Problems and prospects of SMEs in Bangladesh

An investment climate assessment indicates that scarcity of certain resources (energy, finance, land, and labor skills) has started to put a strain on Bangladesh's further growth and productivity gains. This is largely so because of the fact that factor markets have not risen up to the challenge efficiently reallocating resources to the highest productivity entities within the economy. As a result of inefficient reallocation of resources, especially restricted access to finance to the productive and poverty-reducing small and medium enterprises (SME) sector, the Bangladesh economy curtails its own productivity growth, income growth, and poverty reduction. The majority of firms in non-metropolitan areas of Bangladesh are SMEs. These are a key driver to reduce poverty in the country since they are responsible for generating rural non-farm activities-the source of more than 50% of employment and income for the rural population. Impediments of SME Development in Bangladesh are as follows: a. Resource scarcity: In Bangladesh, the scarcity of raw materials inhibits the ability of SME to be export oriented and limits its capacity to reach more advanced stages of international business. b. High employee turnover: Due to the limited growth of SME sector, most of the skilled employees leave SMEs. Levy (2003) observed that SMEs are knowledge creators but poor at knowledge retention. c. Absence of modern technology: One of the main barriers for the development of SME in Bangladesh is inadequate technologies. Many SMEs have failed to adopt modern technology. d. Poor physical infrastructure: Inadequate supply of necessary utilities like electricity, water, roads and highways hinders the growth of SME sector. e. Lack of information: It has been observed that SMEs have very limited use of information technology (IT). Accounting package is used by 1.0-2.0% of the SMEs. The use of computers is revealed by say 15% of the SMEs, while the use of the Internet for business purposes applies to say 8.0-10% of SMEs. f. Limited Access to Finance: Limited access to formal credit remains the strongest constraint on SMEs' growth prospects, in terms of a large supply-demand gap and scarce medium- and long-term credit. g. Lack of entrepreneurship skills: Conservative attitude towards risk, lack of vision, inability to make plan and implementing those hinder the growth of SMEs in Bangladesh. g. Access to Market and lack of awareness regarding the importance of marketing tool: For the SME, owing a retail space is very expensive in the major cities in Bangladesh. As a result, many customers are not interested to buy products and services from SMEs. Because they can't judge the quality until they physically examined the product. Most of the cases SMEs in Bangladesh are not able to use the Integrated Marketing Communication (IMC) tools. But these tools play the role of important stimulus to motivate the customers and retain them. The country does not have enough marketing capability and resources to invest in marketing. h. Lack of research and development (R&D) facilities: It is observed that investment in R&D is still negligible in the SME sector of Bangladesh. i. Fierce competition with the cheaper foreign goods: Fierce competition with the cheaper goods of China, Taiwan, Korea, India, and Thailand also pose a threat to SMEs in Bangladesh. To get rid of these problems, initiatives must be taken both by the public and private sectors. There are some short- and long-term recommendations in order to overcome such problems. Short term recommendations that are implementable by next one year are: 1. Providing tax holidays to new SMEs; 2. Restructuring and justifying import duties on raw materials and finished goods of SMEs; 3. Simplification of the process and procedures of VAT credit taking by the SME entrepreneurs; and 4. Active actions to stop under invoicing. Mid-term recommendations that are implementable by one to three year's period of time, are: 5. Ensuring electricity supply during production period or providing incentives for load shedding; 6. Ensuring quota for local products in public procurement; 7. Providing cooperative facility for marketing export of electrical products; and 8. Active action to ensure quality of imported products; Long-term recommendations that are implementable by five years time, are: 9. Establishing SME research center; 10. Establishing SME training and design center; 11. Imposing Intellectual Property (IP) law to protect innovators; 12. Ensuring qualitative raw materials for SMEs; 13. Facilitating export of SME products via Export Promotion Bureau (EPB); 14. Increasing use of information communication technology (ICT) and e-commerce; and 15. Providing collateral-free loan. Despite the problems persisting in areas noted