Introduction

The SMEs worldwide are recognized as engines of economic growth. The commonly perceived merits often emphasized for their promotion especially in the developing countries like Bangladesh include their relatively high labor intensity, dependence on indigenous skills and technology, contributions to entrepreneurship development and innovativeness and growth of industrial linkages. In almost every part of the world, limited access to finance is considered a key constraint to private sector growth. This is especially true for SMEs of our country as they are facing different types of problems for availing institutional finance though SMEs play dominantly important role in the national economy of Bangladesh by making up over 90 per cent of industrial enterprises, providing employment to 4 out of 5 industrial workers and contributing to over one-third of industrial value-added to gross domestic product (GDP). The relative SME share in manufacturing value-added is much higher and estimated to vary between 45 to 50 per cent of totaling value-added generated by the manufacturing industries sector. Further as important source of new business creation and developing new entrepreneurial talents, these industries provide the much needed dynamism and vitality to the national economy. Implementation of poverty alleviation action programs and strategies is a systematic and continuous effort in Bangladesh. For that purpose, the Poverty Reduction Strategy of the government has clearly identified some core principles and parameters both at macro and micro levels for reducing the existing poverty level at least half within 2015 as targeted in the Millennium Development Goals (MDGs). Rapid and sustainable growth of SMEs is undoubtedly one vehicle for accelerating national economic growth to the point of having a measurable impact in the way of reduction of poverty and unemployment, generation of more employment. More than 90% of the industrial enterprises in Bangladesh are in the SME size-class. Generally, SMEs are labor intensive with relatively low capital intensity. The SME also possess a character of privilege as cost effective and comparative cost advantages in nature. The SME policy strategies have been formulated to assist in the achievement of the goals and targets the MDGs set by the Government.

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A) Objectives of the study Broad objective: To conduct a comprehensive study of SME sector in Bangladesh of its present state, prospects, issues and emerging challenges and analyze the contribution trend of SME sector in GDP of Bangladesh (concerning a forty year time period 1972-73 to 2010-2011). Specific objectives: Thus the specific objectives of the study are as follows: To provide an overview of SME sector in Bangladesh. To appraise the present situation of SME in Bangladesh. To prepare a trend analysis for forty years showing the contribution of Industry Sector on the GDP. To prepare a trend analysis for forty years showing the contribution of SME on the GDP portion coming from the Industry sector. To interpret the result from the trend analysis. To identify the problems of SME in Bangladesh. To recommend solutions to overcome the problems.

B) Methodology Sources of Data and Analysis: Information collected to furnish this report is both from primary and secondary in nature. The primary sources are; Face to face conversations with the officers, relevant file study as provided by the concerned officer, interviewing the officials of Bangladesh Bank. The secondary sources are; Different circulars issued by Bangladesh Bank, Bangladesh Economic Review from Ministry of Finance, different procedure manual published by SME foundation, annual reports of SME foundation, periodicals published by SME foundation, publications published from different libraries and from internet and different research papers.

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This report deals with SME in Bangladesh, Present Scenario of SME, SME Development in Bangladesh, SME Policy Issues, Policy Implications, Analytical Framework of SME, Contribution of SMEs to Employment and GDP, Contribution of Banks to SME Sector, Credit Products and Services Available for SMEs in Bangladesh, Access to finance by SMEs, SME Financing in Bangladesh, In depth analysis for forty years showing the contribution of industry sector & SME on the GDP, Constraints to SME Growth, and some graphs are used to give a clear idea about some information with relevant tables in the Appendix at the end of the report.

C) Significance of the study Now a day, micro credit occupies its own position in the economy. The main customers of this micro credit are the owners of the small and medium enterprises (SME). In a Least Developing Country, like ours, there are a number of SMEs operating their business and they contribute a good portion of GDP of the country. These enterprises are also a big source for employment in rural and out-skirt as well as urban areas. But most of them are sunk in a lot of problems financial problem is the most common and serious among them. The development of small and medium enterprises (SMEs) in developing countries like Bangladesh is generally thought to be a desirable end in view of their perceived contribution to providing productive employment and earning opportunities and thereby poverty reduction. In recent times SMEs have drawn a lot of attention among the policy makers, academics, development partners and others. Although different attempts have been made earlier, it has been found difficult in practice that the unavailability or poor access to relevant information obstructs future planning of SME development. It is worth mentioning here that the future strategy for SME development should essentially consider the previous and ongoing development to avoid redundancy and enhance focus of the future work. This, in other ways, increases the effectiveness and efficiency of the management of resources. For this purpose, a study is planned to be conducted where studies conducted earlier and ongoing are reviewed systematically in a way easily retrievable to consult the development so far. The primary objective of the study is to provide comprehensive insight of the studies undertaken by

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different stakeholders including development partners and, at the same time it will identify points for creating and maintaining conducive environment for sustained growth of the SMEs. As a student of MBA majoring in Banking, performing a research on SME will assist me to acquire in depth knowledge on the current economic scenario of Bangladesh. This understanding will be helpful in the future in my area of work and will guide me to be a rational citizen.

D) Scope of the Study Government of Bangladesh has been given utmost importance in promoting SMEs since their development is crucial for the expansion and diversification of Bangladeshs export. The export earnings of the SMEs are exempted from income tax and tax rebates between 30% to 100% are given on export earnings. Full tax relief is granted to 100% export-oriented SMEs. Export oriented companies are also exempted from local taxes. SMEs that produce agricultural products including potatoes are granted additional benefits. The Industrial Policy, Agricultural Policy, Export Policy and Import Policy also provide a number of incentives to the SMEs. Financing to SMEs i.e. micro credit is a very contemporary issue in our economy. The idea of micro credit was innovated by Dr. Mohammad Yunus and he established Grameen Bank to impose his new thought. This new idea brings a tremendous change in the rural economy and the poor people of Bangladesh become able to improve their economic situation by taking loans from Grameen Bank. Many economist, statistician, social scientist and bankers conducted their research on micro credit. They use primary data, which reflect various aspects of the researches. Any other researcher can use those secondary data for his/her research. The data collection processes are going on frequently for the purpose of new researches. So, relevant recent secondary data and their analysis are available in any library and journal. These available secondary data mainly give me the scope to undertake this study. The range of this study is limited only to analyzing the trend that is the composition of the total GDP of Bangladesh and to prepare and interpret the trend of the contribution of the Industry Sector on the total GDP and the contribution of the SME sector in the GDP portion coming from the Industry sector. The main limitation of the study is the time constrain, and the dependency on data available on the web. So the internal problems of the enterprises can not be identified in this study.
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Definition of Small and Medium Enterprises

Definition of SME in the context of Bangladesh: SMEs in Bangladesh are defined for purposes of industrial policies by the Ministry of Industries (MOI). Historically, this definition has been in terms of fixed-investment brackets, and a dual-mode definition is in place, separate for manufacturing establishments, and service establishments. (a) For manufacturing industries, the revised SME defined: (i) An enterprise would be treated as small if, in todays market prices, the replacement cost of plant, machinery, structures, and other parts/components, fixtures, support utility, and associated technical services (such as turn-key consultancy), i.e. Tk. 50,000 to 1.5 crore ( 0.05 million to Tk. 15 million and / or workforce not more than 50 ; (ii) An enterprise would be treated as medium if, in todays market prices, the replacement cost of plant, machinery, building, structures, and other parts/components, fixtures, support utility, and associated technical services (such as turn-key consultancy), i.e Tk. 1.5 crore to Tk. 20 crore ( Tk. 15 million to Tk. 200 million and/ or workforce not more than 150; From both definitions above, land and building is excluded. (b) For non-manufacturing activities (such as trading or other services), the revised SME defined: (iii) An enterprise would be treated as small if the fixed capital is Tk. 50,000 to Tk. 50,00000 (0.05 million to Tk. 5 million and / or workforce not more than 25; (iv) An enterprise would be treated as medium if the fixed capital is Tk. 50,00000 to Tk. 10,00,00000 (5 million to Tk. 100 million and / or workforce not more than 50; From both definitions above, land and building is excluded).

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As per Industrial Policy 2006 Small Segment: Value of fixed assets (except land & building) up to Tk. 15 million in case of manufacturing enterprise and maximum 25 workers in trading or service enterprise. Medium Segment: Value of fixed assets (except land & building) up to Tk. 100 million in case of manufacturing enterprise and maximum 100 workers in trading or service enterprise. According to Industrial Policy 2006, the Nature of enterprise, Value of asset (excluding land & building), Manpower and Turnover for small & medium enterprise is shown in the Appendix- A, table- 1&2. Some Other Definitions: Curtis E. Tate, Jr. and his co authors in their book Successful Small Business Management (1982) define small business as An organization with a name, a place of operations, an owner, and one or more workers other than the owner. The Federal Reserve Bank of USA says small business is one which is independently owned and operated but is not dominant in its field. In the Small Business Act of 1953, the US Congress gave the same definition of small business.

According to Small Business act 1934, A business which is independently owned and operated and not dominant in its field is a Small Business.

Bolton Report on the commission of the inquiry on Small Business firms, 1977,Small firm is one that has a relatively small share profits market.

Stoner, Freeman, & Gilbert, 1995, Small Business refers to business locally owned and managed, often with very few employees working at a single location.

US Government, A Small Business is one with fewer than 500 employees.

According to executive committee for national economic development, A Small Business one of which processes at least two of the following characteristics:

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Managers are the owners, Capital supplier and the owner is individual or a small group, Worker and the owners are local, market may not be so. Relatively smaller compared with the biggest unit of the industry [Sales, employees etc.]

From all of the above definitions we can make a general definition of SME. A business not dominating in its field, does not engage in any new marketing, workers are local, working at a single location, produced units are relatively small in size, and often all organized by the owner or his family members. Now-a-days there are a lot of SMEs are operating in verity of fields. We get our daily necessaries from the grocery shops. One takes food from a restaurant or from a first food shop. Some shops are selling cloths, books, electronics etc. Hair cutting saloon, laundry, automobile and electronic mechanic, travel agent all of them are serving us in different ways.

SME: Overview from Bangladeshs perspective

Different countries and organizations define SME differently. The Government of Bangladesh has categorized SME into two broad classes: Manufacturing enterprise Non Manufacturing activities

Manufacturing enterprise: Manufacturing enterprises can be divided into two categories; Small enterprise: an enterprise would be treated 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), etc, excluding land and building, were to up to Tk. 15 million; Medium enterprise: an enterprise would be treated as medium 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), etc, excluding land and building, were to up to Tk. 100 million;
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Non-manufacturing activities (such as trading or other services): Non-manufacturing activities can be divided into two categories; Small enterprise: an enterprise should be treated as small if it has less than 25 workers, in full-time equivalents; Medium enterprise: an enterprise should be treated as small if it has between 25 and 100 employees. According to Bangladesh Bureau of Statistics different enterprises are defined as;
Table- 1: Sector wise employee

Sector Micro Small Medium Large

No. of employees 0-9 10-49 50-99 Above 99

Source: Bangladesh Bureau of Statistics, 1999

The Ministry of Industries, Government of Bangladesh has been identified following 11 booster sectors; Electronics and electrical Software-development Light engineering and metal-working Agro-processing/agro-business/plantation agriculture/ specialist farming/tissue-culture Leather-making and leather goods Knitwear and ready-made garments Plastics and other synthetics Healthcare & diagnostics Educational services Pharmaceuticals/cosmetics/toiletries Fashion-rich personal effects, wear and consumption goods. License from Micro credit Regulatory Authority (MRA).

