SME Development

Small and Medium Enterprises (SMEs) constitute the dominant source of industrial employment in Bangladesh (80%), and about 90% of the industrial units fall into this category. SMEs occupy a crucial position in the economy of Bangladesh as they have a significant role in generating growth and creating employment. Of the manufacturing output forty per cent is contributed by SMEs and this sector alone employs about eighty per cent of the industrial workforce. SMEs operate in various sectors, most notably in the garments industry, which accounts for about seventy five percent of the country's exports, directly employ over 1.5 million workers (mostly women) and indirectly supports employment of up to 15 million. SMEs generate employment and income directly and through backward linkages to micro-enterprise units and forward linkages to large industries. SMEs are also active in the service sector and agriculture, where they supply vital farm inputs and market agricultural produces. A growing number of SMEs are exporters and many producers of export products use raw materials, components, and ancillary services supplied by or contracted to SMEs. According to the Industrial Policy -2010 of Bangladesh definition of SMEs: Medium Industry In manufacturing, medium industry will be deemed to comprise enterprises with either the value (replacement cost) of fixed assets excluding land and building between Tk. 100 million and Tk. 300 million, or with between 100 and 250 workers. For services, 'medium industry' will correspond to enterprises with either the value (replacement cost) of fixed assets excluding land and building between Tk. 10 million and Tk. 150 million, or with between 50 and 100 workers. If on one criterion, a firm fall into the 'medium' category, while it falls into 'large' category based on the other criterion, the firm will be deemed as in the 'large' category. Small Industry In manufacturing, small industry will be deemed to comprise enterprises with either the value (replacement cost) of fixed assets excluding land and building between Tk. 5 million and Tk. 100 million, or with between 25 and 99 workers. For services, 'small industry' will correspond to enterprises with either the value (replacement cost) of fixed assets excluding land and building between Tk. 0.5 million and Tk. 10 million, or with between 10 and 25 workers. If on one criterion, a firm fall into the 'small' category, while it falls into 'medium' category based on the other criterion, the firm will be deemed as in the 'medium' category. Sectoral coverage of SMEs: Food & agro based and agro support industries , Leather and leather products, Textile ancillaries, Garment ancillaries, Electrical and Electronic products, Instrumentation, Computer & computer software, Crockeries, Kitchen ware, Surgical & medical appliances and equipments, Light engineering, Jute products, Jute & textile machinery and spares, Animal & Fish feed industries, Waste recycling industries, Handmade & recycled Paper Industries, Pharmaceuticals Industries, Packaging industries, Chemical industries, Composite material products, Plastic and glass products, Electrical fittings, Fruit and Vegetables processing Industries, Fruit Juice Processing Tetra pack, etc. SMEs in Bangladesh face a number of difficulties in their business: l Limited access to short term and long term finance and working capital l Limited access to necessary technologies due to lack of information and know-how, and high prices l In-sufficient infrastructure and utilities (power, gas, port services, high transportation costs, laboratory testing facilities etc.) l Inadequate skills in the fields of production, business management and marketing l Inadequate access to information and in-sufficient business development services l lack of skills and capacity for product diversification l Inadequate research and development l Tariff anomalies, high custom duties and complicated and cumbersome VAT measures. l High interest rates and charges in the banking sector l Inadequate skilled and semi skilled work force to support the industry Brief outlines of some major constraints to SMEs development in Bangladesh: Clearance from the Department of Environment: All industries are also required to obtain a certificate from the Department of Environment in respect of proper arrangement for anti-pollution and safety measures. Here again, the requirements should be clearly stated for the type and size categories of industry and the investor should be allowed to go ahead with investment on the basis of the undertaking that the requirements will be complied with. Access to Finance: SMEs encounter great difficulties while raising fixed and working capital because of the reluctance of banks to provide loans to SMEs. The loan application forms for investment financing from banks are long, tedious, and redundant. Collateral Requirements: One of the main factors that have hampered flow of institutional finance into SMEs is banks' pre-occupation with collateral based