Promoting entrepreneurship in SME sector

Small and medium enterprises (SMEs) are now deemed the engine of growth. National governance for SMEs relates to national policies and action plans encompassing financing, technical and technological support, tax incentives, research, transparent record keeping and business support services. Corporate governance, on the other hand, is an entity's internal style of operation that helps it achieve its ultimate goal. If the national governance is updated keeping in mind the SMEs, innovative investment products from the financial sector will also be available for the entrepreneurs. In an environment of streamlined national governance for SMEs, corporate governance will act as a catalyst to accelerate SMEs' growth.
To encourage an organisation's investment in a traditional business is sponsorship, not entrepreneurship. Entrepreneurs must have the capacity of innovation in the areas of product designing, market penetration or creation of new markets and gaining their competitive advantage through product and market leadership. Development partners and international agencies like International Finance Corporation (IFC), Asian Development Bank (ADB), Japanese International Cooperation Agency (JICA) and many others may provide financial and technical support to the government in the area of national governance for SMEs so that it leaves an impact on the life of the people at the Bottom of the Pyramid (BOP). What the development partners want is a safe environment for putting their money in. Unless policies and action plans of the government are friendly to the investors and the SMEs, they will not be interested in supporting or investing in the SMEs. We need to work in the following areas if we want to promote entrepreneurship in the SME sector:
POLICY FOR ACCESS TO FINANCE: Access to finance is a big challenge for SMEs.  SME policy should focus on the area of easy access to finance encompassing private equity, venture capital, banks and financial institutions and the capital market. Access to finance from different sources depending on the situation of an enterprise and the stage of its growth may be required.
Banks and financial institutions generally do not invest without any collateral. When there is no collateral, there is 'no safeguard'. So, traditional investment does not flow into the SME sector in sufficient amount due to the lack of collateral. Some SMEs may have the collateral, but most of them do not have it.
The entrepreneur of a start-up business needs seed money. None but venture capitalists can support it. But they need an investment policy so that they can invest comfortably with some safety measures put in place. An entity may tie-up with a venture capitalist for raising its fund from the capital market for business expansion. In that case the Initial Public Offering (IPO) rules should be made more flexible to attract the venture capitalists so that they can have an exit plan.
Private equity funds from foreign investors in the form of foreign direct investment (FDI) may also be attracted. They will invest, if they find an easy exit route like the IPO or trade sale at a fair value determined under the valuation method.
ACCESS TO FINANCE AND TECHNOLOGY: The Bangladesh Bank has taken initiatives to finance SMEs with Tk 887.53 billion (88,753 crore) set aside in the form of budgetary allocation for disbursement by all banks and financial institutions. The budget is higher than that in any of the previous years. Still this is much lower than that required by the six million SMEs as projected by the MIDAS in 2001. But banks and FIs are more selective in financing SMEs, mainly due to the lack of collateral and credibility of financial statements.
So the government should take initiative to pump money into the SMEs either at subsidised interest rate like the refinance scheme or in the form of private equity under a 'SME Fund'. Development partners can help create the fund to be managed by a fund manager for investing in SMEs against a certain amount of management fees.
Our enterprises are not technology-driven. Sometimes, without the updated technology the operations may not be cost-effective and fail to achieve the competitive advantage. Without policy support and incentives from the government, the adoption of new technology may be a hurdle for the SMEs.
SUPPORT TO ENTREPRENEURIAL LEADERSHIP: Entrepreneurial leadership is the quality of organising human resources for business, seizing the available opportunities, taking personal responsibility and managing any change for the benefit of the organisation. It is essential for emergence of entrepreneurs. The Dhaka Chamber of Commerce and Industry (DCCI) and the Bangladesh Bank (BB) have taken initiatives to promote entrepreneurship and innovation this year. It is really a good groundwork for finding out entrepreneurs. Such initiatives should continue at the national level.
