Assignment

On

Problems and Prospects of Small and Medium Enterprises (SMEs)
Financing in Bangladesh











Submitted to
Md. Masudul Haque
Assistant Professor
&
Course Coordinator
Bangladesh Institute of Bank Management



Submitted By
Md. Mushfikur Rahman
Officer
Pubali Bank Ltd
Serial No- 29











Date of Submission : 16.04.2014


INTRODUCTION

Bangladesh is an agricultural based country, where around 85% people are living at village
with activities of agriculture, in this perspective Bangladesh can achieve industrialization
through agriculture based small and cottage industry to start aggressively. Small and medium
enterprises (SMEs) make up the largest portion of the employment base in many developing
countries and, indeed, are often the foundation of the local private sector. Now the SMEs are
not only concentrated to low-tech, traditional, and agro-based economic activities; these are
spread over other non-traditional manufacturing and service sector as well. In fact, the SMEs
are recognized as engines of economic growth worldwide. To achieve high and sustained
economic growth, a triggering force is mandatory to exit from endemic poverty and
socioeconomic deprivation. The entrepreneurs behind couldand shouldplay a much
larger role in development, but too often are held back by a lack of ready access to financing
from local formal sector financial institutions. Here lies the scope of commercial banks to
offer banking facilities to this missing middle by offering different products that are
specially featured for this segment. On a long term perspective these commercial banks
expect to gradually develop the creation of an entrepreneurial class across Bangladesh
through proper financing and training. Commercial banks are also developing their procedure
and operational guideline supported by structured recruitment process and subsequent
training with a view to mitigating credit risks and other risks for a smooth flow of SME
financing. Most businesses in Bangladesh are in need of small short-term loans to help
finance their working capital needs or purchase of fixed assets. So when a bank brings about
a momentous difference in these peoples lives by meeting their demand, the bank is more
than a bank. Its a promise - a promise to rise against all adversities; a promise to quality
livelihood; a promise to bridge ordinary people with extraordinary opportunities.SME
financing has been identified as a major obstacle to SME growth. Unfortunately, the issue
seems to be as unresolved as it always has been. Though the majority of the issues are with
the SME themselves, the banks also have major issues in designing financial products for the
SMEs. As a developing country Bangladesh has a lot of potentiality in SME sector. Our
discussion is here to know the SME financing and its problems & prospect with a suggestions
and recommendations regarding the issue.




OBJECTIVES OF THE DISCUSSION

The objectives of the discussion are to identify the factors that influence the development and
growth of the SME sector. Thus the specific objectives of the study are as follows:

1. To appraise the present situation of SMEs in Bangladesh.
2. To evaluate the financing performance of SMEs in Bangladesh.
3. To identify the financing problems of SMEs in Bangladesh. Regarding the
identification of financing problems, we have tried:
to find out whether lack of investment and operating funds hinder the growth of the
SME sector
to find out whether lack of modern technology hinders the growth of the SME sector
to find out whether poor physical infrastructure and high transportation cost
undermine the competitiveness of SMEs
to find out whether shortage of skilled workforce hinders the development of SMEs.
4. To identify the prospect of SMEs in Bangladesh.
5. To recommend solutions to the problems.


SMEs: around the world

According to the European Union (2003) SMEs are defined as enterprises which have at
most 250 employees and an annual turnover not exceeding 50 million Euros. Further, there is
the distinction of small enterprises they have fewer than 50 staff members and less than 10
million Euros of turnover and micro-enterprises (less than 10 persons and 2 million Euros
of turnover).
In the UK, sections 382 and 465 of the Companies Act 2006 define SMEs for the purpose of
accounting requirements. According to this a small company is one that has a turnover of not
more than 5.6 million, a balance sheet total of not more than 2.8 million and not more than
50 employees. A medium-sized company has a turnover of not more than 22.8 million, a
balance sheet total of not more than 11.4 million and not more than 250 employees. It is
worth noting that even within the UK this definition is not universally applied.

In the USA, the definition of a small business is set by a government department called the
Small Business Administration (SBA) Size Standards Office. The SBA uses the term size
standards to indicate how largest a concern can be in order to still be considered a small
business, and therefore be able to benefit from small business targeted funding. The concern
cannot be dominant in its field, on a national basis. It must also be independently owned and
operated. Unlike the UK and the European Union which have simple definitions applied to all
industries, the US has chosen to set size standards for each individual NAICS coded industry.
This variation is intended to better reflect industry differences. The most common size
standards are

500 employees for most manufacturing and mining industries
100 employees for wholesale trade industries
$6 million of annual receipts for most retail and service industries
$28.5 million of annual receipts for most general & heavy construction industries
$12 million of receipts for all special trade contractors
$0.75 million of receipts for most agricultural industries





Present Scenario of SMEs in Bangladesh

In 2003 the International Consultancy Group (ICG) of the UK, in collaboration with the
Micro Industries Development Assistance and Services (MIDAS), conducted the National
Private Sector Survey of Enterprises in Bangladesh. The survey results drew the conclusion
that there were approximately 6 million small and medium enterprises (SMEs), which
included enterprises with up to 100 workers employing a total of 31 million people,
equivalent to 40 per cent of the population of the country of age 15 years and above. The
survey also found that the industrial structure of SMEs consisted of primarily wholesale and
retail trade and repairs (40 per cent), production and sale of agricultural goods (22 percent),
services (15 percent), and manufacturing only (14 per cent). Thus the survey brought out very
prominently the fact that the large untapped potential for expansion in manufacture and
production could be exploited (or contributing more significantly to the national economy.
Another vital finding of the survey under discussion was that SMEs contributed BDT 741
($12.5) billion i.e. nearly 25 per cent of the GDP (BDT 2,996 billion) in 2003. It is reflected
from this survey that enterprises employing 2-5 workers contribute 51 percent share of the
total SME contribution to the economy, followed by 26 percent by those having only one 10
worker and 10 per cent by those having 6-10 workers. For LDCs like Bangladesh, SMEs are
a highly cost-effective route to industrial development.



