notes the Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka highlighting the findings of a study of its Research Cell and recommending a set of measures for growth of the sector
Small and Medium Enterprises (SMEs) play an important role in the country's industrial sector, and thus in its economic development. They provide the largest number of employment and, indeed, constitute the foundation of the private sector. The SME sector is also considered both a thrust sector and a pillar of the country's economic growth.
A well developed SME sector is a pre-requisite to attaining higher growth of large-scale industry and the services sector as well. According to a CIDA report, quoted by a national daily in its issue on August 1, 2010, there are about 6.0 million SMEs in Bangladesh, which contribute about 50 per cent of the country's industrial output, employing about 80 per cent of its industrial labour force. SMEs are labour intensive and also need less capital. They are also significant contributors to backward linkage to heavy industries. About 60 to 65 per cent of SMEs are located outside the metropolitan areas of Dhaka and Chittagong, having easy access to labour and more conducive physical environment. Business costs are thus low in these areas. Therefore, SMEs grow overtime and contribute to enterprise creation, private entrepreneurship development and employment generation.
While the overall contribution of SMEs to the national economy is easily recognized, opinions differ on the extent of the contribution of this sector. Various categories of SMEs together contribute 80 to 85 per cent of industrial employment and 25 per cent of total civilian employment. Apart from employment generation, SMEs also contribute significantly to the creation of value added in manufacturing activity. Figures quoted by different sources ADB (2002), WB (2003), Planning Commission (2008) and BIDS (1998) on value added contributions of the SMEs are closely similar, varying between 45-50 per cent of the total manufacturing value added.
Despite their pre-eminence, SMEs have not been able to grow to their full potential in the country due to various constraints, such as the lack of medium and long-term credit, limited access to market opportunities, technology, expertise and information, lack of suitable incentives, inefficient and limited outreach of government services, and weak capacity among SME entrepreneurs in managing functional areas of business.
The Government is committed to promoting SMEs as vehicles for improvement in the quality of life, economic growth, and poverty reduction of the common people. To that end, the primary role of the government has been, firstly, that of a facilitator, removing policy obstacles and neutralizing market failures and, secondly, that of providing necessary promotional support. The SME Policy 2010 was formulated to assist in the achievement of Millennium Development Goals (MDGs) and targets. The Government constituted a National Taskforce on SME development to draw up a realistic strategy for promoting rapid growth and vigorous competitiveness among SMEs for accelerating the growth of the economy and reducing poverty in the country. The Government also constituted an SME Advisory Panel and an SME Foundation. Experienced specialists and entrepreneurs of relevance have been working together with the SME Cell of the Ministry of Industries (MOI).
In turn, the country's central bank, the Bangladesh Bank (BB), for the first time, released its 'Small and Medium Enterprise (SME) Credit Policies and Programmes' with a disbursement target of around Tk.240 billion for the calendar year 2010. The policy has focused on encouraging more women entrepreneurs in business and investment across the country. The central bank announced to set up a three-tier monitoring system to ensure growth of the SME sector in the country.
Implementation of employment and income generation and poverty reduction programmes and strategies has been a systematic and continuous effort in Bangladesh. Rapid and sustainable growth of SMEs is undoubtedly an important vehicle for accelerating national economic growth, which is an indispensable condition for raising employment and reducing poverty in the economy.
This overview of the development of SME Sector in Bangladesh also seeks to identify the SME sector's potential as means of raising employment and reducing poverty in the country and suggest measures to be taken in that regard.
Data have been gathered from both primary and secondary sources. The secondary data contained in available reports, documents and other published materials have been reviewed and analysed. Primary data have been collected by administering two sets of structured questionnaire, one for the employees of SMEs and another for the firms. The respondents were mainly the owners of the SME units and workers of the respective firms.
Definition of SME: The definition of SME given by Government of Bangladesh in its Industrial Policy 2010 in terms of size of capital and employment of labour has been followed in the paper.
In case of manufacturing, small industries/enterprises are those that have assets worth Tk 5.0 million (50 lakh) to Tk 100 million (10 crore) (excluding land and factory building, but including replacement value) and/or employ 25 to 99 workers. In services industry and business, small enterprises are defined as those that employ 10 to 25 workers and have assets worth Tk 0.5 million (5.0 lakh) to Tk 10 million (1.0 crore). On the other hand, in the manufacturing sector, industry/enterprises are considered as of medium size if they have assets worth Tk 100 million (10 crore) to Tk 300 million (30 crore) (excluding land and factory building, but including replacement value) or employ 100 to 250 workers. In services industry and businesses, the medium enterprises are those that employ 50 to 100 workers and have assets worth Tk 10 million (1.0 crore) to Tk 150 million (15 crore) (excluding land and factory building).
