ISSN 1817-5090 The Cost and Management Vol. 34 No. 3 May-June 2006, pp.

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SMEs in Bangladesh and Their Financing : An Analysis and Some Recommendations

Md. Shamsul Alam Md. Anwar Ullah Abstract: Small and Medium Enterprises (SMEs) are accounting for 25 percent of GDP, 80 percent of industrial jobs, and 25 percent of the total labour force in Bangladesh even though the prospective sector gets negligible facilitation from different support service providers. There are various constraints that hinder the development of SMEs in Bangladesh, such as lack of medium to long-term credit, limited access to market opportunities, technology, and expertise and business information. Lack of suitable incentives, inefficient and limited services from relevant government agencies as well as poor capacity of entrepreneurs are other reasons for the slow growth of SMEs. Obviously, the government has many things to do to flourish the SMEs because, if they flourish, SMEs will create new entrepreneurs, generate more jobs and contribute to a great extent to the national economy. This paper is an academic analysis toward policy formulation in respect of SME financing. Keywords: SMEs, Institutional finance, Government initiatives.

Introduction
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 sources 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
Mr. Md. Shamsul Alam, MA, MBA is APS -1 to the Honble Prime Minister, Government of Bangladesh and Mr. Md. Anwar Ullah, M.Com, MBA, ACMA is a Senior Assistant Secretary, Ministry of Establishment, Bangladesh Secretariat, Dhaka. The opinions expressed in the article is of the authors own. They do not represent the opinion of the Government or the departments to which the authors belong to.

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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 posses 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. Contribution of SMEs to the economy is shown in the table - 1. Table-1 : Contribution of Large and Small Industries to the GDP (%) 1999-00 Large Industry Small Industry Total Industry 11.01 4.39 15.40 2000-01 11.13 4.46 15.59 2001-02 11.16 4.60 15.76 2002-03 11.29 4.68 15.97 2003-04 11.47 4.78 16.25

(Source: Economic Review, Ministry of Finance, GOB, 2004)

SME Defined in Bangladesh

Until recently, public policy did not distinguish medium enterprises as a separate category and instead lumped it with large enterprises. Thus, industrial policies prior to 1999 divided the industrial sector into three categories large, small and cottage. The cut-off limit of these size categories was determined on the basis of the size of fixed assets. Thus, the Industrial Policy 1991 defined Small Industry as industrial undertakings whose total fixed investment excluding the price of land, expenses for inland transportation and commissioning of machinery and appliances, and duties and taxes, was limited to Tk. 30 million (US $800 thousand) including initial working capital, while the upper limit on the investment level in Cottage Industry was Tk. 500,000 (US $13 thousand). In contrast, the Industrial Policy 1999 distinguished medium from large industry and defined the size categories in terms of both capital and employment size. Thus, Large Industry was defined to include all industrial enterprises having 100 or more workers and/or having a fixed capital of over Taka 300 million (US $6 million). Medium industry covered enterprises employing between 50 and 99 workers and/or with a fixed capital investment between Taka. 100-300 million (US $2-6 million). Small Industry meant enterprises having fewer than 50 workers excluding the cottage units and/or with a fixed capital investment of less than Taka 100 million (US $2 million). Cottage Industry covered household-based units operated mainly with family labor. However, in the latest industrial policy announced in 2005, significant changes have been brought about in the definition of the various size categories. In the Industrial Policy 2005, a
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SMEs in Bangladesh and Their Financing : An Analysis and Some Recommendations

distinction has been made between manufacturing and non-manufacturing enterprises. In the case of the manufacturing enterprises, sizes have been defined in terms of the value of the fixed assets while in the case of the non-manufacturing enterprises the cut-off line has been identified in terms of employment size. Thus, large industry is now defined as units with fixed capital of more than Tk. 100 million (US $1.6 million) excluding the value of land and building while non manufacturing large enterprise is defined as units having more than 100 workers. Medium industry is defined as units with fixed capital of Tk. 15-100 million (US $246 thousand - $1.6 million) excluding the value of land and building while non 4 manufacturing medium enterprises are those with employment size between 25 and 100 workers. Manufacturing enterprises with fixed assets of less than Tk. 15 million excluding the value of land and non-manufacturing enterprises with fewer than 25 workers are to be treated as small enterprise. While the definition of SME has changed overtime in different Industrial Policy pronouncements, Bangladesh Bureau of Statistics (BBS), which is the prime national organization responsible for generating and compiling various types of statistics in the country has been consistently using an all together different classificatory scheme. Thus, BBS defines enterprises having 10-49 workers as Medium industries while those having 50 or more workers are identified as Large industries. For industrial GDP data, the medium and large industries are lumped together under Large category. The rest of the industrial enterprises including cottage industries are grouped under the Small category.

