SME Policy Paper

ISSN 1817-5090

The Cost and Management
Vol. 34 No. 3
May-June 2006, pp. 57-72

SMEs in Bangladesh and Their Financing :
An Analysis and Some Recommendations
Md. Shamsul Alam
Md. Anwar Ullah
Abstract: Small and Medium Enterprises (SMEs) are accounting for 25 percent of
GDP, 80 percent of industrial jobs, and 25 percent of the total labour force in Bangladesh
even though the prospective sector gets negligible facilitation from different support
service providers. There are various constraints that hinder the development of SMEs in
Bangladesh, such as lack of medium to long-term credit, limited access to market
opportunities, technology, and expertise and business information. Lack of suitable
incentives, inefficient and limited services from relevant government agencies as well as
poor capacity of entrepreneurs are other reasons for the slow growth of SMEs. Obviously,
the government has many things to do to flourish the SMEs because, if they flourish,
SMEs will create new entrepreneurs, generate more jobs and contribute to a great extent
to the national economy. This paper is an academic analysis toward policy formulation
in respect of SME financing.
Keywords: SMEs, Institutional finance, Government initiatives.

Introduction
In almost every part of the world, limited access to finance is considered a key constraint to
private sector growth. This is especially true for SMEs of our country as they are facing
different types of problems for availing institutional finance though SMEs play dominantly
important role in the national economy of Bangladesh by making up over 90 per cent of
industrial enterprises, providing employment to 4 out of 5 industrial workers and contributing
to over one-third of industrial value-added to gross domestic product (GDP). The relative
SME share in manufacturing value-added is much higher and estimated to vary between 45
to 50 per cent of totaling value-added generated by the manufacturing industries sector.
Further as important sources of new business creation and developing new entrepreneurial
talents, these industries provide the much needed dynamism and vitality to the national
economy. Implementation of poverty alleviation action programs and strategies is a systematic
and continuous effort in Bangladesh. For that purpose, the Poverty Reduction Strategy of
the government has clearly identified some core principles and parameters both at macro
and micro levels for reducing the existing poverty level at least half within 2015 as targeted
Mr. Md. Shamsul Alam, MA, MBA is APS -1 to the Hon’ble Prime Minister, Government of Bangladesh and Mr. Md. Anwar Ullah, M.Com, MBA, ACMA
is a Senior Assistant Secretary, Ministry of Establishment, Bangladesh Secretariat, Dhaka.
The opinions expressed in the article is of the authors’ own. They do not represent the opinion of the Government or the departments to which the authors belong to.

57

Alam & Ullah

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. More than 90% of the industrial enterprises in Bangladesh are in the
SME size-class. Generally, SMEs are labor intensive with relatively low capital intensity. The
SME also posses a character of privilege as cost effective and comparative cost advantages
in nature. The SME policy strategies have been formulated to assist in the achievement of
the goals and targets the MDGs set by the Government. Contribution of SMEs to the economy
is shown in the table - 1.
Table-1 : Contribution of Large and Small Industries to the GDP (%)
1999-00 2000-01 2001-02 2002-03 2003-04
Large Industry 11.01 11.13 11.16 11.29 11.47
Small Industry 4.39 4.46 4.60 4.68 4.78
Total Industry 15.40 15.59 15.76 15.97 16.25
(Source: Economic Review, Ministry of Finance, GOB, 2004)

SME Defined in Bangladesh
Until recently, public policy did not distinguish medium enterprises as a separate category
and instead lumped it with large enterprises. Thus, industrial policies prior to 1999 divided
the industrial sector into three categories — large, small and cottage. The cut-off limit of
these size categories was determined on the basis of the size of fixed assets. Thus, the Industrial
Policy 1991 defined “Small Industry” as industrial undertakings whose total fixed investment
excluding the price of land, expenses for inland transportation and commissioning of
machinery and appliances, and duties and taxes, was limited to Tk. 30 million (US $800
thousand) including initial working capital, while the upper limit on the investment level in
“Cottage Industry” was Tk. 500,000 (US $13 thousand).
In contrast, the Industrial Policy 1999 distinguished medium from large industry and defined
the size categories in terms of both capital and employment size. Thus, Large Industry” was
defined to include all industrial enterprises having 100 or more workers and/or having a
fixed capital of over Taka 300 million (US $6 million). Medium industry covered enterprises
employing between 50 and 99 workers and/or with a fixed capital investment between Taka.
100-300 million (US $2-6 million). ‘Small Industry” meant enterprises having fewer than 50
workers excluding the cottage units and/or with a fixed capital investment of less than Taka
100 million (US $2 million). “Cottage Industry” covered household-based units operated
mainly with family labor.
However, in the latest industrial policy announced in 2005, significant changes have been
brought about in the definition of the various size categories. In the Industrial Policy 2005, a

58 The Cost and Management, May–June, 2006

SMEs in Bangladesh and Their Financing : An Analysis and Some Recommendations

distinction has been made between manufacturing and non-manufacturing enterprises. In
the case of the manufacturing enterprises, sizes have been defined in terms of the value of
the fixed assets while in the case of the non-manufacturing enterprises the cut-off line has
been identified in terms of employment size.
Thus, large industry is now defined as units with fixed capital of more than Tk. 100 million
(US $1.6 million) excluding the value of land and building while non manufacturing large
enterprise is defined as units having more than 100 workers. Medium industry is defined as
units with fixed capital of Tk. 15-100 million (US $246 thousand - $1.6 million) excluding the
value of land and building while non 4 manufacturing medium enterprises are those with
employment size between 25 and 100 workers. Manufacturing enterprises with fixed assets
of less than Tk. 15 million excluding the value of land and non-manufacturing enterprises
with fewer than 25 workers are to be treated as small enterprise.
While the definition of SME has changed overtime in different Industrial Policy
pronouncements, Bangladesh Bureau of Statistics (BBS), which is the prime national
organization responsible for generating and compiling various types of statistics in the country
has been consistently using an all together different classificatory scheme. Thus, BBS defines
enterprises having 10-49 workers as “Medium” industries while those having 50 or more
workers are identified as “Large” industries. For industrial GDP data, the medium and large
industries are lumped together under “Large” category. The rest of the industrial enterprises
including cottage industries are grouped under the “Small” category.

