The document discusses the critical role of small and medium enterprises (SMEs) in economic development and the various obstacles they face, particularly in accessing finance and technology. It highlights the bias of financial institutions towards larger corporations and the need for government intervention to support SMEs through appropriate policies and frameworks. The text emphasizes that overcoming the challenges related to financing and technological advancement is essential for the growth of SMEs, particularly in developing countries like Bangladesh.

1.  Monday, February 5, 2018
https://dailyasianage.com/news/107019/technology-and-finance-for-sme
Technology and finance for SME
M S Siddiqui
Industrialization is historically is the driver of economic development and industrialization use to
support other sectors of the economy. Again industrialization starts with Small and Medium
Enterprise (SME). It create base for high tech and high production industrialization.
When countries are catching up, this consists mainly in problem-solving capabilities that enable
industrial units to improve their productivity and to imitate and adapt products. When countries are
keeping up, technological upgrading within the firm and continuous improvements in product quality
become crucial in order not to lose recently gained competitive advantages. Finally, when countries
are getting ahead, the capability to design and develop new products and processes becomes vital,
on the basis of both R&D and continuous innovation efforts.
The finance and especially medium to long-term finance, is topmost obstacle to growth and
investment of SME apart from technology. Finance has been identified in many business surveys as
the most important factor determining the survival and growth of SMEs in both developing and
developed countries.
These obstacles come at both macroeconomic and microeconomic levels. At these two
environments pose challenges are: unstable economic condition and volatile unstable exchange
rates and legal, regulatory and administrative environment poses major obstacles to access of SMEs
to financing.
SMEs are regarded as high-risk borrowers because of insufficient assets and low capitalization,
vulnerability to market fluctuations and high rates of failure of business. The information asymmetry
arising from SMEs' informal business plan, lack of accounting records, inadequate financial
statements makes it difficult for FIs to assess the creditworthiness of potential SME proposals.
The high administrative and transaction costs of lending or investing small amounts as well as
monitoring of loan operation do not make SME financing a profitable business. FIs are generally
biased towards large corporate borrowers, which provide better business plans, more reliable
financial information, better chances of success and higher profitability for the banks and have credit
ratings.
The property rights regimes may not allow ownership of land, markets for transfer of immovable
assets may be very underdeveloped, lack of credit and collateral legislation may not allow certain
assets that SMEs commonly have access as collateral for loans.
The absence of registries for mortgages and pledges may increase risks to FIs, contract
enforcement and asset liquidation may be hampered due to weaknesses in legislation and lengthy
judicial process of settlement of litigation. FIs also reluctant to accept other collaterals such as
supply order, receivables, future acquired property etc.

2. The state policy always favor SMEs and Central Banks usually instruct FIs to finance SMEs and
even at a lower interest rate but in contrast FIs do lend to SMEs, they tend to charge them a
premium for assuming risk and apply tougher screening measures, thus driving up costs on all sides.
They usually keep the interest rate same but impose very high service charges to cover up
additional expenses.
It is more interesting those FIs in developing countries and often prefers to lend to the government
and thus the public sector crowds out the private sector. Lastly, there is also the problem of insider
lending and/or cronyism, which diverts finance away from SMEs.
To encourage commercial banks to lend to SMEs Central banks and designated financial service
and play a proactive role. Government and the central bank set out a policy framework for
channeling adequate funds to the SME sector.
The government intervention to assist SMEs is based on the fact that numerous market failures
prevent domestic enterprises from building capabilities because they cannot access finance,
information, technology and markets. Specific policies, programs and appropriate institutional
frameworks are needed to help SMEs overcome these failures.
Bangladesh Bank (BB) has given top priority for development of SMEs and a new department
namely 'SME and Special Programs Department' has been established in Bangladesh Bank recently
has given sole responsibility for policy formulation, facilitating fund, monitoring and development of
entrepreneurship in the SME sector. According to policy FIs will disburse loan following the 'Area
Approach Method' banks/financial institutions will try to attain their indicative targets separately by
dividing it as branch wise, region wise and sector wise. Priority shall be given to small entrepreneurs
and woman Entrepreneurs.
Each FIs shall establish a separate 'Women Entrepreneurs' Dedicated Desk' with necessary and
suitable manpower, provide them training on SME financing and suitably appoint a lady officer as
chief of dedicated desk.Moreover, banks must set aside for SMEs 20 percent of the loans they give
out in 2017 and raise it to 25 percent by 2021. Of that for SMEs, at least 50 percent has to be kept
for cottage, micro and small enterprises. It is clearly specifying the right direction of Central Bank to
develop SMEs in Bangladesh in line with proven successful policy of other countries. FIs are not
very keen to abide by the direction and demand of the market. The policy and market mechanism
are not successful in case of development of SME.
These policy supports are not sufficient as post cases FIs don't provide loan to SMEs and other
support new and inexperienced entrepreneurs. Government may also look in to other areas of
supports. These are legal and regulatory frameworks, governance issues, such as bureaucracy and
corruption, access to finance and property rights. Interventions on all fronts are required.
This market or government failure and is closely related to the capacity of the stakeholders involved.
To overcome the failures in the business environment may require adopting selective intervention
approaches rather than market friendly approaches, as market forces may not be sufficient to
remedy the capacity deficits in the system. The choices made will be political, but should be based
on sound analyses.
SME development strategies will necessarily be country and context specific. The recent innovations
in developed countries to improve SMEs' access to credit can provide valuable insights for
developing country banks to become more SME-oriented and to increase the volume and the quality
of their services to this sector.