Present Status of the SME Sector in Bangladesh

Size, Type and Spread of SMEs Because of the definitional problems mentioned above, information on SME is not readily available in Bangladesh. BBS conducts annual surveys of the manufacturing sector, called the Census of Manufacturing Industry (CMI), but as mentioned earlier the BBS lumps under the Large category information on all units with 50 or more workers and hence the information cannot be separated in most cases for the 50-99 workers size category, which is the more commonly used cut-off size limit for medium enterprises. Moreover, there is quite a bit of backlog in the processing of the CMI data. The latest available published CMI report is for the period 1999-2000. The prime agency for the promotion of small and cottage industries in Bangladesh is the Bangladesh Small & Cottage Industries Corporation (BSCIC). BSCIC is required to maintain information and data bank on small and cottage industries in Bangladesh and accordingly the agency carries out nation-wide surveys of the sector at some time intervals. However, the latest such survey by BSCIC was conducted in the late 1980s and it was based on the definition of small and cottage industries given in the earlier industrial policies that used capital rather than employment size as the cut-off limit. Fortunately, BBS carried out a nation wide census of all non-farm economic activities in 2001 and 2003 and a preliminary report based on the census has been made available recently. The report presents
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data by employment size category but there is no information on the size of fixed assets. The previous such national census of non-farm economic activities was carried out by the BBS in 1986. Information available from the recent BBS report has been presented in table-2. The following appears to be the main features of this sector in Bangladesh: Table 2 : Size and Composition of SME in Bangladesh 2001/03
Micro <10 No. of Establishment (thousand) As % of all As % of 10+ Rural-urban distribution (%) of units Urban Rural All Scrotal composition (%) of units Manufacturing Wholesale & retail trade Hotels & restaurants Comm. & personal service Health & social work Transport & commutation Other services All Size of Employment (thousand) As % of all As % of 10+ Rural-urban distribution (%) of units Urban Rural All Scrotal composition (%) of employment Manufacturing Wholesale & retail trade Hotels & restaurants Comm. & personal service Health & social work Transport & Comm. Other services All 3489 97.61 35.45 64.55 100 12.63 58.18 6.55 12.91 1.42 2.45 5.86 100 8119 67.50 Small 10-49 75 2.09 87.36 60.06 39.94 100 34.82 8.84 4.59 3.11 2.97 2.46 43.21 100 1375 11.43 35.17 61.27 38.73 100 35.50 7.56 4.23 3.08 3.26 2.38 43.99 100 Medium 50-99 5 0.14 6.00 73.64 26.36 100 45.09 4.25 1.46 3.65 6.30 2.97 36.28 100 343 2.85 8.77 73.78 26.22 100 45.53 4.16 1.40 3.53 6.43 3.02 35.93 100 SME 10-99 80 2.23 93.36 60.93 39.07 100 35.48 8.55 4.39 3.14 3.19 2.50 42.75 100 1718 14.28 43.94 63.76 36.24 100 37.50 6.88 3.67 3.17 3.89 2.51 42.38 100 Large 100+ 6 0.16 6.64 83.10 16.90 100 66.44 1.99 0.72 2.22 5.27 1.73 25.61 100 2192 18.22 56.06 88.01 11.99 100 72.07 1.24 0.38 1.98 3.86 1.72 18.75 100 Total 10+ 86 2.39 100 62.40 37.60 100 37.53 8.11 4.15 3.08 3.33 2.45 41.35 100 3910 32.50 100 77.36 22.64 100 56.85 3.72 1.83 2.50 3.87 2.07 29.16 100 All 3575 100 36.09 63.91 100 13.22 56.99 6.50 12.68 1.46 2.45 6.7 100 12029 100 52.11 47.89 100 31.01 35.18 5.55 8.08 2.23 2.12 15.53 100

39.96 60.04 100 18.55 50.77 7.34 10.77 1.44 2.14 8.99 100

Source : Economic Census 2001 & 2003, National Report (Preliminary), Bangladesh Bureau of Statistics, July 2005

Changes in the Size and Structure of SME Over Time A comparison of the data from the Economic Census 2001 & 2003 with the data from the previous census of 1986 (Table 3) suggests that the importance of the SME sector has changed marginally during the inter-census period.
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The share of SME in the number of establishments in the 10+ size group has slightly declined from 95.6% in 1986 to 93.4% in 2001/03 while the share in employment came down from 49.8% to 43.9%. The urban SME employment grew at an annual rate of 4.6/ raising the share of urban SME in the employment in 10+ size group from 57% in 1986 to 63.8% in 200.
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Non-manufacturing SME grew at a higher rate during the period causing the share of manufacturing n SME employment to decline from 41, 3% in 1986 to 37.5% 2001/03.

Table-3 : Size and Composition of SME in Bangladesh 1986

Micro <10 No. of Establishment (thousand) As % of all As % of 10+ Rural-urban distribution (%) of units Urban Rural All Sectoral composition (%) of units Manufacturing Wholesale & retail trade Finance & Business service Other services All Size of Employment (thousand) As % of all As % of 10+ Rural-urban distribution (%) of units Urban Rural All Sectoral composition (%) of employment Manufacturing Wholesale & retail trade Finance & Business service Other services All 35.19 42.14 2.46 20.21 100 36.75 14.42 13.13 35.70 100 63.07 6.08 9.06 21.79 100 41.33 12.97 12.42 33.28 100 87.82 1.62 4.38 6.18 100 64.65 7.28 8.39 19.68 100 42.92 32.99 4.02 20.07 100 36.92 63.08 100 55.34 44.66 100 62.93 37.07 100 56.66 43.34 100 73.58 26.42 100 65.15 34.85 100 44.33 55.67 100 24.21 49.32 2.47 24.00 100 5316 73.75 33.08 16.23 13.37 37.33 100 779 10.80 41.17 62.72 6.23 9.09 21.96 100 164 2.27 8.66 34.53 15.74 13.16 36.58 100 943 13.07 49.83 80.64 2.74 6.52 10.09 100 949 13.17 50.17 36.58 15.16 12.86 35.40 100 1892 26.25 100 24.50 48.50 2.72 24.27 100 7208 100.00 35.97 64.03 100 54.04 45.96 100 63.10 36.90 100 54.49 45.51 100 71.68 28.32 100 55.25 44.75 100 36.43 63.57 100 2117 97.62 Small 10-49 47 2.16 90.88 Medium 50-99 2 0.11 4.67 SME 10-99 49 2.27 95.55 Large 100+ 2 0.11 4.45 Total 10+ 51 2.38 100 All 2168 100.00 -

