SMEs in Bangladesh

SMEs in Bangladesh

Introduction

The objectives of the survey is to take stock of experiences on development of entrepreneurs of small and medium enterprises (SMEs) in APO member countries and to analyze the set of initiatives, strategies, programs, policies, and competencies that lead to competitiveness of Asian SMEs.

The survey therefore aims to:

§    Examine the various entrepreneur development initiatives, policies and programs being implemented by many agencies involved at the national level;

§    Examine the various entrepreneurship development initiatives and experiences of some exemplary individual SMEs in the country and analyze how these initiatives have contributed to their success;

§    Undertake comparative analyses at the regional level and to identify commonalities and differences among the experiences and practices of SME development by the countries being surveyed;

§    Identify and elicit a common framework at the regional level for entrepreneur development initiatives and strategies that will effectively work in instilling a productive and competitive mindset for the entrepreneurs of the small enterprises of APO member countries.

PART A:

COUNTRY’S DEVELOPMENT STRATEGY AND OVERVIEW OF THE SMEs IN THE COUNTRY

A.       A BRIEF ECONOMIC REVIEW OF THE COUNTRY

Discuss the profile and the major economic indicators of the country.

The macro economic reforms and management in key economic sectors have significantly influenced the growth in different economic sectors of the national economy. Bangladesh, mainly backed by the growth of industry and service sector has achieved a GDP growth of 5.38 percent in the year 2004-05. Per capita GDP and GNI stood at US $445 and US $470 respectively. The rate of national investment rose to 24.43 percent, which is the ever highest. The contribution of private sector to this investment is 18.53 percent. The contribution of the private sector to the economy is increasingly becoming prominent. In the year 2004-05, the growth of credit to the private sector stood at 17.20 percent. The average inflation stood at 6.49% in the year 2004-05.  The population growth rate (as percentage) for the year 2004 stand for 1.5 and the literacy rate for this year 2004-2005 stand for 62.66 percent.

b.       NATIONAL DEVELOPMENT STRATEGY

Describe the country’s national development strategy/economic plan. Briefly comment on the implementation of this strategy till to-date.

Implementation of poverty alleviation action programs and strategies is a systematic and continuous effort in Bangladesh. For that purpose, the Poverty Reduction Strategy Paper (PRSP) of 2004 has clearly identified some core principles and parameters both at macro and micro levels for reducing the existing poverty level at least half with in 2015 as targeted in the Millennium Development Goals (MDGs). Rapid and sustainable growth of SMEs is undoubtedly one vehicle for accelerating national economic growth to the point of having a measurable impact in the way of reduction of poverty and unemployment, generation of more employment. The Government has expressed her commitment in the PRSP and as well as 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.

c.       OVERVIEW OF THE SMES IN THE COUNTRY

There is great interest in small and medium enterprises (SMEs) as a major plank of poverty reduction in Bangladesh.  Government of Bangladesh formulated a comprehensive Industrial Policy-2005 by putting special emphasis for developing Small and Medium Enterprises (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.

With multilateral trade negotiations often leading to improving market access, and with developing countries also being a lot more willing than before to participate in globalization, rich country government and the aid agencies have apparently decided to focus on the SMEs as one important ingredient of private-sector development.  A number of donors are working in Bangladesh in the interest of fostering SMEs.  Some, like the GTZ, are working not with entrepreneurs but with the chambers and industry associations building their capacities to deliver needed services.  Some, like the Katalyst, are putting together a comprehensive base of knowledge and insights about living production clusters, not all of them in manufacturing,  namely, plastics, agricultural tools, textiles, pond culture, and vegetable-raising.  Yet others such as the SEDF are building enterprise-level capacities through training programs, efforts to upgrade project management skills, enhancing the appraisal and evaluation capacities of financial institutions concerned with SMEs. 

Industrialisation’s link to poverty reduction is through (a) charging-up the growth rate of the country; (b) enhancement of the productivity of the worker(s) in employment; (c) providing employment to the unemployed; (d) expanding consumer spending (and thus the confidence level) by sharing lower costs from scale economies via lower prices.  The extent to which industrialisation actually pitches up as in this virtuous scenario depends on how the “promoters” allocate resources with the aims of going for these effects.  In particular, the impact will depend on which product groups and/or spatial clusters are targeted; on how technical-assistance resources are stacked up between technology know-how, management and secretarial know-how, market-access “networking”, etc.  Either way, having measureable impact will often put a premium on “knowing the customer well”, the customer in this case being the entrepreneurs who have put their money where their mouths are.

Intimate knowledge about the industrial classification of the SME establishments, the spatial distribution of those establishments within each industry between “rural” and “urban” locations, the distribution of these establishments in order of fixed investment size should all be of relevance.  Such a foundation of empirical knowledge is needed so as to articulate priority among competing industrial groups, production clusters, resource receptacles, interventions time-frame of varying length, etc. 

