The term "Small Enterprise Financing" appeared in Bangladesh's literature as early as 2003, coinciding with the introduction of small and medium-sized enterprises (SMEs) in the business and financial spheres. Bangladesh Bank (BB) introduced SME credit policies and programmes in 2008-09 involving bank and non-bank financial institutions.
The definition of an SME varies extensively. In the financial domain, an SME is the cohort of clients with special demands traditionally outside the range of financial products offered by commercial banks. Conversely, those dealing with public policy may advocate support to smaller enterprises as an act of relocating resources to the smaller or 'poorer' stratum. On a macro-level, SMEs have broader implications than meets the eye. Since SMEs operate in a web of inter-industry linkages, poor performances of SMEs may translate to a much greater loss in the overall economy. Due to a long history of success in microfinance, there exists a demand of increasing loan sizes for investments in small and cottage enterprises by the group of clients previously engaged in domestic income-generating activities.
Although understandings of an SME frequently overlap, a clear operational definition should be agreed upon, with regard to whom the development programmes or funding agencies want to target. Inconsistency and chaos would ensue if the judgement of target recipients is left to the discretion of numerous ground-level workers with various agendas. Formulation of a definition can be approached from two angles - it could either involve a check-list covering various dimensions and an entity fitting those categories would be considered a valid recipient of benefits. Or, the product itself could be designed according to the wishes of its target group. For instance, a programme aiming to distribute clothing amongst the homeless could either identify those having no indoor space to sleep, or could offer inferior clothing unwanted by anyone outside the target group.
Being aligned with Bangladesh's National Industrial Policy for its SME programmes and policies, Bangladesh Bank follows the former formula. The bank advises financial institutions to use certain cut-off points in terms of replacement cost of fixed asset (land and building excepted) and the number of workers employed - to determine the size of an enterprise. Nevertheless, the definition of 'enterprise' itself has gone through some evolution accounted by the Ministry of Industries' (MOI). Despite National Industrial Policy (2016) moving away from 'trading', a large chunk of SME loans continues to be disbursed to businesses (retail or wholesale trading). Moreover, enterprises having a high volume of sales exist in spite of employing few workers. Regardless of such unexpected glitches, those enterprises would still be eligible for the benefits of SME credit programmes.
Other than promoting SMEs, development programmes have a secondary scheme in the process. Through the SMEDP, ADB listed the reduction of regional poverty inequality and empowerment of women as other goals to be realised. Therefore, BB urges financial institutions to include women entrepreneurs in their lending programmes. Previously, microfinance and women-based asset transfer programmes have seen a success in women's empowerment in various degrees. Contextually, women-led enterprises are defined when the majority ownership is controlled by women. However, several of such women-led enterprises are "only in name" while registration and de facto ownership not belonging to them.
Looking into the future, an exercise to refine the definition of SME to allow for more effective targeting can be considered. A study may be undertaken to identify observable characteristics of enterprises that allow intermediary financial institutions to locate targets (as intended by the BB and/or MOI) with precision. Alternatively, it may be worthwhile to rethink the modus operandi of SME programmes to better address the concerns of MOI. Priority sectors with narrowly defined economic activities or locations may be identified, and through innovative financing support can be extended to SMEs at the first stages of the value chain. While offering financial services through commercial banks has, to a certain extent, worked to aid SMEs, a combination of financial and non-financial support may be necessary for infrastructural development and capacity building in the long-run.
The writer is a Research Associate at Economic Research Group (ERG) and has benefited from a recent ERG undertaking that dealt with SME-credit policies. [email protected]
