SME : A promising sector in Bangladesh

Small and medium enterprises (SME) loan is the financial support to small and medium sized enterprises. Its economic and social importance is well recognised in the world. The definition of SME is different in different countries depending on the nature and size of the enterprise. The European Union (EU) has defined an SME as legally independent company with no more than 500 employees. They consider SME by three different indicators; staff headcounts, annual sales, and assets. SME represent 99 per cent of all enterprises in the EU providing 90 million jobs. Bangladesh Bank defines the SME depending on total assets, number of employees as well as nature of business except public limited companies. In order to strengthening the activities of agri-loan and SMEs, an exchange of views among the Governor of Bangladesh Bank and Managing Directors and Deputy Managing Directors of public and private commercial banks was held on October 29th at the Bangladesh Bank in Khulna. The meeting held deliberations on problems and prospects in expanding agri-loan and SME loan among the entrepreneurs including woman entrepreneurs. In the discussion, many points came up for the success of SME in Bangladesh. In Japan, Korea and Malayasia, the investment portfolio of SME is large and they are also increasing investment in small businesses. Due to recent increase in the cost of production in China, Vietnam, other countries of Asia; Japan is considering the prospect of SME in Bangladesh. In this respect, Bangladesh Bank is encouraging commercial banks to invest in SMEs in different fields. The lion part of the businesses in Bangladesh is small in size and nature. Considering the points in case of SME finance such as, requirement of small capital, short production period, less environmental pollution, lower income discrimination, creation of employment, eradication of poverty as well as increase of national income, the idea of finance in SMEs started in 2005 by the Bangladesh Bank. In this regard, a fund of Tk 1.0 billion was created under re-financing scheme for SME by making a separate division. Different commercial banks have achieved success by investing in SMEs in Bangladesh. Brac Bank has achieved an outstanding success in giving finance in SME. Following the success of SME, different donor agencies like Department for International Development (DFID), Asian Development Bank (ADB) and the Japan International Cooperation Agency (JICA) have showed interest for financing in this sector. Bangladesh Bank has suggested to finance by making locally prospective new cluster adopting area approach to SME as well as woman entrepreneurs and to provide stimulus to the emergence of new enterprises. Bangladesh Bank further suggests the commercial banks for making SME dedicated desk, woman entrepreneurs' dedicated desk for quick discussion with the SME clients. With a view to achieving success of SME loans, Bangladesh Bank is wholesaling credit by the way of re-financing to the commercial banks. The potential fields for SME finance were identified as setting of 'chumki' on the dresses of ladies in Sirajgonj district, 'nokshi kantha'of Jamalpur district, flower farmers of Gadkhali under Sharsa upajila of Jessore district, vegetable farmers at Chowgacha under Jessore district, production of edible oil from rice polish in Pabna district and mushroom cultivation throughout the country. There is an increasing interest among commercial banks in extending credit to SME sector though there are some problems such as, Tax Identification Number (TIN) certificate is required if the loan limit is over Tk .05 million, high interest rate, lack of necessary grace period, transaction at least for 3 months in case of new entrepreneurs, compulsory guarantor of spouse in case of woman entrepreneurs. Moreover, the SME loans are being used in a suitable way in the appropriate field due to careful investment and strengthening of monitoring system by the commercial banks. As a success of SME loans in agriculture, the cultivation of vegetables particularly, bean by the farmers of chowgacha with collateral free agri-loan from a private bank was visited last year by the Governor of Bangladesh Bank along with a high official of the bank. It was observed that the life style of farmers of Chowgacha had been changing dramatically as the farmers' assets went on increasing. The bank achieved around 95 per cent target in disbursing loan out of its agriculture budget in 2010-2011. By cementing strong relation of the banker-customer for SME loans under collateral or collateral free scheme along with liberal terms and conditions, commercials banks have access to SME segment by selecting appropriate borrowers for the expansion of this sector which will play a pivotal role in mitigating the poverty level and income gap of the people of different strata as well as achievement of millennium goal of the government by 2021 as a whole. Dr Md Azadur Rahman Khan is Assistant Vice President of National Bank Ltd. He can be reached at email: azad_dec@yahoo.com