SCOPES OF SMES

The structural arrangements of Bangladeshs industries show that jute, textiles, paper, steel
and engineering, cement, chemical, fertilizer and pharmaceutical industries are under the big
and medium scale industries. On the other hand, specialized textile industries (including
garments), backward linkage industries, hand-operated welding, food processing and food
linkage industries, leather, ceramics, light engineering including automobiles, basic metal
engineering, small scale chemical engineering, rubber industries, paper printing and
publishing industries, small fabrication industries, non-metal mineral products, batteries,
electrical, electronics, handicrafts, agro-based industries, multilateral jute goods, silk
industries, fruit processing, poultry farming, fisheries, teagardening and processing, vegetable
seed farming, floriculture and agro-forestry, and printing industries, ginning and baling,
construction industries, transportation (including automobiles), cinema and photography,
pathological laboratories, cold storage, furniture, computer Indus tries, fast food, frozen food,
etc, under service industries, and many other sectors are included in the SMEs. But there are
11 booster sectors of SMEs in the Industrial Policy 2005 which are Electronics and Electrical,
Software Development, Light Engineering and Metal Works, Agroprocessing/Agri-
business/plantation agriculture/specialist farming/tissue-culture and related business, leather-
making and leather goods, Knitwear and ready-made garments, Plastics and other synthetics,
Healthcare and diagnostics, Pharmaceuticals/Cosmetics/ Toiletries and Fashion-rich personal
effects, wear and consumption goods.

IMPORTANCE OF SMES

It is said internationally that Small and medium Enterprises (SMEs) account for about 50
percent of GDP and 60 percent of employment. SMEs are estimated to contribute between 25
and 35 percent of world manufactured exports. In terms of industrialization, Japan drew
special attention to the professionals and policymakers in the international arena. Statistics
show that Japan has achieved its industrial development heavily based on SMEs. Some of the
worlds best performing economies, notably Taiwan and Hong Kong, are heavily based on
small enterprises. In much of the developing world, the private sector economy almost
entirely comprises of SMEs. Contribution of SMEs in some selected countries shows that it
has provided very significant proportion of GDP and employment in their national economy.

In many developing countries including Bangladesh, manpower is relatively abundant. It is,
therefore, imperative that their full and effective utilization should become a focal point of
socio-economic policies. Emphasis has to be laid on SME sector to absorb the surplus
manpower in these countries. In fact, developing of SME sector has been requires less capital
outlay and at the same time it provides more employment than the large-scale sector. Second,
a SME unit does not require highly sophisticated technology. It can, therefore, be useful in
backward areas where the people have yet to be trained to meet the challenge of sophisticate
technology. Bangladesh is highly resourceful with so many seasonal fruits and also lots of
agricultural products. Pineapple and mango are best used to produce jam/jelly/juice etc under
SME. Tomato sauce and potato chips are popularly used all over the world. SME is most
suited for processing the items. If we can add more quality to the products and ensure proper
marketing, tremendous demand will be created in domestic and export market. In RMG
industries (knit) circular machines are used for knitting of the items. The circular machines
can also be set at household level to perform job works to feed RMG industries for ultimate
export of T/Polo Shirts etc. This is a subcontracting system where RMG industries supply
yarns to the entrepreneurs having circular machines. The system has already been introduced
in Dhaka and Narayangonj areas with growing demand. Shoe making by small industries as
job works of big shoe companies like BATA is a glaring example of SME product. BATA
supplies raw materials to lots of small factories at household level in Dhaka city and gets the
product (shoes) completed through subcontract system. SMEs are a fundamental part of the
economic fabric in developing countries like Bangladesh, and they play a crucial role in
furthering growth, innovation and prosperity. Small and medium enterprises (SMEs) play a
major role in economic development in every country. Studies indicate that in both advanced
economies and developing countries SMEs contribute on average 60 percent of total formal
employment in the manufacturing sector (Ayyagari et al, 2007).








SMEs in Bangladesh

Different countries and organizations define SMEs differently. The Government of
Bangladesh has categorized SMEs into two broad classes

Manufacturing enterprises
Non Manufacturing activities
o Service Concern
o Business Concern
Medium Enterprises Medium enterprises refer to those enterprises which are not any
Public Limited Companies and which fulfill the following criteria-
1. Manufacturing Concern Having an investment of Tk. 10 Crore to Tk. 30 Crore
excluding land & building and / or employing 100-250 workers.
2. Service Concern- Having an investment of Tk. 1 Crore to Tk. 15 Crore excluding land
& building and / or employing 50-100 workers.
3. Business Concern Having an investment of Tk. 1 Crore to Tk. 15 Crore excluding
land & building and / or employing 50-100 workers.
Small Enterprises Small enterprises refer to those enterprises which are not any Public
Limited Companies and which fulfill the following criteria-
1. Manufacturing Concern Having an investment of Tk. 50 Lac to Tk. 10 Crore
excluding land & building and / or employing up to 25-99 workers.
2. Service Concern- Having an investment of Tk. 5 Lac to Tk. 1 Crore excluding land &
building and / or employing up to 10-25 workers.
3. Business Concern Having an investment of Tk. 5 Lac to Tk. 1 Crore excluding land &
building and / or employing up to 10-25 workers.
Micro Enterprises Micro enterprises refer to those enterprises which are not any Public
Limited Companies and which fulfill the following criteria-
1. Manufacturing Concern Having an investment of Tk. 5 Lac to Tk. 50 Lac excluding
land & building and / or employing up to 10-24 workers.
2. Service Concern- Having an investment of Tk. 5 Lac excluding land & building and / or
employing less than 10 workers.
3. Business Concern Having an investment of Tk. 5 Lac excluding land & building and /
or employing less than 10 workers.
Cottage Enterprises Cottage enterprises refer to those enterprises having an investment
of Tk.500,000 excluding land & building and employing up to 10 manpower all are family
members.

The Ministry of Industries, Government of Bangladesh has identified the following 11
booster sectors;

I. Electronics and electrical
II. Software-development
III. Light engineering and metal-working
IV. Agro-processing/agro-business/plantation agriculture/ specialist
farming/tissueculture
V. Leather-making and leather goods
VI. Knitwear and ready-made garments
VII. Plastics and other synthetics
VIII. Healthcare & diagnostics
IX. Educational services
X. Pharmaceuticals/cosmetics/toiletries
XI. Fashion-rich personal effects, wear and consumption goods.