Source : Bangladesh Census of Non-farm Economic Activities 1986, National Report, Bangladesh Bureau of Statistics, November 1989

Size and Structure of Manufacturing SME The evidence from the Economic Census 2001 & 2003 (Table-4) shows that small manufacturing in Bangladesh consists of some 26 thousand enterprises employing nearly 488 thousand persons while there are some 2311 manufacturing establishments under the medium category engaging about 156 thousand persons. In the 10+ size group, manufacturing SMEs account for nearly 88% of the manufacturing establishments but about 29% of manufacturing employment. The Economic Census did not have information on value added. However, other sources suggest that the share of 5MB in manufacturing value added in Bangladesh in the 10+ group is likely to be around 26%. The small manufacturing enterprises are almost evenly distributed between rural and urban areas both in terms of number of establishment and employment. But in the case of medium manufacturing enterprises there is a higher incidence of urban establishment and urban employment.

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Table 4 : Size and Composition of Manufacturing SME in Bangladesh 2001/03

Micro <10 No. of Establishment (thousand) As % of all As % of 10+ Rural-urban distribution (%) of units Urban Rural All Size of Employment (thousand) As % of all As % of 10+ Rural-urban distribution (%) of emploement Urban Rural All 440 93.2 Small 10-49 26 5.5 81.0 51.7 48.3 100 488 13.1 22.0 51.4 48.6 100 Medium 50-99 2 0.5 7.2 57.0 43.0 100 156 4.2 7.0 57.1 42.9 100 SME 10-99 28 6.0 82.2 52.1 47.9 100 644 17.3 29.0 52.8 47.2 100 Large 100+ 4 0.8 11.8 79.5 20.5 100 1580 42.3 71.0 86.5 13.5 100 Total 10+ 32 6.8 100.0 55.4 44.6 100 2224 59.6 100 76.7 23.3 100 All 472 100.0

26.4 73.6 100 1506 40.4

28.4 71.6 100 3730 100.0

31.6 68.4 100

58.5 41.5 100

Source : Economic Census 2001 & 2003, National Report (Preliminary), Bangladesh Bureau of Statistics, July 2005

The evidence from the Economic Census on the composition of manufacturing SME (Table-3) suggests textiles, non-metallic mineral such as brick and clay products, food products, furniture, and plastic products as dominant industry categories.