Given the availability of SME-related data in the public domain, it is only possible to discuss SMEs’ industrial structure in two major ways, viz based on the number of establishments and the number of persons employed.[1]

Bangladesh’s Development Strategy and Overview of the SMEs

SMEs Defined

From the vantage-point of industrial assistance policy, a classification of establishments based on employment of labour---the abundantly available factor of production---may not have a great deal of policy relevance, as the amount of capital that is combined with a given level of employment may widely vary.  Bangladesh’s Small and Medium Enterprises Taskforce (SMETF), that reported to the Government in September 2004 defined size based on fixed investment, defined size of establishment based on fixed-investment.[2]

SMEs in Bangladesh are defined for purposes of industrial policies by the Ministry of Industries (MOI).  Historically, this definition has been in terms of fixed-investment brackets, and a dual-mode definition is in place, separate for manufacturing establishments, and service establishments.  For manufacturing enterprises,

For manufacturing industries, the Taskforce defines:

(a)          an enterprise would be treated as small if, in today’s market prices, the replacement cost of plant, machinery, building, structures, and other parts/components, fixtures, support utility, and associated technical services (such as turn-key consultancy), etc, were to up to Tk. 10 million;

(b)          an enterprise would be treated as medium  if, in today’s market prices, the replacement cost of plant, machinery, building, structures, and other parts/components, fixtures, support utility, and associated technical services (such as turn-key consultancy), etc, were to up to Tk. 100 million;

(c)          From both definitions above, land is excluded.

For non-manufacturing activities (such as trading or other services), the Taskforce defines:

(d)          an enterprise would be treated as small if it has less than 25 workers, in full-time equivalents;

(e)          an enterprise would be treated as medium if it has between 25 and 100 employees;

From both definitions above, land, once again, is excluded.

Having said that, an alternative, albeit informal, definition, of SMEs is used by the Bangladesh Bureau of Statistics, using head-count for its basis.  Enterprises with upto 9 employees are treated as “micro”; with between 10 and 49, as small; with between 50 and 99, as medium, and all the rest, as large.  For statistical purposes, this is the definition that we use in this paper.

Some data with a national scope that are pertinent to characterizing SMEs in Bangladesh as of 2001/2003 are presented in Table-1.[3]  The highlights of this table is the following: (a) there are some 78,440 private-sector establishments of various size in Bangladesh with some 3.5 million workers employed in them.[4]     

Of this, urban Bangladesh accounts for some 60% of units and 76% of employment overall in the private-sector enterprise sector, with rural Bangladesh accounting for the rest.  Ninety-three point three (93.6%) of all units in Bangladesh belong in the SME category, ie have between 20 and 99 employees.  However, SMEs account for only 44% of the total employment of the enterprise sector. 

Legal status:  The proportion of SMEs that are incorporated as proprietorship is a high 81% according to data obtained from the Registrar of Joint Stock Companies.  Private companies limited by liability account for strictly a very small proportion of the total number of SMEs in Bangladesh. 

Table-2 shows the average employment per establishment within each of the small and medium classes for urban and rural Bangladesh in 2001/2003.  The following results are worth highlighting.  Let it be noted that these are weighted averages.  First, where small establishments are concerned, the average employment size per establishment clusters around a narrow range, namely, 17 – 20 workers, across the six divisions.  We find a similar clustering of average  employment size for medium enterprises in a narrow range of between 65 – 69 employees.  Also, taking the administrative divisions individually, measures of average employment levels don’t differ very greatly as between urban or rural Bangladesh: the values are strung together. 

Table-1

Number of units and levels of employment in small and medium enterprises, 2001/2003

                                                                     (All numbers are in thousands)

Des- Crip- Tions	Urban			Rural			Total
	Small	Medium	Large	Small	Medium	Large	Small	Medium	Large
No. of Units	39.9	3.17	4.036	29.0	1.29	0.88	68.96	4.46	5.01
% of total number of units	50.9	4.0	5.1	38.1	1.6	1.11	87.9	5.7	6.4
Employment	740.4	211.5	1712.67	516.8	85.85	234.669	1257.2	297.4	1947.3
% of total employment	21.14	6.0	48.9	14.8	2.4	6.7	35.9	8.5	55.6

Table-2

Average head-count per establishment across Bangladesh’s industries, 2001/2003

	Small	Medium	SME	Large	All
Food and tobacco	18.6	65.1	21.0	470.5	38.9
Textile manufacturing	19.1	66.2	21.9	490.9	56.6
Ready-to-wear apparels	17.8	70.3	22.9	512.7	249.6
Wood, leather & paper_printing	17.0	66.8	19.7	373.9	38.0
Chemicals and Plastics	19.1	67.0	22.7	367.2	58.0
Non-metallic mineral products	26.0	70.3	41.5	196.8	83.4
Fabricated goods, electricals and means of transport	17.0	65.7	20.3	282.5	35.1
Mining and manufacture nes	24.6	65.5	32.7	227.7	58.9
Various personal services	17.5	66.0	19.9	293.3	28.2
Education/healthcare	18.1	65.5	20.3	292.4	26.7
All industries	18.2	66.7	21.2	388.5	44.6

Source: BBS Census of Enterprises, 2001/2003

Table-3

The structure of “industries” in Bangladesh with respect to size of firms, 2001/2003