above, the SMEs are playing a vital role and generating huge employment opportunities throughout the country. With huge hope and prospects, some important areas of activities in the SME sector are contributing a lot to help stabilise our economic growth and promote overall national development. The SMEs not only constitute the largest segment of productive enterprises comprising a vast majority of industrial establishments but also add to the national gross domestic product (GDP) and generate revenues, net incomes and profits among the enterprises in the private sector. Here, the most difficult task is to give any estimate of the SME contributions to industrial output or national GDP due to scarcity of national level data on these variables. Of the recent available estimates obtained from two major micro surveys, both ICG study and SEDF survey suggest the SME contributions to manufacturing value-added in the national GDP to be within the range of 20 to 25 per cent. As we know, the SMEs are growing over time and contributing to enterprise creation, private entrepreneurship development, and employment generation. The relative SME share in manufacturing value added to the GDP is seen to vary between 28 to 30 per cent. There were approximately six million SMEs, which included enterprises with up to 100 workers employing a total of 31 million people, equivalent to 40 per cent of the population of our country of age 15 years and above. Some private survey also found that the industrial structure of SMEs consisted primarily of wholesale and retail trade and repairs (40 per cent), production and sale of agricultural goods (22 per cent), services (15 per cent), and manufacturing only (14 per cent). Quoting the informal estimates by the Planning Commission the number of medium enterprises (undefined) may be put at around 20,000 and that of small and cottage industries (SCIs,) between 100,000 and 150,000. The SME sector accounts for more than 80% of private establishments, approximately 80% of industrial units and employs 23% of the total labour force of the country, and about half of the gross industrial output. The estimates by Bangladesh Small & Cottage Industries Corporation (BSCIC) suggest that there are currently 55,916 small industries throughout the country. According to a study conducted by Canadian International Development Association (CIDA),there are about 6.0 million SMEs in Bangladesh. In Bangladesh, some of those activities in the SME sector that have the prospects and potential for a possible boom if proper nursing is given, can be noted as follows: 1. Ready-made garments: The ready-made garments sub-sector is the largest foreign exchange earner in Bangladesh, accounting for about 79% of total export earnings and 12% of GDP in 2009. There have been more than 4,000 RMG units, which generate 2.5 million jobs and are the largest employer for women. The sector can be divided into two broad categories-woven and knit products. Knitwear garment exports have been increasing since the early 1990s and now surpass those of woven exports. The United States and the European Union (EU) are the largest importers of Bangladeshi ready-made garment products, accounting for more than 90% of total ready-made garment exports. Besides, fashion design and fashion wears are the booming ones now-a-days. 2. Jute: Jute and jute-related industries are an important part of Bangladesh's heritage. The sector has contributed significantly to the country's economic development. About 20% of the country's total population is directly or indirectly involved in the sector, and jute production accounts for an average 4.0% of total GDP. It was once the highest foreign reserve earner, contributing to over 80% of Bangladesh's foreign exchange reserves. From the 1980s, its share began to decline as synthetic substitutes and artificial fibers emerged. Although jute export has declined to less than 5.0% of total export earnings, it is still a major sector of the national economy. Its foreign exchange earnings stand reach about $300 million, in value terms, annually, and it is one of the major cash crops in the country. 3. Leather goods: The leather goods subsector is another key economic sector in Bangladesh. It is smaller in size, employment, and business investment than the textile sector-contributing 0.31% to gross domestic product (GDP) in FY2003 (at constant prices). All the leather goods businesses are privately owned and a few belong to multinational corporations. A great majority of them employs fewer than 50 people and are export-oriented. 