SMEs Access to Finance Barriers and Windows

Among the many compelling reasons why SMEs fail to realize their full potential, inadequate access to finance is prominent and most commonly cited. With limited capital base of their own and little or no access to institutional financing they rely on inefficient financing service traditionally from informal sources, which eventually proves unsustainable let alone stimulate growth. In the past, government has attempted to provide small and medium enterprises with access to finance through targeted lending. There was a government directive that 5 per cent of Bank loan portfolio be set-aside for small and medium enterprise financing. A separate bank, namely, the Bank for Small Industries and Commerce (BASIC) was set up in 1988 with the objective of financing the small and medium enterprises. There were also attempts to channelize to the sector through public and private banks fund received from international agencies. There were provisions of favorable debt equity ratio, special interest rates and credit guarantee scheme. The central bank also issued directives to both public and private commercial banks regarding working capital loans, use of standardized documentation procedure and time limits for credit sanctioning and loan disbursement. Notwithstanding all these arrangements for financing small and medium enterprises, the actual delivery of institutional credit to this sector has been grossly inadequate. One of the main factors that have hampered flow of institutional finance into small and medium enterprises is a bank preoccupation with collateral based lending. Traditionally banks have used fixed asset ownership particularly land ownership as the basis for judging credit-worthiness. This puts small and medium enterprises at relative disadvantage as they often cannot put up such collateral for loan. Moreover, whatever collateral they can manage gets used up in taking the term loan leaving them with no means to seek working capital loan from institutional sources. Unlike their large-scale counterparts they cannot use influence and contacts and solve the problem
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by putting up collateral of dubious valuation. Banks, on their part, also tend to be less flexible about the collateral requirement in the case of the SMEs as they perceive SME loan to be more risky and the cost of monitoring and supervision of small loans to be higher. Various alternatives to real estate based lending have been suggested for the SMEs. Group guarantee and peer pressure, successfully used in the case of micro-finance, do not appear appropriate for SMEs as these are mostly sole proprietorship units with capital size significantly larger than the amount typically disbursed under micro-finance. Use of assets other than land and building, such as fixture, equipment, vehicles etc as collateral is also a fairly standard practice in institutional finance but is of less use in the case of SMEs as these enterprises usually possess few such non-land assets. Sales proceeds, accounts receivable, inventory etc can be the basis of working capital loan, but this requires proper documentation of the transactions of the SMEs and close monitoring and supervision on the part of the lending institutions. Because of the informal nature of many SME transactions and high cost of small loan administration, use of such movable asset for working capital lending will involve certain difficulties. SMEs as these enterprises usually possess few such non-land assets, Sales proceeds, accounts receivable, inventory etc can be the basis of working capital loan, but this requires proper documentation of the transactions of the SMEs and close monitoring and supervision on the part of the lending institutions. Because of the informal nature of many SME transactions and high cost of small loan administration, use of such movable asset for working capital lending will involve certain difficulties. Financial institutions could significantly reduce the risk when they are lending to SMEs without real estate based collateral if they (a) pre-screen SMEs on the basis of cash flow statements and information from business service providers and receivers to assess track records of firms and their ability to repay in future, and (b) implement close monitoring and supervision in the post-disbursement stage. In such cases, appropriate credit guarantee schemes will need to be devised for covering the lending institutions both for the risk involved as well as for the additional cost of loan administration. In 2003-04, Bangladesh Bank set up a Tk. 10.0 billion refinancing scheme for credit to SMEs. Bangladesh Bank charges participating institutions 5% interest rate while the lending institutions decide on the lending rate of interest. This provides these institutions with the scope of attempting lending to SMEs without real estate based collateral as their risks will be covered through refinancing facility and they can accommodate any additional cost of loan administration through an appropriate spread between the borrowing and the lending rate. Because of the initial success of the program, government raised the amount to Tk.25. 0 billion in the national budget 2004-05. Beside this, International Development Agency (IDA) has provided US$ 10 million to Enterprise Growth and Bank Modernization Project (EGBMP) during FY 2004-5. More over, ADB has finalized an agreement with Bangladesh Bank to provide additional US$ 30 Million to this sector. These huge resources would strengthen the financial programme of EGBMP. This would result in employment generation in one hand and enhancement of purchasing power of the poor on the other hand. Under this programme, the financing capability of various financial institutions and banks have been enhanced and up to April, 2005 Bangladesh Bank has disbursed Tk.1237.34 million for refinancing. Out of this, the contribution of World Bank was Tk.237.26 million while that of Bangladesh Bank
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was Tk. 999.98 million. Detailed refinancing activities of Bangladesh Bank (BB) to various financial institutions and banks is shown at table-5 below: Table - 5 : Refinancing activities of BB and other Bank and financial Institutes
Name of the Banks/FIs Refinanced Banks National Credit & Commerce Bank Ltd. Jamuna Bank Ltd. National Bank Ltd One Bank Ltd The Premier Bank Ltd. BRAC Bank Ltd South East Bank Ltd Sub-Total Non-Financial Institutions Uttara Finance & Investment Ltd Prime Finance & Investment Ltd Midas Financing Ltd Fidelity Assets & Securities Co.Ltd* IDLC of Bangladesh Phoenix Leasing Co.Ltd United Leasing Co.Ltd Vanik Bangladesh Ltd Sub-Total Grand Total
(Source: Bangladesh Bank)

Amount Refinanced (In Million/ Taka) Working Capital 15.64 4 5.8 57.931 38.05 27.90 149.321 7.76 14 0.5 Mid Term 77.50 4.00 24.49 16.55 502.00 1.50 626.04 45.10 14.00 106.26 0.80 17.85 15.01 29.87 0.50 230.09 856.13 Long Term 6.63 6.63 55.54 5.59 39.59 13.48 37.07 49.78 201.41 208.04 Total 93.14 4 4 20.29 81.106 540.05 29.4 781.986 108.401 33.848 148.345 0.80 31.33 54.183 79.65 0.8 455.257 1237.24

