries will attain 6.59 percent growth in FY 2008-09 compared to 7.10 percent in FY 2007-08.

Page | 18

Broad Sectoral Shares of GDP at Current & Constant

At current prices, the share of broad industry sector in total GDP is28.61 percent for FY 2008-09 which were 28.35 percent and 28.38 percent in FY 2007-08 and FY 2006-07 respectively. The contribution of the industry sector is steadily increasing. At constant prices, the share of broad industry sector in total GDP is 29.73 percent for FY 2008-09, up from 29.70 percent, and 29.45 percent in FY 2007-08 and FY 2006-07 respectively.

Page | 19

Bibliography
Bangladesh Bank Ministry of Finance Bangladesh Economic Review 2010 DEPENDENCE ON EXTERNAL FINANCE BY MANUFACTURINGSECTOR: EXAMINING THE MEASURE AND ITS PROPERTIES by - George M. von Furstenberg and Ulf von Kalckreuth Size Structure of Manufacturing Industry and\ Implications for Growth and Poverty - Bangladesh Country Paper Bangladesh Datasheet 2010 Bangladesh Bureau of Statistics Asian Development Bank

Page | 20