SME sector in Bangladesh and policy priorities

A significant transformation of the SME sector has taken place in Bangladesh over time with various public and private initiatives.It is estimated that 7.5 million MSMEs (including cottage) constitute a significant component of economic enterprises accounting over 97% of all enterprises in Bangladesh, and the share of SMEs in GDP is estimated at about 25% in an ADB study of 2015 and it may be even more if properly estimated.

According to the Economic Census 2013, manufacturing units accounted for 10.9% of all units employing 30% of total non-farm employment and the rest were accounted for by trading and services units. The improvements of the SME sector so far achieved need to be nurtured and taken forward to ensure that SMEs play a strong role in the growth and socio-economic development of Bangladesh. The SMEs are growing at around 6%or more annually making this sector an engine of growth. SMEs contribute to the economy not only by itself but also by its contribution as a backward linkage industry of larger industries. The button, zipper and many other accessories of RMG industries are now being supplied by the SMEs. The growing importance of domestic industries in the economy with a declining role of RMG and remittances in the GDP, SME sector would get prominence in the coming years if the sector is properly nurtured to find its place in the export market.

SMEs have been an important source of employment in Bangladesh. The sector employs about 24 million people, of which 23% are engaged in manufacturing SMEs. The commonly perceived and also perhaps generally encountered difficulties of operation of the SMEs include lack of institutional credit, non-availability of working capital, low levels of technology, low productivity, and lack of marketing facilities and market access problems. In addition, unreliable power and gas supply, infrastructure deficiencies, compliance issues and stiff competition both in domestic and international markets seem to have been the key bottlenecks for the development of SMEs.

The new National SME Policy 2019 encompasses strategies to promote policy and regulatory reforms in order to create an enabling environment for SME development and support the creation and strengthening of formal institutions that provide business development and financial services to SMEs on a sustainable basis. The strategy takes inputs from ongoing reforms and policies to improve the general business environment with targeted interventions to support innovative enterprises, start-ups and export-oriented enterprises. The strategy also includes a set of actions to be undertaken by the government in order to create a level-playing field for all SMEs through regulatory reform and administrative simplification with provisions for investment in human capital, business development services, better access to finance and fostering of technology transfer.

However, the definition of SMEs has been a source of controversy in Bangladesh for a long time because different definitions are being followed by different organisations, and it is changing in every Industrial Policies. A need for a uniform definition of SMEs has thus been felt necessary to harmonise the activities of SMEs and assess their contribution to the economy. The current Strategy also places importance on following a unified definition for a longer period which will facilitate the assessment of SMEs' contribution to the economy.

The Ministry of Industry, being the main regulatory body, and various other organisations are involved in SME development in Bangladesh. With the establishment of the SME Foundation in2007, the overall support structure for SME development in Bangladesh became a multi-institution approach. Each of them works in some specific areas although with some overlaps. Bangladesh Small and Cottage Industries Corporation (BSCIC), established in 1957, a corporation under the MoImandated to work mainly for the development of small and cottage industries; BSCIC activities also facilitate the development of micro and small industries in the country. Bangladesh Bank has been facilitating access to finance to SMEs with various policy initiatives, however, there is little or no coordination with other agencies. In addition, some private sector organizations such as MicroIndustries Development Assistance and Service(MIDAS), Chambers of Commerce and Industries, trade bodies and some domestic microcredit organisations such as BRAC, ASA and PKSF and international NGOs and donors are also involved in SME promotion activities in Bangladesh. What is important here is effective coordination between government agencies such as SME foundation and BSCIC to enhance their activities to facilitate the development of SMEs. BSCIC has established a network across the country and if it is shared with the SME Foundation, they could support SMEs in solving their various problems.

The development of SMEs can be instrumental for Bangladesh to embark on higher growth trajectories as envisioned in various plan documents of the government, such as the Perspective Plan2021 and 2041, various Five Year Plans, IndustrialPolicies, etc. While Bangladesh has the advantage of promoting SMEs in terms of abundance of human capital with a natural aptitude of intellectual ability, it lacks a conducive and coherent policy environment to give a boost to the sector.

Inadequate data is another bottleneck to properly estimate the contribution of SMEs in the economy. The Economic Census of BBS, usually done in a 10-year interval, does not collect adequate information that is important to estimate the SMEs'contribution to the economy. Further, the lack of databases of SMEs also prevents them from accessing various support services of the government. The upcoming economic census should address both data inadequacy and the database of MSMEs that would facilitate more research and policy analysis for this sector.

In sum, SME development strategies and measures are needed to advance reforms that might facilitate dynamism and growth of the SME Sector by relying on three key aspects: (i) a favourable policy and regulatory environment, (ii) strong and sustainable institutions providing financial and non-financial services, and (iii) easy access to financial and business services for entrepreneurs including women, rural poor, youths, people with disabilities and ethnic minorities. We have to keep it in mind that the development of SMEs is necessary to facilitate poverty reduction and inclusive development.

Monzur Hossain is Research Director at the BangladeshInstitute of Development Studies (BIDS)