1. 1 Origin of the Report:
In recent days the Small and Medium Enterprise (SME) Financing has become animportant area for Commercial Banks in Bangladesh. To align its corporate policy withthe regulation of Central Bank, banks have become more concerned about SME andopened windows to conduct business in this particular area. This study has beenconducted to fulfill the requirements of sixth term MBM program and gain an insightabout the present condition of small and medium enterprise in the economy of Bangladesh and their financing scenario in light of Bangladesh Bank regulation. 1. 2 Background of the Study:
After Liberation of Bangladesh, intensive efforts were undertaken to accelerate the rate of industrialization in the country. At the beginning, import substitution and subsequentlyexport-led economic growth strategy was pursued for industrialization. In order to attainthis objective, large amount of industrial credit was funneled to the industrial sector. Butthe whole exercise of industrialization came to a halt with the massive diversion of resources to other non priority sectors. Policy makers, of late, have come to recognize thecontribution of SME sector towards economic development in the country. Small andmedium enterprises have been recognized as one of the most important means for providing better economic opportunities for the people of least developing countries likeBangladesh.
A developing economy like that of ours suffers from many peculiar problemssuch as disproportionate pressure of population on agriculture due to lack of ruralindustrialization, unemployment and underemployment of human and materialsresources, unbalanced regional development etc. The contribution of small and mediumenterprises in the solution of these problems is beyond doubt, provided they are organizedand run on scientific basis. Small and medium enterprises are particularly suitable for densely populated countrieslike Bangladesh where SME sector can provide employment with much lower investment per job provided. Out of 11% employment of the civilian labor force provided by themanufacturing sector, about two thirds are estimated to be provided by the small andcottage industries sector. Again, development of small industries facilitates the effectivemobilization of capital and labor resources. They also help in raising standards of living
of people in rural areas. Contribution of SME sector to GDP remained above 4% duringthe period from 1985-86 to 1999-00. Moreover, the present contribution of SME sector toGDP is approximately 5% and SME sector employs 25% of the total labor forces, thusthis sector is the present available sector for creation of jobs (Saha, Sujit R. 2007). Research papers developed by Bakht, Zaid (1998) and Ahmad, Salahuddin et al. (1998)described that the policy environment within which SMEs in Bangladesh operateaccompanies legal, regulatory and administrative constraints to employment creation bySMEs. The robustness of SME contributions to employment generation is a common phenomenon in most developing countries in that the magnitude varies between 70% to95% in Africa and 40% to 70% in the countries of the Asia-Pacific region (Ahmed, M. U. 1999). Liberalization of industrial and trade regimes along with globalization are likely to havehad significant effects on Bangladesh’s SMEs (Ahmed, 2002; Bhattacharya et. al., 2000).
Various recent studies (Ahmed, M. U. 2001, ADB 2001, USAID 2001) show that SMEshave undergone significant structural changes in terms of product composition, degree of capitalization and market penetration in order to adjust to changes in technology, marketdemand and market access brought by globalization and market liberalization. Theofficial data show that the share of private investment in Bangladesh’s GDP in the late1990s, which may be considered as the post-reform era, has remained more of lessconstant at around 15% (Bhattacharya, 2002). This may be interpreted as an evidence of stagnant private sector activities in the country. The recent private sector survey estimates the contribution of the micro, small, andmedium enterprises (MSMEs) is 20-25% of GDP (Daniels, 2003). While SMEs arecharacteristically highly diverse and heterogeneous, their traditional dominance is in afew industrial sub-sectors such as food, textiles and light engineering and wood, cane and bamboo products.
According to SEDF sources quoted from ADB (2003), food and textileunits including garments account for over 60% of the registered SMEs. Despite these contributions in the economy of the country, Banking sectors are notinterested in financing the small and medium enterprises; rather there is a decline in theamount of advances by the Banking sector. There are approximately 52 Banks operating in our country and all are serving large enterprises rather than SMEs though only thesmall enterprise’s contribution is 5% in GDP of Bangladesh in 2007. But why? What are the causes for which Banks are not interested in financing this sector? Fromrecent statistical data of Sonali Bank of Bangladesh, we see that the credit recovery rate is51. 44% in this sector. Why this recovery rate is not large enough? Why the SMEs arefailing to payback their credit to the lenders? We have tried to find out the answer of thesequestions in this research paper. 1. 3 Objectives of the Study:
Based on the above discussion the following objectives are set for the study :
To review the role of SMEs in the economy as well as current status of SMEsand their financing by Banks in Bangladesh.