	% of establishments				% of total persons employed
	Small	Medium	Large	Small		Medium	Large
Food and tobacco	6.7	0.4	.03	2.8		0.5	3.1
Textile manufacturing	14.2	0.9	1.2	6.0		1.3	13.2
Ready-to-wear apparels	1.8	0.2	1.7	0.7		0.3	20.1
Wood, leather & paper_printing	2.9	0.2	0.2	1.1		0.2	1.4
Chemicals and Plastics	1.7	0.1	0.2	0.7		0.2	1.7
Non-metallic mineral products	1.6	0.9	0.9	0.9		1.3	4.0
Fabricated goods, electricals and means of transport	4.3	0.3	0.3	1.6		0.5	1.7
Mining and manufacture nes	0.2	..	..	0.1		0.1	0.2
Various personal services	23.6	1.2	0.8	9.3		1.8	5.1
Education/healthcare	31.1	1.5	0.8	12.6		2.2	5.2
All industries	87.9	5.7	6.4	35.9		8.5	55.6

Note: These percentages are relative to the total number of establishments, and total employment by the private-sector SME sector

Source: SME Cell, using data from BBS Census of Enterprises, 2001/2003

Table-3 shows the percentage importance (in terms of both number of units and the employment levels) of SMEs in the overall world of enterprises. The main result to report is that the number of SME units simply dwarf the number of large enterprises, with typically more than 90% of all enterprises being in the SME class. However, the percentage share of SMEs in total employment controlling for the location is almost always less than for the number of units. In particular, in Dhaka, Chittagong and Khulna divisions, one finds SMEs’ share in employment is lower   than for the economy as a whole.

Table-4 essentially shows that the relative importance of SMEs---both in terms of the numerical importance of establishments or employment---within the entire world of enterprises remains roughly similar in both urban and rural Bangladesh.  The role of SMEs in production is therefore a-spatial.

Table-5 then presents some idea as to the percentage structure of small and medium enterprises, taken separately, across a large number of industries.[5]  Like in the discussion of Table-3, we again see the quantitative importance of food, beverage, textile manufacturing, non-metallic mineral products among  manufacturing subsectors as providing the basis for small and medium enterprises in Bangladesh.  Once again, the importance of services is highlighted.    

 

Table-4: Proportion of SMEs in enterprise population, and in employment, by administrative Divisions of Bangladesh, 2001/2003

Divisions	Urban (% of SMEs in the number of urban units)	Urban (% of SMEs employment in urban areas )	Rural (% of SMEs in the  number of rural  units)	Rural (% of SMEs employment in rural areas)
Dhaka	93.8	61.2	95.6	65.3
Chittagong	93.7	54.2	92.4	69.1
Rajshahi	95.3	65.9	97.9	81.3
Khulna	93.8	59.1	95.8	70.5
Sylhet	96.6	68.6	91.9	41.5
Barisal	95.7	69.4	97.8	82.7
All divisions	94.8	63.1	95.2	68.4

Source: BBS Census of Enterprises, 2001/2003

                                

Table-5: Industrial structure of small and medium enterprises in Urban and Rural Bangladesh, 2001/2003

Sectors	Proportion of small enterprises in the total		Proportion of medium enterprises in the total
	Rural enterprises	Urban enterprises	Rural enterprises	Urban enterprises
Mining	0.4	0.2	1.2	1.0
Food & tobacco	16.6	9.3	7.4	9.0
Textiles MFG	58.7	8.4	29.2	17.5
Wearing apparels	0.3	4.6	1.0	3.3
Wood products	0.2	2.6	.4	1.8
Tanning, etc	1.1	0.8	.1	0.2
Paper & printing	0.1	3.3	.4	3.4
Chemicals & plastics	0.4	4.2	.7	4.6
Non-metallic mineral pr.	6.1	1.1	47.9	3.1
Fabricated products	0.7	3.9	.6	5.8
Electrical equipment	0.0	0.7	.2	0.7
Mfg. Transport equipment	1.6	0.5	.9	0.7
Utility services	0.2	5.0	1.9	3.0
Construction	0.1	0.5	.6	1.8
Trade	2.4	4.9	.5	4.4
Eateries	1.4	7.1	.3	5.2
Transport & Comm.	1.2	22.0	2.8	7.6
Finance & Banking	8.4	16.9	3.8	13.5
Real Estate	0.2	3.9	.3	7.5

Source:  BBS Census of Enterprises, 2001/2003

Type of human resource and management structure

Production workers can be grouped by skills, and those skills are relative to the industrial or product groupings of which their establishments are part. Table-2 presents a distribution of the SME establishments according to BSIC 4-digit classification of all industries in Bangladesh.  Naturally enough, industries are differentiated by the skills, and specific specialization of the workers at various levels.  Therefore, a distribution of the establishments according to the industrial groups is also about a decomposition of the SMEs in Bangladesh.

The SMEs in Bangladesh has never been explicitly categorized with regard to the underlying management structure of the constituent establishments.  However, that is just as well.  This is because management structure can’t be an absolutist concept: the structure that makes sense must be seen to be relative to the product the unit makes, and the technology it uses. One size or type can not aspire to fit all. That said, it is fair to say that most of the SMEs in Bangladesh have a relatively flat---as distinct from hierarchical--- management structure.  By flat structure, we mean one in which the management functions of strategy, systems, skills, structure, Staff, Style, and Subordinate goals---which we shall call shared values---are all concentrated in one management suite, and the suite does not traverse more than one management tier.    

Level of education and skills and management systems

In mature industrial structures, industries are sharply characterized by the extent and character of the median educational levels of their workers.  As well, sometimes, industries are also differentiated by the kind (generalist as opposed to specialized) of education of their typical workers.  Some products are R & D-intensive; some others are capital-intensive.  That said, Bangladesh’s SMEs don’t evince that degree of maturity in its industrial structure.  The average extent of education in ready-to-wear apparels industry---one of the heavy-weights of the industrial structure--- compared with say the plastics industry is not sharply different.  Consequently, educational levels and skills levels are not really much of a differentiator. 