lending. Traditionally banks have used fixed asset ownership, particularly land ownership as the basis for judging credit-worthiness. The solution to this problem lies in banks seeking deposit relationship with owners of SMEs and using cash flow rather than asset ownership as the criterion for credit-worthiness. An expanded credit guarantee scheme will have to play a vital role in this regard. Project Preparation and Evaluation: The first problem entrepreneur's face in seeking institutional finance is with regard to preparation of the project proposal. In spite of directives from the central bank to follow standardized procedure, the loan application process has still remained lengthy and cumbersome. The entrepreneur often lacks the ability to formulate a proper project proposal. Even when he prepares the proposal drawing on outside expert services, there is no guarantee that the proposal will be evaluated properly as the financial institutions themselves lack adequate capability for proper project evaluation. Recommendations for Development of SMEs : The proposed strategies and policies to be implemented on short term, medium term & long term basis. l Periodical Professional Training Courses for SMEs: Periodical professional training courses should be arranged for technical staff of SMEs. Moreover training in management of small enterprises and efficient marketing can also be provided Training, Seminar, workshop should be organized for the development SMEs capabilities to acquire enhanced knowledge and skills about how to choose, use and improve technology. l Extensive Financial Support to SMEs: Various banks, financing institutions, NGOs may further increase its technical and financial support to SMEs through its various financing facilities and windows, which may significantly contribute to the creation and development of SMEs. l Seeking International Financing: Various international donor agencybank extends financing to SM through National Development Financing Institutions (NDFls). It is found that they are not exploring properly. The procedure of those donor agenciesbanks for loan facilities to SMEs through NDFls may review and term and conditions may be examined in order to make international financing more accessible to SMEs in the country. l Alleviating Poverty through SMEs Development: There is great scope of alleviating poverty through SME development. So poverty alleviation strategies and policies for SMEs should be developed, in order to provide job opportunities and enhance living standards for large segment of this poverty ridden country. l Expansion and Diversification of SMEs: Bangladesh's industrial sector needs expansion and diversification. For this purpose, growth of SMEs is essential. However, SMEs have to equip themselves with modern technologies and effectively use them to raise their production efficiency. l Contracting Exchange Schemes among large and small enterprises: In order to develop sub-contracting among large and small enterprises among member countries, Sub-Contracting Exchange Schemes can be launched. Professional Associations can set-up such an establishment. They may collect information about engineering industries components, and what vendor industries can provide such components. These way inter-firm linkages can be expanded around the country. l Implementation and Monitoring of Policy Measures for SMEs. : Only policy prescription is not the end, if it is not implemented through different measures. How far policy measures are implemented, along with, what effect desired or not - such policy measures has had on the development of SMEs should also be monitored from time to time. This monitoring will provide feed back for taking corrective actions, if necessary, to sure desired effect of the policy adopted. An independent body should do the monitoring of implementation of the policy measures. l Developing Institutional Network through Public-Private Partnership: The design of most government agencies appears to be overly bureaucratic and unsuitable for effectively supporting SMEs in Bangladesh. As such, re-organization of the design of these agencies has for long been overdue. Public-private sector partnership, by redesigning the existing public agencies, could be developed, developing appropriate institutional network. l Establishment of R&D Institute for Enterprise and Entrepreneurship Development: In a country like Bangladesh, where entrepreneurial initiative is rare and shy, a separate institute for enterprise and entrepreneurship development, training and research should be developed. l Technology transfer is of vital importance for development of SMEs. Technology transfer through various means and reverse engineering to be arranged through Government and private levels. l Women Entrepreneurship: Women entrepreneurship should be encouraged. All the moment women entrepreneurs are limited in number. As such, policy should be designed to encourage more and more men to be involved in entrepreneurial endeavors. FBCCI Research Division