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SME: Characteristics
There are many characteristics of SME. Some of which are described in the following paragraph: Unity of Individuals and the Organization: The strength of small business is that individual employees retain their personal identities, yet support the unity of the organization. Employees understand and commit themselves to corporate objectives. High Individual Motivation: Individuals are highly motivated for further exertion and organizational development. Though pay for performance is a principal motivator in a small business, comfortable and social life related workplace plays a role of the social motivator. Owners as Managers: In most of the small businesses, owners are responsible for managing the firm. The employees are hired on owners discretion. Owners are responsible for taking any and all management decisions. Streamlined Communication: With simple and petit structure of the organization, good and effective communication is maintained with and among employees. This keeps the organization more susceptible to changes in the business arena. Supportive climate for Organizational Integration: Management including

supervisors keeps close relations with subordinates. They offer training, encouragement and counseling to subordinates for problem solving. Employees are provided with challenging and enjoyable workplace.

SME: Advantages
The SME has many advantages over its larger counterparts. It does not have access to huge resources, numerous employees strong financial backup, or the professional management of the big businesses, but it does posses some distinct advantages that are only its won. Because of small percentage of income that goes for overhead and non-revenue-producing activities, there are still some functions that can be performed more efficiently by small business enterprises than by large ones.
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Growth: Small business helps entrepreneurs develop as an individual and expand their personal abilities. Their growth might have been hampered had they been employed under the guidance of a supervisor in any other organization. Ambition also motivates entrepreneurs and makes them hang in there.

Self employment opportunities: Small business helps people provide job for themselves. Sometimes employment opportunities are limited in big industries. There are losing big firms that are frequently cutting back, closing plants, and lying off people. This creates unemployed people in society who are otherwise capable of performing various jobs. The area of small business can provide a much-needed source of new employment. This shows the important contribution the smaller firms are making to their respective notional economics.

Flexibility: Large corporations often lack the flexibility of small business because of the complex organizational structure, established bureaucracies, and high overhead costs. Decision making in the small business frequently depends on only one or two persons. The management and the workforce in the small business may be more adaptable to change than those of the large corporation. They can react more quickly to changing market conditions or to modify a product for a customer more easily than could a large business.

Better Inter-personnel Relationships: Both managers and staff in the small business are treated as individuals. Managers are given freedom and decision making and provided with variety of responsibilities. Staffs are encouraged to innovate there by reducing boredom in the workplace. Lines of communication are direct between owners and employees.

Independence: Small businesses give its owners the liberty or independence to come go as they please. Owners of small business enterprises have a degree of freedom that are not customary for managers in most big corporations this freedom encourages selfmotivation. Often this freedom of small business owners means the right to work harder and longer hours than they would if they were employees of big business. However, the psychological and financial satisfaction arising from enterprise ownership is powerful rewards for the risks of going into business for oneself.

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Quick decision: As the owner of the business does all in all in that particular concern, the owner does decision-making mostly. So the decision is taken relatively quickly because he or she does not have to discuss other people or superiors to take the decision.

SME: Disadvantages
The SME has their share of disadvantages too. These disadvantages have multiplied in the current years due to increased management problem in recent years. Inability to cope with growth: Sometimes, the factors that are advantageous to small business turn in to serious disadvantage when it is time to grow. Growth often requires the owner to give up certain authority. Similarly, growth also requires specialized management skills, which the owner may lack. Management problem: Effective and efficient management is very important for the smooth running of any kind of business. A new businessperson often has the knowledge and skill to produce a good but will lack the necessary kills of planning organizing, staffing, directing and controlling. Yet the small business owner is often forced to become a generalist in management since he or she cant afford to employ a specialized person having necessary managerial skills. Also they do not give the subordinates enough responsibility to manage. Shortage of working capital: Shortage of working capital is the most predominant limitation of small business. For this limitation, they cannot take the advantage of economics of scale. They cannot take the advantage of discounts given for bulk purchases. This leads to the inability to cope up with their larger competitors in new facilities, equipment, tools, and methods. Lack of coordination: Another disadvantage is the lack of coordination between production and marketing. That is the failure to balance and coordinate these to critical functions. It is important for small business to keep judicious balance among:

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Having too few products so that the orders of potential customers have to be turned down. Having too big inventory as to bear too much inventorying and maintenance cost. Diversifying too fast. The advantage of diversification and the advantages of product specialization should be balanced.

Lack of effective selling techniques: Small businesses usually dont have the access to specialized person at marketing. So, they lack in scientific market research, specialty advertising and personal selling. As a result sales are comparatively lower than the larger enterprises. Location of the head office and the accessibility does affect the sale to certain degree.

Policy Issues for SME

Public Development Outlay: Although successive five-year plan documents have mentioned development of small, medium and cottage enterprises as priority area, public development expenditure in this sector has not been commensurate with this declared policy. Thus, in the Fourth Five Year Plan, the revised public allocation to this sector was Taka 2,016 million which was a meager 0.58 per cent of the total public development outlay in the plan. In the current Five-Year Plan, the share of the sector in total public development expenditure has gone down even further. If the sector has to make much headway, there is need for substantial increase in public investment in the sector particularly in the area of training, extension, research, market promotion, etc. A collaborative effort of the government with business associations, nongovernmental organizations NGOs and other development partners is recommended in such public outlays. Trade Policy: During the past decade, substantial reforms have been carried out in the external trade regime of Bangladesh. The import procedure has been greatly eased and deregulated. Import tariffs have been lowered and quantitative restrictions virtually eliminated. All these have facilitated greater access of domestic producers to imported raw materials. This has particularly benefited SMEs as they were affected more adversely by the regulated trade regime.
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However, import liberalization has also exposed domestic producers to competition from foreign goods. To ensure a level playing field and to enable domestic SMEs to compete effectively with imports, the following policy concerns need to be addressed. Prior Announcement of Policy Changes: To enable domestic producers, particularly the SMEs, to prepare themselves to face external competition there is need for adequate forewarning about impending policy direction. This is particularly true of trade policy measures. If the government makes prior announcements of its impending trade policy changes, particularly with respect to tariff schedules, investors will be aware of the degree of competition they will be facing with the changes and will make adjustments in their investment and production plans accordingly. Tariff Rationalization: To encourage domestic production, there should be adequate gap between duty on raw materials and duty on finished products. In fixing duty on finished products, possible under-invoicing and dumping should be taken into account, as otherwise, effective duty rates on finished goods will turn out to be lower than that on raw materials in spite of the higher statutory rate on the finished item. Appropriate Tariff Valuation: To avert the problem of under-invoicing, a system of tariff value has been put in place for certain categories of imports. There are complaints that these tariff values are often not in line with the going world price of these items which sometimes puts domestic producers at a relatively disadvantaged position.

Fiscal Policy: Value Added Tax: The main components of indirect tax in Bangladesh are Value Added Tax (VAT), Supplementary Duty and Excise Duty. VAT is imposed on producer, manufacturer, importer, exporter or service renderer under the Value Added Tax Act, 1991, on goods or specified services, at the rate of 15% at every stage of transfer. VAT paid against the input is adjustable against the VAT on output to be collected from the buyers and the net sum stands payable on delivery of goods or specified services to the VAT authority. Exemption is allowed to certain goods or service or certain taxpayers. All cottage industries, except those producing particular products, are exempted from VAT. But, manufacturer, producer or service renderer (other than cottage entrepreneurs), whose annual turnover does not exceed Taka 1.5 million are
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required to pay Turnover Tax at the rate of 2.5 per cent in lieu of 15 per cent VAT. This limit is too low for small industries. As a result, small industries are subjected to the same 15 per cent VAT as their large-scale counterparts. In addition, supplementary duty is imposed at variable rates on certain categories of consumption goods across all size categories. Finally, excise duty applies to a limited number of items irrespective of size classification. Thus, in terms of indirect taxes, there is virtually no differentiation between SMEs and their large-scale counterparts, which is considered inequitable by most SMEs. Tax Holiday: Similarly, there are no differentiated treatments of SMEs either with respect to duty on capital machinery or direct taxes. There are provisions of tax holidays for enterprises of all size categories subject to rules and procedures set by the National Board of Revenue. To avail themselves of tax holiday, enterprises recommended by the relevant sponsoring agencies have to get the approval of the National Board of Revenue which is a cumbersome and lengthy process. The tax holiday, however, is not available to sole proprietorship enterprises which are the usual form of small and cottage industries in Bangladesh.

Wealth Tax: Wealth tax is payable by an individual if his net wealth exceeds Taka 2.5 million. As per existing law, no wealth tax is payable by a company, the usual legal form of a large industry. On the other hand, the legal form of small industries is usually sole proprietorship, and hence these enterprises have to pay wealth tax on their business capital.

Thus, fiscal policy in Bangladesh is not particularly tailored to provide support to SMEs, which is pointed out by most SME entrepreneurs as a critical policy constraint hindering SME growth.

SME: Policy Implications

In recent years, SMEs have emerged as a new engine of growth in many developing countries; and factor endowments and development potentials show that SMEs can also play a significant role in Bangladesh in promoting its poverty reduction agenda. This has

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been acknowledged in the countrys development and poverty reduction strategies; and policies and programs have been initiated to ensure unhindered growth of the SMEs. In this backdrop, this note has examined the growth and contribution of the SMEs to GDP and the national economy using available information. The SMEs in Bangladesh cover different sectors (mainly livestock, fishing and poultry, industry and services) and the SMEs are growing over time. The analysis shows that during FY78-FY03, small enterprises grew by 4.6 percent per year, while medium enterprises grew by 6.4 percent during FY82-FY03. During FY03-FY06, the number of SMEs in different sectors increased by 5.2 percent. This growth matches the manufacturing sector growth and the share of small scale industries in the overall economy. The important concern relating to the SME sector is to ensure its speedy growth in output, employment, and exports. For this, the countrys industrial strategy needs to be anchored in multi-layered subcontracting arrangements between the large enterprises and the SMEs and among the SMEs themselves. In this respect, much of the high productivity growth of SMEs would come from firms with robust potential for productivity growth and sub-sectors with significant subcontracting activity. For the purpose, the National Task Force has identified 11 sectors as booster sectors. In recent years, SME-centered activities in education, health, information technology, and food processing sectors have expanded rapidly in response to higher demands and there exists more potential for their future expansion. Innovation and searching for new markets are also important for sustaining the growth of existing SMEs and flourishing of new SMEs. Infrastructural bottlenecks, especially power, gas, and transport are significant deterrents to SME expansion and these should be effectively addressed for ensuring uninterrupted growth of SMEs. The analysis shows that SMEs have good potential of absorbing the countrys expanded labor force. Employment generation grew at a yearly rate of 5.4 percent in small enterprises during 1991-2001; while it grew by 9.6 percent for the medium enterprises during 1982-2003. It is estimated that SMEs currently absorb almost 80 percent of the total employment in the industry sector and 23 percent of the countrys total labor force.
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Since creation of decent and productive employment opportunities for the expanding labor force is the key challenge for accelerating poverty reduction in the country, SMEs provide an excellent vehicle for absorbing the labor force, especially in SMEs of different booster sectors. 12 In terms of contribution to GDP, the share of SMEs is growing over time. The estimates in this note put the contribution of SMEs at between 40 percent and 50 percent to total manufacturing output and between 20 percent and 25 percent to overall GDP. Labor productivity in the SMEs is found to be higher than that of large enterprises. The compulsion, however, is to further increase the labor productivity, for which sustained efforts of human capital development (training, education, and technical knowledge) are essential. Generally, SMEs require less capital to establish and operate relative to large industries. The analysis shows that access to formal financing, especially bank financing, for SMEs has been increasing in recent years. However, despite the introduction of refinance facilities by the Bangladesh Bank, the supply of institutional finance still remains inadequate for the SMEs. Although several banks have opened special windows for catering to SME loan and some banks have introduced collateral free loan, it is important to develop and adhere to a common norm in bank-SME relationships so that the SMEs can access credit in a timely and efficient manner. Apart from catering to collateral free loans for SMEs, banks and NBFIs need to evolve and expand innovative financial product lines for SMEs to meet their diverse demands, such as raising funds through syndication and domestic factoring which have emerged as successful tools of SME financing in many countries. Like in many East Asian countries where SMEs have played key roles in promoting rapid industrial and export growth, Bangladesh needs to adopt its own model of creating institutions and support mechanisms for SMEs covering government, private, and NGO sectors. In addition to finance, this should involve technical support system for providing technical extension services directly to the SMEs in which institutions like BSCIC, BSCIR, and other public and private sector agencies would play key roles in serving the SME sector. In order to be effective, targeting strategies can be used, such as using a system of special designation to select SMEs that would receive priority in allocation of
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the support programs. Such special designations could include several categories such as promising SMEs program, technically advancing SMEs program, and the like. If necessary, SME sanctuaries could be established through which certain product lines would be reserved for SME production over a given period and preferential support would be given to SMEs producing import substitutes of technology-intensive imported components and products. The thrust would be to offer comprehensive sets of assistance programs to facilitate the SMEs to upgrade themselves, increase productivity, and improve competitiveness. The efforts could be built using a network approach to providing assistance in financing, production technology, management, R & D, environmental protection, and other areas. The network would include various government institutions, public and private financial institutions, professional groups, and relevant trade bodies and associations. The broad based package of assistance to SMEs could be administered under the networking approach. A local SME upgrading program could be introduced through creating a tripartite partnership among multinational corporations (MNCs), local SMEs, and the government under which MNCs would provide focused assistance to their suppliers to improve quality and operational efficiency. The scope of work of separate SME windows/dedicated desks for catering to SME loan could be broadened to provide comprehensive SME related one stop services including financial counseling and resource availability, business development strategy and availability of support services, and marketing strategy and export linkages. If necessary, a SME training and marketing fund may be created to support training facilities and export promotion activities. For accelerating future growth and viability of the SMEs, technological innovation and knowledge transfer, product diversification, and marketing services are the key areas where special attention are needed. The adoption of a comprehensive road map, jointly worked out for implementation through public-private collaboration, for technological and marketing services for the SMEs can go a long way in creating a competitive SME sector in the country with required export linkages.