Present Status of the SME Sector in Bangladesh
Size, Type and Spread of SMEs
Because of the definitional problems mentioned above, information on SME is not readily
available in Bangladesh. BBS conducts annual surveys of the manufacturing sector, called
the Census of Manufacturing Industry (CMI), but as mentioned earlier the BBS lumps under
the “Large” category information on all units with 50 or more workers and hence the
information cannot be separated in most cases for the 50-99 workers size category, which is
the more commonly used cut-off size limit for medium enterprises. Moreover, there is quite
a bit of backlog in the processing of the CMI data. The latest available published CMI report
is for the period 1999-2000. The prime agency for the promotion of small and cottage industries
in Bangladesh is the Bangladesh Small & Cottage Industries Corporation (BSCIC). BSCIC is
required to maintain information and data bank on small and cottage industries in Bangladesh
and accordingly the agency carries out nation-wide surveys of the sector at some time
intervals. However, the latest such survey by BSCIC was conducted in the late 1980s and it
was based on the definition of small and cottage industries given in the earlier industrial
policies that used capital rather than employment size as the cut-off limit. Fortunately, BBS
carried out a nation wide census of all non-farm economic activities in 2001 and 2003 and a
preliminary report based on the census has been made available recently. The report presents

The Cost and Management, May–June, 2006 59

Alam & Ullah

data by employment size category but there is no information on the size of fixed assets. The
previous such national census of non-farm economic activities was carried out by the BBS in
1986. Information available from the recent BBS report has been presented in table-2. The
following appears to be the main features of this sector in Bangladesh:
Table 2 : Size and Composition of SME in Bangladesh – 2001/03
Micro <10 Small 10-49 Medium 50-99 SME 10-99 Large 100+ Total 10+ All

No. of Establishment (thousand) 3489 75 5 80 6 86 3575
As % of all 97.61 2.09 0.14 2.23 0.16 2.39 100
As % of 10+ - 87.36 6.00 93.36 6.64 100 -
Rural-urban distribution (%) of units
Urban 35.45 60.06 73.64 60.93 83.10 62.40 36.09
Rural 64.55 39.94 26.36 39.07 16.90 37.60 63.91
All 100 100 100 100 100 100 100
Scrotal composition (%) of units
Manufacturing 12.63 34.82 45.09 35.48 66.44 37.53 13.22
Wholesale & retail trade 58.18 8.84 4.25 8.55 1.99 8.11 56.99
Hotels & restaurants 6.55 4.59 1.46 4.39 0.72 4.15 6.50
Comm. & personal service 12.91 3.11 3.65 3.14 2.22 3.08 12.68
Health & social work 1.42 2.97 6.30 3.19 5.27 3.33 1.46
Transport & commutation 2.45 2.46 2.97 2.50 1.73 2.45 2.45
Other services 5.86 43.21 36.28 42.75 25.61 41.35 6.7
All 100 100 100 100 100 100 100
Size of Employment (thousand) 8119 1375 343 1718 2192 3910 12029
As % of all 67.50 11.43 2.85 14.28 18.22 32.50 100
As % of 10+ 35.17 8.77 43.94 56.06 100 -
Urban 39.96 61.27 73.78 63.76 88.01 77.36 52.11
Rural 60.04 38.73 26.22 36.24 11.99 22.64 47.89
All 100 100 100 100 100 100 100
Scrotal composition (%) of employment
Manufacturing 18.55 35.50 45.53 37.50 72.07 56.85 31.01
Hotels & restaurants 7.34 4.23 1.40 3.67 0.38 1.83 5.55
Comm. & personal service 10.77 3.08 3.53 3.17 1.98 2.50 8.08
Health & social work 1.44 3.26 6.43 3.89 3.86 3.87 2.23
Transport & Comm. 2.14 2.38 3.02 2.51 1.72 2.07 2.12
Other services 8.99 43.99 35.93 42.38 18.75 29.16 15.53
All 100 100 100 100 100 100 100
Source : Economic Census 2001 & 2003, National Report (Preliminary), Bangladesh Bureau of Statistics, July 2005

Changes in the Size and Structure of SME Over Time
A comparison of the data from the Economic Census 2001 & 2003 with the data from the
previous census of 1986 (Table 3) suggests that the importance of the SME sector has changed
marginally during the inter-census period.
7 The share of SME in the number of establishments in the 10+ size group has slightly
declined from 95.6% in 1986 to 93.4% in 2001/03 while the share in employment came
down from 49.8% to 43.9%.
7 The urban SME employment grew at an annual rate of 4.6°/ raising the share of urban
SME in the employment in 10+ size group from 57% in 1986 to 63.8% in 200.



