The identification of micro, small, and medium-sized enterprises (MSMEs) in Bangladesh, as in many other countries, is primarily based on criteria such as the number of employees, turnover, and assets. However, MSMEs encompass diverse business models and performance levels, which are often overlooked. Under the legal definition in Bangladesh, many medium enterprises (MEs), especially those involved with trading, surpass the MSME turnover threshold, leading financiers to categorise them as corporate enterprises. Yet, based on their performance and sectoral focus, these businesses should still be considered medium enterprises rather than large corporates.
In many cases, MSMEs also struggle to attract attention from financiers. A survey conducted by the Alliance for Financial Inclusion (AFI) in 2017, involving 28 member countries of the SMEF Working Group, highlighted that sectoral concentration can be an important factor in defining MSMEs. Thus, a redefinition of MSMEs-taking into account business models, sectoral concentrations, and performance-could significantly enhance the development of the MSME sector. Additionally, the financing limits for MSMEs must be reconfigured to reduce the financing gap.
MSMEs today are the future's corporate enterprises. According to McKinsey analysis and an article published by the World Economic Forum, MSMEs account for 90 per cent of global businesses but often struggle with productivity when compared to larger companies, despite their crucial role in driving economic growth. In Bangladesh, many MSMEs operate informally. High cash intensity, concerns about regular tax submissions, and the lack of banking infrastructure in remote areas deter many MSMEs from engaging with formal banking systems.
The issue is further compounded by inflation, with business earnings failing to keep pace with rising costs. After adjusting for inflation, many MSMEs see a decline in purchasing power, forcing them to view taxes as an additional burden. As a result, they tend to avoid banks unless financing is urgently needed. In contrast, developed economies often have banks that provide financial advisory services to MSMEs. In Bangladesh, MSMEs also expect such advisory services from their bankers, but many receive minimal support as bankers tend to focus on expanding their financing portfolios and recovering funds from this market.
To promote inclusive MSME participation in the financial sector, it is crucial to redefining MSMEs under the National Industrial Policy. Furthermore, banks and financial institutions should foster a culture of offering financial advisory services to MSMEs. Skilled bankers at service desks can do the job. By implementing these steps, banks will have better access to MSMEs, and a comprehensive national MSME database can be organised.
Sanjoy Pal
A banker and certified Financial Modeling & Valuation Analyst
Corporate Finance Institute, Canada.
pal.sanjoy25@gmail.com