To find out the reason why the Banks are not interested (problems) to financethe SMEs.
To review the present role of Regulatory Authorities in SME financing anddevelopment.
1. 4 Methodology of the Study:
The study was conducted mainly based on secondary information although someinformation relating to entrepreneurs have been collected primarily. The sources of datainclude Office Records, BIBM – Library, Different Research Paper regarding SMEs, Different Publications on SMEs of different banks and some websites. Sample banks of DNCBs, PCBs, and FCBs from the sample frame, was selected purposively considering the amount of loan size, interest rate, loan processing fees, periodof loans, mode of finance and management. Policies relating to SME financing such as fiscal policy, monetary policy and internal policies of commercial banks was examined thoroughly with a view to find out theinfluence of existing policies on SME financing. Trend and pattern of bank financing toSME was analyzed by classifying the financing in terms of areas, rate of interest, types, category, and banks. 1. 5 Limitations of the Study:
Since this research is only for academic purpose, there were some limitations in thisstudy. These are mentioned below: 1. Discussion about the Small and Medium Enterprises is a vast subject, but onlysome selected areas are covered in the research paper. 2. The study is basically based on secondary data. 3. Time was enough but it was not possible to give full concentration in this regarddue to continuous pressure from other courses. 1. 6 Organization of the Report:
This paper is divided into ten chapters. The first chapter is the introduction of the report. The second chapter focuses on the current status of SMEs in the economy. The thirdchapter explains the current status of SME financing by banks in Bangladesh. The fourthchapter explains why banks are not interested in financing the SMEs. The fifth chapter shows minimum requirements for SME financing according to Bangladesh Bank. Thesixth chapter contains prudential regulations for SME financing by Bangladesh Bank. Theseventh chapter shows guidelines by Bangladesh Bank for SME financing. The eighthchapter describes other developmental activities for SME financing. The ninth chapter explains constraints of SME financing. The last chapter contains the concluding remarksof the report.
Current Status of SMEs in the Economy
2. 1 Brief Macro-economic Review:
Bangladesh, mainly backed by the growth of manufacturing, construction and servicesector has achieved a year-upon-year GDP growth of 6. 51% in 2006-07, as comparedwith the 6. 63% in FY 2005-06, and 5. 38% in 2004-05. Per capita GDP recently surpassed$500. From 1% during the 1970s, growth rate of GDP per capita has ramped up to over 3% since the early 1990s and, since 2003-04, even higher, to 4 off percent. Growth has been more stable too; Bangladesh among the handful of countries that sustained positive per capita growth in each year since the early 1990s. This performance has beenunderpinned by rising agricultural and non-farm rural output and a rapid expansion inexport of readymade garments (RMG). Faster economic growth has helped Bangladesh to reduce the poverty rate by about 1(one) percentage point per year since 1990. Poverty fell from 60% in 1990 to 50% in2000. Although the latest poverty data are still being collected, proxy indicators suggestthat good progress on poverty reduction and social development has continued in recentyears. Many MDGs are also on track for being met. (World Bank 2005)
The rate of gross investment in GDP in 2007-07 is 24. 33%. The relative share of privatesector in gross investment, which has been growing secularly, is 18. 73% in 2006-07. Between 2005-06 and 2006-07, credit to the private sector grew by 11. 2%. The population growth rate averaged 1. 5% or so; the literacy rate has averaged at 62% duringthis decade. Growth rate of manufacturing output of Bangladesh is on an increasing trend. Manufacturing growth during 1992-96 averaged 8. 21%. In the next four years, thecorresponding growth averaged more than nine percent annually. Service sector grew atan average rate of 4. 9%, which is lower than that of industries (manufacturing) sector. The quantum index of SMEs has grown by 5. 4%. The export of readymade garments(RMG) both woven and knitwear has picked up a commendable mode of growth, whichearns over 76% export earnings
2. 2 Current Status of Small and Medium Enterprises in Bangladesh : The Small and Medium Enterprises worldwide are recognized as engines of economic growth. The commonly perceived merits often emphasized for their promotion especially in the developing countries like Bangladesh include their relatively high labor intensity, dependence on indigenous skills and technology, contributions to entrepreneurshipdevelopment and innovativeness and growth of industrial linkages. 2. 2. 1 Definition :
According to the latest circular of BANGLADESH BANK (Date – 26/05/2008), thedefinition of Small & Medium Enterprise sector is given below: Small Enterprises – Small enterprises refer to those enterprises which are not anyPublic Limited Companies and which fulfill the following criteria- Service Concern
Having an investment of Tk. 50, 000 to Tk. 50, 00, 000 excludingland & building and / or employing up to 25 workers.
