SMEs in Bangladesh and Their Financing : An Analysis and Some Recommendations more by Dr. M.

Anwar Ullah, FCMA

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Introduction In almost every part of the world, limited access to finance is considered a key constraint toprivate sector growth. This is especially true for SMEs of our country as they are facingdifferent types of problems for availing institutional finance though SMEs play dominantlyimportant role in the national economy of Bangladesh by making up over 90 per cent ofindustrial enterprises, providing employment to 4 out of 5 industrial workers and contributingto over one-third of industrial value-added to gross domestic product (GDP). The relativeSME share in manufacturing value-added is much higher and estimated to vary between 45to 50 per cent of totaling value-added generated by the manufacturing industries sector.Further as important sources of new business creation and developing new entrepreneurialtalents, these industries provide the much needed dynamism and vitality to the nationaleconomy. Implementation of poverty alleviation action programs and strategies is a systematicand continuous effort in Bangladesh. For that purpose, the Poverty Reduction Strategy ofthe government has clearly identified some core principles and parameters both at macroand micro levels for reducing the existing poverty level at least half within 2015 as targeted Mr. Md. Shamsul Alam, MA, MBA is APS -1 to the Honble Prime Minister, Government of Bangladesh and Mr. Md. Anwar Ullah, M.Com, MBA, ACMAis a Senior Assistant Secretary, Ministry of Establishment, Bangladesh Secretariat, Dhaka. The opinions expressed in the article is of the authors own. They do not represent the opinion of the Government or the departments to which the authors belong to. SMEs in Bangladesh and Their Financing :An Analysis and Some Recommendations Md. Shamsul AlamMd. Anwar Ullah Abstract: Small and Medium Enterprises (SMEs) are accounting for 25 percent of GDP, 80 percent of industrial jobs, and 25 percent of the total labour force in Bangladesheven though the prospective sector gets negligible facilitation from different supportservice providers. There are various constraints that hinder the development of SMEs inBangladesh, such as lack of medium to long-term credit, limited access to marketopportunities, technology, and expertise and business information. Lack of suitableincentives, inefficient and limited services from relevant government agencies as well as poor capacity of entrepreneurs are other reasons for the slow growth of SMEs. Obviously,the government has many things to do to flourish the SMEs because, if they flourish,SMEs will create new entrepreneurs, generate more jobs and contribute to a great extentto the national economy. This paper is an academic analysis toward policy formulationin respect of SME financing. Keywords: SMEs, Institutional finance, Government initiatives. The Cost and ManagementVol. 34 No. 3May-June 2006, pp. 57-72 57

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58 The Cost and Management, MayJune, 2006 Alam & Ullah in the Millennium Development Goals (MDGs). Rapid and sustainable growth of SMEs isundoubtedly one vehicle for accelerating national economic growth to the point of having ameasurable impact in the way of reduction of poverty and unemployment, generation ofmore employment. More than 90% of the industrial enterprises in Bangladesh are in theSME size-class. Generally, SMEs are labor intensive with relatively low capital intensity. TheSME also posses a character of privilege as cost effective and comparative cost advantagesin nature. The SME policy strategies have been formulated to assist in the achievement ofthe goals and targets the MDGs set by the Government. Contribution of SMEs to the economyis shown in the table - 1. Table-1 : Contribution of Large and Small Industries to the GDP (%)1999-002000-012001022002-032003-04 Large Industry11.0111.1311.1611.2911.47Small Industry4.394.464.604.684.78Total Industry15.4015.5915.7615.9716.25 (Source: Economic Review, Ministry of Finance, GOB, 2004) SME Defined in Bangladesh Until recently, public policy did not distinguish medium enterprises as a separate categoryand instead lumped it with large enterprises. Thus, industrial policies prior to 1999 dividedthe industrial sector into three categories large, small and cottage. The cut-off limit ofthese size categories was determined on the basis of the size of fixed assets. Thus, the IndustrialPolicy 1991 defined Small Industry as industrial undertakings whose total fixed investmentexcluding the price of land, expenses for inland transportation and commissioning ofmachinery and appliances, and duties and taxes, was limited to Tk. 30 million (US $800thousand) including initial working capital, while the upper limit on the investment level inCottage Industry was Tk. 500,000 (US $13 thousand).In contrast, the Industrial Policy 1999 distinguished medium from large industry and definedthe size categories in terms of both capital and employment size. Thus, Large Industry wasdefined to include all industrial enterprises having 100 or more workers and/or having afixed capital of over Taka 300 million (US $6 million). Medium industry covered enterprisesemploying between 50 and 99 workers and/or with a fixed capital investment between Taka.100-300 million (US $2-6 million). Small Industry meant enterprises having fewer than 50workers excluding the cottage units and/or with a fixed capital investment of less than Taka100 million (US $2 million). Cottage Industry covered household-based units operatedmainly with family labor.However, in the latest industrial policy announced in 2005, significant changes have been brought about in the definition of the various size categories. In the Industrial Policy 2005, a

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SMEs in Bangladesh and Their Financing : An Analysis and Some Recommendations distinction has been made between manufacturing and non-manufacturing enterprises. Inthe case of the manufacturing enterprises, sizes have been defined in terms of the value ofthe fixed assets while in the case of the non-manufacturing enterprises the cut-off line has been identified in terms of employment size.Thus, large industry is now defined as units with fixed capital of more than Tk. 100 million(US $1.6 million) excluding the value of land and building while non manufacturing largeenterprise is defined as units having more than 100 workers. Medium industry is defined asunits with fixed capital of Tk. 15100 million (US $246 thousand - $1.6 million) excluding thevalue of land and building while non 4 manufacturing medium enterprises are those withemployment size between 25 and 100 workers. Manufacturing enterprises with fixed assetsof less than Tk. 15 million excluding the value of land and non-manufacturing enterpriseswith fewer than 25 workers are to be treated as small enterprise.While the definition of SME has changed overtime in different Industrial Policypronouncements, Bangladesh Bureau of Statistics (BBS), which is the prime nationalorganization responsible for generating and compiling various types of statistics in the countryhas been consistently using an all together different classificatory scheme. Thus, BBS definesenterprises having 10-49 workers as Medium industries while those having 50 or moreworkers are identified as Large industries. For industrial GDP data, the medium and largeindustries are lumped together under Large category. The rest of the industrial enterprisesincluding cottage industries are grouped under the Small category. Present Status of the SME Sector in Bangladesh Size, Type and Spread of SMEs Because of the definitional problems mentioned above, information on SME is not readilyavailable in Bangladesh. BBS conducts annual surveys of the manufacturing sector, calledthe Census of Manufacturing Industry (CMI), but as mentioned earlier the BBS lumps underthe Large category information on all units with 50 or more workers and hence theinformation cannot be separated in most cases for the 50-99 workers size category, which isthe more commonly used cut-off size limit for medium enterprises. Moreover, there is quitea bit of backlog in the processing of the CMI data. The latest available published CMI reportis for the period 1999-2000. The prime agency for the promotion of small and cottage industriesin Bangladesh is the Bangladesh Small & Cottage Industries Corporation (BSCIC). BSCIC isrequired to maintain information and data bank on small and cottage industries in Bangladeshand accordingly the agency carries out nation-wide surveys of the sector at some timeintervals. However, the latest such survey by BSCIC was conducted in the late 1980s and itwas based on the definition of small and cottage industries given in the earlier industrialpolicies that used capital rather than employment size as the cut-off limit. Fortunately, BBScarried out a nation wide census of all non-farm economic activities in 2001 and 2003 and apreliminary report based on the census has been made available recently. The report presents