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Finally, an important issue for SME development in Bangladesh is to set a vision and adopt a pro-active SME promotion policy that would facilitate a rapid transition from traditional to relatively modern product categories along with higher capitalization and use of better production technologies. This will help up scale the existing low productivity informal SMEs and deepen their links with mainstream growth seeking activities. As such, the development of SMEs in the country calls for a re-thinking of the present nature of micro credit interventions to address the second generation issues of credit up scaling and technology diffusion necessary to create sustained impact on poverty reduction.

Supportive Policies and Institutional Arrangements of SME

The economic efficiency and overall performance of the SMEs are considerably dependent upon the macroeconomic policy environment and specific promotion policies pursued for their benefit. Examination of the policy environment and institutional support within which SMEs operate suggests that despite stated objectives of successive governments, the broad macro policy regime remains biased against SME development. Allocations of public sector investments, trade policies and taxation policies in particular have mostly been anti-SME development in character and contents (ADB, 2002). The specific promotional policies and support measures such as extension services, financial and physical support form the public sector agencies and the development partners have also not always been adequately effective. Weak and inefficient management and lack of proper implementation of the various policy support measures have rendered various assistance relate business advisory services, such as training, credit marketing and physical infrastructural facilities (through BSCICs Industrial Estates Programme), much less effective than desired. The private sector efforts through participation of MIDAS, BASIC and selected NGOs (especially GB, BRAC and Proshika) have not so for been adequate especially in SME promotion. SMEs because of their structural weaknesses, such as, scale barriers, inefficient management and weak technological capacities need pro-active policies and institutional support in addition to removal of existing policy biases.

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While getting the government out of business and greater participation of the private sector are now emphasized as key strategies for development, some public sector participation for desirable monitoring of selected essential public services such as, effective legal and judicial procedures, commercial contracts, and land settling arrangements and such will still be necessary. Analysis of the existing institutional support for SMEs reveals similar failings across the agencies with poor operational efficiency due to numerous structural and administrative and managerial bottlenecks. Discussion follows on some of the existing institutions of the country, which are working in the broad SME sector. Bangladesh Small & Cottage Industries Corporation (BSCIC): BSCIC has been acting as the state-run policy coordinator, service developer and distributor of facilities in the SME sector. A major responsibility of the Corporation has been to mobilize policy support for improving the economic environment, particularly for the benefit of the SMEs. Its services constitute inputs in the areas of land development (estate building) technology transfer, credit rationing, training, design development among other. Unfortunately, BSCIC could not perform as expected although its achievement in physical terms particularly in estate building over the past 40 years is impressive. Eighty-one percent of the developed plots (7069 out of 8763) have been allotted to the entrepreneurs as of October 2003. But only 2495 i.e. 30% of the plots have been used for actual industry building. One can see that there has been a lot of waste of public money in idle investments in BSCIC. BSCIC, therefore, urgently needs reforming. It can play its planned catalytic role in the SME sector only after reforming itself. With reference to reform, however, a word of caution is necessary. Experience suggests that under any reform program BSCIC or for that matter any state run organization in Bangladesh must not be given any regulatory or licensing role over the SME sector or on any private sector initiative. Bangladesh Industrial Technical Assistance Center (BITAC): Bangladesh Industrial Technical Assistance Center (BITAC) was set up by government as an autonomous body under the Ministry of Industries. Its mandate is to: (a) train industrial personnel to upgrade their skills; (b) render technical advice to industries; (c) disseminate modern know-how and improved techniques among industrial personnel; (d) manufacture and supply spare parts, tools and machines; and (e) develop equipments tools and processes. BITAC has since its birth played an
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important but limited role by facilitating transfer of technology to the industrial sector of the country besides developing human resources through its skill development training programs. However, it has suffered from chronic paucity of funds necessary for conducting training and modernization. This venerable organization with years of experience and goodwill should be reenergized and enabled to play its due role in the national economy. Bangladesh Council for Scientific & Industrial Research (BCSIR): Bangladesh Council for Scientific & Industrial Research (BCSIR) has also remained an underutilized organization in spite of its potential. Particularly, its regional establishments in Chittagong and Rajshahi should have been fully used to undertake research in locally available materials, which can be used as inputs by the SMEs. The agencys research in the area of Soya foods and Spirulina for example has attracted attention of the public but there has been no sustained effort by BCSIR to remain in the public view. Years of neglect and fund starvation have stifled the growth of BCSIR. Other Institutions: Over the years a number of semi government and private sector institutions have become active in the SME area. Some of these like the BASIC Bank, and just named BCSIR are in the public sector. But more importantly NASCIB, MIDAS, CARITAS, Kumudini, Banglacraft to name a few are some of the organizations, who have appeared in the private sector and are contributing to promotion and development of the SMEs particularly those in the traditional sector. However, more SMEs should be encouraged and assisted to form their own associations and build-up links with the national bodies. The major non-government private sector support agencies in the field of finance include a large number of non-government microfinance organizations (NGOs). Their work among the landless & asset less poor through infusion of microfinance has activated millions of miniscule SMEs across the country.

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SME: Systematic Framework

Market development is a broad concept which envelops a number of interconnected factors. In general, demand and supply characteristics associated with products determine their market prospects. Therefore, at the outset it may be convenient to sketch a conceptual framework with the underlying demand and supply-side factors exerting significant influences on the development of the market for SMEs. Figure 1 is such a diagrammatic representation of the framework. Any market is characterized by the demand and supply side considerations.

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As presented in Figure 1, the demand for SME products can be thought of arising from consumers in domestic as well as foreign economies. On the supply side, firms will try to continue (or expand) the production of commodities for which markets already exist and they may also introduce new products. Now there are a number of factors that may affect the supply and demand sides, for products produced by SMEs, either individually or through some interaction between them. First let us consider the demand side. Purchasing power of consumers is one of the most important demand side factors. Particularly if any SME is only supplying its products to the domestic economy, consumers purchasing power will determine the size of the market. For goods with fairly elastic demand, changes in their prices can also greatly affect demand. Since individuals SMEs are most likely to be price taker, they cannot exert any significant influence on price. At the aggregate level, improved productivity and/or large foreign supplies can result in lower price stimulating the demand. However, in the case of goods with price inelastic demand, movement in prices will only have a little effect. For such goods given the productivity any expansion of supply (either by domestic industry or by imports) will cause a fall in overall industry revenue and only an increase in demand will expand the market (in terms of total expenditures by consumers). Markets in poor countries are small and global markets can remove the constraint of lower purchasing power. Despite a fascinating academic debate, it is widely believed most export items supplied by poor countries like Bangladesh are faced with a highly elastic demand in international market and as a result it is the supply side factors rather than demand that determine export success. Trade policies of the trading partners can also significantly influence the demand. High tariffs, quantitative restrictions, subsidies, and other non-tariff and technical barriers can undermine the competitiveness and access of domestic SMEs in their markets. There are other instances, however, when such policies can also be beneficial. For example, it is widely regarded that Multi-fiber Arrangement (MFA) quotas in textiles and clothing imports of western developed countries facilitated the growth of RMG sector in Bangladesh (Rahman and Razzaque, 1998). Also, various trade preferences extended by the developed countries to he developing world have benefited the latter.

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Quality of products and services has become another import demand side factor particularly in the western developed countries. In many cases, suppliers need to demonstrate their capability in maintaining proper quality control for their products and services. Quality control, assurance and management systems, accreditation and certification, quality marks and labels, standardization, etc. are often considered as technical barriers to trade, especially with regard to international competitiveness and globalization, nevertheless they have emerged as important factors in global marketing of goods. Certain standards in the production of goods and services have been developed and are widely used to assure consumers of the quality of the products that they are purchasing. Timely delivery and availability of goods influence demand significantly. The consumption pattern of many products are related to seasonal cycle and as a result delayed or untimely supply may be of no use. On the other hand, goods must be available in the market for consumption and to be demanded. In todays world marketing of goods is a determining factor for demand for many goods. Advertisement, brand names, and various means of popularizing products are indispensable components of business strategy. Finally, in recent times social campaigns by different pressure/lobbying groups seem to have had impact on demand. In the early- to mid1990s lobbyists in the US made vigorous campaign to boycott RMG products of Bangladesh alleging that children were being exploited in garment factories. On the supply side, SMEs will try to continue and expand the production of the goods for which markets already exist or introduce new products. Despite the significance of the demand side factors, many argue that supply side constraints are most important. Resource constraints such as lack of investible resources and working capital will certainly hamper production, which may be exacerbated by shortage of skilled workers. Unavailability of information not only inhibits firms introducing new products and exploring new markets but also entering into business. Besides, there are certain other factors that determine the competitiveness of SMEs and consequently survival in the market. While trade policies can promote some enterprises, others may be affected severely as a result of it.10 Physical infrastructure, transport cost; domestic environment, etc. may also be responsible for firms competitiveness. These factors will be discussed further in the next section.

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It needs to be mentioned here that the demand and supply side factors do not operate in isolation. Rather, they interact amongst themselves to aggravate the situation further. For example, weak physical infrastructure, hostile domestic environment, corruption, transport cost, and shortage of skilled workers may are likely to affect investment. Again, factors like domestic environment and corruption can aggravate such demand side constraints as timely delivery, availability, and social campaign.