7 Non-manufacturing SME grew at a higher rate during the period causing the share of
manufacturing n SME employment to decline from 41, 3% in 1986 to 37.5% 2001/03.
Table-3 : Size and Composition of SME in Bangladesh – 1986

As % of all 97.62 2.16 0.11 2.27 0.11 2.38 100.00
As % of 10+ - 90.88 4.67 95.55 4.45 100 -
Urban 35.97 54.04 63.10 54.49 71.68 55.25 36.43
Rural 64.03 45.96 36.90 45.51 28.32 44.75 63.57
All 100 100 100 100 100 100 100
Sectoral composition (%) of units
Manufacturing 24.21 33.08 62.72 34.53 80.64 36.58 24.50
Finance & Business service 2.47 13.37 9.09 13.16 6.52 12.86 2.72
Other services 24.00 37.33 21.96 36.58 10.09 35.40 24.27
All 100 100 100 100 100 100 100
As % of all 73.75 10.80 2.27 13.07 13.17 26.25 100.00
As % of 10+ - 41.17 8.66 49.83 50.17 100 -
Urban 36.92 55.34 62.93 56.66 73.58 65.15 44.33
Rural 63.08 44.66 37.07 43.34 26.42 34.85 55.67
All 100 100 100 100 100 100 100
Sectoral composition (%) of employment
Manufacturing 35.19 36.75 63.07 41.33 87.82 64.65 42.92
Finance & Business service 2.46 13.13 9.06 12.42 4.38 8.39 4.02
Other services 20.21 35.70 21.79 33.28 6.18 19.68 20.07
All 100 100 100 100 100 100 100

Source : Bangladesh Census of Non-farm Economic Activities 1986, National Report, Bangladesh Bureau of Statistics, November 1989

Size and Structure of Manufacturing SME
The evidence from the Economic Census 2001 & 2003 (Table-4) shows that small
manufacturing in Bangladesh consists of some 26 thousand enterprises employing nearly
488 thousand persons while there are some 2311 manufacturing establishments under the
medium category engaging about 156 thousand persons. In the 10+ size group, manufacturing
SMEs account for nearly 88% of the manufacturing establishments but about 29% of
manufacturing employment. The Economic Census did not have information on value added.
However, other sources suggest that the share of 5MB in manufacturing value added in
Bangladesh in the 10+ group is likely to be around 26%. The small manufacturing enterprises
are almost evenly distributed between rural and urban areas both in terms of number of
establishment and employment. But in the case of medium manufacturing enterprises there
is a higher incidence of urban establishment and urban employment.


Alam & Ullah

Table 4 : Size and Composition of Manufacturing SME in Bangladesh 2001/03

As % of all 93.2 5.5 0.5 6.0 0.8 6.8 100.0
As % of 10+ 81.0 7.2 82.2 11.8 100.0
Urban 26.4 51.7 57.0 52.1 79.5 55.4 28.4
Rural 73.6 48.3 43.0 47.9 20.5 44.6 71.6
All 100 100 100 100 100 100 100
As % of all 40.4 13.1 4.2 17.3 42.3 59.6 100.0
As % of 10+ 22.0 7.0 29.0 71.0 100
Rural-urban distribution (%) of emploement
Urban 31.6 51.4 57.1 52.8 86.5 76.7 58.5
Rural 68.4 48.6 42.9 47.2 13.5 23.3 41.5
All 100 100 100 100 100 100 100

Source : Economic Census 2001 & 2003, National Report (Preliminary), Bangladesh Bureau of Statistics, July 2005

The evidence from the Economic Census on the composition of manufacturing SME (Table-3)
suggests textiles, non-metallic mineral such as brick and clay products, food products,
furniture, and plastic products as dominant industry categories.

SMEs Access to Finance – Barriers and Windows
Among the many compelling reasons why SMEs fail to realize their full potential,
inadequate access to finance is prominent and most commonly cited. With limited capital
base of their own and little or no access to institutional financing they rely on inefficient
financing service traditionally from informal sources, which eventually proves
unsustainable let alone stimulate growth.
In the past, government has attempted to provide small and medium enterprises with access
to finance through targeted lending. There was a government directive that 5 per cent of
Bank loan portfolio be set-aside for small and medium enterprise financing. A separate bank,
namely, the Bank for Small Industries and Commerce (BASIC) was set up in 1988 with the
objective of financing the small and medium enterprises. There were also attempts to
channelize to the sector through public and private banks fund received from international
agencies. There were provisions of favorable debt equity ratio, special interest rates and credit
guarantee scheme. The central bank also issued directives to both public and private
commercial banks regarding working capital loans, use of standardized documentation
procedure and time limits for credit sanctioning and loan disbursement. Notwithstanding all
these arrangements for financing small and medium enterprises, the actual delivery of
institutional credit to this sector has been grossly inadequate. One of the main factors that
have hampered flow of institutional finance into small and medium enterprises is a bank pre-
occupation with collateral based lending. Traditionally banks have used fixed asset ownership
particularly land ownership as the basis for judging credit-worthiness. This puts small and
medium enterprises at relative disadvantage as they often cannot put up such collateral for
loan. Moreover, whatever collateral they can manage gets used up in taking the term loan
leaving them with no means to seek working capital loan from institutional sources. Unlike
their large-scale counterparts they cannot use influence and contacts and solve the problem