SME: Thrust sector deserves appropriate support
SME has been considered as the thrust sector in the economic development of the country
with growing importance from all walks of life. It is evident that, substantial increase in SME
and Retail Credit portfolios along with commercial, corporate and institutional lending,
would lead the banks to its higher trajectory of growth, minimizing the risk of lending
through portfolio diversification. As such, most of the banks have taken up aggressive
marketing policy to augment their exposure in SME and Retail Credit. Though SME concept
is nothing new, as evident from the establishment of Bangladesh Small and Cottage
Industries Corporation (BSCIC), but a fresh look into and Endeavour to boosting the sector
are still imperative. Bangladesh Bank re-finance scheme for SME is laudable. The role of
IFC-SEDF for creating awareness among the entrepreneurs and banks/NBFIs to be more
focused in SME deserve appreciation.
Prospects:
Un-employment problem is a growing concern all over the world more particularly in
developing countries, and the panacea to the setback mostly lies in massive development of
labor incentive SME sector. SME in many cases can be set up at domestic and household
level contributing to cost cutting. Family members may also participate in the process.
The government is considering a special package for the SME sector
Determining the economy growth government initiating to develop SME. The government
considers a further cut in bank interest rates, especially for small and medium enterprises
(SMEs) to help the sector grow faster, said the commerce minister yesterday. ?We have
already brought down the interest rate to support the countrys entrepreneurs. We are
considering reducing the rate further to help different sectors, especially the SMEs, grow
faster,? said Faruk Khan. Now Analysis SME loans through a graph based on 2010 fiscal
policy.

Role of SMEs Export Growth in Bangladesh
Bangladesh maintained its upward strides in economic growth duly manifested by positive
developments of the major macro-economic indicators. GDP growth was 6.43 percent in
2006-2007 compared to 6.63 percent in 2005-2006. The growth of GDP was 5.96 percent for
the year 2004-2005. The national savings and investment reached 29.20 and 24.30 percent of
GDP respectively in 2006-2007. Per capita GDP and GNI would cross U$ 482 mark for the
first time in Bangladesh and stand at US$ 482 and US$ 520 respectively. The contribution of
service sector in the GDP was 52.33% in 2007-2008; while industry and agriculture sectors
were 28.58% and 19.09% respectively.
After all, small and medium enterprises, including the tiny and micro enterprises comprise
virtually all (about 99.85%) of all business enterprises outside agriculture in Bangladesh.
Large enterprises account for only 0.15% of the said enterprises. SMEs including micro
enterprises account for some 81.2%, while only 0.15% of all business enterprises employ a
full 18.8% of the employment of all business enterprises outside agriculture. Clearly, small
and medium enterprises including micro enterprises have a ground-breaking, monolithic and
humongous importance in the economy of Bangladesh in the context of pro-poor growth.
The government launched a strategy of industrialization focused on the manufacturing sector.
Industries (manufacturing) sector expanded at an average rate of 6.44% per annum
throughout the years of FY 1972-2005. The average growth of industry sector
(manufacturing) during 1992-96 was 8.21 percent. But during 1997- 2003, the growth rate
rose to 6.8 percent. Manufacturing sector registered 10.77% growth for the 2005-2006. It was
9.52% for the year 2006-2007.
The growth of SMEs in a number of industries, particularly in the field of plastic, food,
footwear, rubber products, chemicals, job printing and certain categories of metal based
products. Plastic industry has not only succeeded in substituting imports but has also been
able to penetrate the export market in specific range of products such as drums and bulk
containers etc. The industry has also been producing items that are considered deemed
export, e.g. accessories for the garments industry etc. Similar export successes have also been
achieved by imported metal based engineering product industries. Thus, export of
engineering products has experienced nearly 27% annual growth during the last 10 years,
with production carried out by enterprises belonging to the SME sector. Easy import of
components has also facilitated the rapid growth of a wide variety of footwear products in the
country. Similarly, lower cost of imported paper and ink has helped commercial job printing
to grow rapidly. Import of packaging materials at lower cost has contributed to the growth of
other food industry. Rubber products and other chemical products also seem to have
benefited from easier access to raw materials due to trade liberalization. Pilferage from the
export oriented garments factories of fabric imported duty free also adversely affected the
SMEs in weaving.
The growth of SMEs has been the trend in domestic demand. On the other hand, SMEs in
dominant manufacturing industries such as grain milling seem to have stagnated due to
relatively low income elasticity of demand for these products.

Government Initiative for SME Export Development
(i) Government Policies and Strategies for SMEs : The government has committed in the
PRSP and as well as in the Industrial Policy 2005 to consider SMEs as vehicles for quality of
life improvement, economic growth and poverty alleviation of the common people. The
Government will play the role as a facilitator removing policy obstacles and neutralizing
market failures and secondly will provide necessary promotional support to SMEs. The
poverty Reduction Strategy Paper (PRSP) Stateg: The Government will pursue an
employment intensive industrialization with emphasis on SMEs and export oriented
industries.
(ii) Booster Sectors: For promotional support SME policy Strategies 2005 has identified the
following 11 booster sectors: (1) Electronics and electrical; (2) Software development; (3)
Light engineering and metal-working; (4) Agro-processing/agri-business/ plantation
agriculture/ specialist farming/tissue-culture and related business; (5) Leather- making and
leather goods; (6) knitwearmaking and leather goods; (7) Plastics and other synthetics; (8)
Healthcare and diagnostics; (9) Educational services; (10)
Pharmaceuticals/cosmetics/toiletries; and (11) Fashion-rich personal effects, wear and
consumption goods
(iii) Revenue and financial Incentives: The industrial enterprises identified as Thrust Sectors
including small and medium enterprise (SMEs) in the Industrial Policy 2005 will enjoy
special fiscal and financial incentives.