Technology and machinery installed

Perhaps, there is room for some discussion about the situation about the choice of technology and the type and sourcing of machinery installed in the industries.  Bangladesh’s textiles and apparel-export industry has a strong European predisposition:  Bangladesh’s spinning industry wears an almost an European décor in that virtually all the spinning mills have chosen European equipment.  Some of the spinning mills are very highly mechanized, with employment size less than 100 and thus eligible to being considered of medium in size.  The ready-made garments industry---the focal point of the medium enterprises in the economy---labour intensity is higher.  In fact, the ratio of wages and salaries to value added in the RMG industry is one of the highest among all manufacturing industries in Bangladesh.

A look at Table shows that the SMEs  as an industry has as many as 11 product groupings.  The most important industrial category which really dominates the SMEs as enterprises is ready-to-wear garments, and the second most important category is textiles weaving.  The 3^rd most significant industrial grouping is about food processing.  Clearly, the number and the type of machinery in each of the industries being discussed here are categorically different from each other.  For instance, in the ready-to-wear garments industry, the dominant type of equipment comprises sewing machines.  Typically, these sewing machines are of Japanese “Juki” brand, or “Brother” brand: standard kinds of industrial sewing machines which sew at very high speed.  Other comparatively peripheral equipments are (i) stitching machines; (ii) cutting machines; (iii) lining machines, etc.  The typical garments mill is not really characterized by “labour-intensive” technology, as the typical capital-labour ratio is understood to be US dollar 3000.  The textile weaving industry is slightly more labour-using, with a capital-labour ratio of US $ 2600.  Textiles spinning is the most capital-intensive, with capital-labour ratio of more than US $ 4000.  Capital-labour ratio in food processing---at US $ 2400--- is significantly lower compared with either garments industry or textiles industry.  The tendency increasingly is towards choice of more and more mechanized technologies in manufacturing industries.   

Access to finance and markets

Table-6 gives an idea of the role of small and medium enterprises as destinations for bank credit in 2004 and 2005. Bangladesh’s classification of bank advances lumps medium enterprises with the large enterprises, while small units are lumped with cottage-based units.  As such, unfortunately, it is not possible to speak of the access to finance issues for SMEs per se.  We know however separately that SCIs corresponds to more than 99% of all productive establishments in Bangladesh.

 

Out of 3.8 million establishments of all kinds in Bangladesh, only 10798, or just about 0.3% happen to fall in either medium or large establishment size class based on employment size.  The percentage is even much lower in manufacturing or trade---the two subsectors from which the case studies in this paper are drawn.  And yet, such staggering smallness of the proportion of medium and large establishments is coupled with a preponderance of large and medium enterprises in total credit disbursements from the banking system.  It is quite safe to assume that of total credit disbursed to large-and-medium class, an overwhelming majority ---perhaps, 80% or so---is arrogated by large establishments.  It becomes quickly clear that SMEs, for all their numerical superiority among establishments, receiving bank credit is the exception and not the rule. 

Why is the access to finance for the SMEs in Bangladesh not even based on neutral ground, not to speak of rosy or good?  This is because the issue of bank credit is based on the ownership of collateral: bankers insist on immoveable  property for collateral.  Only about 15-20% of the owners of SMEs own any immoveable property at all in which the bankers are interested.  This automatically excludes about 80% of SMEs from being among the privileged client of a bank loan. 

Table-6

Percentage distribution of advances made by PCBs, FCBs and NCBs in 2005 and 2004:  By receiving sectors

(Numbers are percentages; last row shows the disbursements in Tk. crores)

Name of Sectors and type Of financing		Private Comm- ercial Banks, 2005		Private Comm- ercial Banks, 2004		Foreign Comm- ercial Banks, 2005		Foreign Comm- ercial Banks, 2005		State Comm- ercial Banks, 2005		State Comm- ercial Banks, 2005
Agriculture	0.8		0.6		0.1		0.1		56.7		10.8
Large & Medium industry	14.0		11.4		10.9		11.1		17.9		21.1
SCI	0.7		.6		.6		.6		.9		1.1
WC large/medium industry	17.2		14.4		27.2		26.3		7.1		17.9
WC for SCI	.9		.7		1.4		1.3		.4		.9
Construction	8.7		15.7		0.9		0.8		1.6		6.7
Transportation	1.8		7.8		2.2		1.0		0.2		0.8
Storage	0.2		1.6		0.0		0.0		3.0		1.3
Trade financing	46.6		39.0		24.9		21.2		7.7		30.2
Miscellaneous	9.1		8.2		31.7		37.6		4.6		9.3
Total	100.0		100.0		100.0		100.0		100.0		100.0
Total advances	53029		40298		7819.8		6629		10637		37662

Note: SCI stands for small and cottage industry; WC stands for working capital

Access to markets

No custom study has ever been done in Bangladesh of the division of the output of SMEs into domestic sales and those overseas.  However, some broad-brush idea of this issue can be provided here. 

Of the industry that are clearly export-oriented in Bangladesh, the following stand out (Table-7).