by putting up collateral of dubious valuation. Banks, on their part, also tend to be less flexible
about the collateral requirement in the case of the SMEs as they perceive SME loan to be more
risky and the cost of monitoring and supervision of small loans to be higher.
Various alternatives to real estate based lending have been suggested for the SMEs. Group
guarantee and peer pressure, successfully used in the case of micro-finance, do not appear
appropriate for SMEs as these are mostly sole proprietorship units with capital size
significantly larger than the amount typically disbursed under micro-finance. Use of assets
other than land and building, such as fixture, equipment, vehicles etc as collateral is also a
fairly standard practice in institutional finance but is of less use in the case of SMEs as these
enterprises usually possess few such non-land assets. Sales proceeds, accounts receivable,
inventory etc can be the basis of working capital loan, but this requires proper documentation
of the transactions of the SMEs and close monitoring and supervision on the part of the
lending institutions. Because of the informal nature of many SME transactions and high cost
of small loan administration, use of such movable asset for working capital lending will
involve certain difficulties.
SMEs as these enterprises usually possess few such non-land assets, Sales proceeds, accounts
receivable, inventory etc can be the basis of working capital loan, but this requires proper
documentation of the transactions of the SMEs and close monitoring and supervision on the
part of the lending institutions. Because of the informal nature of many SME transactions
and high cost of small loan administration, use of such movable asset for working capital
lending will involve certain difficulties. Financial institutions could significantly reduce the
risk when they are lending to SMEs without real estate based collateral if they (a) pre-screen
SMEs on the basis of cash flow statements and information from business service providers
and receivers to assess track records of firms and their ability to repay in future, and (b)
implement close monitoring and supervision in the post-disbursement stage. In such cases,
appropriate credit guarantee schemes will need to be devised for covering the lending
institutions both for the risk involved as well as for the additional cost of loan administration.
In 2003-04, Bangladesh Bank set up a Tk. 10.0 billion refinancing scheme for credit to SMEs.
Bangladesh Bank charges participating institutions 5% interest rate while the lending
institutions decide on the lending rate of interest. This provides these institutions with the
scope of attempting lending to SMEs without real estate based collateral as their risks will be
covered through refinancing facility and they can accommodate any additional cost of loan
administration through an appropriate spread between the borrowing and the lending rate.
Because of the initial success of the program, government raised the amount to Tk.25. 0
billion in the national budget 2004-05. Beside this, International Development Agency (IDA)
has provided US$ 10 million to Enterprise Growth and Bank Modernization Project (EGBMP)
during FY 2004-5. More over, ADB has finalized an agreement with Bangladesh Bank to
provide additional US$ 30 Million to this sector. These huge resources would strengthen the
financial programme of EGBMP. This would result in employment generation in one hand
and enhancement of purchasing power of the poor on the other hand. Under this programme,
the financing capability of various financial institutions and banks have been enhanced and
up to April, 2005 Bangladesh Bank has disbursed Tk.1237.34 million for refinancing. Out of
this, the contribution of World Bank was Tk.237.26 million while that of Bangladesh Bank


Alam & Ullah

was Tk. 999.98 million. Detailed refinancing activities of Bangladesh Bank (BB) to various
financial institutions and banks is shown at table-5 below:
Table - 5 : Refinancing activities of BB and other Bank and financial Institutes
No. of Beneficiary IDA Portion
Name of the Banks/FIs Refinanced Amount Refinanced (In Million/ Taka) Enterprises (included in the
main calculation
Banks Working Capital Mid Term Long Term Total

National Credit & Commerce Bank Ltd. 15.64 77.50 - 93.14 228
Jamuna Bank Ltd. - 4.00 - 4 1
National Bank Ltd 4 - - 4 1
One Bank Ltd 5.8 24.49 - 20.29 69
The Premier Bank Ltd. 57.931 16.55 6.63 81.106 84
BRAC Bank Ltd 38.05 502.00 - 540.05 3551 219.75
South East Bank Ltd 27.90 1.50 29.4 32
Sub-Total 149.321 626.04 6.63 781.986 1766 219.75
Non-Financial Institutions
Uttara Finance & Investment Ltd 7.76 45.10 55.54 108.401 59
Prime Finance & Investment Ltd 14 14.00 5.59 33.848 17
Midas Financing Ltd 0.5 106.26 39.59 148.345 245
Fidelity Assets & Securities Co.Ltd* 0.80 0.80 1 0.6
IDLC of Bangladesh 17.85 13.48 31.33 20 16.91
Phoenix Leasing Co.Ltd 1.2 15.01 37.07 54.183 24
United Leasing Co.Ltd 29.87 49.78 79.65 58
Vanik Bangladesh Ltd 0.3 0.50 0.8 2
Sub-Total 23.76 230.09 201.41 455.257 426 17.51
Grand Total 173.081 856.13 208.04 1237.24 2192 237.26

(Source: Bangladesh Bank)

* Figures with asterisk received refinance from IDA funding
Note: Total Amount refinanced Tk. 1237.24 million
Bangladesh Bank portion Tk. 999.983 million
IDA Portion Tk. 237.26 million
It would he seen from the above Table that up to April 2005 Bangladesh Bank distributed
Tk.1237.24 million as refinancing to 7 banks and 8 other financial institutions. It may be
mentioned that the same amount of money was distributed by the above banks and financial
institutions to 2192 SMEs earlier as loan. Out of the total loan Tk.173.08 million has been
provided as working capital, T k. 856.13 million as mid-term loan and Tk. 208.04 million as
long-term loan. About 18 banks and financial institutions have so far signed agreements
with the central bank to get access to the refinancig facility. Banks and other financial
Institutions have so far financed about 3094 SMEs. The Asian Development Bank (ADB) has
ploughed into some $ 50 million to the government under its Small and Medium Enterprise
Sector Development programme of the total $ 15 million is provided for SME sector policy
and institutional restructuring and $ 5 million as tehnical assistance for capacity building
and training. The rest $ 30 million went to the central bank’s enterprise fund.
Historically, the commercial banks have been used as the exclusive conduits of funds for the
SMEs. There is a strong case for exploring other possible conduits such as non-governmental
organization (NGOs) who have success stories not only with micro finance but also with