SME: Major Priority needed for Development

The role of SMEs in providing productive employment and earning opportunities has emerged as an important concern among policy makers, donor agencies and researchers. This growing commitment towards the development of the SME sector is based largely on three core arguments. First, SMEs enhance competition and entrepreneurship, and hence have external benefits on economy-wide efficiency, innovation and aggregate productivity growth. Thus direct government support of SMEs will help countries exploit the social benefits from greater competition and entrepreneurship. Second, SMEs are generally more productive than large firms, but financial market and other institutional failures impede SME development. Thus, pending financial and institutional improvements, direct government financial support to SMEs can boost economic growth and development. Third, SME expansion boosts employment more than large firm growth because SMEs are more labor intensive. From this perspective, subsidizing SMEs may represent a poverty alleviation tool. SMEs are considered to be the seedbed for the development of entrepreneurial skills and innovation. Small capital requirement makes easy entry and exit possible and private sector entrepreneurial activities have many important spillover and positive externality effects.
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However, liberalization of the economy along with rapid globalization has posed severe challenges to SMEs not only in international markets but also in the domestic economy. Since SMEs are based on relatively small investment, their survival depends on readily available markets with easy access. In todays world, market development is a much more challenging task, which requires coordinated efforts by individual business enterprises and the Government.

SME: Position in the Economy of Bangladesh

Any precise quantitative estimate of the importance of SMEs in Bangladesh economy is precluded by non-availability of comprehensive statistical information about these industries at the national level. Latest BSCIC estimates suggest that there are currently 55,916 small industries and 511,612 cottage industries excluding handlooms. Including handlooms, the number of cottage units shoots up to 600,000 units indicating numerical abundance of small and cottage industries (SCIs) in Bangladesh. The most recent private sector survey estimates the contribution of the micro, small, and medium enterprises (MSMEs) is 20-25% of GDP (Daniels, 2003). Quoting informal Planning Commission estimates, the SEDF puts the number of medium enterprises (undefined) to be around 20,000 and that of SCIs to be between 100,000 to 150,000. This wide variation in the BSCIC and Planning Commission estimates of the number of SMEs might be due to at least two reasons: (a) different definitions of SMEs and (b) different coverage of SME families. There is an urgent 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. Regardless of the correct magnitude, SMEs undoubtedly play a very important role in the economy of Bangladesh in terms of output, employment, and private sector activities. They are quite predominant in the industrial structure of Bangladesh comprising over 90% of all industrial units. Together, the various categories of SMEs are reported to contribute between 80-85% of industrial employment and 23% of total civilian employment (SEDF, 2003). However, serious controversies surround their relative contribution to Bangladeshs industrial output due to
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paucity of reliable information and different methods used to estimate the magnitude. The most commonly quoted figure by different sources (ADB, World Bank, Planning Commission and BIDS) relating to value added contributions of the SMEs is seen to vary between 45-50% of the total manufacturing value added. While SMEs are characteristically highly diverse and heterogeneous, their traditional dominance is in a few industrial sub-sectors such as food, textiles and light engineering and wood, cane and bamboo products. According to SEDF sources quoted from ADB (2003), food and textile units including garments account for over 60% of the registered SMEs. Various recent studies show that SMEs have undergone significant structural changes in terms of product composition, degree of capitalization and market penetration in order to adjust to changes in technology, market demand and market access brought by globalization and market liberalization. Broadly four industry categories (food and allied products, textiles and apparels, and engineering and fabricated metal products) currently dominate the SME sector. In recent years, other industries which have grown in importance in the SME sector are light engineering, readymade garments, printing and publishing, wood and wood products, plastic products, electrical goods, electronics, artificial jewelry, wooden and steel furniture, television and radio assembling and soaps and detergents. The growth in new sectors is reflective of a structural change taking place in the SME sector from traditional to relatively modern product categories, perhaps with higher capitalization and use of better production techniques. Summarizing the findings of various major studies the SEDF lists the following important positive changes taking place in the situation of the SMEs in Bangladesh: SMEs have diversified their activities Entry and exit into the sector has become easier The RMG industry has contributed significantly to SME development by providing them with orders for accessories and packaging materials The development of the footwear industry has increased subcontracts to SMEs Small-scale entrepreneurship has grown significantly in agro-processing in general and in poultry in particular

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Banking sector involvement in SME

SME financing is a high risk service with low profit, discouraging the banking sector to extend loans to this sector. However, banks cannot ignore an emerging sector like SMEs. That is why; banks are continuously endeavoring to evolve appropriate model(s) of financing SMEs. Generally, banks provide both working and other than working capital financing to large and medium as well as small industries. Unfortunately, information regarding financial contribution by banks to this sector is not segregated. We have reviewed the contribution of different type of banks to this sector published by Bangladesh Bank. It is clear that both working capital and other than working capital financing is higher in large and medium industries than that of small industries. Recently, working capital financing has been increased in large and medium as well as in small industries. That may be because of the recently formulated USD 30 million Small and Medium Enterprise Sector Development Project in Bangladesh Bank. However, in this chapter, I have shown that in terms of contribution to SMEs, nationalized commercial banks (NCBs) come first followed by private commercial banks (PCBs) and specialized banks (SBs). The reason behind the upward contribution of PCBs is that a fund of BDT 116.00 Crores under the Credit Agreement No. 1070-BAN (SF), signed between the GOB and ADB on 25 January 1991 (Siddiquee, 2003). Credit disbursements under the above credit scheme totaled BDT 95.33 Crores against 183 SCI projects on 8 October 1998. The growth rate of PCBs declined thereof. Under another credit guarantee scheme, Government released BDT 25.00 Crores to Bangladesh Bank for providing guarantee facility to investors in SCIs. However, the growth became quite sluggish in the year 2000 and 2001 because of the abeyance of new proposals under the scheme as per decision of the Ministry of Finance of 14 September 1999. Moreover, only the NCBs have extended credit to priority sectors in response to government directives that at least 5% of a banks loan portfolio be set aside for SCIs financing, although this is not sufficient. The contribution of PCBs in developing this sector is very meager. It seems that they even do not care for the government directives. For example, in 2001, NCBs have outstanding loans and advances of BDT 504.93 Crores in SCIs, which is 1.54% of total loans and advances outstanding, whereas PCBs have BDT 303.32 Crores (0.86% of total loans and advances outstanding) and SBs have BDT 110.74 Crores (1.02% of total loans and advances).

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SME: Credit Products and Services offered by Banks

SME financing is a new product in the range of services provided by banks. SME loan is different from other loans, not only because this is small in size, but also because its modalities are different. Nevertheless, to foster the growth of SME sector, various financial institutions now offer a wide range of products and services to SMEs in many countries. Unfortunately Bangladesh still has a scarcity of SME financing institutions or SME financing products and services. For example, two banks namely BASIC Bank (SME financing covers almost 100% of the loan portfolio) and BRAC Bank Limited (extends over 50% of the loan portfolio) are specifically devoted to SME financing. Other commercial banks are also open for SME finance, though their coverage is low. However, commercial banks should not be the only source of SME financing. There are other financial institutions, which finance SMEs worldwide, such as the SME Department of International Finance Corporation (IFC), World Bank Group. IFC has extended the SME financing facilities to Bangladesh through the South Asia Enterprise Development Facility (SEDF) along with the 13 local Partner Financial Institutions (PFIs). The PFIs include commercial banks (such as Arab Bangladesh bank Ltd., BRAC Bank Ltd., Dhaka Bank Ltd., Southeast Bank Ltd., and The City Bank Ltd.), leasing companies (e.g., Industrial Development and Leasing Company of Bangladesh Ltd. (IDLC) and United Leasing Company Ltd), and SME Banks. SEDF PFIs have subscribed to the concept of SME finance and have worked towards this. SEDF has already developed Credit Scoring modules at 7 PFIs. This enables these PFIs to reduce the time requested for screening SME loan applications. Moreover, a comprehensive risk grading framework has been developed for a PFI which enables the company to better manage its lending risks and adopt risk-based loan pricing policies. SEDF assists two PFIs in setting up separate SME departments. This includes establishing the appropriate strategy, organizational structure, operational processes and risk management. SEDF is also conducting a detailed segmentation study of the SME market in Bangladesh. Depending on the entrepreneurs financing needs and the suitability of such financing to their ventures, a wide variety of products offered in the market. The products or instruments available

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globally for channeling funding to SMEs include but not limited to term loans, leasing, industrial hire-purchase for asset acquisition/business expansion, overdraft (OD), revolving credit, factoring, letter of credit (L/C), trust receipts, bankers acceptance (BA), foreign exchange contracts, bills of exchange purchased, etc. for working capital needs, outward/inward bills for collection (OBC/IBC) for trade services and Bank Guarantee (BG), and Shipping Guarantee (SG) for different guarantee services. For example, IFC has developed products like Leasing, SME Risk Capital, Equity Funds and services like Credit lines, Credit bureaus etc. that can expedite the total process of SME financing. To enquire about the availability of SME financing products and services, I have surfed a number of commercial banks website as well as the websites of other financial institutions, such as IDLC of Bangladesh and IPDC of Bangladesh. I have found that some of them do provide some .innovative products or services solely targeting SMEs, while others have repackaged some of their existing products as SME products. For example, BRAC Bank introduces .Anonno Rin, Apurbo Rin, Pathshala Rin, Aroggo Rin, Digoon Rin and Supplier Finance. The City Bank Ltd. has Cash Credit (Hypothecation), Cash Credit (Pledge), Secured Overdraft, SOD Against Work Orders), Dutch Bangla Bank Ltd. has .Small Shop Financing Scheme., Overdraft, Cash Credit (Hypothecation) Eastern Bank Ltd. has Current A/C, STD A/C, Fixed Deposit A/C, Overdraft/Cash Credit, Demand loan, Time Loan, Term Loan, Letter of Credit, Import Loan, Guarantee, Local Bill Purchase, Foreign Bill Purchase), Prime Bank Ltd. introduces Small & Medium Enterprise (SME) Cell, which has access to USAID funds; Pubali Bank Ltd. has mere Term Loan; Social Investment Bank Ltd. has Special Credit Line for Small and Medium shop owners; and South East Bank Ltd. has only Term Loan. Among the non-bank financial institutions (NBFIs), IDLC of Bangladesh mainly focus on SME financing by providing business solutions through financial products like business loan, machinery loan, double loan and lease finance. They have introduced .factoring first in the
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country. Among other sophisticated SME financing instruments, Industrial Promotion and Development Company (IPDC) of Bangladesh has introduced the first asset securitization in Bangladesh in 2004, followed by IDLC of Bangladesh with Asset Backed Securitized Zero Coupon Bonds of BDT 190 million in 2005.

An in depth analysis about the contribution of Industry sector on GDP for past forty
years (1969 to 2011)

Rapid and sustainable development and social progress essentially call for industrialization in an economy. The industry sector has, therefore, got to play a critical role in this regard. The contribution of this important sector to Bangladesh economy has been on the increase. While in FY 1969-70, the contribution of the broad industry sector to real GDP was 428.1 crore taka, it increased to 156590 crore taka in FY 2011-12. Among the fifteen sectors identified for computing national income, the broad industry sector includes five sub-sectors such as:

Mining and quarrying; Manufacturing; Construction; Electricity and gas and Water supply.

Among these sub-sectors, the contribution of the manufacturing sector is the highest.

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Industry Contribution To GDP(1969 to 2011)

Industry

The above graph shows the contribution to GDP of the Industry sector as a whole. Contribution of this sector to the economy had been growing at an increasing g rate since independence. Growth rate was stabilized from the FY 1990-91, and before that, the sector experienced negative and sloth growth rates. The contribution to the GDP was only 428.1 crore taka in the FY 1969-70 and now it stands at 156590 crore taka on FY 2011-12. The growth rate was not smooth, and fluctuated a lot. Growth declined during FY 2006-07 and 2009-10.