Table-7

Importance of SMEs in export receipts of Bangladesh, 2004/05

Name of subsector(s) producing industrial goods that are exported	Exports during 2004/05, US $ Million	Exports during 2004/05, US $ Million Due to SMEs	Proportion of exports accounted for by SMEs	Definition of SME
a) Woven garments	3598	450	12.5	Between 10 and 99 workers
b) Knitwear	2819	352	12.5	Between 10 and 99 workers
c) Leather	221	94	42.5	Between 10 and 99 workers
d) Jute goods	307	12	3-5	Between 10 and 99 workers
e) Fertilizer and chemical products	197	0	0	Between 10 and 99 workers
f) Footwear	88	44	50	Between 10 and 99 workers
g) Ceramic products	29	0	0	Between 10 and 99 workers
h) Engineering goods	85	20	22-25	Between 10 and 99 workers
i) Petroleum by-products	35	0	0	Between 10 and 99 workers
j) Handicrafts	5	5	100	Between 10 and 99 workers
k) Others	621	n.a.	n. a.	Between 10 and 99 workers
Total exports	8652	977	11.3

Source: All estimates are based on trade estimates, and not based on detailed survey(s).

Use of Information Technologies (IT)

SMEs have very limited use of information technology (IT).  Accounting package is used by  1-2% of the SMEs.  The use of computers is revealed by say 15% of the SMEs, while the use of the Internet for business purposes applies to say 8-10% of SMEs. 

The role of quality certification is minimal among SMEs in Bangladesh.  There is no SMEs that has received ISO 9001:2000 certification except in the software, footwear, apparel, cycle-manufacturing industries.  Wherever exporting is one of the drivers of the firm, quality-assurance certification becomes an imperative.  However, SMEs have ways to go before one can cite this aspect of management of quality as a role model in any serious discussion.

Some SMEs in Bangladesh have availed of 5-S model of productivity enhancement.  This is particularly true for a small number of medium-sized enterprises in the pharmaceutical industry of the country.  MICRO---one of the pioneers of electronics-goods production with inspirational leadership---had availed of the entirety of Total Quality Management (TQM) and also Just-in-Time (JIT) inventory policies. 

Major problems and issues challenging competitiveness of SMEs in the country?

According to the Japan Center for Economic Research, which has produced  Competitiveness Index for 50 countries of the world for four years since  1980, there are eight determinants of competitiveness for nations, namely, internationalization; enterprise; education; governance; science and technology; infrastructure; finance; and IT (http://www.jcer.or.jp/eng/pdf/potential2005.pdf).   

According to the World Economic Forum, the following question highlight the ingredients of the business environment that positively impinge upon productivity of SMEs.  Does the government  maintain an arm’s-length relationship with respect to  the private sector, or does it play favorites? Does the judicial system allow for the reasonable, expeditious, transparent, and low-cost settlement of disputes, or is justice for sale? Is tax revenue channeled back into  the economy through productivity-enhancing investments in human capital and infrastructure, or is the money wasted on inefficient projects, or, what is worse, is it mostly stolen? Is the regulatory environment hampered by unnecessary layers of bureaucracy and red tape, reducing competitiveness and raising the costs of transactions and operations? How efficiently are new technological innovations absorbed, and is attention being paid to constantly upgrading the country’s educational system?  Does the country engage with the outside world with openness and self-confidence, or with fear and ambivalence?  What is the role of property rights and institutions?

With a slight paraphrasing of the above, the following five appear pertinent to enterprise competitiveness vs. SMEs, namely, (a) modernization of the technology and management processes in the enterprise; (b) worker educational and training attainment; (c)  the scope and quality of the infrastructure;  (d) commitment to innovation, product quality and customer satisfaction; and (e) the harnessing of information technology (IT) to serve the customer well and to shave marketing and communications costs. 

Unfortunately, it is not possible to write authoritatively about how well Bangladesh’s SMEs fare with regards to these competitiveness drivers, because the country has never carried out nationally representative sample survey(s) to probe these questions.[6] Having said that, successful SMEs of the kind that we have included in our roster of case studies amply shows that in spite of the overall relative backwardness of both the level of management and technical expertise, and of the physical infrastructure, some individual firms respond  creatively and effectively.  They innovate amid leanness of resources, demonstrating in the process a significant amount of creative initiative, an innovative bent of mind.  These are the people who can turn on a dime while finding solutions to their own production and technology problems.  We have provided some instances in our case studies.

Development public Initiatives, policies and programmes implemented

The Policy and Institutional Framework for SME Development

An exclusive focus on small and medium enterprises (SMEs) in Bangladesh is a relatively new concept.  For much of the past, it was Small and Cottage Industries (SCIs) which were the operative category in the mindset for public interventions for industrialization.  The focal point of the delivery of public services for that stated purpose was Bangladesh Small and Cottage Industries Corporation (BSCIC), a parastatal that was created in 1957 on the basis of an Act of the Parliament.  A brief description of the BSCIC will be moot at this stage. 

