The challenges of SMEs in Bangladesh

Small and medium-sized enterprises (SME) are critical to our economy, accounting for 25% of the total GDP and employing 30% of the working population. However, what we often fail to understand is that the significance of SMEs extends far beyond their contribution to our GDP and employment. 

We still lack proper official national statistics to determine the precise role that SMEs play in keeping the economy of our country afloat. 

When we look at the various economic activities in our country, from agriculture to manufacturing and services, we can see that SMEs play an important role in various supply chains. Therefore, we will not be able to properly capture the importance of SMEs in our economy unless we conduct a proper value chain analysis, moving away from our traditional method of assessment. 

Thus, I would like to emphasise the importance of having a sector-based value chain analysis so that we have a better understanding of the importance of SMEs in our economy. 

When we talk about SMEs, we sometimes refer to micro, small, and medium-sized enterprises while in other times, we refer to the cottage industry. These definitional problems are frequently reflected in our policies and discussions about SMEs, leading to confusion. 

The problem with this ambiguity is that many studies, including one from Sanem, have found a significant difference among micro-enterprises, cottage enterprises, small enterprises and medium enterprises. In Bangladesh, medium-sized enterprises are often in a better position than micro and small-sized enterprises because they face fewer challenges. 

This is why, when discussing SMEs, I believe we must ensure the proper segregation of the two: micro and small enterprises on the one hand, and medium enterprises on the other. However, for this article, I will use a broader definition of SMEs to include micro and cottage industries within small industries.

Informal activities account for a sizable portion of the role of SMEs in our economy. SMEs are also not properly included in the formal registration process. 

Because of their informal nature in terms of economic operations, employment generation, and their role in the entire supply chain, they face many additional challenges, such as difficulty obtaining loans from institutions and government assistance through institutional forms or channels. However, as they do not have to go through many formal processes that take a lot of time and money, their informality can sometimes give them an advantage. 

Despite some apparent advantages, there are numerous drawbacks of informality. The most significant disadvantage is related to financing. 

SMEs require funds for operating expenses and business expansion. Because of their informal nature, they do not receive loans from formal institutional channels such as banks. 

Banks are hesitant to give loans because they believe the transactional and operating costs for these small loans are high. Furthermore, many banks believe that these loans are risky because the business models of many SMEs may not be sustainable, making the recovery of loans uncertain. 

Thus, these SMEs obtain loans from informal channels at a very high rate of interest. This financial challenge is a significant impediment to the growth of SMEs. 

However, many countries, especially the East and Southeast Asian countries, have attempted to tackle the financing issue through a variety of initiatives, including the establishment of SME banks, the integration of the informal channels for financing SMEs in the formal process, and the creation of new innovative mechanisms.

Although some initiatives have been taken in our country, they have remained limited to paper and have not been implemented in real life as of yet. In this regard, innovative and appropriate steps must be taken to ensure that SMEs receive the necessary support to survive. 

The government, in particular, must take the lead in doing so because there is a complete market failure in terms of financing SMEs. They must create effective financing channels, banking channels, and, if necessary, new organisations to finance SMEs.

The second issue is one of infrastructure. Many SMEs lack access to land, electricity, gas, and other necessities for running their businesses. 

In our country, there is a lack of willingness on the part of the relevant authorities to solve these sector-specific and SME-specific infrastructural barriers. For example, though the Ministry of Industry has been entrusted with resolving these issues, their efforts have been in vain. 

The primary reason for this is that the existing policies in Bangladesh to support SMEs are insufficient, poorly formulated, and lack harmonisation. There has been very little effort made to help SMEs by removing anomalies through the integration of our export policy, import policy, industrial policy and fiscal and monetary policies. 

We must address these policy-level challenges as well by taking a new approach. However, we must understand that even if we come up with innovative ideas, they will be futile unless there is a proper institutional mechanism in place and a strong will on the part of the relevant authorities to implement them.

The third factor to consider is skill development. SMEs generate ideas, but they frequently struggle to find the skilled manpower required to put them into action. 

Taking Japan, China, Malaysia, Vietnam, and Thailand as examples, we can see that they have prioritised the development of SMEs in their policies, recognising that it is possible to generate large-scale employment through SMEs, and thus move towards greater economic development. I am not seeing this kind of urgency to promote SMEs in Bangladesh. 

To assess the impact of the ongoing pandemic on SMEs, Sanem has been conducting quarterly surveys of 500 firms since June 2020. Among these, 300 firms were micro and small enterprises. 

The data we have gathered thus far suggests that Covid-19 has had the greatest negative impact on micro and small businesses, followed by medium businesses, and then large businesses. In terms of recovery, micro and small enterprises are recovering at a much slower pace than medium and large ones. 

In terms of stimulus packages, micro and small enterprises received the least. Sanem's ongoing survey found that, so far, among the surveyed firms, only 9 percent of small and micro enterprises received stimulus packages, while 30 percent of medium enterprises and 46 percent of large enterprises did. 

This demonstrates that there is a significant bias toward large enterprises when it comes to receiving stimulus packages, which places SMEs at a disadvantage. In addition, due to the challenges mentioned earlier, the stimulus packages given to SMEs were not disbursed properly.

What can be done about this? I have already discussed the policy changes that must be implemented. Moreover, I have also talked about how important revision and integration are in major economic policies. 

In terms of monetary and fiscal policies, we need to clarify exactly what benefits we are providing to SMEs in terms of loans and taxes. In terms of industrial policy, we must concentrate on determining how to make economic zones more useful to SMEs. 

We need to figure out how we can help them with their infrastructural issues. We should also consider how we can improve our workers' skills to meet our SMEs' requirements. 

Additionally, our export policy should focus on how we can connect SMEs to our export diversification programmes. It is also possible that when SMEs are not direct exporters, they can still play an important role in the export-oriented sectors' backward linkage industries or forward linkage industries. 

Thus, how SMEs can contribute to our export without being direct exporters must be addressed in our export policy. In terms of import policy, we must consider what protections are required for SMEs regarding tariffs. We need to equip SMEs with the tools and capabilities to handle barriers within WTO measures. 

We must, therefore, devise actionable and implementable policies. Our government should also activate and empower the organisations they have already set up for SMEs by engaging capable individuals. 

Dr Selim Raihan is the Executive Director of Sanem

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.