Barriers for SME Export
(i) Insufficiencies Information: Problems in identifying, selecting and contracting
international markets due to information insufficiencies. (i) Limited information to locate
markets; (ii) Unreliable data about the international Market; (iii) Locating foreign business
opportunities; (iv) inability to contact overseas customers;
(ii) Functional Barriers: Insufficiencies of various functions internal to the enterprises such
as human resources, production and finance with regards to exporting: (i) Lack of managerial
time to deal with internationalization; (ii) Insufficient quantity of personnel for
internationalization; (iii) Lack of excess production capacity for exports; (iv) Shortage of
working capital for financing exports;
(iii) Marketing Barriers: Pressures imposed by external forces on adapting the elements of
the companys marketing strategy including barriers associated with the companys product,
pricing,
distribution logistics and promotional overseas: (i) Developing new products for foreign
markets; (ii) Adapting export product design/style; (iii) Meeting export product quality/
standards/
specifications; (iv) Offering technical/after-sales service; (v) Offering satisfactory prices to
customers; (vi) Granting credit facilities to foreign customers; (v) Complexity of foreign
distribution channels; (vi) Maintaining control over foreign middlemen; (vii) Unavailability
of warehouse facilities abroad; (viii) Excessive transportation/insurance costs; (ix) Adjusting
export promotional activities to the target market;
(iv) Procedure Barriers: Barriers associated with the operational aspects of transactions
with foreign customers. (i) Unfamiliar exporting procedures/ paperwork; (ii) Difficulties in
communicating with overseas customers; (iii) Slow collection of payments from abroad; (iv)
Difficulties in enforcing contracts and resolving disputes;
(v) Government Barriers: Barriers associated with the actions or inaction by the home
government in relation to its indigenous companies and exporters. (i) Lack of home
government
assistance/incentives; (ii) Unfavorable home rules and regulations; (iii) Unfavorable foreign
rules and regulations;
(vi) Customer and Competitor Barriers: Barriers associated with the firms customer and
competitor in foreign markets which can have an immediate effect (i) Different foreign
customer habits/ attitudes; (ii) Keen competition in overseas markets;
(vii) Business Environment Barriers: Barriers associated with the economic, political-legal
and socio-cultural environment of the foreign markets within which the company operates or
is planning to operate. (i) Foreign currency exchange risks; (ii) Unfamiliar foreign business
practices; (iii) Different socio-culture traits; (iv) Verbal/Non-verbal language differences; (v)
Inadequate of infrastructure for e-commerce; (vi) Political instability in foreign markets;
(viii) Tariff and non-tariff Barriers: (i) High tariff barriers; (ii) Inadequate property rights
protection (PRP); (iii) Restrictive health, safety and technical standards; (iv) Arbitrary tariff
classification and reclassification; (v) Unfavorable quotas and/ or embargoes; (vi) High costs
of customs administration;


Market Development Initiative for Export
A major focus of the trade associations and chamber bodies should be to gather information
regarding existing and potential markets and advise entrepreneurs regarding products and
their qualities which are in demand now or can be in demand in future. What design and
packaging charges and improvements would make particular products more attractive to
customers, particularly abroad, should also be regularly assessed. Properly designed market
development efforts such as negotiations, advertisements and exhibitions, both at home and
abroad, that would be helpful towards expanding sales should be in the portfolio of their
market development activities. Like many other countries the SMEs of Bangladesh have been
affected by the precipitous economic liberalization in the early 1990s without first taking
action preparatory to liberalization. All kinds of foreign goods including ordinary consumer
items have been coming into the country easily. The domestic industries, given their relative
inefficiency, cannot compete with these imported items in terms of price and also, not
infrequently, quality. As a result existing enterprises have been failing and possible new ones
have not been coming up initiating a process of de-industrialization. Finally special care must
be taken both by the entrepreneurs as well as by the relevant government agencies to, ensure
quality control and to make the products up to the international standard to remain alive in the
competitive world market. Consequently, small businesses always trying to keep one step
ahead of their rivals.