regard to credit to SMEs albeit in a limited way. As they are more developmental in character
than commercial banks which are primarily profit oriented, this may help try out lending to
SMEs without real estate based collateral and without having to reduce vigilance in pre and
post lending stages.
The lack of access of SMEs to institutional finance is observed to be even higher when it
comes to women owned or women managed enterprises. There is a general trend towards
rise in women entrepreneurship in Bangladesh, but women trade bodies claim that social
acceptability of this trend is not reflected in the attitude of the lending agencies, which
discourages them from seeking institutional finance. The other major problem SME
entrepreneurs face in seeking institutional finance is with regard to the preparation of the
project proposal. In spite of directives from the central bank to follow standardized procedure,
the loan application process has still remained lengthy and cumbersome. The entrepreneur
often lacks the ability to formulate a proper project proposal. Even when he prepares the
proposal drawing on outside expert services, there is no guarantee that the proposal will be
evaluated properly as the financial institutions themselves lack adequate capability for proper
project evaluation.
Loan processing, particularly in the case of public sector banks, involves high transaction
costs for borrowers in terms of time and visits needed and unofficial payments made. Because
of lack of proper autonomy and accountability, the public sector financial institutions are
beset with inflexibility, inefficiency, political interventions and corruption. Since the
performance of the bank officials is not properly evaluated they lack the incentive to bring
larger number of suitable borrowers, particularly those in the small and medium enterprise
sector, within the fold of institutional financing. They adopt a passive and inflexible attitude
towards the borrowers either to avoid the risk of making an inappropriate lending or to
force the borrower to make side payments for more favorable handling of the loan application.
These problems are unlikely to go away without major institutional reforms of the public
sector banks. Another major weakness of business financing in Bangladesh is lack of its
modernization for purposes of e-commerce. In the context of an evolving globalize trading
system the importance of e-commerce can hardly be overemphasized. But due to the absence
of congenial telecommunication facilities and appropriate financial systems, business
enterprises particularly SMEs have not taken any initiative towards e-commerce.
Bangladesh faces formidable developmental challenges. With a population density of 928
per square kilometer, it is the most densely populated country leaving aside a number of
city-states. Per capita GDP of US$ 440 barely distances Bangladesh from a small number of
countries at the very foot of the income scale. About 42 per cent of the population lives on
the wrong side of the poverty line. Agriculture accounts for nearly a quarter of the GDP
employing more than half of the labor force. About 77 per cent of the population still resides
in the rural areas. Although population growth rate has come down to 1.47 per cent, annual
growth of labor force is estimated to be 4.3 per cent. With the absorptive capacity of the
agricultural sector limited to at most one third of the new entrants to the labor force, the
country is faced with the pressing need of creating employment opportunities outside
agriculture. The role of SME assumes special importance in this context.


Alam & Ullah

To overcome the hurdles of financing and to make time-based progress ‘Local Enterprise
Investment Centre’ (LEIC) has been launched to facilitate improved access for the Small and
Medium Entrepreneurs (SMEs) to capital, innovation, new technologies and business practices
by way of establishing partnership with foreign or large local enterprises. Canadian
International Development Agency (CIDA) and IDLC Bangladesh Limited jointly set up the
LEIC to help develop a more vibrant private sector, which will serve as an engine for
innovation, structural change and economic growth.
The International Finance Corporation (IFC), the private sector arm of the World Bank Group,
has signed an Agreement to issue a local currency guarantee of up to $5 million with United
Leasing Company Limited (ULC) in Bangladesh. Credit enhancement from the proposed
guarantee, will assist ULC to borrow the equivalent amount of local currency from Citibank
Bangladesh and use the longer tenured funding to further expand its portfolio of leases to
the SME sector in Bangladesh. The proposed guarantee will facilitate the mobilization of
longer-term local currency financing from the more liquid foreign banks to leasing companies
that serve the SME sector.

Special Initiatives of the Government
In the past, the government has attempted to provide SMEs with access to finance through
targeted lending. There was a government directive that 5% of a bank’s loan portfolio be set-
aside for small and cottage industry financing.
(a) BASIC Bank: BASIC Bank was established in 1989 to finance small and cottage industries.
It is mentioned in its Memorandum of Articles that at least 50% of its loan-able fund
should be invested in Small Scale Industries (SSI). In 2003, the bank lent Taka 51.29
billion to SSI sector to a number of 418 projects. The bank offers moderate interest rates
on SME lending compared to other private commercial banks and foreign banks. For
financing small and cottage industries in the private sector, the Bangladesh Bank has
been providing refinance facility to this bank since 1999. A sum of Taka 250 million was
disbursed to BASIC in FY 2004 under this scheme.
(b) Palli Karma-Sahayak Foundation (PKSF): The Government established PKSF in May
1990 to work as an apex organization for the development of micro finance sector in
Bangladesh. PKSF is distributing micro-credit among the poor through 225 large and
small NGOs. Most of the beneficiaries are women. Government allocateed Tk 217 million
in FY 2006-07 for this programme. In addition, in FY 2006-07, the allocation raised to Tk.
267 million by injecting Tk. 100 million in “Special Fund for the Employment of the
Hardcore Poor” administered by PKSF. To provide Credit Assistance to Small
Entrepreneurs in rural areas, Government also increased the allocation in FY 2006-07 to
Tk. 150 million by a further allocation of Tk 100 million.
(c) Refinance Scheme for Small and Medium Enterprises: To help overcome the financial
constraints of this sector and induce the banks and other financial institutions to provide
credit facilities to the SME sector, particularly the small entrepreneurs, Bangladesh Bank
introduced a refinance scheme with a special fund of Taka 10 billion effective from May