3. Each country will have its own challenges, opportunities and priorities for change. Resources
available for implementation will vary by country, so that results achieved will also be different.
Although the business environment in developing countries and developed countries differs in many
respects, the problems of servicing SME customers are similar, namely high perceived risk,
problems with information asymmetry and high administrative costs.
For example, in the 1980s and most of the 1990s, enterprise policy in European countries focused
on employment creation, and initiatives supporting new business creation were prominent. Then,
emphasis changed to one of achieving international competitiveness and programs encouraging
business growth, support for technology based businesses and creation of an enterprise culture
within the society started to gain in importance.
An effective policy framework for SMEs should begin with stocktaking to identify real constraints and
possible solutions.The assessment of creditworthiness and monitoring may be overcome by FIs
themselves with certain policies and improvement of human capital through identifying potential
clients, ascertain their creditworthiness, disseminate adequate financial and accounting techniques,
pre-screen project proposals, monitor repayment, exert peer pressure, and maintain one-to-one
contacts during the entire payback period.
On the part of policy makers may take pragmatic policy to overcome other limitation of the
entrepreneurs. At present manufacturing has become extremely complex and knowledge-intensive
as all the sectors need support of R&D, software, design, engineering, training, marketing and
management come to play a greater role in the production of goods and services.
These updated services use to lead the development of a competitive national production capacity in
many first tier and second tier newly industrialized economies (NIEs). In a liberalized and open
economy, competitiveness increasingly depends on the ability to incorporate new technology and
management practices.
NIEs are successful examples of export-led growth based on traditional industries. Initially focused
on the manufacturing of clothing and textiles, leather and footwear, plastics and toys, they have
switched to the "low-technology side of the high-technology industries", and some are now leading
exporters of technology in the Information and Communication technology (ICT).
Bangladesh is successful in garments sector primarily without policy support but government came
with some policy support such as Bonded warehouse and Back to Back Letter of credit for import of
raw materials from other countries. The growth of export of garment is allowing down as Bangladesh
only produce low cost garment and "experts" suggesting entrepreneurs to go for high value garment
without policy support. Bangladesh needs technology and development of own brands for overseas
market.
The overseas investment is the better process or excess to technology but local entrepreneur are
against the overseas investment in garment sector. Again in order to develop own brands,
entrepreneurs need overseas investment but overseas investment is restricted. Both policy and
decision of government and entrepreneurs are not really in favor of further development of high
value garments industries.
Government still is not very keen to provide such Bond facility to other sectors due to limitation of
progressive ideas. All the possible sectors should be supported with Bond facilities until the customs
duty bring down to a tolerable level and or sign free trade agreement with different countries.
The overseas service recipients of ICT sector in west are not willing to take hassle of payment
through complicated banking channel but take advantage of high take service such as debit /credit

4. cart, PayPal etc. Government and policy makers are "afraid" of easy flow of foreign currency and
reluctant to allow local service providers to receive money against service export.
They are still ignorant that all payments are duly recorded in all such transactions and tracking down
to source is much more easy work than at present traditional transactions of foreign currencies. After
much persuasion, government has allowed limited and conditional inbound of payment through
PayPal but payment by debit /credit cards are still restricted.
Bangladesh may allow overseas investment and transfer of technology and set up on design centers
for footwear, plastics and toys, and other products. These sectors should be allowed bond license to
import raw materials and component in order to expand SMEs in those sectors. The experiences of
other countries may be replicate to acquire, diffuse and master technologies as well as innovate can
be achieved in many ways. The two major problems of SEMs - lack of technology and finance
should be immediately addressed in a pragmatic and customized method.
The writer is a legal economist