Major Export flourishing in Bangladesh:
1. SME Sub-Sectors
(i) Agro-process, agro-based and agro-supportive industries ;(ii) Handicraft: braided rug of
jute & cotton etc., (iii) artificial flower making, etc; (iv) computer soft ware and ICT; (v)
micro-electronics; (vi) food processing and food staffs; (vii) floriculture; (viii) gift items; (ix)
poultry and cattle; (x) jute goods; (xi) electrical appliances, (xii) leather and leather goods;
pottery; (xiii) light engineering; (ivx) staffed toys; (xv) RMG, knitwear etc.; (xvi)
aquaculture; (xvii) automobiles; (xviii) horticulture and (xix) medicinal plants culture;
pharmaceutical
2. Sub- Sectotal SME Export Information
Gift items :The countrys gift items manufacturing firms participated in the Tokyo
International Gift Fair held on September 2- 5, 2008 . Bangladeshi participating companies
displayed SME products like handicrafts, home textile, jute products, nakshi katha, scarf,
bags, belts, wallets, show pieces, wall- mat, candle, cushion cover pottery and such other
products. From this fair Bangladesh participants received US$ 20,000 spot orders in addition
to 120.000 prospective orders. SAARC Trade Fair in Colombo, held from August 28 31
2008 was also able to receive spot order worth US$ 490.000. Pharmaceuticals items, Soft
Drink, Jamdani Saree, Dhakai Moslin, Silk Scrap, and Other products were put on display in
the Colombo fair. The prospects of exporting shoes and gift items and RMG products to
Japan.
Home Textile: Export of home textile products can fetch US$1.0 billion by the next few
years as many of the countrys regional rivals have shifted their focus on producing high-
value textiles. Exports of home textile items such as bed linen, cushion, blanket, nakshikatha,
curtain and pillow will continue to boom in the next years. Home textile products have the
potentials to earn $1.0 billion from export by 2012-13 fiscal years. If the current rate of
growth continues, by next four years home textile would emerge as the third highest export
earning sector. A number of countries of north and South America, Europe, Africa, middle
and Southeast Asia are major markets of Bangladeshs home textiles. The demand for home
textile to the USA and Europe, which account for Bangladeshs 80 per cent export market,
rose sharply in the recent months amid declining shipments from some south and Southeast
Asian countries.
Electrical & Electronics Products: There is huge markets for electrical goods in different
countries across the globe including Europe and Middle East. Bangladesh is near about self-
sufficient in electrical goods and accessories. Apart from some 5 per cent sophisticated items
95 per cent electrical products are made in Bangladesh, at the last edge to be self-sufficient in
producing all kinds of fans cables within two to three years. There is huge prospect of
exporting electrical goods abroad if government helps in this regard. The products of
electrical accessories like substation equipment, household electrical appliances, tube light
and incandescent bulb, electrical and electronic ballast, supper enamel copper wire, energy
saving bulb, voltage stabilizer, electrical cables, energy saving bulbs, electric motor, electric
meter, transformers, light fittings, electrical fan, capacitor, IPS-UPS and varnish have a
tremendous market for export into African countries . A local electronics assembling
company will set up a liquid crystal display (LCD) television assembling plant and
refrigerators the first of its kind in Bangladesh.
Bicycle Export: The country exported bicycles worth US$ 64.28 million in the just
concluded fiscal year. Bangladesh exported around half a million bicycles in 2007-08. There
is huge demand for our bicycles in the European countries. Currently, worlds some of the
leading companies including Raleigh of UK, Avocet Sports, PCM of UK, Motor and Sports
of the UK, Aldi of Holland, Bachtenkirch Interbike of Germany, M&F De Scheemaeker of
Belgium and Formula Cycling of Belgium are importing bicycles from Bangladesh.
Bangladesh is also trying other potential markets like Canada, the United Kingdom (UK)
through supplying bicycles in a limited scale.The UK is a leading importer that imports
bicycles worth around 220 million euro a year. Bangladesh alone exported bicycles worth 13
million euro to the UK in calendar 2007.Bicycle industry is a light engineering sector and
most of parts are locally available.Bangladesh can export around 2.0 million pieces of
bicycles a year.
Light Engineering : Currently, the light engineering has been producing highly demanded
products like crushing machines, bicycle, spare parts of shallow engines, carbon rod for dry-
cell batteries, pistons, etc. The sector is also producing agricultural tools like power-tiller and
its spare parts, irrigation pumps, crank shaft, automobile components like bracket,
accelerator, oil expeller, marine parts like bush and others. Besides, it is also manufacturing
parts for textiles, jute and tea, food processing, construction, and tools required for furniture
industry. A light engineering company has started export of flour machines to Australia
recently. The light engineering sector is growing on an average 30 per cent annually and it is
now eyeing export around half a billion US dollars in 2008- 09 fiscal. The light engineering
sector exported US$ 310 million in 2006-07 fiscal year. There are around 40,000 light
engineering units across the country and its local market size is estimated to be around
Tk.200 billion with its 40000 units. The case for the light engineering sub-sector, which is but
part of the Small and Medium Enterprises (SMEs), should not be looked upon as just one of
the so many other claimants to government largesse. In fact, the light engineering sub-sector
is the key to the development of heavy industry.
ATM Body Frames to be Manufactured Locally : A local manufacturer is set to produce
automated teller machines (ATM) body frame, which would help develop the electronic
banking sector even further. Initially, 10 ATM body frames will be delivered and 500 more
frames by 2010. A private company involved in providing ATM machines to many banks of
the country. In recent years, electronic channels of banking, especially ATM, have become
popular among the urban population. However, the costs that they incur to manufacture such
ATM bodies is substantially lower than the imported ones. A local light engineering products
manufacturer at Dholaikhal that manufactured these bodies, the cost of manufacturing each
ATM body is Tk 1.5 lakh where as imported price is an ATM machine for Tk 5 lakh, which
was Tk 11 lakh previously, as they do not have to pay import duties anymore.
Apparel Industry: The countrys export earnings from the Readymade Garments (RMG)
sector may well reach the $ 25 billion mark by the year 2013 if it remains competitive in the
global market.During the same timeframe, the industry should grow in terms of capacity to
employ 2 million more people in this sector. RMG export which contributes around 76
percent of the countrys annual export income, stood at $ 10.7 billion at the end of the of the
fiscal year 2007-2008 posting a growth of 16 percent from the previous year.The industry, the
lifeline of Bangladesh economy at the same time, directly employs more than 2.2 million
people, while indirectly benefiting around 10 million.
Textiles Industry : The countrys total export earnings from ready-made garment items,
textile fabrics, terry towels and home textiles exceeded $1.24 billion in July this year.Of the
total, knitwear and woven garments together accounted for earnings over $ 1.19 billion in
July.The EPB statistics knitwear and woven garments grew around 71.64 per cent to
$1187.80 million, with knitted items growing 84.50 per cent and woven 58.55 per cent in
July. Pharmaceutical, raw jute, agro processed foods and tobacco exports also continued their
hefty growth in July amid continued demand for the Bangladeshi goods among the expatriate
communities.However, export earnings from vegetables, leather and tea dropped during the
period under review.
Jute-Blended Denim: A local fabric producer has successfully developed better and durable
denim woven from blended yarns of jute and cotton. Bangladeshs $10 billion apparel export
industry produces a huge quantity of denim apparels. Woven garment manufacturers are the
main users of denim for making jackets and jeans for global buyers. In the last fiscal year
ended in June 2007, the country earned only $147 million from export of more than 0.6
million tons of raw jute.
Bags:Bangladesh made a big impact in the worlds biggest shipbuilding fair in Hamburg,
bagging export orders worth US$250 million and carving a niche among the nations of ship
manufacturers. The ten ships weigh 7250 tons each and have an order price of over $170
million. A prime location for building small ships thanks to its abundant cheap labor and
traditional expertise.
Leather and Lather Goods:Bangladesh is going to launch a global standard testing
laboratory to test and certify exportable leather and footwear products to meet the demands of
international buyers. The countrys export of leather goods and footwear products will
definitely increase as the local exporters will be able to receive international standard
certificate from the local authorities. Meanwhile, leather worth $261.67 million was exported
during July-May period of 2007-08 fiscal year against its target of $264.47 million for the
same period. During the same period, the manufacturers exported footwear worth $145.73
million against its target of $147.92 million, while leather bags and purses worth $7.86
million were exported against its target of $11.65 million.