BSCIC

The operating divisions of BSCIC in decreasing order of importance are (i) promotion and extension; (ii) projects; (iii) marketing, technology and design.  Because roughly 63% of the revenue budget of BSCIC is allocated to the P & E division, it follows that this is the flagship division.  The main activity of this division is to provide pre- and post-investment counseling of manufacturers and tiny producers.  Pre-investment counseling consists of spotting timely and potentially profitable small-business opportunities, profiling “potentially viable” projects based on such opportunities; identifying and matching up entrepreneurs with such projects; and then supporting such establishments through the provisioning of credit and some infrastructural facilities.  In the 1980s and 1990s, the supply chain of industrial entrepreneurs for the P & E to run up  big performance scores used to be managed and mobilized by an extensive project “Development of Rural Industries” (DRI).  The DRI was subsequently absorbed into the regular, revenue budget of the country, inside the P & E division.  The mandate of this P & E division is one of two majors interfaces between BSCIC and entrepreneurship development.    

The number of industrial entrepreneurs rose from 34219 in 1998/99 to 64, 704 in 2002/03-- The other BSCIC major entrepreneurial involvement of BSCIC has been with the Women Entrepreneurship Development Programme (WEDP).  While the first was about spurring entrepreneurship among SCIs in generally, WEDP worked with women only. WEDP was an extensive programme.  Over a period of some 20 years starting from the early 1980s, WEDP created more than 40,000 female-headed establishments in such sectors as custom rice-milling, goat rearing, poultry-raising, and the like.  For much of its life, the project received good billing from evaluations on account of a reasonably good repayment of the credit distributed. 

The other  important programme of BSCIC is about the Industrial Estates (IE).  Under this IE programme, BSCIC develops land and some essential infrastructural support services from a greenfield environment and then invites entrepreneur applicants to come and set up shop aboard its premises.  After an initial  screening, BSCIC sends a short-list of the names of aspiring entrepreneurs to the District Evaluation Committee (DEC) where the final selection of awardees is made.  These latter are then invited by BSCIC to take possession of the industrial plots.  BSCIC does fork out  significant up-front subsidies to the awardees.

The entrepreneurial development that BSCIC has brought about is not of a Schumpeterian type where a break-through idea or a commercially keen insight, which was so far not spotted by anyone, is somehow spotted by someone.  When followed up and implemented in the form of a commercial venture, such a breakthrough becomes a torrent from a trickle.  In stead, BSCIC’s contributions to entrepreneurship development has more been in the nature of every-day infusion of counseling, credit, some small input of design and market-intelligence to men and women of small and tiny means so that they could start their own business, howsoever puny, lowly and initially challenging.  This has undoubtedly made a not insignificant contribution to the emergence of small and tiny businesses in Bangladesh owned by men and women who would otherwise have had no opportunities to open their own businesses.

Efforts of the Government to promote small and medium enterprises

The Government of Bangladesh has announced the Industrial Policy 2005. This policy document states: "the SME sector has been given priority as a privileged sector".  The PRSP states:"The Government will pursue an employment intensive industrialization with emphasis on SMEs and export-oriented industries".  The Government is committed to pave for industrialization led by the private sector amid a business environment that can bring out the best among all SME stakeholders.  It is in the evolution of just such a business environment--- good and available infrastructure, well-trained and  broad-based human resources, vigorous entrepreneurship bred out of an entrepreneurial culture,  performing credit, insurance, venture-capital markets, and markets for complementary expert services---that we at the Ministry of Industries would like to take advantage of the TA resources that ADB’s financial assistance has made possible in the corpus of SMESDP.

The Government created a Small and Medium Enterprise Cell (SME Cell) in the Ministry of Industries (MOI) in 2003 so as to provide a focal core for implementing policies and interventions that selectively take care of SMEs in Bangladesh.  Subsequently, government constituted in October 2003 an SME Taskforce which was based in the office of the Prime Minister, with the Principal Secretarty to the Prime Minister in the Chair.  The SME Taskforce was appropriately blended with participation from the Government, the private sector, academia and the civil society.  The Taskforce’s report was approved by the Cabinet of ministers, early in 2005.  Based completely on the contents of the report of the SME Taskforce, the Government of Bangladesh issued, for the first time, Small & Medium Enterprise Policy Strategies, 2005---which will provide the framework for interventions and policy strategies for the development of SMEs in Bangladesh.  One of the highlights of the Policy Strategies is that the Government constituted a Small & Medium Enterprise Advisory Panel as an independent and meritocratic brains-trust for the MOI for all developmental, technical and structural advisories.  The SMEAP comprises again participation from the private sector and the civil society, and at the moment is prestigiously headed.  The Ministry of Industries is very responsive to the SMEAP, and the two have forged a real synergy in the interest of the development of SMEs.      

In the private sector, the following four have been important projects for the fostering of entrepreneurship in Bangladesh: (i) the JOBS project, funded by United States Agency for International Development (USAID); (ii) Katalyst, funded by a consortium comprising DFID, Swiss Development Corporation and the GTZ and implemented by SwissContact, a Swiss consultancy; (iii) South Asia Enterprise Development Fund (SEDF).  We confine ourselves to the Katalyst and SEDF for the moment. 

Private sector activities in the field of SME promotion

Any account of the promotion of SMEs through private sector would be incomplete without a proper treatment of the activities of two substantively-funded BDS effort in the country, namely, Katalyst and SEDF.  Katalyst is a 5-year project funded by DFID, SIDA and Swiss Development Corporation (SDC), and is worth US dollar 25 million in funding between 2002 and 2007.    It is the largest project of its kind funneling embedded services to what the project calls SMEs.  The project has a head-count of 45.