4. Agribusiness: Bangladesh is predominantly an agricultural country. Agriculture is the engine of growth of the economy. The overall contribution of the broad agriculture sector is estimated at 20.60% of GDP in fiscal year (FY) 2008-2009. In FY 2008-09, Bangladesh earned USS870.11 million by exporting agricultural products which is 5.59 per cent of total export earning. In FY2007-FY2008, export earnings from agricultural products were $987.56 million-7.0% of total export earnings. Agribusiness is related to the commercial production of agricultural commodities (including crops, livestock, fisheries, and forestry); transformation of agricultural commodities into products; provision of inputs to the production of agricultural commodities (including planting and genetic material, agrochemicals, equipment, and pharmaceuticals); and the marketing and distribution of agricultural commodities and products. 5. Plastic products: There are about 3,000 plastic businesses in Bangladesh. Over a half of them have less than 24 employees. The country has seen a dramatic increase in plastic exports in recent years. It contributed to foreign exchange revenues worth several billion takas and has the potential to become one of the country's top 10 exports. More than 200,000 skilled and unskilled people are employed in this sector, which manufactures moldings and other products for garment accessories, toys, toothbrushes, ballpoint pens, shoes, pharmaceutical packages, bottles, pipes, and plastic wrapping. Bangladeshi plastic goods are exported to 23 countries. The plastic industry has played an important role as a backward linkage operation for various upstream industry sectors such as garments, medicine, and food processing. 6. Information and communication technology: Telephone density in Bangladesh is among the lowest in the world. Telephone coverage has been improved by the Grameen Phone, but there is still room for further growth. Bangladesh's information and communication technology (ICT) subsector is not large, estimated at less than $200 million, but it is growing rapidly at about 20% a year. SME ICT businesses are : " support and consulting services for various types of ICT work such as internet services providers; " contracting and technical and services support for mobile phone and fixed-line carriers; " software development; and " other ICT-related businesses such as data processing, automation, and call centers. Private sector involvement, particularly that of the SMEs, is an integral part of this development process. The ICT sector contributes to the overall development process and poverty alleviation efforts through employment generation, economic expansion, and exports. The rapid expansion of mobile telephony and the internet greatly facilitate the business process and economic efficiency. 7. Light engineering: The light engineering sub-sector supports basic industry functions in Bangladesh. The subsector consists of about 7,000 firms, employs 800,000 persons, and generates annual revenue of about $1.6 billion or about 2.0% of annual GDP. The sub-sector manufactures a wide variety of parts, tools and light machinery that supply to the national industries across the board such as agriculture, food processing, chemical, transport, construction and others. Improvement of operating efficiency, industry linkage, investment, and access to finance are among the important steps to help combat the situation about the present state of somewhat depressed domestic and international demand. 8. Handicrafts: Handicrafts are produced by family-based small manufacturing units to produce articles such as baskets, pottery, wall hangings, handbags, carpets, and embroidered quilts. Handicrafts and cottage industries contribute to an important part of foreign exchange earnings, generating employment and creating opportunities to utilize indigenous natural resources. Members of craft families or cooperatives are employed in the handicraft production units at the cottage level, providing the necessary linkages to SMEs. The handicraft sector is considered a key area for future expansion in terms of export potential. With the low cost of labour and rich cultural heritage in Bangladesh, the subsector has a clear advantage in the world market. Besides, ceramics, jewelries (imitations'), toys, cosmetics and toiletries, electronics software-development; agro-processingagri-businessplantation, agriculture specialist farmingtissue-culture; healthcare & diagnostics; pharmaceuticalscosmeticstoiletries; shipbuilding, renewable energy (solar power, windmill), basic chemicalsdye and chemicals, ICT and ICT-based services readymade garments industry, active pharmaceuticals ingredient industry and radio pharmaceuticals industry, furniture, energy efficient appliancesmanufacturing of electronic goodsdevelopment of electronic materials, frozen fish industry, tea industry, home textiles etc., are also the potentially booming fields of SME activities. The writer is Chief Executive Officer (CEO) and Managing Director, Small & Medium Enterprise (SME) Foundation