Country-status change has a price for businesses to pay. As Bangladesh approaches its graduation from least-developed country (LDC) status in 2026, concerns run high that its small and medium enterprises (SMEs) in particular may face challenges in exporting goods in a free-play regime with the rollback of preferences.
For decades, Bangladesh has been enjoying preferential trade terms under its LDC classification, most notably through the European Union's Everything But Arms (EBA) initiative, which grants duty-free access to almost all products. This has played a crucial role in boosting the country's export earnings, especially among SMEs. This trade privilege is set to expire in November 2026-unless the EU grants a short-term extension, which remains uncertain. In the absence of EBA, Bangladesh must secure access to the EU's Generalised Scheme of Preferences Plus (GSP+), or face tariffs ranging between 8.0 and 12 per cent.
But GSP+ comes with strict compliance requirements, including adherence to 27 international conventions on labour rights, human rights, environmental protection, and governance. Many fear these compliance burdens may overwhelm smaller businesses.
Experts familiar with the developments say without urgent reforms and a clear SME-readiness strategy, the sector could struggle to remain competitive post-graduation. They see the current interim government period as a critical opportunity to take stock of the SME landscape and develop meaningful policy interventions.
The SME sector of the economy currently contributes nearly 25 per cent of Bangladesh's export earnings and supports around 1,500 enterprises directly engaged in international trade. Many also serve as crucial suppliers to large industries and the domestic market.
Global buyers-especially in the EU-are increasingly demanding compliance with Environmental, Social, and Governance (ESG) standards, akin to Corporate Social Responsibility (CSR) frameworks, but giving more emphasis on the environment and governance issues.
For SMEs already operating on thin margins, the cost of meeting ESG benchmarks-such as ethical sourcing, workplace safety, and environmental compliance-is simply unaffordable without support.
The finance gap remains a longstanding and worsening problem facing the SMEs. Most commercial banks in Bangladesh prefer lending to large corporations, citing lower risk and larger loan sizes. Monitoring SME loans, they argue, is costly and burdensome. Only a few institutions, like BRAC Bank, stand out for SME-focused lending.
According to the most recent definitions, SMEs in manufacturing are defined as having assets between Tk 7.5 million and Tk 150 million, and up to Tk 500 million for medium-sized enterprises. These thresholds are lower for service-oriented firms.
While some SMEs have benefited by exploring foreign loans with lower interest, such financing is expected to dry up-or become more expensive-after the graduation. Compounding this, domestic interest rates are projected to remain elevated for the foreseeable future, until inflation cools to the 5.0-6.0-percent range. That means higher borrowing costs for SMEs at a time when they need to invest in upgrades, compliance, and innovation to remain competitive on the global market.
The stock market offers an alternative funding source, but it remains largely inaccessible to smaller firms. Only 11 SMEs have listed on the SME board since its launch over four years ago, highlighting regulatory and structural bottlenecks.
"SMEs already struggle to get loans without collateral," says a senior official at the SME Foundation. "The few credit-guarantee schemes that exist are not expanding fast enough to match rising demand."
In FY24, loan disbursement under the Cottage, Micro, Small, and Medium Enterprise (CMSME) category rose by just 0.46 per cent from the previous fiscal year-well below what's needed to sustain the sector's growth.
Despite the challenges, experts believe the upcoming LDC graduation could serve as a turning point, too, if handled wisely and a quick reform conducted. With targeted policy reforms, Bangladesh could use the transition to diversify its exports, formalize informal businesses, and expand the footprint of digital and service-based SMEs.
Idea-based business remains unexplored: There has been a lack of idea-based financing here. In China, loans can be secured against innovative business ideas, while Bangladesh's lending system remains entrenched entirely as asset-based.
Although venture capital and startup funding-platforms do exist, regulatory barriers make entry into and exit from such investments cumbersome for idea-based businesses.
"The legal and regulatory environment is not friendly to risk-taking," says a Dhaka-based startup CEO. "This discourages investment in promising but unproven ideas."
Freelance economy: a missed opportunity: Another underexplored area is Bangladesh's growing outsourcing and freelance economy. Thousands of freelancers provide IT and content services from home, earning millions of dollars in foreign exchange annually. Yet, these individuals often face high tax burdens and receive no export incentives. Those who grow large often shift operations abroad-for example, by opening offices in Singapore-to escape large tax burden.
"These brilliant freelancers are voiceless. They manage everything with their own skills but are excluded from the formal export structure," says one IT consultant.
Experts suggest integrating freelancers into SME structures and revising tax and export policies to encourage the formalization of their businesses. To address these gaps, experts recommend that Bangladesh Bank and relevant ministries create flexible and innovation-friendly financial instruments tailored to SMEs-especially those in services and tech sectors.
Current SME policies, many argue, are skewed toward larger corporates, while private banks often neglect their broader developmental role in favour of maximizing profits. "Banks forget they have a responsibility to the national economy-not just to shareholders," notes one policy analyst.
The real challenge, then, is not merely to survive LDC graduation-but to seize it as an opportunity to build a more inclusive, resilient, and competitive SME ecosystem.
jasimharoon@yahoo.com
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