– Having an investment of Tk. 50, 000 to Tk. 50, 00, 000 excludingland &
building and / or employing up to 25 workers.
– Having an investment of Tk. 50, 000 to Tk. 1, 50, 00, 000excluding land & building and / or employing up to 50 workers. Medium Enterprises
– Medium enterprises refer to those enterprises which are notany Public Limited Companies and which fulfill the following criteria- Service Concern
Having an investment of Tk. 50, 00, 000 to Tk. 10, 00, 00, 000excluding land & building and / or employing up to 50 workers.
– Having an investment of Tk. 50, 00, 000 to Tk. 10, 00, 00, 000excluding land & building and / or employing up to 50 workers.
– Having an investment of Tk. 1, 50, 00, 000 to Tk. 20, 00, 00, 000 excluding land & building and / or employing up to 150 workers. SMEs in Bangladesh are also defined for purposes of industrial policies by 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 manufacturingestablishments, and service establishments.
According to the Industrial policy 2005,
small and medium enterprises shall becategorized using the following definitions: a. Manufacturing enterprise:
– an enterprise should be treated as small if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures, supportutility, and associated technical services by way of capitalized costs (of turn keyconsultancy services, for example), etc, excluding land and building, were to be up to tk. 15 million; Medium enterprise –
an enterprise would be treated as medium if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures, support utility, and associated technical services by way of capitalized costs (such as turnkey consultancy services), etc, excluding land and building, were to be up to tk. 100million; b. Non-manufacturing enterprise:
– an enterprise should be treated as small if it has less than 25workers, in full time equivalents; Medium enterprise –
an enterprise would be treated as medium if it has between 25and 100 employees. 2. 2. 2 Overview of the SMEs in the economy of our country: There is a great interest in small and medium enterprises (SME) as a major plank of poverty reduction in Bangladesh. The government has formulated a comprehensiveindustrial policy 2005 by putting special emphasis for developing SMEs as a thrust sector for balanced and sustainable industrial development in the country to help deal with thechallenges of free Market economy and globalization. Some data with a national scope that are pertinent to characterizing SMEs in Bangladeshas of 2001-2003 are presented in Table – 1. The highlight of this table is the following: There are some 78, 440 private sector establishments of various sizes in Bangladesh withsome 3. 5 million workers employed in them. The urban Bangladesh accounts for some
60% of units and 76% of employment in the private-sector enterprises. Rural Bangladeshaccounts for the rest. 93% of all units in Bangladesh belong in the SME category, i. e. have between 20 and 99 employees. However, SMEs account for only 44% of the totalemployment of the enterprise sector. Private companies limited by liability account for strictly a very small proportion of thetotal number of SMEs in Bangladesh. Table – 1: Number of units and levels of employment in small and medium enterprises, 2001-03
(All numbers are in thousands)
Source: BBS Census of Enterprises, 2001/2003.
Table – 2 shows the average employment per establishment within each of the small andmedium classes for urban and rural Bangladesh in 2001/2003. The following results areworth highlighting. Let it be noted that these are weighted averages. First, the average employments per establishment for small establishments have values of between 17 and 20 workers across all industries. We find a similar a narrow range of between 65-69 employees for average employment size for medium enterprise. Table – 2: Average head-count per establishment across Bangladesh’s industries, 2001-03 8