No. of Beneficiary Enterprises

IDA Portion (included in the main calculation

228 1 1 69 84 3551 32 1766 59 17 245 1 20 24 58 2 426 2192

219.75 219.75

0.6 16.91

1.2 0.3 23.76 173.081

17.51 237.26

* Figures with asterisk received refinance from IDA funding Note: Total Amount refinanced Tk. 1237.24 million Bangladesh Bank portion Tk. 999.983 million IDA Portion Tk. 237.26 million It would he seen from the above Table that up to April 2005 Bangladesh Bank distributed Tk.1237.24 million as refinancing to 7 banks and 8 other financial institutions. It may be mentioned that the same amount of money was distributed by the above banks and financial institutions to 2192 SMEs earlier as loan. Out of the total loan Tk.173.08 million has been provided as working capital, T k. 856.13 million as mid-term loan and Tk. 208.04 million as long-term loan. About 18 banks and financial institutions have so far signed agreements with the central bank to get access to the refinancig facility. Banks and other financial Institutions have so far financed about 3094 SMEs. The Asian Development Bank (ADB) has ploughed into some $ 50 million to the government under its Small and Medium Enterprise Sector Development programme of the total $ 15 million is provided for SME sector policy and institutional restructuring and $ 5 million as tehnical assistance for capacity building and training. The rest $ 30 million went to the central banks enterprise fund. Historically, the commercial banks have been used as the exclusive conduits of funds for the SMEs. There is a strong case for exploring other possible conduits such as non-governmental organization (NGOs) who have success stories not only with micro finance but also with
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regard to credit to SMEs albeit in a limited way. As they are more developmental in character than commercial banks which are primarily profit oriented, this may help try out lending to SMEs without real estate based collateral and without having to reduce vigilance in pre and post lending stages. The lack of access of SMEs to institutional finance is observed to be even higher when it comes to women owned or women managed enterprises. There is a general trend towards rise in women entrepreneurship in Bangladesh, but women trade bodies claim that social acceptability of this trend is not reflected in the attitude of the lending agencies, which discourages them from seeking institutional finance. The other major problem SME entrepreneurs face in seeking institutional finance is with regard to the preparation of the project proposal. In spite of directives from the central bank to follow standardized procedure, the loan application process has still remained lengthy and cumbersome. The entrepreneur often lacks the ability to formulate a proper project proposal. Even when he prepares the proposal drawing on outside expert services, there is no guarantee that the proposal will be evaluated properly as the financial institutions themselves lack adequate capability for proper project evaluation. Loan processing, particularly in the case of public sector banks, involves high transaction costs for borrowers in terms of time and visits needed and unofficial payments made. Because of lack of proper autonomy and accountability, the public sector financial institutions are beset with inflexibility, inefficiency, political interventions and corruption. Since the performance of the bank officials is not properly evaluated they lack the incentive to bring larger number of suitable borrowers, particularly those in the small and medium enterprise sector, within the fold of institutional financing. They adopt a passive and inflexible attitude towards the borrowers either to avoid the risk of making an inappropriate lending or to force the borrower to make side payments for more favorable handling of the loan application. These problems are unlikely to go away without major institutional reforms of the public sector banks. Another major weakness of business financing in Bangladesh is lack of its modernization for purposes of e-commerce. In the context of an evolving globalize trading system the importance of e-commerce can hardly be overemphasized. But due to the absence of congenial telecommunication facilities and appropriate financial systems, business enterprises particularly SMEs have not taken any initiative towards e-commerce. Bangladesh faces formidable developmental challenges. With a population density of 928 per square kilometer, it is the most densely populated country leaving aside a number of city-states. Per capita GDP of US$ 440 barely distances Bangladesh from a small number of countries at the very foot of the income scale. About 42 per cent of the population lives on the wrong side of the poverty line. Agriculture accounts for nearly a quarter of the GDP employing more than half of the labor force. About 77 per cent of the population still resides in the rural areas. Although population growth rate has come down to 1.47 per cent, annual growth of labor force is estimated to be 4.3 per cent. With the absorptive capacity of the agricultural sector limited to at most one third of the new entrants to the labor force, the country is faced with the pressing need of creating employment opportunities outside agriculture. The role of SME assumes special importance in this context.
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To overcome the hurdles of financing and to make time-based progress Local Enterprise Investment Centre (LEIC) has been launched to facilitate improved access for the Small and Medium Entrepreneurs (SMEs) to capital, innovation, new technologies and business practices by way of establishing partnership with foreign or large local enterprises. Canadian International Development Agency (CIDA) and IDLC Bangladesh Limited jointly set up the LEIC to help develop a more vibrant private sector, which will serve as an engine for innovation, structural change and economic growth. The International Finance Corporation (IFC), the private sector arm of the World Bank Group, has signed an Agreement to issue a local currency guarantee of up to $5 million with United Leasing Company Limited (ULC) in Bangladesh. Credit enhancement from the proposed guarantee, will assist ULC to borrow the equivalent amount of local currency from Citibank Bangladesh and use the longer tenured funding to further expand its portfolio of leases to the SME sector in Bangladesh. The proposed guarantee will facilitate the mobilization of longer-term local currency financing from the more liquid foreign banks to leasing companies that serve the SME sector.