Industrial Policies and SME: Industrial Policies announced so far in Bangladesh since the mid-1980s have been designed to promote industrial growth, driven essentially by the private sector. Integration with the global economy is now high on the government's policy agenda. To that end, a number of changes have been brought in the country's policies, including in the industrial policy, for embracing economic as well as financial integration to achieve targeted growth.
Before independence, SMEs were seriously neglected and there was no policy support whatsoever. In the First Industrial Policy (1971-1975), SMEs were neither given any incentive nor did they face any threat. All major industries were nationalized following an inward looking policy. SME was defined as an enterprise having maximum investment of Tk.20.5 million. The Second Industrial Policy (1975-1981) did hardly have anything related to the development of the SME sector. There was, however, a planned shift from public to private sector led growth, heading towards a 'free enterprise system'. The Third Industrial Policy (1981-1990) was relatively SME friendly. However, the policy remained only on paper due to no or weak implementation in practice. A greater emphasis was given on 'free enterprise system', privatization, and export oriented industrialization. In this phase, the definition of SME remained the same as in the First Industrial Policy. A modest change in the policy environment was seen during the Fourth Industrial Policy (1991-1995) but it produced some policy induced constraints hindering SME development. Preparedness for globalization, privatization and export oriented industrialization was given a higher priority in the industrial policy. Investment ceiling was extended up to Tk.30 million. Strong emphasis on globalization, privatization and export oriented industrialization continued in the Fifth Industrial Policy (1996-2001) as well, resulting in more policy induced constraints that hindered the development of SMEs.
In the Sixth Industrial Policy in 2002, small industries were defined as enterprises with fixed capital investment of less than Tk.250 million. Medium industries were defined as enterprises with fixed capital investment between Tk.250-500 million. The Seventh Industrial Policy accorded almost the same treatment to SMEs as by its predecessor.
In the Eight Industrial policy in 2004, the SMEs received more attention. The definition of SMEs was clarified following observations by specialists and business chambers. In the policy, SMEs were classified into manufacturing and service providing SMEs. In the manufacturing industry, small enterprise was defined as small if, in current market prices, the replacement cost of plant machinery and other parts/components, fixtures, support utility and associated technical services by way of capitalized costs (of turn key consultancy services, for example), excluding cost of land and building, were up to Tk.15 million. An enterprise was treated as medium if in current market prices replacement cost of plant machinery and other parts/components, fixtures, support utility and associated technical services by way of capitalized costs (such as turn key consultancy services), excluding cost of land and building, were up to Tk.100 million. In non-manufacturing activities (such as trading or other services), small enterprise was treated as small if it had less than 25 workers, in full time equivalents, whereas medium enterprise was treated as medium if it had between 25 and 100 employees.
The government had formulated a comprehensive industrial Policy in 2005 by putting special emphasis on developing SMEs as a thrust sector for balanced and sustainable industrial development in the country to help deal with the challenges of free market economy and globalization. Almost the same objectives, policy strategies, definitions of SMEs were followed in the subsequent Industrial Policies.
In the 2009 Industrial policy, the SMEs received more attention. In the case of manufacturing activity, small industry included enterprises with either the value (replacement cost) of fixed assets excluding land and building in the range of Tk.0.5 million to Tk.15 million or enterprises having between 10 and 50 workers, and medium industry included enterprises with either the value (replacement cost) of fixed assets excluding land and building in the range of Tk.15 million to Tk.200 million or enterprises having between 50 and150 workers. In the case of non-manufacturing industrial activity, small industry included enterprises with either the value (replacement cost) of fixed assets excluding land and building in the range of Tk.0.5 million to Tk.5 million or enterprises having between 10 and 25 workers, and medium industry included enterprises with either the value (replacement cost) of fixed assets excluding land and building in the range of Tk 5.0 million to Tk.100 million or enterprises having between 25 and 50 workers. If one criterion puts an activity in the small category while the other criterion puts it in the medium category, the activity was considered to belong to the medium category.