Growth Rate of Industry contribution to GDP

50 40 30 20 10 0 -10 -20 Industry

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As is depicted by the graph, the growth of the industry sector shows a lot of fluctuations for the forty year time period. The country experienced negative growth during FY 1973-74 and FY 1975-76. Also during FY 1980-81 and FY 1984-85. Growth rate fell during FY 2007-08 to FY 2009-10 due to the global financial crisis. Otherwise, the rate remained more or less steady starting from 1987-88. The growth rate rose to a maximum of 12% during FY 1976-77 FY 1978-79. The sector experienced the maximum negative growth of -10.9 percent during the FY 1974-75.

Gross Domestic Product (GDP) at Current Prices (1972 to 2011)

Large-scale

Small-scale

The above graph shows the contribution of the small, medium and large industries in GDP for a forty year time period. Though the contribution of the sectors remained very low up to the FY 1988-89, the sector showed noticeable growth in the following periods. While it was only 120 and 274 for large and medium and small industries (respectively) for the FY year 1972-73, it stands at 112625 and 43965 for large and medium and small industries respectively for the FY 2010-11. As the graph shows, growth rate has increased noticeably from the FY 1988-89, when the contribution of the large and medium and small industries to the countrys GDP were 3141 and
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2420 respectively. The industry contribution had been increasing at an increasing rate since then, with the large and medium industries growing at a higher yet more fluctuating rate and the small industries growing at a more stable but lower rate. The growth rate of the small industry sector gave a start from the FY 1990-91. The growth rate of the large and medium industries increased and decreased frequently.

Large & Small Scale Industry Growth Rate

160 140 120 100 80 60 40 20 0 -20 -40 Large-scale Small-scale

As we look at the growth of the large and medium and small industry sectors separately, we can see that the growth rate of the large and medium enterprises had been higher than that of the small enterprises. However, growth for the large and medium enterprises had been more fluctuating, while the small enterprises experienced more or less stable growth rate. The growth rate for the small sector became noticeable mainly from the FY 1990-91, and remained more or less steady throughout the forty year period except for decline in 1998-99 and FY 2007-08 and FY 2008-09, due to declining economic conditions. The vision of the Government is that Bangladesh will have, by 2021, a dominant industrial sector where industrial sector will account for at least 40 percent of the gross domestic product (GDP) with a capacity to absorb 25 percent of the workforce. The Government, therefore, aims to take coordinated steps to accelerate the development of all important industrial sectors which should be environment-friendly and technologically advanced.

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Medium to Large Scale Industries

Medium to Large Scale Industries

The Quantum Index of Production (QIP) is an important tool for measuring the production performance of manufacturing industries. Data available from Bangladesh Bureau of Statistics (BBS) shows that QIP (1988-89=100), representing medium to large-scale industries, had been 122.73 for the year 1991-92, and rose to 122.73 in FY 1991-92. He next fiscal year the average QIP stood at 141.8, and it rose to 153.89 for the year 1993-94. The year after that had a QIP of 163.33, which rose to 173.5 and 179.3 for the next two years. The following years experienced a growing trend of QIP that was more or less steady in nature. However a sharp increase in QIP is seen on the FY 2010-11, due to the Government announcing the National Industrial Policy 2010. In order to accelerate the pace of industrialization in the country, the Government announced the realistic Industrial Policy. This increased the performance of the Industry sector and QIP rose from 442 to 580.

The important and underlying objectives of the Industrial Policy 2010 include generation of productive employment, mainstreaming women in the industrialization process and poverty alleviation. To these ends, consistent with the imperative that labor-intensive industries are more suited than capital-intensive industries, the policy document spells out measures for the promotion of cottage, small and medium industries (SMEs). It also spells out special efforts for ensuring diversified uses of jute to make the jute industry profitable. Small and Medium Enterprises (SMEs), by producing exportable surpluses of commodities together with fulfilling local demands are making significant contribution to the economy of the
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country. This sector is a potential sector in terms of local value additions and creation of employment opportunities. As the large potential of employment generation by SMEs has attracted attention of the policy makers and observers, a range of initiatives for channeling loans to SMEs are being taken.

An in depth analysis about SME refinancing for past five years (2006 to 2011)
SME has been considered as the thrust sector in the economic development of the country with growing importance from all walks of life. It is evident that, substantial increase in SME and Retail Credit portfolios along with commercial, corporate and institutional lending, would lead the banks to its higher trajectory of growth, minimizing the risk of lending through portfolio diversification. As such, most of the banks have taken up aggressive marketing policy to augment their exposure in SME and Retail Credit. Though SME concept is nothing new, as evident from the establishment of Bangladesh Small and Cottage Industries Corporation (BSCIC), but a fresh look into and Endeavour to boosting the sector are still imperative. Bangladesh Bank re-finance scheme for SME is laudable. The role of IFC-SEDF for creating awareness among the entrepreneurs and banks/NBFIs to be more focused in SME deserve appreciation. In view of the limited access of SMEs to credit facilities from the formal banking system, Bangladesh Bank has opened a window of SME refinancing facilities for the commercial banks and the non-bank financial institutions (NBFIs) so that they can accommodate a larger amount of SME financing for which BB earmarked a refinance scheme fund of Tk. 3 billion which has recently been raised to Tk. 5 billion. Currently banks and financial institutions are also coming forward to provide finance to this sector alongside traditional financing from personal and family savings. Bangladesh Bank is operating three funds such as Bangladesh Bank Fund, IDA Fund and ADB Fund for refinancing the scheduled banks and financial institutions against the disbursed loans. These funds are being used as revolving fund. In order to avail of the refinancing facilities, participatory agreement has already been signed between Bangladesh Bank and 22 banks and 24 financial institutions. At present, 21 banks and 22 financial institutions are availing of these refinancing facilities.
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In FY 2005-06 (upto June,

Types of Refinance (Up to June 30, 2006 )
7.81 15.45 10.23

2006),

Tk.

226.69226.69

million has been disbursed

36.32 37.52

Amount Refinance (In million/Taka)

Long term

to
76.71

banks

and

financial

Mid Term 1.66

institutions for refinancing of 3281entrepreneurs from the three funds. These facilities

Working Capital

17.94 23.05 a) Bangladesh Bank

refinancing
c) ADB b) IDA

included disbursement of 136.08 million from

Bangladesh Bank Fund (no. of beneficiaries were 2164), Tk. 70.91 million from the IDA Fund (the number of entrepreneurs was 930) and Tk. 19.7019.70 million from the ADB Fund (the number of entrepreneurs was 187). The refinancing facilities provided to 3281 entrepreneurs are comprised of working capital (Tk. 42.65 million), Mid Term Loan (Tk. 124.46 million) and Long Term Loan (Tk. 59.58 million).

Amount Refinance(In million/Taka) Up to June 30,2006

Number of beneficiary enterprises (Up to June 30,2006)

a) Bangladesh Bank

b)

IDA

c)

ADB

a)

Bangladesh Bank

b)

IDA

c)

ADB

a)

Bangladesh Bank

b)

IDA

c)

ADB

The above pie chart clearly shows that the majority loan provided to the SME sector is by Bangladesh Bank, providing about 60% of the total loan, while IDA comes second, providing almost 31% of the loan and ADB providing the rest 9 of the loan to the SME sector. In case of beneficiaries covered, Bangladesh Bank covers most of the entrepreneurs while IDA covers the rest, with a few covered by the ADB.
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Types of refinance (Up to June 30, 2007)

19.3

In FY 2006-07 (up to June, 2007), Tk. 453.91 million

Amount Refinance (In million/Taka)

has been disbursed to banks

37.17 79.67

Long term

and financial institutions for refinancing

125.83

Mid Term

25.31

53.13

of

5411

entrepreneurs from the three funds. facilities These refinancing included of 251.25

Working Capital

32.77 34.98 45.75 b) IDA a) Bangladesh Bank

c)

ADB

disbursement million from

Bangladesh

Bank Fund (no. of beneficiaries were 3273), Tk. 125.28 million from the IDA Fund (the number of entrepreneurs was 1446) and Tk. 77.38 million from the ADB Fund (the number of entrepreneurs was 692). The refinancing facilities provided to 3281 entrepreneurs are comprised of working capital (Tk. 113.50 million), Mid Term Loan (Tk. 204.27 million) and Long Term Loan (Tk. 136.14 million).
Amount Refinance (In million/Taka) (Up to June 30,2007) Number of beneficiary enterprises ( Up to June 30, 2007)

a)

Bangladesh Bank

b)

IDA

c)

ADB

a)

Bangladesh Bank

a) Bangladesh Bank

b)

IDA

c)

ADB

b)

IDA

c)

ADB

The above pie chart clearly shows that the majority loan provided to the SME sector is by Bangladesh Bank, providing about 55% of the total loan, while IDA comes second, providing almost 3128% of the loan and ADB providing the rest 17% of the loan to the SME sector. In case of beneficiaries covered, Bangladesh Bank covers most of the entrepreneurs while IDA covers the rest, with a few covered by the ADB.
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Types of Refinance (Up to June 30, 2008)

38.54 49.32 63.48 71.49 87.65 79.21 a) Bangladesh Bank

In FY 2007-08 (upto June, 2008), Tk. 762.54

Amount Refinance (In million/Taka)

million
123.45

has

been

Long term

disbursed to banks and financial institutions for

206.75

Mid Term

refinancing

of

8356

Working Capital

42.65

entrepreneurs from the three funds. These facilities

c)

ADB

b)

IDA

refinancing

included disbursement of 409.41 million from Bangladesh Bank Fund (no. of beneficiaries were 4630), Tk. 163.46 million from the IDA Fund (the number of entrepreneurs was 1962) and Tk. 189.68 million from the ADB Fund (the number of entrepreneurs was 1764). The refinancing facilities provided to 3281 entrepreneurs are comprised of working capital (Tk. 209.52 million), Mid Term Loan (Tk. 341.72 million) and Long Term Loan (Tk. 211.31 million).
Amount Refinance (In million/Taka) (Up to June 30, 2008)

Number of beneficiary enterprises (Up to June 30, 2008)

a) b) c)

Bangladesh Bank IDA ADB

a) a)

Bangladesh Bank IDA c) b) b) IDA

ADB c) ADB

Bangladesh Bank

The above pie chart clearly shows that the majority loan provided to the SME sector is by Bangladesh Bank, providing about 54% of the total loan, while ADB comes second, providing almost 25% of the loan and IDA providing the rest 21% of the loan to the SME sector. In case of beneficiaries covered, Bangladesh Bank covers most of the entrepreneurs while IDA covers the rest, with a few covered by the ADB.
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Types of Refinance (Up to June 30, 2009)

Amount Refinance (In million/Taka) 52.75 66.59 112.82 96.4 61.51 138.68 178.48 a) Bangladesh Bank

In FY 2008-09 (upto June, 2009), Tk. 1245.2 million has been disbursed to

Long term Mid Term Working Capital

201.56 336.4

banks

and

financial

institutions for refinancing of 12401 entrepreneurs from These the three funds.

refinancing included

c)

ADB

b)

IDA

facilities

disbursement of 716.44 million from Bangladesh Bank Fund (no. of beneficiaries were 7001), Tk. 224.50 million from the IDA Fund (the number of entrepreneurs was 2477) and Tk. 304.25 million from the ADB Fund (the number of entrepreneurs was 2923). The refinancing facilities provided to 12401 entrepreneurs are comprised of working capital (Tk. 378.68 million), Mid Term Loan (Tk. 545.62 million) and Long Term Loan (Tk. 320.90 million). Amount Refinance (In million/Taka) Up to June 30, 2009 Number of beneficiary enterprises (Up to June 30, 2009)

a)

Bangladeshb) IDA c) Bank a)

ADB

Bangladesh Bank ADB

a)

Bangladesh Bank

b)

IDA

c)

ADB

b)

IDA

c)

The above pie chart clearly shows that the majority loan provided to the SME sector is by Bangladesh Bank, providing about 58% of the total loan, while ADB comes second, providing almost 24% of the loan and IDA providing the rest 15% of the loan to the SME sector. In case of beneficiaries covered, Bangladesh Bank covers most of the entrepreneurs while IDA and ADB cover the rest.