Recommendations for Export Development of SMEs
The proposed strategies and policies to be implemented on shortterm, medium term & long
term basis.
1. Extensive Financial Support to SMEs: Various banks, financinginstitutions, NGOs may
further increase its technical andfinancial support to SMEs through its various
financingfacilities and windows, which may significantly contribute tothe creation and
development of SMEs.
2. Trade Fairs, Exhibitions, Symposiums, Seminars andWorkshops: Trade fairs, exhibitions,
symposiums, seminars,workshops etc. on SMEs should be organized on a regular
basis.Publications of all these events should be made available for allSME establishments.
Chambers around the country can arrangeexhibitions for SMEs products, so that larger
number ofconsumers may gain awareness about the diversity and qualityof SMEs products.
3. Periodical Professional Training Courses for SMEs: Periodicalprofessional training courses
should be arranged for technicalstaff of SMEs. Moreover training in management of
smallenterprises and efficient marketing can also be provided.Training programme/workshop
should be organized for thedevelopment of SMEs capabilities to acquire enhancedknowledge
and skills about how to choose, use and improvetechnology.
4. Seed Money, Leasing, Venture Capital and Investment Funding:There is a great need for
improving different aspects of financialservices of SMEs, such as seed money, leasing,
venture capitaland investment funding.
5. E-Commerce: Electronic Commerce has also great potential fordevelopment around the
country and abroad. Through thisdevice, matching of buyers orders to sellers can be done in
suchproducts in which SMEs are dealing. Such exchange ofinformation about sellers and
purchasers shall be most useful forAgro products, leather products, textiles and clothing, IT
andmetal products as well as raw materials and intermediate goods.
6. Alleviating Poverty through SMEs Development: There is greatscope of alleviating
poverty through SMEs development. Sopoverty alleviation strategies and policies for SMEs
should be developed, in order to provide job opportunities and enhance living standards for
large segment of this poverty ridden country.
7. Expansion and Diversification of SMEs: Bangladeshs industrial sector needs expansion
and diversification. For this purpose, growth of SMEs is essential. However, SMEs have to
equip themselves with modern technologies and effectively use them to raise their production
efficiency.
8. Credit Guarantee Scheme & Financing of SMEs: Financing SMEs can be successful, if two
arrangements can be undertaken:
i. Separate institutions dealing with SMEs loans should be established around
the country. They can provide adequate evolume of finance, on less strict terms and can
supervise the loan repayment process as well.
ii. Credit guarantee schemes. Credit guarantee schemes for SMEs can be
an effective means of supporting small enterprises development, especially in our country
where access to credit is constrained for small borrowers.
9. Technology Transfer: Technology transfer is of vital importance for development of
SMEs. Technology transfer through various means and reverse engineering to be arranged
through Government and private levels.


Brief Overview of SME Financing:
There is a great interest in small and medium enterprises (SME) as a major plank of poverty
reduction in Bangladesh. The government has formulated a comprehensive industrial policy
2005 by putting special emphasis for developing SMEs as a thrust sector for balanced and
sustainable industrial development in the country to help deal with the challenges of free
Market economy and globalization. Some data with a national scope those are pertinent to
characterizing SMEs in Bangladesh
as of 2001-2003. There are some 78,440 private sector establishments of various sizes in
Bangladesh with some 3.5 million workers employed in them.
The central bank has set the target for disbursement of loans at over Tk. 625 billion for the
small and medium enterprise (SME) sector in calendar year, 2011, marking a 64 .56 per cent
increase over that of the previous year.
The banks and financial institutions initially set the target at Tk. 240 billion in 2010. But the
SME financing target was later revised upward for the year to Tk. 380 billion to meet the
growing demand for such credits.

Contribution of SMEs in the Economy
In view of present economic development effort in Bangladesh the SME sector plays an
important role. These are reflected in the following performance /activities of this sector:
During the Fourth Five year plan, a total of 0.35 million jobs were created against the
target of 0.4 million.
Contribution of SME sector to GDP remained above 4.5% during the period from2000-01
to 2004-2005 despite decline in the amount of advances by the bankingsector to this sector.
SME sector employs 25% of the total labour force. As a result, this sector is the present
available sector for creation jobs.
SME sector help alleviate poverty, increase income level of rural people and promote agro-
industrial linkage in Bangladesh.
SME sector requires lower energy supply, lower infrastructure facilities and this sector
imposes less environmental risk. They contribute towards better utilization of local resources
and skills that might otherwise remain unutilized.
Small industries being labour oriented are capable of generating more employment.
They are necessary to maintain and retain traditional skills and handicrafts.
They are the only medium for diversification of rural economy and for peaceful and
concurrent socio-economic development of all classes of people. From the above discussion,
we can say that SMEs are playing an important role in our economy in various ways.
In Bangladesh, SMEs playing a significant role for the development of our economy by
creating employment opportunity and producing important alternative machines and
machinery parts for saving huge foreign currency for our country. So as a part of our
development strategy, we should intensify our efforts to develop this sector to grow industrial
base and volume of foreign trade. As we know that in this age of globalization, it is
impossible to stop the flow of foreign goods to any country. Only quality products can meet
the challenges in global market. For meeting this situation SMEs need to upgrade their
technological capabilities and production facilities in order to produce quality products at a
competitive price.
The evidence for the re-emphasis on the SMEs is manifest in the Governments own policy
intent, in any reasonable survey of the literature, and in any compilation of economic
statistics regarding the industrial sector. Though the SME sector is becoming gradually a
rising industrial sector of our country and contributing more and more to our export, this
sector faces several common problems like lack of technical know-how, shortage of long-
term financial support, lack of skilled workers, marketing link, R & D, knowledge on safety
measures, hygiene, environmental pollution, etc. We need to acquire proper institutional
knowledge in the fields of technological and managerial education and ask academics and
researchers to work more vigorously for the sectors rapid development.
SMEs in Bangladesh produce a multitude of labour intensive goods including, consumer
items, toys small tools and paper products for the domestic market. Further development of
these industries offers various investment opportunities. Export-oriented production in SMEs
has gained momentum in the past few years. Entrepreneurs from Hong Kong, Japan and
Korea have taken advantage of Bangladeshs cheap and easily trainable labour and its
infrastructure facilities to manufacture products for the export market.

Purpose of the loan

Contribute to the socio-economic development of the country.
Encourage small and medium industry especially agro-based industry of the country.
Participate in reduction of poverty through employment generation and income generating
projects.
Provide financial assistance to small and medium enterprise, which have limited access to
the formal financial markets.



Pre-Operation

Before embarking upon or undertaking Small Enterprise financing, the banks shall
implement/follow the guidelines given below. The banks already involved in Small
Enterprise financing will ensure compliance with these guidelines within six month of the
date of issuance of Small Enterprise Financing Prudential Regulations.