Special Initiatives of the Government

In the past, the government has attempted to provide SMEs with access to finance through targeted lending. There was a government directive that 5% of a banks loan portfolio be setaside for small and cottage industry financing. (a) BASIC Bank: BASIC Bank was established in 1989 to finance small and cottage industries. It is mentioned in its Memorandum of Articles that at least 50% of its loan-able fund should be invested in Small Scale Industries (SSI). In 2003, the bank lent Taka 51.29 billion to SSI sector to a number of 418 projects. The bank offers moderate interest rates on SME lending compared to other private commercial banks and foreign banks. For financing small and cottage industries in the private sector, the Bangladesh Bank has been providing refinance facility to this bank since 1999. A sum of Taka 250 million was disbursed to BASIC in FY 2004 under this scheme. (b) Palli Karma-Sahayak Foundation (PKSF): The Government established PKSF in May 1990 to work as an apex organization for the development of micro finance sector in Bangladesh. PKSF is distributing micro-credit among the poor through 225 large and small NGOs. Most of the beneficiaries are women. Government allocateed Tk 217 million in FY 2006-07 for this programme. In addition, in FY 2006-07, the allocation raised to Tk. 267 million by injecting Tk. 100 million in Special Fund for the Employment of the Hardcore Poor administered by PKSF. To provide Credit Assistance to Small Entrepreneurs in rural areas, Government also increased the allocation in FY 2006-07 to Tk. 150 million by a further allocation of Tk 100 million. (c) Refinance Scheme for Small and Medium Enterprises: To help overcome the financial constraints of this sector and induce the banks and other financial institutions to provide credit facilities to the SME sector, particularly the small entrepreneurs, Bangladesh Bank introduced a refinance scheme with a special fund of Taka 10 billion effective from May
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01 2004. To encourage the banks and financial institutions to provide credit to the SMEs, the Government introduced a Tk. 100 million Refinancing Scheme through Bangladesh Bank. The World Bank and the Asian Development Bank (ADB) will provide US$ 10 million and US$ 30 million respectively to support this scheme. About 3000 SMEs have received credit under this scheme. For the development of agro-product processing and software industries, the Government allocated Tk 100 million to Equity Development Fund in the revised budget of FY 2005-06. So far, 212 projects have been financed from this Fund. This fund also enhanced to Tk 200 million in FY 2006-07 for this Fund. To build up agro-based farm and industries, a credit support to the tune of Tk. 100 million is allocated in the current fiscal year under the Agro-based Industries Assistance Programme. In FY 2006-07, the allocation is Tk 150 million to this Programme. Initially, only the small enterprises having fixed investment not exceeding Taka one million will be entitled to have credit facilities up to Taka 0.5 million in individual cases under this scheme. The participating banks and financial institutions will apply their own interest rates on the loans made to the borrowers but Bangladesh Bank will charge Bank Rate (currently it is 5%) to the lender banks and financial institutions under this scheme. Till June 2005, a total number of 2681 enterprises have been financed by different banks and financial institutions under this program. Critiques are saying that only participating financial institutions are getting benefit from this scheme, final borrowers remain out of any direct benefit. They are also saying that this program is also not taking account of micro and small enterprises for special consideration. (d) Credit Distribution Package: It has been announced by the SME Cell that 80% of total resources available for SME would be allocated specially for small enterprises. (e) Lead Bank: It has also been decided by the SME Cell that in the short run BASIC Bank and BRAC Bank will be working together as lead banks and will be responsible for distribution of the credit and venture capital fund. These two banks will closely work with the previously mentioned Advisory Panel. Over the medium term, this responsibility will devolve to the SME Foundation. (f) SME Foundation: Asian Development Bank has expressed its interest to support the government to set up a Small and Medium Enterprises (SME) Foundation as part of its country assistance strategy. Some other development partners will support the SME foundation and it can be an apex body for these industries. The SME is one of the Manilabased lenders priority sectors and the bank would ready to channel more fund if the disbursement and utilisation of existing funds become faster. Over the medium term and beyond (a time-frame of 18 or so months from now), the Government shall have to form an SME Foundation as a pivotal platform for the delivery of all planning, developmental, financing, awareness-raising, evaluation and advocacy services in the name of all SME development as a crucially-important element of poverty alleviation. The functions of the Foundation would be to provision one-window delivery of all promotional and administrative facilities, including some resources needed for capacity building in appropriate industry association(s) for SMEs in the country.
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Conclusion and Recommendations

