Small steps, giant leaps?

The labour-intensive SME sector is crucial to Bangladesh's economy, driving job creation, economic diversification, innovation, and support for larger enterprises while fostering social stability and sustainability. This sector comprises cottage, micro, small, and medium enterprises, usually defined by a small workforce, minimal fixed assets, low investment, and low turnover. SMEs play a significant role in the country's industrial development, with the Bangladesh Bureau of Statistics (BBS) reporting that micro, small, and medium manufacturing entities make up 36.38 per cent, 50.54 per cent, and 6.89 per cent of the sector respectively-- together accounting for 93.81 per cent of total manufacturing and 32.85 per cent of the workforce. In FY22, they contributed 38.51 per cent to value addition and constituted 24.45 per cent of GDP, up from 23.36 per cent in FY21. The COVID-19 pandemic severely impacted SMEs, leading to widespread closures and significant capital losses for entrepreneurs.

Building on the SME Strategy Framework-2005 and the National Industrial Policy-2016, the government adopted the SME Policy 2019 to enhance the SME sector's dynamism by increasing efficiency, creating a conducive business environment, facilitating access to finance, developing skills, enhancing marketing, upgrading technology and innovation, conserving environment, refining competitiveness, and generating employment. This policy aims to increase the SME's contribution to GDP from 25per cent to 32 per cent by June 2024, aligning with national development goals. To implement this policy, strategies for institutional, legal, and financial reform were considered, focusing on enhancing access to finance, technology, markets, education, training, and business support services. However, the sector faces challenges, including limited credit access, high borrowing costs, collateral requirements, inadequate infrastructure, and regulatory barriers, all exacerbated by the COVID-19 pandemic.
As of 2023, Bangladesh's GDP was approximately Tk 4,490,84 billion, with SME sector investments at Tk 275.60 billion, constituting just 0.61 per cent of GDP. This low percentage indicates that without significant interventions, real growth in the SME sector may remain limited. A July 2024 report from the Monetary Policy Department of Bangladesh Bank revealed a notable increase in loan disbursement for Small Scale Cottage Industries (SSCI) from FY 2020 to FY 2023, while growth in Medium Scale Industries (MSI) remained limited. MSI loans rose from Tk 81.39 billion in FY 2020 to Tk 90.73 billion in FY 2023. In contrast, SSCI loans surged from Tk 64.62 billion to Tk 184.86 billion in FY23.. The recovery rate for MSI loans stands at 96.80 per cent, showing strong borrower repayment behaviour. Even more impressive, SSCI loans have a recovery rate of 134.26 per cent, indicating full repayment with interest, which highlights a robust financial environment in the SME sector. Meanwhile, the loan recovery rate for Large Scale Industries (LSI) was 89.82 per cent, underscoring the stronger performance of SMEs compared to larger industries. It is essential to critically review the SME Policy-2019, as despite the sector's immense potential, SMEs encounter significant challenges such as operational difficulties, financing issues, and employability concerns. The country has not fully realised the intended outcomes of this policy.
The SME Policy 2019 aims to establish a structured support framework with a time-bound action plan to coordinate efforts between the government and private sector, thereby enhancing the SME sector's GDP contribution and reducing poverty. However, it has not met its objectives. The policy lacks a solid foundation for identifying specific problems or their root causes. Effective public policy requires a deep understanding of these issues to address them directly rather than merely tackling surface symptoms. Analysing root causes allows for prioritisation of impactful factors and better resource allocation, resulting in sustainable solutions. The SME Policy 2019 seems to overlook a comprehensive analysis of the various policy options necessary for sustainable solutions. Evaluating these options is essential for identifying interventions that directly tackle the root causes, which is crucial for devising an effective, sustainable long-term policy.
The policy targets to raise the sector's GDP contribution from 25 per cent to 32 per cent. In 2019, Bangladesh's GDP was US$ 351.2 billion registering a 7 per cent increase amounting to $24.58 billion. This goal is ambitious and challenging to achieve between July 2019 and June 2024 due to economic conditions, government support, and the sector's capacity. Setting realistic and relevant goals is vital for an effective National SME policy, as they encourage stakeholder engagement, optimise resource allocation, facilitate evaluation, and ensure long-term sustainability. While a strategy for implementing the 11 goals of the SME Policy 2019 has been developed, it lacks specific, measurable, achievable, relevant, and time-bound (SMART) indicators for monitoring progress. SMART indicators provide clear benchmarks for assessing policy effectiveness, improving resource allocation, and informing decision-making. They also enhance accountability, ensure transparency, and foster continuous improvement. For example, useful indicators for measuring Goal 1 include: a) number of simplified administrative procedures for SME entrepreneurship; b) amount of domestic and foreign investment in the SME sector; c) SME's access to finance (availability and affordability of credit); d) Ease of Doing Business ranking; and e) number of trained personnel in SME entrepreneurship (capacity building).
A robust implementation roadmap is crucial for effectively executing a policy, as interconnected activities can lead to delays. However, the SME Policy 2019 lacks such a roadmap. Additionally, monitoring, evaluation, and review mechanisms are not functioning properly, hindering the policy's continued effectiveness. To meet the policy objectives, coordinated actions across organisational, financial, non-financial, and legal reforms are essential for smoother SME operations. A structured implementation plan will enhance efficiency, improve effectiveness, address potential challenges, increase accountability, and foster better stakeholder engagement through optimal resource utilisation.
The Asian Development Bank (ADB) reported that SMEs account for an average of 42 per cent of GDP or manufacturing value added in ASM countries. In India, China, and Japan, SMEs contribute 80 per cent, 60 per cent, and 69.5 per cent to GDP respectively. Germany's SMEs rank second globally in employment and value addition. Micro enterprises make up about 82 per cent of employment and contribute around 17 per cent to value addition. SMEs also significantly impact trade, with those in the People's Republic of China (PRC) and India representing over 40 per cent of total export values, followed by Thailand (26 per cent), the Republic of Korea (19 per cent), and Indonesia (16 per cent). Researchers find some relevant factors that facilitate attainment of SDG leadership in SMEs including shared vision, long-term perspective, co-creation, shared responsibility, empowering people, eco-centric values, creativity and innovation, bonding and trust, knowledge sharing, strategic adaption, and progressive culture.
The future of Small and Medium Enterprises (SMEs) is influenced by various dynamics, including economic trends, formalisation of micro-enterprises, technological advancements, globalisation, green initiatives, sustainability, and evolving policies. To develop a new National SME Policy, the following recommendations may be considered: a) Identifying problems and their root causes; b) Setting realistic goals based on these issues; c) Analysing policy options for sustainable solutions; d) Establishing SMART indicators and a monitoring and evaluation framework to review progress periodically; and e) Creating a coordinated implementation plan to optimise resources for effective execution.
Fostering a vibrant SME sector requires balancing small, incremental policy improvements with bold, transformative investments in technology. Gradual enhancements can lay the groundwork for more ambitious initiatives, while decisive actions can drive significant changes that promote growth and resilience in the SME sector.

Dr Md Abdul Latif is Additional Director, Bangladesh Institute of Governance and Management (BIGM). [email protected]