01 2004. To encourage the banks and financial institutions to provide credit to the SMEs,
the Government introduced a Tk. 100 million Refinancing Scheme through Bangladesh
Bank. The World Bank and the Asian Development Bank (ADB) will provide US$ 10
million and US$ 30 million respectively to support this scheme. About 3000 SMEs have
received credit under this scheme. For the development of agro-product processing and
software industries, the Government allocated Tk 100 million to Equity Development
Fund in the revised budget of FY 2005-06. So far, 212 projects have been financed from
this Fund. This fund also enhanced to Tk 200 million in FY 2006-07 for this Fund. To
build up agro-based farm and industries, a credit support to the tune of Tk. 100 million
is allocated in the current fiscal year under the Agro-based Industries Assistance
Programme. In FY 2006-07, the allocation is Tk 150 million to this Programme. Initially,
only the small enterprises having fixed investment not exceeding Taka one million will
be entitled to have credit facilities up to Taka 0.5 million in individual cases under this
scheme. The participating banks and financial institutions will apply their own interest
rates on the loans made to the borrowers but Bangladesh Bank will charge Bank Rate
(currently it is 5%) to the lender banks and financial institutions under this scheme. Till
June 2005, a total number of 2681 enterprises have been financed by different banks and
financial institutions under this program. Critiques are saying that only participating
financial institutions are getting benefit from this scheme, final borrowers remain out of
any direct benefit. They are also saying that this program is also not taking account of
micro and small enterprises for special consideration.
(d) Credit Distribution Package: It has been announced by the SME Cell that 80% of total
resources available for SME would be allocated specially for small enterprises.
(e) Lead Bank: It has also been decided by the SME Cell that in the short run BASIC Bank
and BRAC Bank will be working together as lead banks and will be responsible for
distribution of the credit and venture capital fund. These two banks will closely work
with the previously mentioned Advisory Panel. Over the medium term, this responsibility
will devolve to the SME Foundation.
(f) SME Foundation: Asian Development Bank has expressed its interest to support the
government to set up a Small and Medium Enterprises (SME) Foundation as part of its
country assistance strategy. Some other development partners will support the SME
foundation and it can be an apex body for these industries. The SME is one of the Manila-
based lender’s priority sectors and the bank would ready to channel more fund if the
disbursement and utilisation of existing funds become faster. Over the medium term
and beyond (a time-frame of 18 or so months from now), the Government shall have to
form an SME Foundation as a pivotal platform for the delivery of all planning,
developmental, financing, awareness-raising, evaluation and advocacy services in the
name of all SME development as a crucially-important element of poverty alleviation.
The functions of the Foundation would be to provision one-window delivery of all
promotional and administrative facilities, including some resources needed for capacity
building in appropriate industry association(s) for SMEs in the country.


Alam & Ullah

Conclusion and Recommendations
Conclusion
As the experiences of SME finance in Bangladesh suggest, there is critical need for putting in
place a credit delivery system that evaluates the credit worthiness of borrowers, on a basis
other than fixed asset ownership. The evaluation may require examining transaction records
of the borrowers, assessing the value of movable assets etc. There will also be the need for
enhanced post disbursement monitoring. An effective SME finance policy will have to cover
such enhanced cost of credit administration. In addition to credit guarantee or refinancing
facility there will have to be adequate rediscount facility for the primary lender to
accommodate these costs. Such credit line also needs to be made available to non-bank
institutions such as the NGOs. The financing scheme should also include special provisions
for women entrepreneurs. Indeed, the Implementation of appropriate policies and strategies
is a prerequisite to harness sustainable competitiveness of SMEs around the country.
Suggestive remarks have been stipulated in this write up. With that paradigm, proactive
policy is essential to enact them. The first step this regard is to make firm’s filly aware of the
competitive challenges they have to face. The next step is to help SMEs prepare to meet the
challenge by understanding their strengths and weaknesses and providing the inputs they
need to help them upgrade. The main inputs are finance, market information, training,
infrastructure development, R&D, management tools, technology, skills and links with
institutions for support services.
Recommendations
(1) Uniform Definition of SMEs: There should be a consensus on developing a uniform
definition of each category of SMEs with generic classification around the country. It
should be given standard industrial code (SIC). Without uniform definition, formulation
policy and its implementation are not possible.
(2) Seed Money, Leasing, Venture Capital and Investment Funding: There is a need for
improving different aspects of financial services of SMEs, such as seed money, leasing,
venture capital and investment funding. There is a lack of long-term loans; interest rates
are high, Guarantee/Security issues, exchange risks etc. All these limit the development
of SMEs. Finance, both short and long term, should be provided at market cost of capital.
Fund should be made available through encouragement for setting up ‘Venture Capital’
organization in Bangladesh. The concept of venture capital (VC) has successfully
operating in the USA, EU countries, and Canada.
(3) Establishment of Small Business Investment and Lending Corporation (SBILC): We
should start with ‘something effective’ for industrial development in general and the
SMEs sector in particular. Such a step, for example, could be the establishment of a
separate Corporate body. That means a separate financing institution could be developed,
with joint ownership of the public and private sector. To make the proposed initiative
effective in achieving its goals, government may set up a Small Business Investment
and Lending Corporation (SBILC). The SBILC can be formed under Small Business



