Opportunities and challenges of CMSMEs

Cottage, micro, small and medium enterprises (CMSMEs) are the backbone of any developing economy. They make up more than 90% of all businesses and provide two out of three private sector jobs in Bangladesh. 

They also play a vital role in various supply chains, from agriculture to manufacturing and services, and contribute to economic growth, social development, and environmental sustainability. In the ever evolving landscape of global economies, CMSMEs have emerged as dynamic contributors to economic vitality. 

These enterprises are not merely entities; rather they are the credit plus approach fostering poverty reduction, social peace, job creation, women empowerment, economic growth, innovation etc. 

In the global context, SMEs contribute significantly, constituting 40% of GDP and are on the path to becoming the cornerstone for generating seven out of 10 jobs by 2030 in emerging economies. They are also expected to generate 600 million jobs across the world to absorb the growing workforce.  

In Bangladesh, the SME sector plays a pivotal role in the country's economic landscape, contributing significantly to employment, income generation, and overall economic development. This sector encompasses a diverse range of enterprises, from traditional cottage industries to more modern small and medium-sized businesses. 

Moreover, in Bangladesh, SMEs account for a substantial portion of the total businesses both in urban and rural areas. For example, National Bank Limited (NBL) has significant percentages of rural customers in its portfolio and it is increasing day by day. And 54% loans have been extended to small entrepreneurs out of its total SME portfolio. 

But SMEs are not having adequate trade finance facilities due to some constraints, mindset and dominance of large corporations. It constitutes only 9% of total SME business in 2022 and if it is nourished with reasonable care and support, it has the potential to contribute more than envisioned not only in the domestic level but also in the international market.  

One of the main opportunities of the SME sector in Bangladesh is the growing domestic and international demand for its products and services.  

SME financing, particularly through refinancing and pre-financing facilities, offered by Bangladesh Bank provides distinct advantages over other forms of financing. Through this mechanism, the Bangladesh Bank has been extending liquidity support and also paving the way of profit maximisation of the lenders. 

The Bangladesh Bank also issues credit guarantee against some of the products. Nevertheless, the scope of work under Credit Guarantee Coverage (CGS) can be broadened, simplified and customised. The ongoing CGS has added an additional layer of security and comfort. The presence of a credit guarantee scheme not only instils confidence in lenders, but also serves as a risk mitigation tool, providing coverage in case of defaults. 

Moreover, SME financing facilitates better repayment dynamics. The nature of these facilities aligns with the cash flow patterns of CMSMEs, making repayments more manageable and reducing the risk of default. This improved repayment behaviour contributes to the stability of the lending portfolio. 

SME financing also mitigates the lender's concentration risk effectively. Additionally, SME financing provides lenders with better control over their customers.  

However, the SME sector in Bangladesh also faces many challenges, which hinder its growth and development. 

One of the major challenges is access to finance, which is the most common and critical constraint. According to a World Bank report, only 36% of SMEs in Bangladesh have access to formal credit, compared to 48% in South Asia and 68% in East Asia and Pacific. 

The main reasons for the low access to finance are the collateral requirements, high interest rates, lack of information, infrastructure and less attention to the SMEs by the lenders. As a result, many SMEs rely on informal sources of finance, such as moneylenders, relatives, and friends, which are often costly and unreliable. 

The competition with large corporate entities makes SMEs less resilient in the market. In addition, SMEs face challenges like lack of proper documentation, higher LC margin requirement, less awareness of market penetration, higher cost of funds, turnover tax, poorly structured organisation, lack of technological knowledge etc. 

Lastly, the impact of Covid-19, Russia-Ukraine war, acute dollar crises, and sustained inflation has caused unprecedented disruption. So, on a broader scale the key challenges of SMEs are limitation to capacity, policy support, finance, infrastructure, and efficiency.   

In order to overcome these challenges and harness the opportunities of the SME sector in Bangladesh, some possible solutions and recommendations may be as follows: 

Policy reforms: The government may enact and implement effective and coherent policies and regulations to support and promote the SME sector, such as addressing SME definition, revision of SME policy, the SME act, and introduction of a dedicated institution for SME Credit Guarantee Scheme.  

Formation of a company for CGS: The government can form a company particularly for monitoring of Credit Guarantee Scheme so that both lenders and borrowers can have assurance and comfort. 

Institutional support: The government may further strengthen and expand the institutional support and services to deal with Credit Guarantee issues through the SME Foundation, the BSCIC, the Bangladesh Bank, and the NBFIs. These institutions should provide various financial and non-financial assistance to SMEs, such as loans, stimulus, subsidies, guarantees, finance, training, consultancy, mentoring, and networking. Moreover, the government should encourage and facilitate the participation and collaboration of other stakeholders, such as the private sector, the civil society, the academia, and the development partners, in supporting and promoting the SME sector. 

Financial inclusion: The government and the financial institutions should enhance the financial inclusion and literacy of SMEs, especially the women and youth entrepreneurs, who often face discrimination and exclusion in accessing finance. 

This can be done by increasing the availability and affordability of financial products and services for SMEs, such as microfinance, leasing, factoring, venture capital, and crowdfunding. Moreover, this can be done by improving the information and awareness of SMEs about the financial opportunities and options, as well as the financial management and planning skills. 

Forming an independent government body: To address the challenges faced by SMEs, ensuring they have the necessary financial tools and policy support to flourish, an independent government body or ministry might be formed.  

Capacity development: The government, the lenders and the stakeholders should enhance the capacity development of SMEs, especially the low-skilled and informal workers, who often lack the necessary knowledge and competencies to operate and grow their businesses. Training for bankers towards creating SME entrepreneurs and monitoring the existing ones could play a vital role.    

Public-private partnership: The government and the private sector should foster public-private partnership (PPP) for enhancing the SME sector in Bangladesh. 

As government and regulatory bodies focusing on SMEs, the implementation of robust banking strategies by banks could smoothly elevate Bangladesh from a LDC to a middle-income status. This not only aids in achieving SDG but also aligns with the vision of becoming a smart country. 

SMEs require substantial support for their growth and development. This includes an expansion and simplification of credit guarantee coverage to instil confidence in financial institutions, along with more effective training programs for bankers facilitated through collaboration with trade bodies, SME Foundation, and the central bank. 

Addressing the current definition of SME and financing ceiling is crucial, and establishing a dedicated bench for SME cases within financial institutions can streamline processes. The expansion of pre-financing and refinancing programs by BB is essential for providing flexible financial solutions to SMEs. 

Collaboration among the central bank, bankers, SMEs, and trade bodies is needed, with a focus on initiatives like Supply Chain Financing through digital platforms. Additionally, creating a separate Credit Information Bureau (CIB) for micro enterprises under the supervision of the Microcredit Regulatory Authority (MRA) would ensure accurate credit information, collectively forming a comprehensive framework for the sustained growth and success of SMEs.

The author is the Executive Vice President and Head of CRM (MSME) at National Bank Limited.