Industrial Policy 2010 has been aimed at achieving the MDGs and, above all, reducing unemployment and the proportion of the population afflicted by poverty and hunger to less than a half by 2017 through the adoption of short-, medium- and long-term programmes that help build a modern and vibrant industrial sector. Industrial Policy 2010 has also pledged that no effort will be spared in raising the growth rate of the Gross Domestic Product (GDP) to 8.0 per cent by 2013, further to 10 per cent between 2017 and 2021, and thereby to elevate Bangladesh to the cherished rank of 'middle-income country'. As in the previous ones, the present industrial policy has given due emphasis on the SME sector and targeted to create employment opportunity for at least one person from each household in order to reduce poverty and unemployment. There is no alternative to providing for a flourishing environment and vigorous development of SMEs in attaining that goal. Recognizing the importance of SMEs, Industrial Policy 2010 has declared the SMEs as a thrust sector, considering the planned and balanced development of these labour-intensive industries as the engine of growth.
Present Scenario of SME in Bangladesh: SMEs play a significant role in the economy of Bangladesh. They account for about 45 per cent of manufacturing value added, 80 per cent of industrial employment, 90 per cent of total industrial units, and employ about 25 per cent of the total labour force. Their total contribution to export earnings varies between 75 per cent and 80 per cent. According to ADB, there are about 6.0 million SMEs and micro enterprises in Bangladesh, which contribute around 25 per cent of the GDP. About 60 to 65 per cent of SMEs are located outside the metropolitan areas of Dhaka and Chittagong. SMEs have easy access to labour in these non-urban areas, where business environment is better than in the congested urban centres and business costs are also low.
Data on the number of SMEs in Bangladesh available from different sources vary widely. For example, a DCCI-CIPE study finds a wide variation in the statistics on SMEs supplied by the BSCIC and Bangladesh Planning Commission. The aforementioned study notes that according to BSCIC data, which covers only manufacturing units, there are 55,916 small industries and 5,11,612 cottage industries, excluding handlooms. The number of cottage units shoots up to 6,00,000 units if the handloom sector is included, which indicates the numerical superabundance of small and cottage industries (SCIs) in Bangladesh. According to Bangladesh Planning Commission, on the other hand, the number of medium enterprises (undefined) in the country is around 20,000 and that of SCIs between 1,00,000 - 1,50,000. This wide variation in the BSCIC and Planning Commission estimates of the number of SMEs might be due to at least two reasons: (i) different definitions of the SMEs, and (ii) different coverage of the SME sector.
Whatever the correct number, the SMEs are undoubtedly quite dominant in the industrial structure of Bangladesh, comprising over 90 per cent of all industrial units. This numerical dominance of SMEs in Bangladesh's industrial sector is evident in all available sources of statistics. However, the wide variation in their number as indicated by different sources strongly suggests the need for adopting and using a uniform set of definitions for SMEs by all government agencies to help formulation of pro-active SME promotion policies. As new definitions have been adopted in the Industrial Policy 2010 of the country, it would be necessary and appropriate to harmonize the definitions followed by all relevant institutions, viz., Bangladesh Bureau of Statistics, Finance Division of the Ministry of Finance, Planning Commission, Bangladesh Bank and all financial institutions, Export Promotion Bureau, the Ministry of Commerce, and of course, the Ministry of Industries.
SMEs are labour-intensive and have a low capital base. This twin characteristic of SMEs encourages individual entrepreneurs to invest, mainly in manufacturing products that appeal to the general public but are also significant contributors to backward linkage to heavy industries. The significant increase in SME loans over the last few years indicates that production in SMEs has been on the rise. Total SME loans increased by Tk 158.20 billion (15,820.07 crore) or 27.89 per cent to Tk 725.40 billion (72,540.25 crore) at the end of June, 2011, as compared to Tk 567.20 billion (56,720.18 crore) at the end of June, 2010. Category-wise institutional SME loans increased at the end of June, 2011 in specialised banks (+43.46%), private banks (+34.21%), non-bank financial institutions (+46.52%), foreign banks (+10.02%) and state owned banks (+14.80%), as compared to June, 2010. Banks and the non-banking financial institutions (NBFIs) are currently responding favourably to the government initiatives towards channelling more funds to the SME sector as conduits for raising employment and reducing poverty.
The SME sector is gradually becoming a rising industrial sector in the country and is contributing more and more to exports. SMEs' contribution to national exports through such industries as ready-made garments, jute, and leather is significant, though scarcity of raw materials hinders the ability of SMEs to be export oriented and limits their ability to reach more advanced stages of international business. Cheaper supply of goods and inputs in India, Taiwan, China, Thailand and Korea stimulate SME growth in those countries, raising competition faced by the Bangladesh SMEs, which also suffer local constraints such as shortage of electricity and water, and weak road and highway infrastructure. This sector also faces several common problems like lack of technical know-how, shortage of long-term financial support, lack of skilled workers and marketing links, dearth of knowledge about safety measures, hygiene, environmental pollution etc.