With a funding of US dollar 5 million annually, and with a total funding of the equivalent of US dollar 25 million, it is clear that this project had very substantial funding on its hands.

The first important strategic decision Katalyst took was that it established a working lien versus the Ministry of Commerce.  The primary locus of responsibility of the MoC is spurring of Bangladesh’s exports or deemed exports.  The “industrialization” of Bangladesh was not a subject-matter of direct relevance to the MoC. 

KATALYST has developed an integrated approach based on the sub-sector services methodology. It consists of five stages:

1.Research
2.Analysis
3.Service market identification
4.Interventiondesign
5. Monitoring & Evaluation

The key characteristic is that prior to the interventions in the markets, their constraints and the opportunities need to be understood and analyzed with respect to the possible relevance for business services.

KATALYST's goal is to increase the competitiveness of small and medium enterprises in selected areas and sectors with a purpose to develop more effective markets for business services in the Bangladesh economy. An indicator of KATALYST's growth will be an increase in employment and in incomes in SME sector of the economy.

KATALYST has focused its activities on the development of some of the SME sectors in Bangladesh.

The first subsector to engage the attention of Katalyst was the aromatic rice subsector. The exports from aromatic rice in Bangladesh rose from a 100 tons to 3000 tons only over a fifteen year period. In 2003, the two next subsectors to engage the attention of Katalyst are agro-tools and pond fisheries. In 2004, furniture, plastics and vegetables have engaged the attention of this project.  Clearly, Katalyst has worked with a fairly wide range of sub-sectors, with very highly varying densities of SMEs within them. 

The following shows the most major output from Katalyst since 2002, and  gives an idea of the evolving focus of the project:

(a) Subsector Market Assessment of the Aromatic Rice Subsector, DFID & IDE Bangladesh, 2002

(b) Subsector Market Assessment of the Aromatic Rice Subsector, DFID & IDE Bangladesh, 2002

©    Pond Fishery Subsector Service Market Assessments, Bangladesh, IDE & KATALYST 2003

(d) Assessing Supply of and Demand for Quality Management Services in Bangladesh, Katalyst, 2004

(e) The Accounting, Financial Advisory, and Taxation Services Market in Bangladesh, Katalyst, 2004

(f) Design of the Katalyst project, Bangladesh, June 2004.

Crop diversification in agriculture, fisheries, manufacturing, cross-cutting support services, business process improvements---are in the mix of activities so far undertaken by Katalyst.

Katalyst has tasked itself to make a difference, inter alia, by making industrial and rural services available mainly for the following seven product areas, namely, agro-tools, furniture, plastics, vegetable, fisheries and bamboo.  As well, Katalyst has a center of expertise and regulations to offer advocacy services to the Government in advisory capacity. 

A typical subsector project consists of (i) donor identification of a sub-sector; (ii) SBS mapping and constraints analysis by a consulting team; (iii) selection of service market and service-market assessments; (iv) start of project activity (or not); (v) intervention design; (vi) intervention(s); (vii) monitoring and evaluation. 

Katalyst has so far initiated project activity in this fashion in vegetables production, plastics, agro-tools.  Detailed monitoring and evaluation of project will be launched in the near future.  According to Katalyst, a mid-term evaluation of itself found results to be broadly positive. 

Of late, Katalyst has gone into the territory of partnering with two Bangladeshi companies to develop accounting, financial management and taxation training packages for small enterprises. Under the agreement, CEC and Skill Plus will develop a package and give training to SME entrepreneurs on accounting, financial and taxation management. The training package will be promoted under the 'More business' campaign, which is a joint initiative among Banglalink, Standard Chartered Bank, The Daily Star---three of Bangladesh’s most successful corporate icons--- and Katalyst. Katalyst clearly has strategic partnerships with some of best brands in Bangladesh, although the nexus between these brands and the task of spurring of productivity and competitiveness of SMEs in Bangladesh remains, at the moment, unclear.  The project is one year shy of its completion. 

SEDF

The SouthAsia Enterprise Development Facility (SEDF), a newly launched initiative funded by the IFC and other donors, which has targeted its efforts towards greater SME financing from local Bangladeshi banks. In June 2002 SEDF kicked off operations with a conference where it brought to Dhaka several SME finance experts and officers from highly successful SME lending institutions worldwide like Business Partners of South Africa, PlantersBank of the Philippines and the National Development Bank of Sri Lanka. Local banks have, according to SEDF literature, since responded very positively to SEDF’s access to finance program: Dhaka Bank Limited has already signed an agreement with SEDF to collaborate on training and TA on information technology (IT), marketing, human resource development and credit management. SEDF is also working with numerous other local financial institutions to make them aware of the profitability potential of Bangladesh’s large SME sector.   Between 2002 and to-date 13 banks have entered into the status of what SEDF called partner financial institutions (PFIs).

SEDF undertakes technical assistance programs for partner financial institutions (PFIs) revolving around four strategic pillars; commitment, knowledge, efficiency and tools.

• Commitment: to be measured through strategic allocation of resources to SME finance; can be achieved through advocacy, strategic interaction, benchmarking with peer financial institutions.
• Knowledge: to be spread at various levels of the institutions; can be achieved through training, exposure to the best practices, institutional development programs.
• Efficiency: an imperative for sustainability of the SME finance program; to be measured in reduced time and costs of SME loan processing; can be achieved through instituting performance-based HR polices, process automation and procedural streamlining.
• Tools: measured through the number of financial products available to SME finance; can be achieved through introduction of new products such as factoring.