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Types of Refinance (Up to March 31, 2010)

58.19 87.26 132.27 100.74 144.48 224.8 a) Bangladesh Bank

In FY 2009-10 (upto June, 2010), Tk. 1540.94

million has been disbursed

235.7

Amount Refinance (In million/Taka)

Long term

to banks and financial institutions for refinancing

493.79

Mid Term

of 15672 entrepreneurs from These facilities the three funds.

Working Capital

63.71

refinancing included

c)

ADB

b)

IDA

disbursement of 954.28 million from Bangladesh Bank Fund (no. of beneficiaries were 9828), Tk. 251.71 million from the IDA Fund (the number of entrepreneurs was 2584) and Tk. 334.94 million from the ADB Fund (the number of entrepreneurs was 3268). The refinancing facilities provided to 1567.2 entrepreneurs are comprised of working capital (Tk. 432.99 million), Mid Term Loan (Tk. 726.8 million) and Long Term Loan (Tk. 381.1 million).
Amount Refinance (In million/Taka)Up tp March 31, 2010 Number of beneficiary enterprises (Up to March 31, 2010)

a) a) Bangladesh Bank b) IDA c) ADB a)

Bangladesh b) IDA c) Bank b) IDA

ADB c) ADB

Bangladesh Bank

The above pie chart clearly shows that the majority loan provided to the SME sector is by Bangladesh Bank, providing about 62% of the total loan, while ADB comes second, providing almost 22% of the loan and IDA providing the rest 16% of the loan to the SME sector. In case of beneficiaries covered, Bangladesh Bank covers most of the entrepreneurs while IDA and ADB cover the rest
Page | 40

Types of Refinance (Up to June 30, 2011)

68.7 99.8 168.71 132.47 144.48 80.34

In FY 2010-11 (upto June, 2011), Tk. has 1930.66 been

Amount Refinance (In million/Taka)

million
288.33

Long term

disbursed to banks and financial institutions for

673.72

Mid Term

refinancing entrepreneurs three

of

21191 the

Working Capital

274.11 Bangladesh Bank

from

funds.

These facilities

c)

ADB

b)

IDA

a)

refinancing

included disbursement of 1236.1 million from Bangladesh Bank Fund (no. of beneficiaries were 1386.9), Tk. 312.61 million from the IDA Fund (the number of entrepreneurs was 3160) and Tk. 381.89 million from the ADB Fund (the number of entrepreneurs was 4162). The refinancing facilities provided to 21191 entrepreneurs are comprised of working capital (Tk. 498.93 million), Mid Term Loan (Tk. 974.90 million) and Long Term Loan (Tk. 456.8 million)

Amount Refinance (In million/Taka) Up to June 30, 2011

Number of beneficiary enterprises (Up to June 30, 2011)

a) a) Bangladesh Bank b) IDA c) ADB a)

Bangladesh Bank IDA c) b) b) IDA

ADB c) ADB

Bangladesh Bank

The above pie chart clearly shows that the majority loan provided to the SME sector is by Bangladesh Bank, providing about 64% of the total loan, while ADB comes second, providing almost 20% of the loan and IDA providing the rest 16% of the loan to the SME sector. In case of beneficiaries covered, Bangladesh Bank covers most of the entrepreneurs while IDA and ADB cover the rest.
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Types of refinancing (FY 2006 to 2011)

Up to June 30, 2006 Working Capital Mid Term Long term 42.65 124.46 59.58

Up to June 30, 2007 113.5 204.27 136.14

Up to June 30, 2008 209.52 341.72 211.31

Up to June 30, 2009 378.68 545.62 320.9

Up to March 31, 2010 432.99 726.8 381.15

Up to June 30, 2011 498.93 974.9 456.83

As we can see from the above chart, the highest amount of SME loan provided by the three major institutions was in the form of mid term loan. It is granted for 1-3 years. The second highest amount of SME loan paid is in the form of working capital loan. In many cases, SMEs are unable to generate the revenue needed to meet expenses incurred by day-to-day business operations. In such circumstances, they may apply for a working capital loan. Unlike most other business loans that allow companies to acquire capital in order to expand, a working capital loan covers only expenses incurred by existing capital and human resources (e.g. utilities, rents, payroll, etc.). Working capital loans are generally granted only to companies with a high credit rating, and are only meant to be used until a company can generate enough revenue to cover its own expenses. The least amount of SME loan provided had been that of long term loans, which are loans paid for more than three years.

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Constraints to SME Growth

It is important to understand the operational strengths and weaknesses of the SME sector for pragmatic policy making and effective implementation of such policies. Given the heterogeneity in the type, composition and characteristics of SME facilities, it is exceedingly difficult to generalize operational constraints. However, common constraints include: Lack of modern technology Lack of adequate investments Irregular/inadequate supply of power High rate of interest on bank loans Inadequate availability of raw materials Absence of clear-cut government policies Fierce competition Lack of skilled technicians and workers Lack of research and development facilities. In addition, lack of institutional credit, non-availability of working capital, low levels of technology, low productivity, and lack of marketing facilities and market access problems are major bottlenecks to SME growth in Bangladesh. In the recent years, domestic law and order conditions, unreliable power supply and stiff competition both in domestic and international markets seem to have been the added dimensions to the SME operational bottlenecks. However, systematic and in-depth studies based on sufficiently large samples are needed to precisely identify the operational woes of the different categories of the SMEs.

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SME: Constraints from Bangladeshs perspectives

Quality and Standards: Bangladesh has failed to ensure the quality of products and services to consumers not only in the domestic market but also in international markets. There is no national quality policy and adequate support systems that provide assistance to all enterprises to understand the principles of quality and to develop quality consciousness in business behavior. Currently, the Bangladesh Standards and Testing Institution (BSTI) formulate national standards of industrial, food, and chemical products. However, the most important problem is that BSTI lacks credibility and importers from North America and Europe do not accept certificates issued by it (Haque, 2003). The other crucial problem is that while BSTI can impose restriction on marketability of local products if they fail to comply with standards, there is no such provision for imported goods. This puts locally produced goods at a disadvantageous position vis- vis competing imports (Feria, et al., 2003). Marketing: SMEs in Bangladesh, especially the small enterprises, do not have enough marketing capability and network. An overwhelming majority of small firms do not have resources to be invested in marketing. Advertisement is an important determinant of demand but SMEs in Bangladesh in most cases are not in a position to use this as a marketing tool. Exportoriented SMEs have very little marketing activities and most of them try to survive by linking up with multinational buyers or setting up subcontracting relationships with them. In the domestic market, SMEs are confronted with cheap imports and are hard pressed to hold on to their market share. Also, a lack of resources and skills make it difficult for SMEs to take advantage of market promotional activities. Investment and Working Capital: One of the most important problems affecting supply is the access to finance. SMEs need finance to enable them undertake productive investment in order to expand their business, to introduce new products, and to market them. Various survey and micro studies in Bangladesh have identified access to finance as the main problem facing the SMEs. In the most recent private enterprise survey (Daniels, 2003), as many as 58% of the surveyed businesses report the problem of lack of investment funds and 35% also mention the problem of lack of operating funds. Banks are shy to lend to SME activities, as they do not consider them as

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attractive and profitable undertakings (Hossain, 1998; Bhattacharya, 2000; and Sia, 2003). SMEs are also regarded as high risk borrowers because of their low capitalization, insufficient assets, and high Restrictive trade policy such as overvalued exchange rate, high tariffs, quantitative restrictions, etc. will create an anti-export bias and as such SMEs in the export-oriented sectors will be affected mortality rates (Sia, 203) and consequently, they are not offered any attractive deals in terms of loans and interest rate. SMEs in the export sector also have the problem of access to working capital and there is no credit insurance policy for them. Shortage of Skilled Workers: Although Bangladesh is a labor abundant country, shortage of skilled workforce is perceived to be a major constraint for manufacturing production. This problem is particularly acute for medium scale export oriented enterprises. Manufacturing goods now overwhelmingly dominate Bangladeshs export basket, but a significant proportion of it comprises very low domestic value addition because of limited backward linkage in the RMG sector, which will require skilled manpower. Therefore, supply capacity is preconditioned by availability of skilled workers. Lack of entrepreneurship and management skills: Most owner-managers and entrepreneurs often lack wider managerial skills that hinder their long-term success. Strategic planning, medium to long-term vision, marketing, commitment to quality, knowledge of quality systems, communicating in foreign languages, cash-flow management, information technology are a few critical elements of management required to meet challenges of the market economy, especially in the international market environment. In such a complex setting since it is not possible for an individual to muster all of these qualities, firms make division of labor. There is some evidence in the context of the developed countries that formal management training can reduce the failure rates of small enterprises (OECD, 2002). However, smaller firms are less likely than larger enterprises to provide training to its workers and managers and are less aware of the benefits they would obtain from management training and few see training as a strategic tool. Besides, there is also a lack of facilities for such training. Physical Infrastructure: The state of physical infrastructure is weak in Bangladesh. It is evidenced that in countries with poor infrastructure, business must devote more resources to such tasks as acquiring information, procuring inputs, and getting their products to market (World Bank and BEI, 2003). There are two dimensions of poor infrastructure one is the unavailability
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of a certain service or utility (such as telephone, water, electricity, roads and highways, etc.) and the other is the unreliability of the services provided. In Bangladesh there are problems on both fronts and together undermines the competitiveness of SMEs. Transport costs: The World Bank-BEI (2003) enterprise level survey finds transport to be a bigger problem in Bangladesh than in some comparator countries. Three factors interact to accentuate this problem. First, the recent research works on economic geography and international trade suggest that unfavorable geographical locations (e.g. distance) increase the costs of both export and import trade relative to countries with more favorable geographical characteristics. A 10-percentage point increase in transport costs is found to reduce trade volumes by about 20 per cent (Limao and Venables, 2001). Bangladesh must be more competitive in the manufacturing process to offset 12 Credit insurance is the insurance against the risk of non-payment by the buyers in the importing countries. The geographical disadvantage of being farther away from its North American and EU markets compared too many other competitors. Inefficient and corrupt ports and inland transportation increase the cost of production substantially. Under this circumstance, many SMEs will find it extremely difficult to compete in the global market. Import-competing SMEs that rely on imported raw materials for their production may also be equally affected. Trade Policy and Incentives: Bangladeshs trade policy underwent a radical change particularly in the decade of the 1990s. Liberalization of industrial and trade regimes along with globalization are likely to have had significant effects on Bangladeshs SMEs (Ahmed, 2002; Bhattacharya et. al., 2000). Over the past decade there has been a significant change in the world trade regime. The WTO agreements limit the use of certain trade measures as quantitative restrictions and subsidies. WTO agreements not only cover the traditional goods sector, but also new sectors like services and intellectual property rights. There is a tendency for considering these newly included sectors as constraints to trade prospects of a poor country like Bangladesh. Long-run economic prosperity will critically hinge upon turning the challenges of globalization into opportunities. Besides, there are certain benefits of trade agreements. For example, one salient feature of SMEs is that they often rely on indigenous techniques of production which are based on genuine innovation. Now if they can be protected with intellectual property rights, this may generate substantial business opportunities for SMEs. There is evidence in the context of
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developing countries that innovations from small enterprises have resulted in large-scale businesses. Information: Lack of information is a major constraint to market development of Bangladeshs SMEs. Firms need all kinds of information: with regard to setting up a business, accessing finance, fulfilling government requirements, developing markets, and finding markets. Trade information is more than ever an element of competitiveness due mainly to three reasons: (i) Assessing market trends and characteristics, (ii) understanding the market and new market access conditions, and (iii) identifying new market opportunities and potential trading partners. The Internet has introduced a new way of doing business especially in the filed of commercial operations selling and buying, advertisement, servicing and training. The number of enterprises using Internet to market their products and services is rapidly increasing and more and more SMEs are becoming aware of the potential of this new technique. Poon and Jevons (1997) therefore appositely view that Internet has created unpredictable and unprecedented opportunities for SMEs and they can access to certain markets similar way as large enterprises and are able to engage international marketing which otherwise could have been unaffordable due to huge amount of resources required. The use Internet at the private enterprise level is still very low in Bangladesh and there is a serious lack of infrastructure in this regard. Amongst others, the dissemination of information is badly affected as result of little use of Internet. It is often the case that since the private enterprises does not have the appropriate and adequate information (e.g., they are unaware of the rules and regulations and compliance requirements), government agencies monitoring the business practices take undue advantages (Haque, 2003). Legal and regulatory framework: Creating an appropriate and effective legal and regulatory framework is an important precondition for the establishment of a legitimate private sector. The absence of an effective and transparent legal system discourages small firms in exploring into risky ventures of business. There are a number of redundant formal requirements to start and run business that create high compliance costs and become barriers to SME development, growth and market entry. These barriers are further exacerbated if administrative procedures to implement regulation are inefficient or cumbersome.