Investment and Lending Act passed through the Parliament. Under SBILC there may
have external and Internal Financing policies. Taken from the different countries
experiences the different types of financing policies and programme that can be
introduced through SBILC, is enumerated below:
s Low Doc Loan Programme, which may allows small business to use a simple one-
page application for loans up to Tk.50,000; loans between Tk. 50,000 and Tk. 1,00,000
may require the one-page application plus personal tax returns for three years and
a personal financial statement from entrepreneur.
s Direct loans, this type of loan may be provided directly to the small business with
public funds and no participation. The interest rate charged on direct loans depends
on the cost of money to the government and it changes as general interest rates
fluctuate. It can be limited to a fixed ceiling.
s Immediate participation loan, can be made from a pool of public funds and private loans.
s Guaranteed loan. When private lenders extend loans to small businesses, SBILC in
those cases can provide guarantee for repayment in case the borrower defaults on
the loan, which may be given for a defined amount of loan and up to certain
percentage e.g., 80% or 75% of loans.
s Seasonal line of credit programme, may be offered for short –term capital to growing
companies needing to finance seasonal buildups of inventory or accounts receivable.
The maturity period cannot be exceed 12 months and the company must repay it
form cash flow. Accounts receivables and inventory can be collateral for the loan.
s Contract loan programme, is another short-term loan guarantee, but it is designed
to finance the cost of labour and mater9ials needed to perform a contract. Maturity
times are up to 18 months.
s Export working capital programme. Under this prgramme the SBILC may give
guarantee 90 percent of bank credit line up to a certain limit. In such case Loan
proceeds must be used to financee small business exports.
s Disaster Loans. As their name implies, disaster loans can be provided to small
businesses devastated by some king of financial or physical losses (such as
tremendous flood, earthquakes). Disaster loan may carry below-market interest rates.
s Greenline revolving line of credit programme. Greenline programme can be designed
to increase small companies’ access to working capital by providing them with
revolving lines of credit. It can be different than traditional loans, which may require
fixed monthly payments; the Greenline programme may employ highly flexible
revolving loans, in which cash-hungry small businesses able to draw on a credit line
only when they need the money. This loan prgramme can be designed to provide
short-term credit to allow small businesses to finance the sale of their products and
services until they can collect payment for them.
s Loan for Small business innovation research programme. This types of loan can be
designed under three different phases. Phase I grants, which determine the feasibility
of a technology or product run up to 6 months. Phase II grants, to be designed for
development of concept into a specific technology or product run up to 24 months.


Alam & Ullah

Phase III is the commercialization phase, in which the company should pursue
commercial applications of the research and development conducted in phase II
and I and must use private funding to bring a product to market.
s Loan for small business technology transfer programme. The Small business
Technology Transfer programme (STTP) may complements the Small business
Innovation Research (SBIR) programme. SBIR may focuses on developing
commercially promising ideas which originate in small businesses, STTP may allow
small companies to exploit a vast new reservoir of commercially promising ideas
which originate in universities govt. funded R&D centers and other institutions like
BISCIR. Researchers at these institutions can join forces with small businesses and
can spin off commercially promising ideas while remaining employed at their
research institutions.
(4) Internal methods of financing SMEs: Small business owners should not rely solely on
financial institutions and government agencies for capital. Instead, the business itself
has the capacity to generate capital. This type of financing, called bootstrap financing,
is available to virtually every small business and encompasses factoring, leasing rather
than purchasing equipment, using credit cards, and managing the business frugally.
Another source of financing could be raising fund from share market by flotation of IPO
by SME under ‘Group IPO Scheme (GIPS)’. In the case of GIPS, a group of SME would
utilize their assets for issuance of public shares to be managed by an independent agency.
(5) Seeking International Financing: Various international donor agency/bank extends
financing to SMEs through National Development Financing Institutions (NDFIs). It is found
that they are not explored properly. The procedure of those donor agencies/banks for loan
facilities to SMEs through NDFIs may be reviewed and term and conditions may be
examined in order to make international financing more accessible to SMEs in the country.
(6) The Role of Donors, particularly IDB: Donors, particularly IDB, may come forward to
assist the financial institutions in alleviating the constraints faced by SMEs, primarily
the access to credit and capacity building. Funding support in the form of grant may be
sought from IDB for Technical Assistance and Consulting Services for products and skill
development for the SMEs. In this area, BSCIC may also be involved for providing
promotional and technical support services to the SMEs with funding support of IDB.
(7) Assistance for SMEs from Board of Investments and Export Development Centres:
Public sector agencies like Board of Investments and Export Development Centres can
also provide useful information to SMEs. They can provide necessary information about
trade fairs in member countries as well as training in organization of exhibitions. They
can identify foreign buyers and assist local SMEs in establishing contacts with them.
Information on changing demand conditions in various international markets can be
pro vided and advisory services on exploring trade opportunities can be provided to
prospective exporters.