The underlying principle driving all technical assistance programs is sustainability.

Enhancing Commitment to SME Finance

Financial institutions are working with the SEDF on a 50:50 cost-sharing basis.

Advocacy: SEDF staff members keeps PFIs abreast of the latest developments in SME finance techniques, benchmarks and trends.

SME strategy formulation: SEDF has helped two PFIs in the process of SME strategy formulation through conducting institutional diagnostics and structured strategy workshops. This is in addition to the four PFIs which received assistance from SEDF on SME strategy formulation last year. The number of PFIs that come to SEDF for SME strategy formulation consultation has fallen from 4 in 2003 to 2 in 2004. 

Spreading Knowledge of SME Finance

SEDF organized study tours for PFI senior management to best practice SME finance institutions in India and Sri Lanka.

SEDF has organized a training program on Sales Leadership in order to enhance selling skills of the field level PFI professionals.

SEDF organized five 5-day training programs on the “Fundamentals of Good Management.” One of the training programs was conducted by the Singapore Institute of Management and the remaining four by a local consulting firm. Over 110 PFI professionals attended these programs.

Improving Efficiency in SME Finance

SEDF has developed Credit Scoring modules at three PFIs as pilot programs. This will enable these PFIs to reduce the time requested for screening SME loan applications.

SEDF has assisted a PFI in its automation through implementation of a core banking software. The first phase of business process re-engineering has been completed by SEDF consultants. The bank, along with its 18 branches, is expected to go online by the end of 2004.

A comprehensive risk grading framework has been developed for a PFI which will enable the company to better manage its lending risks and adopt risk-based loan pricing policies. The assignment was carried out by the leading Indian credit rating agency, CRISIL.

IT Diagnostics: SEDF conducted IT diagnostics for five PFIs. The diagnostics was aimed at identifying gaps in software and hardware infrastructure for catering to the SME client segments.

Redefining the HR policy: SEDF has helped a PFI in instituting a performance-based human resources policy which encompasses recruitment, job description, assessment, incentives and development of the bank staff. The study was carried out by a local consulting firm.

ISO diagnostics: with a view to streamlining processes/procedures and promoting efficiency, SEDF has carried out an ISO diagnostics of a PFI. The first phase of this on-going project has been completed. The PFI aims for an ISO 9001 certification audit by the end of 2004.    

PROBLEMS AND CHALLENGES FOR SME DEVELOPMENT

1.    Intense competitiveness of the global and domestic market-place in which the SMEs have to compete;

2.    Secularly-increasing quotient of specialised knowledge and codified R & D that have become defining characteristics of products and competitors in globally-integrated markets;

3.    Inequalities in the distribution of wealth, including human-capital, that lead to a crowding out of SMEs in general, and small enterprises in particular, from participating in markets for venture capital and credit;

4.    Deficient foundation of policy-relevant knowledge and information of a kind that can make a difference to the pro-poorness of the development strategy for SMEs growth;

5.    Inadequate level and uneven distribution of execution, design and implementation capacities in the facilitators and providers so as to spur competitive growth of their clients in the shortest possible time;

6.    The “inherent difficulties” of dealing effectively with all government failures, market failures and enterprises’ own failures in the interest of expeditious development of SMEs.

SOME IMPORTANT STEPS TO BE TAKEN FOR SME SECTOR

1.   A two-stage stratified random sampling of SMEs throughout Bangladesh slated to start early in 2006, so as to bench-mark, for the first time in Bangladesh, SME comprehensively;

2.   The crystalisation of keen policy-relevant insights from this survey which will hopefully input substantively into the formulation of a strategic plan of action;

3.   A conscious design to embed all policy planks into Bangladesh’s Poverty Reduction Strategy Programme;

4.   The formation of an SME Foundation within the next 18 months or so, comprising the SME Advisory Panel and SME Cell to become an independent private-sector Foundation created expressly by Government action, and tasked comprehensively with all matters pertaining to the development of SMEs throughout Bangladesh in a thoroughly pro-poor manner;

5.   An well-orchestrated effort to funnel much-needed provisioning of debt-capital and R & D funds into the world of innovative and deserving SMEs;

6.   Upgrading of all relevant kinds of capacities in the SME sector.

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[1] It is not as yet possible to carry out this structural discussion based on measures of output.  It remains the hope of the TA Grant Team to also do so in a future date.

[2] “Head-count” would nevertheless be an useful measure of size for statistically purposes.

[3] Of course, establishments smaller than head-counts of 10 are excluded from this body of data.

[4] BBS data on enterprises include some units under the sub-sectoral captions of “public administration and defence”, for instance.  Clearly, these units do not belong in the private-sector. 

[5] Entries in each column add to 100, except for rounding errors.

[6] With financial assistance from the Asian Development Bank (ADB), the SME Cell in the Ministry of Industries (MOI) is now slated to run a set of nation-wide surveys which will sample a representative collection of SMEs in Bangladesh.  An incisive questionnaire will be administered for this purpose and, it is believed, will generate information about all of the foregoing correlates of productivity and competitiveness by SMEs in all industrial groups in the country.  The survey is expected to commence sometime in 2006 now.