SMEs need institutional identity to move forward

The SME sector has been badly hit by the Covid-19 pandemic resulting in huge losses for most of these small to medium size entrepreneurs. Due to the crisis, a large number of people employed in this sector have lost their jobs as well. In an interview with Jahidul Islam of The Business Standard (TBS), Dr Md Masudur Rahman, chairperson of the SME Foundation, discussed the present condition of this sector

Are SMEs recovering from the immediate impact of Covid-19? Or is the crisis deepening?

Over the last 15 months, businesses in Bangladesh have been struggling like in other parts of the world. The negative impact of Covid-19 was much greater in the SME sector than in other sectors. SME entrepreneurs of Bangladesh produce goods mainly targeting the domestic market. Last year, they could not sell their products during major festivals like Eid, Ramadan, Pohela Baishakh and Puja due to the pandemic.

In the SME sector, 76% of the businesses faced losses in the 66 days of national shutdown last year. Many workers lost their jobs. Those lucky enough to keep their jobs, faced loss of income.

From July to August last year, the situation began to improve and the SME sector, like other sectors of the economy, began to turn around.

The second wave of the pandemic hit the country this year when SME entrepreneurs started production for Eid, Ramadan, Pohela Baishakh and Puja. Sales were less than hoped for, but they nevertheless managed to minimise losses based on past experience.

Right now, there are still problems in marketing due to regional lockdowns. Entrepreneurs are suffering with the capital isolated from the rest of the country.

The government plans to increase SMEs' contribution to GDP to 32% by 2024 from 25% now. Will it be achieved?

The SME sector is ensuring more than 80% of employment in the country's industrial sector. This sector is playing a big role in supplying materials to big industries and SMEs are also acting as forward linkages for many industries.

The 25% SME sector contribution to GDP calculation is very old. Since 2015, economic activity in the country has increased a lot. The target for the industrial sector to achieve a 35% contribution to GDP by 2021, was fulfilled a year earlier. We are on track for the SME sector to contribute 32% of GDP by 2024.

What are the major problems currently facing the SME sector?

I think the biggest problem in the SME sector is lack of funds. Although the flow of credit in this sector has been increasing for several years, 75% of SME entrepreneurs are still without bank accounts. It is not possible to reach all these entrepreneurs through the conventional banking system and there are systemic problems in the banking sector which has certain documentation requirements that SMEs are often unable to meet. The SME sector needs an alternative organic financial structure to meet this crisis.

Most businesses in the SME sector are informal. Most of them do not have trade licenses or bank accounts. They don't even have access to disaster relief as they are not included in any government database.

SME entrepreneurs lack capacity and workers in this sector lack skills. Without product innovation, product design, introduction of new technologies, and skilled manpower to manage them, the SME sector will not be able to survive in global competition.

Market access has also become a major problem for SME entrepreneurs in Bangladesh amid the pandemic. The government has declared lockdowns in many places in the country due to the second wave. In this situation, maintaining the supply chain is also a challenge.

The cost of doing business as a whole in the SME sector is rising. Other costs besides land prices are rising, nor is the government tax structure SME friendly. SME entrepreneurs cannot reach policymakers like the big entrepreneurs can, and SMEs are also not getting a fair price for their products.

Policymakers need to work on solving all these problems. We need to ensure equal opportunity for all entrepreneurs.

What initiatives have been taken by the SME Foundation in recent time?

We have initiated training of entrepreneurs in banking literacy, through representatives of SME clusters spread across the country. We have also launched a programme to connect bankers with entrepreneurs.

We have also organised Digital Entrepreneur Fairs in eight divisions of the country with the support of the government's A2I project.

Two incubation centres have been set up in Dhaka and Chattogram for SME entrepreneurs. Separate offices have also been set up to train entrepreneurs. We are working to bring SME entrepreneurs into the stock market and are also trying to get them membership in trade chamber.

We have started building a database for entrepreneurs in different SME clusters and are also setting up a separate database of women entrepreneurs with the help of the World Bank. If all these initiatives are successful, the SME Foundation will become a more important organisation.

Informality is a major problem in the sector. What is your future plan to eliminate the problem?

The SME sector will not be able to move forward through informal management. In order to improve, we have to move towards providing SMEs institutional identity.

Many entrepreneurs are deprived of a number of government services simply because they do not have an institutional identity or a trade license.

The SME Foundation has started discussions at the stakeholder level to bring SME entrepreneurs into the formal sector. However, it is not possible to list about one crore entrepreneurs overnight. In this situation, the assistance in this sector has to continue informally.

To reduce informality in the industry, it is necessary to ensure administrative
reform and also to modernise the process of the government's service delivery mainly in the area of issuing trade license.

If a mobile-based financial service provider can launch an account quickly using the National Identity Card database, why can't the city corporation issue a trade license using the same database?

How helpful will the proposed budget for the next financial year be for the SME sector?

The budget has put forward a number of supportive proposals for the SME sector.

The budget contains special proposals for the development of light engineering, agricultural processing, and dairy processing industries.

Our annual demand in the light engineering sector is Tk80,000 crore. Of this, we produce equipment worth Tk25,000 crore. The 10-year tax rebate in this sector will play a helpful role in meeting the production deficit of Tk55,000 crore. Our processing industry is developing rapidly and we are producing different agricultural products. This is increasing employment and yet, although we are producing enough meat to meet demand, there is a deficit in milk production.

The announcement of VAT exemptions, customs duty, and other taxes in the sector, will boost the development of small entrepreneurs as well as the economy.