Conclusion As the experiences of SME finance in Bangladesh suggest, there is critical need for putting in place a credit delivery system that evaluates the credit worthiness of borrowers, on a basis other than fixed asset ownership. The evaluation may require examining transaction records of the borrowers, assessing the value of movable assets etc. There will also be the need for enhanced post disbursement monitoring. An effective SME finance policy will have to cover such enhanced cost of credit administration. In addition to credit guarantee or refinancing facility there will have to be adequate rediscount facility for the primary lender to accommodate these costs. Such credit line also needs to be made available to non-bank institutions such as the NGOs. The financing scheme should also include special provisions for women entrepreneurs. Indeed, the Implementation of appropriate policies and strategies is a prerequisite to harness sustainable competitiveness of SMEs around the country. Suggestive remarks have been stipulated in this write up. With that paradigm, proactive policy is essential to enact them. The first step this regard is to make firms filly aware of the competitive challenges they have to face. The next step is to help SMEs prepare to meet the challenge by understanding their strengths and weaknesses and providing the inputs they need to help them upgrade. The main inputs are finance, market information, training, infrastructure development, R&D, management tools, technology, skills and links with institutions for support services. Recommendations (1) Uniform Definition of SMEs: There should be a consensus on developing a uniform definition of each category of SMEs with generic classification around the country. It should be given standard industrial code (SIC). Without uniform definition, formulation policy and its implementation are not possible. (2) Seed Money, Leasing, Venture Capital and Investment Funding: There is a need for improving different aspects of financial services of SMEs, such as seed money, leasing, venture capital and investment funding. There is a lack of long-term loans; interest rates are high, Guarantee/Security issues, exchange risks etc. All these limit the development of SMEs. Finance, both short and long term, should be provided at market cost of capital. Fund should be made available through encouragement for setting up Venture Capital organization in Bangladesh. The concept of venture capital (VC) has successfully operating in the USA, EU countries, and Canada. (3) Establishment of Small Business Investment and Lending Corporation (SBILC): We should start with something effective for industrial development in general and the SMEs sector in particular. Such a step, for example, could be the establishment of a separate Corporate body. That means a separate financing institution could be developed, with joint ownership of the public and private sector. To make the proposed initiative effective in achieving its goals, government may set up a Small Business Investment and Lending Corporation (SBILC). The SBILC can be formed under Small Business
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Investment and Lending Act passed through the Parliament. Under SBILC there may have external and Internal Financing policies. Taken from the different countries experiences the different types of financing policies and programme that can be introduced through SBILC, is enumerated below: s Low Doc Loan Programme, which may allows small business to use a simple onepage application for loans up to Tk.50,000; loans between Tk. 50,000 and Tk. 1,00,000 may require the one-page application plus personal tax returns for three years and a personal financial statement from entrepreneur. s Direct loans, this type of loan may be provided directly to the small business with public funds and no participation. The interest rate charged on direct loans depends on the cost of money to the government and it changes as general interest rates fluctuate. It can be limited to a fixed ceiling. s Immediate participation loan, can be made from a pool of public funds and private loans. s Guaranteed loan. When private lenders extend loans to small businesses, SBILC in those cases can provide guarantee for repayment in case the borrower defaults on the loan, which may be given for a defined amount of loan and up to certain percentage e.g., 80% or 75% of loans. s Seasonal line of credit programme, may be offered for short term capital to growing companies needing to finance seasonal buildups of inventory or accounts receivable. The maturity period cannot be exceed 12 months and the company must repay it form cash flow. Accounts receivables and inventory can be collateral for the loan. s Contract loan programme, is another short-term loan guarantee, but it is designed to finance the cost of labour and mater9ials needed to perform a contract. Maturity times are up to 18 months. s Export working capital programme. Under this prgramme the SBILC may give guarantee 90 percent of bank credit line up to a certain limit. In such case Loan proceeds must be used to finance\e small business exports. s Disaster Loans. As their name implies, disaster loans can be provided to small businesses devastated by some king of financial or physical losses (such as tremendous flood, earthquakes). Disaster loan may carry below-market interest rates. s Greenline revolving line of credit programme. Greenline programme can be designed to increase small companies access to working capital by providing them with revolving lines of credit. It can be different than traditional loans, which may require fixed monthly payments; the Greenline programme may employ highly flexible revolving loans, in which cash-hungry small businesses able to draw on a credit line only when they need the money. This loan prgramme can be designed to provide short-term credit to allow small businesses to finance the sale of their products and services until they can collect payment for them. s Loan for Small business innovation research programme. This types of loan can be designed under three different phases. Phase I grants, which determine the feasibility of a technology or product run up to 6 months. Phase II grants, to be designed for development of concept into a specific technology or product run up to 24 months.
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Phase III is the commercialization phase, in which the company should pursue commercial applications of the research and development conducted in phase II and I and must use private funding to bring a product to market. Loan for small business technology transfer programme. The Small business Technology Transfer programme (STTP) may complements the Small business Innovation Research (SBIR) programme. SBIR may focuses on developing commercially promising ideas which originate in small businesses, STTP may allow small companies to exploit a vast new reservoir of commercially promising ideas which originate in universities govt. funded R&D centers and other institutions like BISCIR. Researchers at these institutions can join forces with small businesses and can spin off commercially promising ideas while remaining employed at their research institutions.

(4) Internal methods of financing SMEs: Small business owners should not rely solely on financial institutions and government agencies for capital. Instead, the business itself has the capacity to generate capital. This type of financing, called bootstrap financing, is available to virtually every small business and encompasses factoring, leasing rather than purchasing equipment, using credit cards, and managing the business frugally. Another source of financing could be raising fund from share market by flotation of IPO by SME under Group IPO Scheme (GIPS). In the case of GIPS, a group of SME would utilize their assets for issuance of public shares to be managed by an independent agency. (5) Seeking International Financing: Various international donor agency/bank extends financing to SMEs through National Development Financing Institutions (NDFIs). It is found that they are not explored properly. The procedure of those donor agencies/banks for loan facilities to SMEs through NDFIs may be reviewed and term and conditions may be examined in order to make international financing more accessible to SMEs in the country. (6) The Role of Donors, particularly IDB: Donors, particularly IDB, may come forward to assist the financial institutions in alleviating the constraints faced by SMEs, primarily the access to credit and capacity building. Funding support in the form of grant may be sought from IDB for Technical Assistance and Consulting Services for products and skill development for the SMEs. In this area, BSCIC may also be involved for providing promotional and technical support services to the SMEs with funding support of IDB. (7) Assistance for SMEs from Board of Investments and Export Development Centres: Public sector agencies like Board of Investments and Export Development Centres can also provide useful information to SMEs. They can provide necessary information about trade fairs in member countries as well as training in organization of exhibitions. They can identify foreign buyers and assist local SMEs in establishing contacts with them. Information on changing demand conditions in various international markets can be pro vided and advisory services on exploring trade opportunities can be provided to prospective exporters.

