Why is formalising SME sector a must?

When it comes to small and medium-sized enterprises (SME) in our country, one thinks of the small and neglected enterprises who do not have the facility to market their products, nor do they get help from banks or the government.

Many neglect SME ventures, thinking they are meant to survive in a limited environment, but then go wondering why this sector is not turning into a big industry.

In reality, SME enterprises are playing a major role in national production by supplying raw materials to large industries. Entrepreneurs are contributing a lot to the economy by employing a large number of unskilled and semi-skilled workers. But there is scope and need for large scale expansion in this sector.

By expansion, I do not mean that the size of the SME sector needs to expand. I believe that moving forward on the path to achieving the ability to survive any disaster, tackling all kinds of risks, is more important. Doing so will ensure the sustainable development of this sector.

A good place to start would be the institutionalisation of the sector and gradually moving away from the traditional informal sector. This would ensure the rights of workers and also maximise returns for entrepreneurs.

When we talk about worker rights, the basic things are a fair wage, job security, and a decent working environment. To ensure all that, entrepreneurs first need some benefits, including a secure business environment. But these are not possible without institutionalisation.

When it comes to setting up a big firm in Bangladesh, there are some obstacles, like any other country in the world, and in some cases, setting up small firms offer greater benefits.

Many cannot provide the kind of capacity, capital, human resources, funds, credit, and technology required to establish a large firm. And, the kind of progress that is made by forming big firms may not be what is desired in our country.

On the other hand, small entrepreneurs have more control over their firms. However, these institutions do not have adequate measures to deal with uncertainty and risk which has been proven amid the pandemic.

Every business has some risk involved but big businesses take several measures to ensure their security which small businesses lack. Without institutionalisation, this problem cannot be addressed.

A good way to start with the institutionalisation process would be to bring all industrial establishments into registration and documentation. But it is also true that due to administrative inefficiency and harassment, many entrepreneurs feel discouraged in entering this process.

If bureaucratic complications, corruption, and the lengthy process can be tackled, the cost of business will be reduced significantly and everyone will want to move forward formally.

We can get some idea about what occurs in the SME sector without formalisation if we look at the financial incentive packages offered by the government amid the pandemic. 

Many organisations in the SME sector could not even apply for the stimulus due to their lack of documentation. These organisations must be quickly registered with minimal documents such as national identity cards (NID), electricity bills, and house rental documents.

Small and medium enterprises are generally identified in the SME sector, and medium scale entrepreneurs are in a relatively good position. They are also getting benefits from the government. But cottage, micro and small entrepreneurs need to be viewed separately.

To reduce the current pressure on cities, small and medium scale industries need to be developed in rural areas. But the problem of financing is much greater in rural areas than in cities and it is also difficult for rural areas to get access to information.

The lack of access to market facilities for rural entrepreneurs is even more obvious. To solve this problem, village entrepreneurs need to be able to increase their communication with big shopping malls at the divisional or district level. Here, established entrepreneurs and entrepreneur organisations must play a role alongside the government.

Dr Sayema Haque Bidisha is an economics professor at Dhaka University

She talked to The Business Standard over phone for the interview