LEGAL FRAMEWORK FOR PRIVATE EQUITY AND VENTURE CAPITAL: To ensure access to finance, private equity may play an effective role in governing emerging SMEs. None but venture capitalists may invest in a start-up business, if the venture is found innovative, coachable and has growth potential. Such private equity and venture capital, termed the shadow financial system, must have a legal framework for effective regulation so that any unregulated financial system cannot pose a threat to the stability of the financial system in the country.
CORPORATE GOVERNANCE: Corporate governance is not only required for any Public Interest Enterprise (PIE). Corporate governance can record historical performance of the entity. Without this business may fall all of a sudden with the loss of investors' money. So, there should be a simple corporate governance guideline for SMEs.
TAX INCENTIVES FOR SMES AND INVESTORS TO SMES: SMEs get limited tax incentives and SME financiers do not get any tax incentive. Considering the economic vibrancy of the sector, both SMEs and their financiers should be brought under the purview of tax incentives.
SME DATABASE: In order to do research or reach any decision on essential services as required for SMEs' development, there should be a national database on SMEs. This can be used for research or any specific purpose like financial planning and providing technical, technological, marketing, legal and financial support, tax incentives, etc. The database will help the government, entrepreneurs and investors take the right decision and thus aid sustainable growth of SMEs.
SME ADVISORY AND SUPPORT CENTRE: The SME Foundation has the responsibility to provide advisory services to the SMEs. Different development partners have plans to provide such business support services in different ways with the government or SME Foundation acting as a coordinator for providing such services the way the entrepreneurs need.  
SME INSURANCE: Goods and assets, excepting crop and livestock, can now be insured. As agriculture sector's contribution to the gross domestic product (GDP) is more than 19.29 per cent with crops accounting for 13.44 per cent directly, venture capitalists may regard it as a hot sector for boosting investments. But due to natural calamities and uncertainties involved with the production of crops and livestock, the insurance facilities may be introduced to save the farms, investments and investors. There was a declaration on crop insurance in the budget for the fiscal year 2012-13. But it has not yet been materialised.
CAPACITY BUILDING: Entrepreneurial leadership is not being addressed appropriately. So, the capacity is not increasing in line with the expected growth. If the government takes initiatives, development partners may come up to support financially and/or technically to build the capacity under the private equity fund management.
RESOLUTION OF DEFINITION CONFLICT: Most of the countries, including Bangladesh, have defined SMEs based on a threshold of the value of their plants, machinery and manpower. Depending on the size of the economy, the threshold may be smaller or larger while the factors remain almost the same.
The International Accounting Standard Board (IASB) has issued a definition acceptable to all communities and countries. The definition is transparent, acceptable for all sizes of economy and free from any contradiction in the event of nationwide implementation. The IASB defines an SME in the 'IFRS for SMEs' as an enterprise which
- Does not have public accountability
- Publishes general purpose financial statements
An entity is publicly accountable, if
- Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over the counter market including local and regional markets); or
- It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary business.
Whatever the definition is in different countries depending on different sizes of the threshold, most of the SMEs around the world have no public accountability because of their own source of financing or the government's special promotional financing or venture capitalist financing. To ensure uniformity in the definition across the globe, the IASB has termed this type of organisations as "Non-Publicly Accountable Entity (NPAE).'
As the term 'SME' is used globally, the IASB has resolved to use the term SME in place of Non-Publicly Accountable Entity (NPAE).
IMPLEMENTATION OF BFRS FOR SMES: Most of the SMEs in Bangladesh are proprietorship or partnership ventures having no obligation to maintain accounts excepting for income tax requirement. So, they need audited accounts and submit them to the tax authority for the tax purpose only. Accounts are essential for each entity to plan its growth, even if it is not mandatory as per law. The Institute of Chartered Accountants of Bangladesh (ICAB) has adopted the Bangladesh Financial Reporting Standard (BFRS) for SMEs. Unless the SMEs are compliant with the BFRS in record-keeping and preparing financial statements, they should not be qualified for any credit or capital and no formal or informal financier will finance those SMEs.

The writer is an Associate Member of ICAB and Head of Finance of Venture Investment Partners Bangladesh Ltd. (VIPB).
 roy_dipok@yahoo.com