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(8) Periodical Professional Training Courses for SMEs & for Entrepreneurship Development: Periodical professional training courses should be arranged for technical staff of SMEs. Moreover training in management of small enterprises and efficient marketing can also provided. Islamic Chamber regularly organizes training workshops on management, marketing, procurement of technologies, quality control system and financing of SMEs, for the benefit of representatives of private enterprises and staff of member chambers in different regions of the Islamic World. Training programme/ workshop should be organized for the development of SMEs capabilities to acquire enhanced knowledge and skills about how to choose, use and improve technology. At present, no such institution exists except a project of the BSCIC called SCITI (Small and Cottage Industries Training Institute). IAT, BUET has conducted total eight training programs for the light engineering industries during last several years. Training on different aspects of SMEs activities for entrepreneurs is crucial for the development of an entrepreneurial (9) BSCIC to be reorganized: Most entrepreneurs and businessmen express their dissatisfaction about BSCIC. BSCIC fails to provide needed services to the small industries due to manifold reasons; primarily due to its unorganized management. BSCIC has to be reorganized so that enacted policy for SMEs can be implemented to help grow small industries in the country in a better manner. Alternatively, a separate organization such as Small and Medium Enterprise Development Authority (SMEDA) may be established to act as a one-stop consultancy Agency to: (a) act as a body for facilitating policy making for SMEs, (b) provide and facilitate support services for SMEs, (c) act as a resource base for the SMEs, and (d) represent SMEs on domestic and international forums. The authority may be state supported, private or jointly supported organization. (10) Developing Institutional Network through Public-Private Partnership: The design of most government agencies appears to be overly bureaucratic and unsuitable for effectively supporting SMEs in Bangladesh. As such, re-organization of the design of these agencies has for long been overdue. Public-private sector partnership, by redesigning the existing public agencies, could be developed, developing appropriate institutional network. The objective behind this would be to utilize the strengths of public and private agencies, while neutralizing the limitations, if any, inherent in their existing organizational design. (11) Establishment of R&D Institute for Enterprise and Entrepreneurship Development, Training and Research Institute: In a country like Bangladesh, where entrepreneurial initiative is rare and shy, a separate institute for enterprise and entrepreneurship development, training and research should be developed. To make it a centre of excellence in SMEs development, it should be designed, involving educational institutions, business associations, relevant government bodies, private research agencies, and individual consultants having experience in SMEs development. (12) Implementation and Monitoring of Policy Measures for SMEs: Only policy prescription is not the end, if it is not implemented through different measures timely and properly.
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How far policy measures are implemented, along with, what effect - desired or not such policy measures has had on the development of SMEs should also be monitored from time to time. This monitoring will provide feedback for taking corrective actions, if necessary, to ensure desired effect of the policy adopted. Of course, onus has to be on BSCIC or alternately an independent body can be assigned to do the monitoring of implementation of the policy measures, and possible impact. References
Ahmed, M. U. (2001), Globalization and Competitiveness of Bangladeshs Small scale Industries ( SSIs): An Analysis of the Prospects and Challenges, in R. Sobhan et al. (eds.), Bangladesh Facing the Challenges of Globalization, (Dhaka: Centre for Policy Dialogue & University Press Ltd.). Ahmed, M. U. (1999), Development of Small-scale Industries in Bangladesh in the New Millennium: Challenges and Opportunities, Asian Affairs, 21(1), Jan-March. ADB (Asian Development Bank) (2001), High Level Workshop on Strategic Issues and Potential Response Initiatives in the Finance, Industry and Trade Sector (Dhaka: ADB; November). ADB (Asian Development Bank) (2002), Bangladesh: Strategic Issues and Potential Response- Small and Medium Enterprise Development and Export Expansion (Dhaka: ADB). Bakht, Z. (1988), Jobs Opportunities and Business Support (JOBS) Programme: Growth potentials of Small and Medium Enterprises: A Review of Eight Sub-Sectors in Bangladesh, (Dhaka: Bangladesh Institute of Development Studies; mimeographed; JOBS Sub-sector Study). BBS (Bangladesh Bureau of Statistics) (1997) Report of the Census of Manufacturing Industries (Dhaka: BBS). BBS (Bangladesh Bureau of Statistics) (2004), Report of the Census of Manufacturing Industries (Dhaka: BBS). Hossain, N. (1998), Job Opportunities and Business Support (JOBS) Program: Institutional Reform and the Informal Sector (IRIS) (Maryland, USA: University of Maryland at College Park; October). Miah, M. A. (forthcoming), Survey on Entrepreneur Development for Competitive SMEs: Bangladesh (Dhaka: Ministry of Industries, and Government of Bangladesh; November 28, 2005). Rajapatirana, S. (1997), From the Local to the Global Market: The Challenges for Small and Medium Sized Enterprises (Washington, D.C.: The World Bank). Rashid, L. (n.d.), Conducive Regulatory Environment in Bangladesh: Bridging the Gap between Micro and SME Finance, Internet version. SEDF (Small Enterprise Development Facilities)/World Bank (2003), The SME Sector: Taking Stock of the Present Situation, Dhaka: SEDF/World Bank; mimeographed). United Nations (2004), Promoting Business and Technology Incubation for Improved Competitiveness of Small and Medium-sized Industries through Application of Modern and Efficient Technologies (New York: United Nations Publication). USAID (United States Agency for International Development) (2001), Bangladesh Enterprise Development Assessment Report, Vol. 1 (Dhaka: USAID). GOB (Government of Bangladesh) (2003 to 2006), Budget Speeches 2003-04, 2004-05, 2005-06, 2006-07(Dhaka: Ministry of Finance, GOB). The Business Bangladesh (a monthly English magazine of Bangladesh), Vol. 3, Issue 9, June 2006. The New Nation (a national daily English newspaper of Bangladesh), June 7, 2005. The Bangladesh Observer (a national daily English newspaper of Bangladesh), December 26, 2005.

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