1. Banks shall establish separate Risk Management capacity for the purpose of Small
Enterprise financing, which will be suitably staffed by personnel having sufficient expertise
and experience in the field of consumer finance/business.
2. The banks shall prepare comprehensive Small Enterprise credit policy duly approved by
the Board of Directors, which shall interalia cover loan administration, including
documentation, disbursement and appropriate monitoring mechanism. The policy shall
explicitly specify the functions, responsibilities and various staff positions, powers/authority
relating to approval/sanction of consumer finance facility.
3. For every type of Small Enterprise finance activity, the bank shall develop a specific
Product Program Guide (PPG). The program shall include the objective/quantitative
parameters for the eligibility of the borrower and determining the maximum permissible limit
per borrower. The PPG will also indicate the maximum permissible exposure banks will take
against each product.
4. Bank shall put in place and efficient computer based MIS for the purpose of Small
Enterprise finance, which should be able to effectively cater to the needs of Small Enterprise
financing portfolio and should be flexible enough to generate necessary information reports
used by the management for effective monitoring of the bank's exposure in the area. The MIS
is expected to generate the following periodical reports:
Delinquency reports (for 30, 60, 90 180 & 360 days and above) on monthly basis.
Reports interrelating delinquencies with various type of customers of various
attributes of the customers to enable the management to take important policy
decisions and make appropriate modifications in the lending program.
Quarterly product wise profit and loss account duly adjusted with the provision on
account of classified accounts. These profit and loss statements should be placed
before the Board of Director in the immediate next Board Meeting. The branches of
foreign banks in order to comply with these conditions shall place the reports before a
committee comprising of Chief Executive Officer, Chief Finance Officer and Head of
Small Enterprise.

5. The banks shall develop comprehensive recovery procedures for the delinquent loans. The
recovery procedures may vary from product to product. However, distinct and objective
triggers should be prescribed for taking pre-planned enforcement/recovery measures.

6. The institutions starting consumer financing are encouraged to impart sufficient training on
an ongoing basis to their capability regarding the various aspects of Small Enterprise
financing.

7. The banks shall prepare standardized set of borrowing and recourse documents (duly
cleared by their legal counsels) for each type of Small Enterprise financing.




SALIENT FEATURES OF LENDERS

Some observation of 8 senior executives of SME division of 8 commercial banks with
structured questionnaire. They have pointed out the following issues:

1. The selected commercial banks have sanctioned about 20% to 25% of total loan portfolio
as SME loan.

2. The selected banks have disbursed 85% - 90% as SME loan from the yearly allocation of
SME loan.

3. SME Loan Recovery Rate of selected commercial banks is about 95%. It seems recovery
rate of SME loan is very high.

4. The selected banks have introduced SME loan for the last 5 to 10 years. Due to the demand
of SME loans almost all the selected commercial banks have established an independent
SME division.

5. Some executives have highlighted that SME entrepreneurs are not properly aware
about SME credit facilities.

The executives have also pointed out some problems they are facing at the time of granting
SME loans. The problems are as follows:

1. They observe that most of the SMEs are not maintaining book of accounts and other
related trade documents properly. It creates barrier for assessing borrowers financial position
at the time of evaluating SME credit proposal.

2. Banks also observed that the borrowers use SME loan for other purposes instead of using
in the SMEs. Fund diversion hinders the optimum growth of SMEs.

3. The executives also point out that most of the commercial banks receive more SME credit
applications at the time of business seasons.

4. In many instances SME applicants/borrowers fail to provide adequate documents at the
time of loan application. Due to this reason it takes extra time for sanctioning
SME loans.

5. As SMEs are not maintaining proper book of accounts, the practice creates barrier in
forecasting the actual sales of SMEs.

6. Sometimes SMEs are not able to provide required collateral. Due to this reason banks face
problems in granting credit.

7. SMEs are reluctant to conduct financial transactions through financial institutions.



Required Documents for Loan

CIB report
Picture of the site
Personal Net Worth
Bank Statement of that company
Financial Statements of that company
Environment Durability- Diligent Check List
Environment Durability- Diligent Check List
Trade License (up to date)
Owners National ID
Terms & Condition by other Bank
Valuation Report of Collateral
Collateral Visiting Report
Business site visiting report
TIN certificate (up to date)
Guarantors National ID
Guarantor and Borrowers Photograph
Stock Report
Creditors information
Debtors Information
Sales Status
Customer list.




PROBLEMS

From the sequence of our analysis we have observed some problems that create barriers to for
the development of SME sector in Bangladesh. These problems are analyzed in this section.

1. Non-Availability of finance hinders the growth of SMEs in Bangladesh. About 47% of the
investigating entrepreneurs mention that loan granting procedures are very complex and
about 13% entrepreneurs mention that their loan applications have been rejected.

2. Most of the entrepreneurs mention that due to the low salary structure most of the
skilled employees leave SMEs.

3. One of the main barriers to the development of SME in Bangladesh is inadequate
technologies. Many SMEs have failed to adopt modern technology due to the shortage of
adequate fund.

4. Most of the entrepreneurs have mentioned that commercial banks ask for collateral at the
time of granting loans. It hinders the entrepreneurs to get credit from the institutional sources.

5. It is reflected from table 17 that about 46% of the respondents mention that banks take a
long time to grant SME loans. It seems that the loan procedure system is lengthy.

6. The respondents also mention that loan application procedure is tough. Due to this
reason some of the entrepreneurs are reluctant to take loan from financial institutions.

7. About 35% of the respondents have mentioned that they are facing problems of
paucity of working capital.

8. Numbers of institutions offering micro credit facilities are inadequate in our country. Even
it is reflected from our study about 23% respondents have collected loans from non
institutional sources.

9. Banks consider SMEs as high risk borrowers because of their inability to comply with the
banks collateral requirements. Most of the banks investigated have mentioned that SMEs are
not able to provide required collateral. Due to this reasons banks face problems in SME
financing.

10. Some executives have highlighted that SME entrepreneurs are not properly aware about
SME credit facilities.

11. Inequality of opportunity is a major problem for SMEs. Female entrepreneurs are
treated with discrimination. They are not well represented in business organizations.
We have observed from our study that only 10% respondents are female entrepreneurs.
Government and our society do not provide adequate institutional
assistance and encouragement to the women entrepreneurs.

12. For SMEs, owing a retail space is very expensive in the major cities in Bangladesh. As a
result, many customers are not interested to buy products and services from SMEs. Because
they cant judge the quality until they physically examine the products.