Bangladesh Bank (BB), the country's central bank, has given the highest priority to SME sector development and established a new Department named SME & Special Programmes Department in 2009. According to a recent BB report, the Department was mainly created to strengthen the SMEs for alleviating poverty and hunger, ensuring gender equality, empowering women, generating employment, ultimately to achieve the overall economic development of the country.
The main activities and steps taken by the Department were:
a) Road-show: Department successfully participated in Road show programme from Teknaf to Tetulia in March-April, 2011 for raising awareness.
b) Target based Lending: To achieve the target and encourage banks and financial institutions for investment in productive sector, BB instructed target based lending and disburse sector/cluster-wise lending in manufacturing, service sector and women entrepreneurs. BB achieved 138 per cent of target in 2010 and announced Tk 620 billion (62,000 crore) target for 2011, of which Tk 67.90 billion (6,790 crore) was cluster based.
c) Progress of disbursement in manufacturing and service sector: As productive sector investment is beneficial for national economy, BB has disbursed 65 per cent of total in manufacturing and service, of which 35 per cent in manufacturing and 25 per cent in service sector in 2010.
d) Priority to women entrepreneurs for disbursing more credit: To encourage participation and empowerment of women entrepreneurs, TK 18.05 billion (1,805 crore) SME loans were disbursed among 13,723 women entrepreneurs in 2010. Moreover, some women friendly policies were adopted. These were: 15 per cent of total BB SME refinance fund to be allocated for women entrepreneurs; provision of loan facility of up to Tk 2.5 million (25 lakh) against personal guarantee; limiting interest rate to a maximum of 10 per cent per annum; all types of loan applications of SME women entrepreneurs to be dealt with the highest priority; establishment of 'women entrepreneurs dedicated desk' by banks and financial institutions (FIs); and ensuring service friendly approach towards women entrepreneurs.
e) Timely changes in SME credit policy: Some changes in SME credit policy were made to help small entrepreneurs. These were: refixing the lower limit of small credit to Tk.50 thousand, introducing Rubber Roler system in Rice-Mills, group lending to women entrepreneurs, nominating 'focal officer' by each Bank and Financial Institution, informing 'Board of Directors' of Banks/FIs on SME activities regularly, and forming 'Monitoring Cell' at BB Head Office, offices of BB in different districts and also at Banks and Financial Institutions level.
Fiscal policy support extended to SMEs through such measures as tax holiday, reduction of turnover tax, expansion of the coverage of entrepreneurs' equity fund (EEF) to include SMEs, and reduction of duties on necessary raw materials will have a positive impact on the development of the SMEs. Adoption of these fiscal policy measures will be crucial for promotion of the SME sector, keeping in mind the important role it can play in accelerating economic growth, generating employment and reducing poverty.
Problems for SME Development: A dynamic and vibrant SME sector is not a luxury but a dire necessity. As the economy already faces a huge challenge to absorb some two million people entering the labour force annually, exports and job-oriented manufacturing, especially the SME sector, must hold the key to national development over the next quarter century or so. A similar view expressed by the World Bank. Others argue that factors that pose serious problems/constraints to SME development are: poor product, quality and standards, weak marketing, paucity of investment and working capital, shortage of skilled workers, lack of entrepreneurship and management skills, poor conditions of physical infrastructure, rising of transport costs, inconsistent trade policy and incentives, information gap, weak legal and regulatory framework and an unsound domestic environment. They suggest that it is necessary to reform the Government's industrial policy and technology policy to outline its measures to support SMEs in technological upgradation.
The results of the survey, conducted by the Metropolitan Chamber of Commerce & Industry (MCCI), indicate that the SME sector faces a lot of problems in Bangladesh which, inter alia, are the absence of adequate skilled manpower and modern technology, poor physical infrastructure, unfavorable geographical conditions, resources scarcity i.e., scarcity of raw materials, difficulty in exporting SME products etc., financial constraints, lack of information, lack of quality assurance, limited marketing capability and resources, lack of marketing opportunities, illegal imports, lack of research and development facilities, lack of participation of women entrepreneurs, lack of entrepreneurship skills, entrepreneurs' conservative attitude towards taking risk and lack of vision, weak law and order situation, poor capacity to make and implement plans, all of which hinder the growth of SME in Bangladesh.