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Domestic environment: There is no denying that irrespective of the size small or large the performance of firms is affected by business environment. A stable macro-economy, an open trade and investment regime, and a competitive financial sector are argued to be most essential ingredients for a vibrant private sector. However, all this will work well if institutions function efficiently in an enabling environment. There are a number of major issues that inhibit an enabling environment for SME businesses in Bangladesh. These are: (i) the absence of clear guidelines that would provide all future directions and programmes, (ii) an outdated legal and regulatory framework that is no longer responsive to the present needs, (iii) a tax regime that serves more as a disincentive for business, and (iv) a general failure in the bureaucratic system that increases the cost of doing business. Apart from the listed factors above, corruption is pervasive in Bangladesh and the country ranks worse on measure of corruption than its neighbors. It has been found that almost half of the private enterprises in Bangladesh recognize corruption as a major or very severe obstacle.

SME Constraints needed an integrated approach

Developed countries have been supporting small enterprises for a long time. All OECD countries have developed appropriate institutions and support measures to service the needs of the SMEs. SMEs are assisted not just because they are small, but because of their capability to be efficient, innovative and their ability to compete in the national marketplace, as well as internationally. Given the discussions in the previous section, the need for providing effective support for in developing markets of Bangladeshs SMEs cannot be overemphasized. By analyzing the worldwide experience, UNECE (2002) concludes that the establishment of a coherent national policy towards SMEs is very difficult. There is no standardized model arising from the market economies that can be applied for developing the private and SME sector in Bangladesh. Nevertheless, the integrated approach to SME development suggested by UNECE to a number of East European countries may deserve serious consideration. This approach calls for devising appropriate measures at three levels, as listed below:

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(i) Strategic level (policy making); (ii) Institutional level (support institutions); and (iii) Enterprise level (entrepreneurs and business entities). The most important feature of the integrated approach is that it aims at providing a comprehensive support mechanism. Considering the problems faced by SMEs in Bangladesh, we can relate various desired actions to the three levels of the integrated approach. First, let us consider the enterprise level. There is no denying that the ultimate success in business depends on the efficiency of individual firms. Such constraints to market development as entrepreneurial and managerial skills will have to be developed at the enterprise level. But then institutions must play a vital role as facilitators. Training courses for improving the managerial and entrepreneurial skills, human resource development schemes, supporting firms in maintaining quality and standards, information gathering and their analysis, operation of an effective and supportive legal and regulatory framework, etc. are the areas where the role of institutions is indispensable. Finally, at the highest level the policy makers with inputs from stakeholders should design appropriate short-, medium-, and long-term strategies to promote SMEs and private sector.

Problems faced by SME sector

At present SME sector is facing a lot of problems in Bangladesh. Some major problems are as follows; Resource scarcity: In Bangladesh scarcity of raw materials hinder the ability of SME to be export oriented and limits its ability to reach more advanced stages of international business. High employee turnover: Due to limited growth of SME most of the skilled employees leave SMEs. Levy (2003) observed that SMEs are knowledge creators but poor at knowledge retention.

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Absence of modern technology: One of the main barriers for the development of SME in Bangladesh is inadequate technologies. Many SMEs have failed to adopt modern technology. Poor physical infrastructure: Inadequate supply of necessary utilities like electricity, water, roads and highways hinder the growth of SME sector. Moreover unfavorable geographical conditions increase the transportation cost. Financial constraints: Availability of finance hinders the growth of SMEs in Bangladesh. Bangladeshi bank considers SMEs as high risk borrowers because of their inability to comply with the banks collateral requirements. Only about 15-20% of the owners of SMEs own any immovable property. Bankers issue loan on the basis of ownership of immovable property as collateral risk. As a result it automatically excludes rest 80% SMEs from the list of privileged clients of the banks. Whatever collateral SMEs can manage gets used up in talking the term loan leaving them with no means to seek working capital loans from banks. Because of low access to institutional financing SMEs rely on inefficient financing services from informal sources. Lack of uniform definition: In Bangladesh the definition of SME has changed overtime in different industrial policy announced by the government in different year. Absence of uniform definition makes the formulation and implementation of SME policy difficult. Lack of information: Miah (2006) has observed that SMEs have very limited use of information technology (IT). Accounting package is used by 1-2% of the SMEs. The use of computers is revealed by say 15% of the SMEs, while the use of the Internet for business purposes applies to say 8-10% of SMEs. Lack of entrepreneurship skills: Conservative attitude towards risk, lack of vision, ability to make plan and implementing those hinder the growth of SME in Bangladesh. Participation of women entrepreneurs: Equality of opportunity is a major problem for SME. Female entrepreneurs are treated discriminately. They are not well represented in business organization. Government does not provide adequate institutional assistance for women entrepreneurs. Access to Market and lack of awareness regarding the importance of marketing tool: For SME, owing a retail space is very expensive in the major cities in Bangladesh. As a result many
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customers are not interested to buy products and services from SMEs. Because they cant judge the quality until they physically examined the product. Most of the cases SMEs in Bangladesh are not able to use the Integrated Marketing Communication (IMC) tools. But these tools play the role of important stimulus to motivate the customers and retain them. The country does not have enough marketing capability and resources to invest in marketing. Bureaucracy: Wang (1995) observed that the inadequate government supports are top ranking constraints for SMEs. Unnecessary layers of Bureaucracy and red-taps reduce the competitiveness of SME and raising the cost of transactions and operations. Absence of transparent legal system: The absence of an effective and transparent legal system discourages SMEs in exploring into risky ventures of business. There are a number of unnecessary formal requirements to start and run business that create high compliance costs and become barriers to SME development, growth and market entry. Lack of commitment to innovation and customer satisfaction: Ernesto (2005) stated that to keep in pace with international competition, firms of all size are challenged to improve and innovate their products processes constantly. But in Bangladesh SMEs are still not relating the importance of satisfying and retaining customers by offering novel and desired benefits. Lack of quality assurance: Govt. has failed to frame a national quality policy, provide adequate support systems and establish a national quality certification authority. As a consequence SME of Bangladesh has failed to ensure the quality of their products and services both in local and international market. Lack of research and development facilities: It is observed that investment in R&D is still negligible in. Fierce competition with the cheaper foreign goods: Fierce competition with the cheaper goods of China, Taiwan, Korea, India, and Thailand also pose threat to SME in Bangladesh.

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Important issues for overcoming problems

The contribution of SMEs in Bangladeshs economy cannot be overemphasized. Currently, SMEs are confronted with a number of problems that impede the development of their markets. A number of factors may be considered to help SMEs to overcome various problems. Definition: The current definition of SMEs, as provided in the latest Industrial Policy, is quite broad. Given the resource constraint, it may not be possible to provide adequate fiscal and financial assistance to all enterprises included in SMEs. Besides, there is also need for a uniform definition of SMEs, as currently the Bangladesh Bureau of Statistics (BBS), Ministry of Industries, Planning Commission, and the National Board of Revenue have different definitions. Business Support Centers: There is a need for developing business support centers or business development services. They include a wide variety of non-financial services such as labor and management training, extension, consultancy, counseling, marketing and information services, technology development and diffusion, and mechanisms to improve business linkages through sub-contracting and business clusters. Currently, BSCIC provides some of theses services but there are concerns that it has failed to play an important role in promoting SMEs particularly in the district outside Dhaka. The business development centers should ideally be working as storehouse of all kinds of information for SMEs from how to set up a business to evolving opportunities in the international markets. Absence of proper information dissemination programme from public services institutions is a serious problem now and it must be overcome with the help of support centers. In this regard, the private sector can play an effective role. Business development services must be demand-side oriented and capable of adapting to users needs. Competition amongst business services providers (BSPs) should also be maintained. Clusters and sub-contracting: There is evidence that clustering and networking can help SMEs boost their competitiveness. Clusters are sectoral and geographical concentration of SMEs, faced with common opportunities and threats. Collaborative action between regionally concentrated firms and between firms and supporting local private and public institutions has become a key factor in meeting the challenges of increasing competition in both domestic and export markets. Business networks and industry clusters are seen to be a powerful means for overcoming the size
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constraints of SME and for succeeding in an ever more competitive market environment. Collaborative actions involving SME and large firms, supporting private and public institutions and local and regional governments, offer new opportunities for developing specific locational advantages and the competitive strengths of clustered firms. It may be useful to identify a number of potential sectors as thrust sector and then incentives can be provided for the development of clustering in these sectors. Select clusters may also be supported with easy access to credit and other services. Sub-contracting by a large enterprise often help promote the development of SMEs. Therefore, such enterprises with significant forward and backward linkages involving the operation of small businesses may be provided with incentives. To set up an Exclusive EPZ for SMEs: Creation of a separate export processing zone (EPZ) for SMEs (and particularly for SMEs) may attract foreign direct investment in many export oriented small enterprises. EPZ-firms also receive attractive fiscal and financial incentives, which may enhance the competitiveness of SMEs. Some products that are predominantly manufactured in small enterprises (and also in micro and informal sectors) such as handicrafts, bamboo, cane products, silk and silk products, have great potential for export provided adequate promotional measures are undertaken (Bhattacharya et al. 2002). Export-oriented SMEs should also be supported for setting up offices and showrooms abroad, and for taking part in international trade fairs. Support for Innovation and Technology Development: Most SMEs are characterized by indigenous technology and they are involved in improving their existing production techniques and processes. If innovation does not take place in an indigenous sector, enterprises become uncompetitive. When production processes or technology are indigenous in nature it may not be possible to support them with imported technology or expertise As a result, support for SME technology development in the OECD and in the emerging markets is given by the governments. Usually, technology research institutes and universities play an important role in the improvement of indigenous innovations. In the context of Bangladesh as well, an interaction between SME needs and research institutes may thus be mutually beneficial and can help improve the competitiveness of domestic enterprises. Access to Credit: Access to credit is a big problem for SME market development. And whenever the credit is available the interest rate is high and is at par with that of loans for large
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enterprises. SMEs will need some support in ensuring an improved access to credit with a lower interest rate. Export-oriented SMEs should also be supported with the services of an Export Credit Agency to mitigate their risk of exporting and help facilitate the provision of working capital from banks and other financial institutions. Quality and Standards: Quality is an integral part of international competitiveness worldwide. There is a need for national quality policy, which should define the goals and the actions of the country towards quality. Such policy has to be explicitly explained, harmonized with international needs and knowledge, accepted and applied by governments as well as by nongovernmental organizations in order to increase the competitiveness of national products and services, to facilitate the dynamic diffusion of quality culture, to strengthen the quality infrastructure and, finally, to support international trade. The certification of quality systems allows enterprises to show that they fulfill the requirements of globalized market economies. The Government can promote quality awareness and help SMEs in safeguarding the required quality through National Quality Assurance Schemes. The national standardization authority should focus more on the adoption of international standards in order to increase the competitiveness of the indigenous companies in the world markets. Training Facilities: Training facilities for developing entrepreneurial and managerial skills are not adequate in the country. Public-private sector partnership and cooperation is required to extend these facilities. Skilled Workforce: Shortage of skilled workers is a general problem associated with industrial development in the country. This is also a constraint for increasing the domestic value added (i.e. developing backward and forward linkages) in the existing export content. In the long-run, the level (and quality) of education will determine the skill composition of the workforce. In the short-run, however, it will be essential to provide for various practical training programmes so that certain specialized industry requirements can be fulfilled. Physical Infrastructure: The state of physical infrastructure is weak in Bangladesh and longterm investment will be required to make any improvement in this regard. In the short run exclusive SME industrial parks and EPZs with adequate infrastructure facilities may mitigate the problem of weak infrastructure.
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Transport Costs: Transport costs have become an important element of international competitiveness. Various competitors of Bangladesh are geographically located close to important world centers of commercial activities and thus are in an advantageous position compared to her. Apart from the structural factor of geographical location, the sea-ports of Bangladesh are terribly inefficient which increases the cost of doing business and erodes the competitive advantage of local industries. Inland transportation is also subject to such problems as illegal toll collection, bad road communication, congestion, and frequent disruption due to political programmes and labor unrest. Therefore, if efficiency in the operation of the ports is ensured and inland transportation are made easy and free of all troubles, SMEs will be extremely benefited. This will also act as a permanent incentive for doing business in the country. Legal and Regulatory Framework: There is a pervasive lack of confidence in the legal and regulatory framework of the country which characterized by weak and non-transparent administrative and judicial systems, lack of information, lack of accountability of the public sector institutions, and unfriendly attitude of the regulatory bodies. Weak legal procedures discourage private sector activities and make the investors unsecured. It is therefore important to introduce a business friendly legal and regulatory framework. Domestic Environment and integrated approach: Market development of SMEs requires addressing the demand and supply side constraints which can best be addressed by creating a SME-enabling environment. An enabling economic environment comprises sound