(8) Periodical Professional Training Courses for SMEs & for Entrepreneurship
Development: Periodical professional training courses should be arranged for technical
staff of SMEs. Moreover training in management of small enterprises and efficient
marketing can also provided. Islamic Chamber regularly organizes training workshops
on management, marketing, procurement of technologies, quality control system and
financing of SMEs, for the benefit of representatives of private enterprises and staff of
member chambers in different regions of the Islamic World. Training programme/
workshop should be organized for the development of SMEs capabilities to acquire
enhanced knowledge and skills about how to choose, use and improve technology. At
present, no such institution exists except a project of the BSCIC called ‘SCITI (Small and
Cottage Industries Training Institute). IAT, BUET has conducted total eight training
programs for the light engineering industries during last several years. Training on
different aspects of SMEs activities for entrepreneurs is crucial for the development of
an entrepreneurial
(9) BSCIC to be reorganized: Most entrepreneurs and businessmen express their
dissatisfaction about BSCIC. BSCIC fails to provide needed services to the small industries
due to manifold reasons; primarily due to its unorganized management. BSCIC has to
be reorganized so that enacted policy for SMEs can be implemented to help grow small
industries in the country in a better manner. Alternatively, a separate organization such
as Small and Medium Enterprise Development Authority (SMEDA) may be established
to act as a one-stop consultancy Agency to: (a) act as a body for facilitating policy making
for SMEs, (b) provide and facilitate support services for SMEs, (c) act as a resource base
for the SMEs, and (d) represent SMEs on domestic and international forums. The authority
may be state supported, private or jointly supported organization.
(10) Developing Institutional Network through Public-Private Partnership: The design of
most government agencies appears to be overly bureaucratic and unsuitable for
effectively supporting SMEs in Bangladesh. As such, re-organization of the design of
these agencies has for long been overdue. Public-private sector partnership, by
redesigning the existing public agencies, could be developed, developing appropriate
institutional network. The objective behind this would be to utilize the strengths of public
and private agencies, while neutralizing the limitations, if any, inherent in their existing
organizational design.
(11) Establishment of R&D Institute for Enterprise and Entrepreneurship Development,
Training and Research Institute: In a country like Bangladesh, where entrepreneurial
initiative is rare and shy, a separate institute for enterprise and entrepreneurship
development, training and research should be developed. To make it a ‘centre of
excellence’ in SMEs development, it should be designed, involving educational
institutions, business associations, relevant government bodies, private research agencies,
and individual consultants having experience in SMEs development.
(12) Implementation and Monitoring of Policy Measures for SMEs: Only policy prescription
is not the end, if it is not implemented through different measures timely and properly.


Alam & Ullah

How far policy measures are implemented, along with, what effect - desired or not -
such policy measures has had on the development of SMEs should also be monitored
from time to time. This monitoring will provide feedback for taking corrective actions, if
necessary, to ensure desired effect of the policy adopted. Of course, onus has to be on
BSCIC or alternately an independent body can be assigned to do the monitoring of
implementation of the policy measures, and possible impact.Ì
References
Ahmed, M. U. (2001), “Globalization and Competitiveness of Bangladesh’s Small scale Industries ( SSIs): An Analysis of the
Prospects and Challenges,” in R. Sobhan et al. (eds.), Bangladesh Facing the Challenges of Globalization, (Dhaka: Centre
for Policy Dialogue & University Press Ltd.).
Ahmed, M. U. (1999), “Development of Small-scale Industries in Bangladesh in the New Millennium: Challenges and
Opportunities,” Asian Affairs, 21(1), Jan-March.
ADB (Asian Development Bank) (2001), High Level Workshop on Strategic Issues and Potential Response Initiatives in the Finance,
Industry and Trade Sector (Dhaka: ADB; November).
ADB (Asian Development Bank) (2002), Bangladesh: Strategic Issues and Potential Response- Small and Medium Enterprise Development
and Export Expansion (Dhaka: ADB).
Bakht, Z. (1988), “Jobs Opportunities and Business Support (JOBS) Programme: Growth potentials of Small and Medium
Enterprises: A Review of Eight Sub-Sectors in Bangladesh,” (Dhaka: Bangladesh Institute of Development Studies;
mimeographed; JOBS Sub-sector Study).
BBS (Bangladesh Bureau of Statistics) (1997) Report of the Census of Manufacturing Industries (Dhaka: BBS).
BBS (Bangladesh Bureau of Statistics) (2004), Report of the Census of Manufacturing Industries (Dhaka: BBS).
Hossain, N. (1998), Job Opportunities and Business Support (JOBS) Program: Institutional Reform and the Informal Sector (IRIS)
(Maryland, USA: University of Maryland at College Park; October).
Miah, M. A. (forthcoming), “Survey on Entrepreneur Development for Competitive SMEs: Bangladesh” (Dhaka: Ministry of
Industries, and Government of Bangladesh; November 28, 2005).
Rajapatirana, S. (1997), From the Local to the Global Market: The Challenges for Small and Medium Sized Enterprises (Washington,
D.C.: The World Bank).
Rashid, L. (n.d.), “Conducive Regulatory Environment in Bangladesh: Bridging the Gap between Micro and SME Finance,”
Internet version.
SEDF (Small Enterprise Development Facilities)/World Bank (2003), “The SME Sector: Taking Stock of the Present Situation,”
Dhaka: SEDF/World Bank; mimeographed).
United Nations (2004), Promoting Business and Technology Incubation for Improved Competitiveness of Small and Medium-sized Industries
through Application of Modern and Efficient Technologies (New York: United Nations Publication).
USAID (United States Agency for International Development) (2001), Bangladesh Enterprise Development Assessment Report,
Vol. 1 (Dhaka: USAID).
GOB (Government of Bangladesh) (2003 to 2006), Budget Speeches 2003-04, 2004-05, 2005-06, 2006-07(Dhaka: Ministry of
Finance, GOB).
The Business Bangladesh (a monthly English magazine of Bangladesh), Vol. 3, Issue 9, June 2006.
The New Nation (a national daily English newspaper of Bangladesh), June 7, 2005.
The Bangladesh Observer (a national daily English newspaper of Bangladesh), December 26, 2005.


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