Government and Non-government Programmes for SME Development: The government and the non-government organizations have initiated various programmes for the SME development in Bangladesh. As various types of industries and business enterprises have grown in the SME sector, the government has given priority to the promotion of this sector for expanding industrial production and boosting the country's economic development. Special emphasis has been given to the growth of women's entrepreneurship in SME and there are a variety of inducements to attract women in business. Initiating with the SME Task Force and later with the SME Advisory Panel, the SME Foundation was formed by the government and has been in operation since 2006 with specific objectives to look after policy, drawing up a reliable strategy for SMEs, and conducting country-wise study.
SME Foundation is a non-profit organization mandated to help growth, expansion and overall development of SMEs in Bangladesh. Over the years, the SME Foundation has been working in line with the government policy of reducing poverty through creating employment with the help of industrialization based on modern technologies. In particular, the Foundation is working on policy advocacy, capacity building of entrepreneurs, facilitating and financing, women entrepreneurship development, marketing management and expansion, creation of SME entrepreneurs, identification of SME sub-sectors, pre-and post-investment counseling, quality certification for standardized products, SME Web portal development and Helpline Centre.
Among the non-governmental organizations (NGOs) involved with the SME development in Bangladesh are the related trade bodies, including the Chambers and the Associations, Training Institutes, private banks and financial institutions, and various forms of NGOs especially working for raising employment and reducing poverty.
Conclusions: SMEs can act as a vital player in a country's accelerated industrialization and economic growth, employment generation and reducing poverty. Government of Bangladesh has highlighted the importance of SME in the Industrial Policy 2010. SME has been identified by the Ministry of Industries as a 'thrust sector'. As the SME sector is labour intensive, it can create more employment opportunities; for this reason government has recognized SME as a poverty reduction tool. SME can also foster the development of entrepreneurial skills and innovation. Along with poverty reduction, SME can reduce the urban migration, increase cash flow in rural areas, and thereby enhance the standard of living of the rural people.
Notwithstanding its importance, the performance of SMEs in Bangladesh has been significantly below the performance at the international level. Although Government of Bangladesh has taken some initiatives to ensure the growth of SME, those steps are not enough. The government of Bangladesh should give more focused attention on some areas, such as, arrangement of finance, provision of infrastructure facilities, framing appropriate legal framework, establishing a national quality policy etc. We are quite optimistic that if these suggestions are implemented, the growth of SME sector in Bangladesh will accelerate.
Recommendations: In order to remedy the problems faced by SMEs, the study recommends the following:
a) A uniform definition of SME has to be developed for the proper implementation of all SME programmes. Bangladesh Bank, Bangladesh Bureau of Statistics, and SME Foundation have different definitions of SMEs. Government may take necessary initiatives to make it uniform.
b) Development of infrastructure is essential for the optimum growth of SME. So, the government needs to take appropriate steps for the infrastructure development of Bangladesh.
c) Government must have to take adequate measures to ensure the uninterrupted supply of raw materials for SME.
d) Government and financial institutions should provide adequate finance for modernization and technological advancement of SME.
e) Government, financial institutions and non government organisations (NGOs) may take necessary steps to ensure uninterrupted financial support to the prospective SMEs in Bangladesh.
f) Government should take the initiative to develop web pages exclusively for SME and an integrated SME database. This would reduce the barriers to SME access to global market.
g) In order to encourage women entrepreneurship, government may involve women entrepreneurs in policy formulation and implementation, arrange funds for women entrepreneurs, provide necessary training to women entrepreneurs in urban and rural area of Bangladesh.
h) Government through SME foundation may devise appropriate marketing tools to popularize the products of SME.
i) For minimizing bureaucratic hassles and accelerating the growth of SME, government may provide one roof service under the SME foundation.
j) Appropriate legal framework is necessary to ensure the development of SME of Bangladesh.
k) In this era of intense competition, continuous planning and quality improvement are essential prerequisites for the survival of SMEs. In order to improve quality, SMEs can follow the 'Just in Time (JIT)' philosophy and use 'Total Quality Management (TQM)' and can ensure the improvement of quality and productivity at a time.
l) Government should establish a credible certification authority especially for SMEs, so that the sector can obtain a technical evaluation of the quality of their products within the shortest possible time. The certification by the authority should be acceptable worldwide. Government may also provide assistance to SMEs during the certification process and promote the importance of product certification for international acceptance.
m) Research and Development (R&D) is must for the development and growth of SME. So, government must have to invest in R&D for ensuring the intensification of SME of Bangladesh.
Restriction may be temporarily imposed on the import of substitute SME products, which are domestically produced in Bangladesh.
Prepared by the Research Cell, Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka. E-mail: firstname.lastname@example.org or email@example.com