13. Inadequate government supports are top ranking constraints for SMEs. Unnecessary
layers of bureaucracy and red-tapes are reducing the competitiveness of SMEs and raising the
cost of transactions and operations.

14. It is reflected from table 23 that investigating entrepreneurs have pointed out that
inadequate supply of necessary utilities like electricity, water, roads and highways hinders the
growth of SME sector.

15. Most of the investigating entrepreneurs do not have adequate international exposure. To
keep pace with international competition, firms face challenges to improve and innovate their
products processes constantly. But in Bangladesh SMEs are still not stressing the importance
of satisfying and retaining customers by offering novel and desired benefits.

16. In most of the cases SMEs in Bangladesh are not able to use the Integrated Marketing
Communication (IMC) tools. But these tools play the role of important stimulus in motivating
the customers and retaining them. The country does not have enough marketing capability
and resources to invest in marketing.

17. Govt. has failed to frame a national quality policy, provide adequate support systems and
establish a national quality certification authority. As a consequence SMEs of Bangladesh
have failed to ensure the quality of their products and services both in local and international
markets.

PROSPECTS

To start SMEs it requires a small amount of fund. So, people with a little capital may start
their business. Growth of SMEs may have a positive impact on the overall economic
development of Bangladesh.

Low risk involvement:

Capital requirement is low in SMEs. SMEs are also diversified in nature. As a result, SMEs
are considered as low risk organizations.

Low cost products in domestic market:

SMEs are providing a diversified range of products at a lower price in local market. People
are getting SME products at a lower price.

Accelerated growth of SMEs:

It has been observed that in the last decade almost every year SME sector has experienced
positive growth rate in each year. The yearly growth rate is about 8%.

Good recovery rate:

We have observed from the study that SME recovery rate of selected commercial banks is
about 95%. It seems recovery rate of SME loan is very high.

Availability of labor at a lower wage:

Bangladesh is a labor abundant country. A large number of laborers can be availed at a lower
cost here.

Government and institutional encouragement:

Government has established an independent SME foundation to help and encourage the
development of SMEs. Recently Asian Development Bank (ADB) has provided some fund
for SME sector development in Bangladesh.

Separate SME branches:

It has been observed that recently many commercial banks have opened separate specialized
SME branches. Among them most pioneers are Brac Bank (Prapti Current Account, Anonno
Rin, Apurbo Rin), Standard Chartered Bank, Dhaka Bank, Eastern Bank Limited, The City
Bank, Mutual Trust Bank and National Bank.

Women Entrepreneurs Loans:

Some commercial banks have special SME loan schemes for women entrepreneurs, such as
Orjon of Standard Chartered, Protyasha of IFIC, Mukti of Eastern Bank Limited, Prothoma
Rin of Brac Bank and Nokshi of The City Bank. Through these schemes, women
entrepreneurs may start their own businesses. This will help a lot of women entrepreneurs to
become self dependent.




RECOMMENDATIONS

The following suggestions are recommended for the development of SMEs:

SME loan application and disbursement procedure is complex. So the commercial
banks and financial institutions must have to take necessary measures to make it
easier. Government, financial institutions and non-government Organizations (NGOs)
may take necessary steps to ensure uninterrupted financial support to the prospective
SMEs in Bangladesh.
Government needs to take appropriate measures to fix the minimum salary/wages of
the employees of SMEs. That will help to minimize the employee turnover.
In order to ensure the retention of skilled workforce the government and SME
foundation should take necessary steps.
Government and financial institutions may provide adequate finance for
modernization, expansion and technological advancement of SMEs.
Development of infrastructure is essential for the optimum growth of SMEs. So
government of Bangladesh needs to take appropriate policy strategy for the
infrastructure development of Bangladesh.
Government and Central Bank may provide collateral free SME loans to prospective
entrepreneurs. Government may establish one specialized SME Bank to provide
collateral free bank loans to SME entrepreneurs.
Government should take adequate measures to ensure the uninterrupted supply of raw
materials for SMEs. We have observed that a large portion of SME organizations are
facing paucity of working capital. So it is recommended that commercial
banks/financial institutions may extend working capital financing to the prospective
SMEs.

In order to take bank loans SMEs must have to maintain proper trade documents and
book of accounts such as- trade license, financial statements, yearly sales record, tax
certificate, bank statements etc.
SME foundation may take appropriate marketing tools to popularize the SME
products. Like Dhaka International Trade Fair it may try to organize a yearly
trade fair for SME products.
In order to encourage women entrepreneurship government should:
a. Involve women entrepreneurs in policy formulation and implementation.
b. Arrange funds for women entrepreneurs.
c. Provide necessary training to women entrepreneurs in rural and urban areas
of Bangladesh.
For minimizing red tapes and accelerating the growth of SME, government may
provide one roof service under the SME foundation. Appropriate legal framework is
also necessary to ensure the development of SMEs of Bangladesh.
In this era of intense competition continuous planning and quality improvement act as
a prerequisite for the survival of SMEs. In order to improve the quality SMEs can
follow the Just in Time (JIT) philosophy and use Total Quality Management (TQM)
and can ensure the improvement of quality and productivity at a time.
Government should establish a credible certification authority especially for SMEs, so
that this sector can obtain a technical evaluation of the quality of their products within
a shortest possible time. The certification of the authority should be accepted world-
wide. Govt. may also provide assistance to SMEs during the certification process and
promote the importance of product certification for international acceptance among
the SMEs.

Restriction may be imposed on imported products which are produced by the SMEs in
Bangladesh.
Research and Development (R&D) is a must for the development and growth of
SMEs. So government must have to invest in R&D for ensuring the intensification of
SME of Bangladesh.


CONCLUSION

Over the years the SME sector of Bangladesh has grown rapidly. In fact the SME sector of
Bangladesh has widened but depth has to be achieved in true sense. Performance of SMEs in
Bangladesh is found significantly below the level of international standard. The sector has to
be made investor friendly, otherwise the depth of the SME sector can not be achieved.
Although the government of Bangladesh has taken some initiative in ensuring the growth of
SMEs but those steps are not enough at all. But the government has shown its positive
attitude towards this sector. Bangladesh government should continue to give more focuses on
some areas, such as financing, providing infrastructure facilities, framing appropriate legal
framework, establishing national quality policy etc. We are quite optimistic that the SMEs of
Bangladesh will get a boost if the suggested measures are implemented.