macroeconomic and structural policies, good infrastructure, fair policy of competition, and efficiently functioning institutions. Therefore, an integrated approach to SME development incorporating efforts at policy-making, institutional, and enterprise levels will be most efficient way of supporting the private sector.

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Findings
Shortage of working capital has been found the top most problem for the SMEs. Other specific findings of the study are given below: SMEs with larger capital employ more persons and follow the division of labor. Enterprises under manufacturing group employ comparatively larger proportion of employees in upper hierarchy. Small size enterprises create employment with relatively smaller amount of capital and them comparatively more efficient in capital utilization. Rate of gross profit margin is highest in agro-based enterprises. Whereas manufacturing enterprises show the discouraging figures. Majority of small enterprises belongs to the lower classes of investment/capital range and they do not require locational amenities (say, availability of high-tech essential services, port facilities, etc). They can flourish in non-metropolitan / rural areas if they get credit and a minimum infrastructural and institutional facility. Again sources of finance for most of the enterprises are the owners and their families. Only few of them take institutional loans and others go for non-institutional loans. The SMEs who go for loans, most of them pay a hiking price to the NGOs and money lenders because loan processing is easier than that of the Banks and it is less time consuming also. Sole proprietorship and own & family based sources of finance dominate the ownership and financing patterns of small and medium enterprises. It is revealed that most small enterprises in our country are bound to rely on their own savings or that of their relatives and friends and sometimes have to go to the moneylenders for loans that are available at hiking price. However, inadequate finance causes underutilization of capacity and leads many other problems. Banks and financial institutes may take initiatives for liberal credit policy for financing small rural enterprises to overcome their problems.

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Most of the SMEs do not hold sufficient fixed assets to provide security for taking loans. Banks may also consider their moveable assets (say, inventory or receivables) side by side fixed assets as security for providing loans to this sector.

The bankers may provide a guide line - How to prepare a project proposal - so that any eligible project can not be rejected only for the reason of proper documentation and information.

The small rural enterprises could mobilize untapped resources of capital and skill in the rural areas if bank loans and institutional support back them. For up-gradation of the existing plant, increasing the capacity utilization and establishing the new unit, not only banks, but also leasing companies can help the SMEs by expanding their network in the rural areas. Leasing companies should change their tendency to finance only the well-established large units or to cluster their activities around the big cities.

The banks can nominate other organizations that can provide technical support, advice and also monitoring to the SMEs after sanction the fund. One organization can be nominated for operation for a single area in a particular location.

Financing the small rural enterprises can open the avenues of counseling and other ancillary services to the rural bank branches to earn more income. Rural banking is totally different from the urban banking. Small credit occupies almost whole part of the rural banking. So special training is required for the bankers to make micro credit fruitful.

Many new entrepreneurs are coming in the Ago-based business. If the banks and other financial institutions give financial support to these new entrepreneurs many other entrepreneurs may be interested to come into this business.

In many countries the Government provided labor-training institute to supply skilled labor forces to the industries. But in our country Government effort in this case is not sufficient. Skilled labor force is an asset not only for the individual firm but also for the industry and the country's economy. It increases the productivity and efficiency of the firm. The bakers have to consider the number of total skilled and semi-skilled labors during the scrutiny of a project proposal.

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Recommendations
Extension of credit facility, no doubt, is a necessary condition to boost SME and Bangladesh Bank refinance scheme is also the timely approach. But these are not the sufficient conditions; rather promotion, facilitation, marketing supports and protection of infant industry are imperative in a state of merger and acquisition all over the world. Marketing of SME products should be facilitated and given highest priority where both private sector and the government should take the lead. The traditional attitude of the bankers to earn more profit shall have to be changed to contribute to economic development of the country promoting SME. Bangladesh Bank may implement a 'one third' policy of lending i.e. one third of total credit exposures of a bank should be in corporate, one third in retail and one third in consumer. Refinance may also be allowed on monthly basis extending up to 50% for trading. The government may also help motivate the bankers to change their attitude from corporate to SME customers allowing tax rebate for financing in SME sectors. Though, Bangladesh Small and Cottage Industries Corporation (BSCIC) has been established long back to promote small and cottage industries of the country, but could not be made so effective, rather the organization is now on the verge of closure. Since BSCIC has wide network all over the country with established set up, it may be well integrated with today's SME concept to start the journey of industrialization afresh and so to save both time and money in the process. The government should also come up with pragmatic policies and take appropriate measures to support and patronize SME as a thrust sector with more incentive package like subsidy in water, gas, electricity, export benefits etc. Above all, the basic concept for industrialization which lies in the integration of SME with big industries shall have to be implemented with highest national priority. In order to overcome the above mentioned problems the following suggestions are recommended; Government must have to take adequate measures to ensure the uninterrupted supply of raw materials for SME.
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Due to the absence of uniform definition the policy formulation and implementations are not possible. Government should take initiative to develop a uniform definition of each category of SMEs.

Government needs to take appropriate measures to fix the minimum salary/wages of the employees of SME. That will help to minimize the employee turnover. Government and financial institution may provide adequate finance for modernization and technological advancement. Development of infrastructure is essential for the optimum growth of SME. So government of Bangladesh needs to take appropriate policy strategy for the infrastructure development of Bangladesh.

Government, financial institutions and Non Government Organizations (NGOs) may take necessary steps to ensure uninterrupted financial support to the prospective SMEs in Bangladesh.

Govt. of Bangladesh should take the initiative to develop web pages exclusively for SME and an integrated SME database. It will reduce the barriers to SME access to global market.

In order to ensure the retention of skilled workforce the government should make the entrepreneurial career attractive by minimizing the uncertainty. In order to encourage women entrepreneurship govt. may; involve women entrepreneurs in policy formulation and implementation, arrange funds for women entrepreneurs, provide necessary training to women entrepreneurs in rural and urban area of Bangladesh.

For minimizing red tapes and accelerating the growth of SME, government may provide one roof service under the SME foundation. Appropriate legal framework is necessary to ensure the development of SME of Bangladesh. In this era of intense competition continuous planning and quality improvement act as a prerequisite for the survival of SMEs. In order to improve the 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.

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Government should establish a credible certification authority especially for SMEs. So those, this sector can obtain a technical evaluation of the quality of their products within a shortest possible time. The certification of the authority should be world wide accepted. Govt. may also provide assistance to SMEs during the certification process and promote the importance of product certification for international acceptance among the SMEs.

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 imposed on import of SMEs products which are available in Bangladesh. SME foundation may take appropriate marketing tools to popularize their products.

Conclusion
Small and medium enterprises (SMEs) act as a vital player for the economic growth, poverty alleviation and rapid industrialization of the developing countries like Bangladesh. SMEs are significant in underlying countrys economic growth, employment generation and accelerated industrialization. SME has identified by the Ministry of Industries as a thrust sector. As the SME sector is labor intensive, it can create more employment opportunities. For this reason government of Bangladesh has recognized SME as a poverty alleviation tool. SME also foster the development of entrepreneurial skills and innovation. Along with poverty alleviation SME can reduce the urban migration and increased cash flow in rural areas. As a result it will enhance the standard of living in rural areas. Performance of SMEs in Bangladesh is significantly found below the level of international standard. Although government of Bangladesh has taken some initiative to ensure the growth of SME but those steps are not enough at all. But government shows its positive attitude towards this sector. Bangladesh government should continue to give more focuses on some areas, such as arrangement of finance, provide infrastructure facilities, frame appropriate legal framework, establish national quality policy etc. I am quite optimistic that if the above mentioned suggestions are implemented then the growth of SME sector in
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Bangladesh will be accelerated. A vibrant SME sector is considered as one of the principal driving forces in the development of a market economy. They stimulate private ownership and entrepreneurial skills, and are flexible and can adapt quickly to changing market demand and supply situations, generate employment, help diversify economic activity, and make a significant contribution to exports and trade. Even in the developed market economies SMEs account for a large share in output and employment. There are many constraints in developing the SME sector in Bangladesh. Access to credit is considered as the main constraint. Commercial banks are found reluctant to extend credit to the SME sector. The main reasons are high risk and monitoring cost. To meet the challenge and reduce the perceived risk in lending to SME sector, the Bangladesh Bank has embarked on a program to expand and redesign the existing refinance window of Bangladesh Bank into Small Enterprise Fund (SEF). However, it was thought that the introduction of Credit Guarantee/Insurance Scheme or adequate refinancing facilities by the Bangladesh Bank may be of substantial help in increasing the participation of the commercial banks in SME financing. Private Banks cannot be expected to undertake this type of financing as additional costs and high risk involved. On the other hand, NCBs that cater to a variety of sectors, from large industries to SMEs will not also be expected to give special attention that SME financing calls for. The lending institutions should be encouraged to emphasize on the relationship lending technologies, which is based on soft information. The soft information may include the character and reliability of the SME.s owner based on direct contact over time by the institutions loan officer; the payment and receipt history of the SME gathered from the past provision of loans, deposits, or other services to the SME by the institution; or the future prospects of the SME garnered from past communications with SME.s suppliers, customers, or neighboring businesses. Banking norms and attitudes towards SME financing should be changed as because small enterprises differ considerably from the traditional clientele and do not conform to the norms detailed in the manual of banking norms and procedures. So, it needs a concerted effort of different financial institutions, such as Bangladesh Bank, BSCIC, NCBs, PCBs, SBs or even insurance companies to make SME financing a success as well as making a powerful SME sector for Bangladesh.

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