SME Policy on the anvil: Addressing finance, information, training, marketing issues

The contribution of Small and Medium-sized Enterprises (SMEs) to the economy is well known. According to Bangladesh Bank, SMEs account for about 45 per cent of manufacturing value addition, about 80 per cent of industrial employment, around 90 per cent of total industrial units and 25 per cent of labour force. The contribution of SMEs to export earnings varies from 75 per cent to 80 per cent. It is evident that the SME sector is very important for our economy. But some constraints seem to be holding it back from reaching the optimal level.

As per the Economic Census of 2013, the total number of enterprises in the country was 7.80 million of which 11 per cent were SMEs. The 2003 Private Sector Survey estimated that there were six million enterprises, including micro, small and medium. Each of these had workforce with fewer than 100 employees. About 60 to 65 per cent of all SMEs are located outside the metropolitan areas of Dhaka and Chattogram. As they provide employment to people in these areas, SMEs are contributing to regional development and balancing industrialisation. SMEs can also reduce urban migration to the capital and other major cities, increase cash flow in rural areas, and thereby enhance the standard of living of the rural people. These organisations can play a major role in bridging the urban-rural income gap and contribute towards inclusive growth.

The Bangladesh government has taken various initiatives to help the SME sector. Some lead organisations have been set up to monitor and accelerate the activities of SMEs. Bangladesh Small and Cottage Industries Corporation (BSCIC) is one of the focal government organisations. It is playing a very important role in speeding up industrial growth through promotion and extension of small and cottage industries. Additionally, a SME development cell has been set up in the Ministry of Industries to look after the policy and other related activities and problems of SMEs. Meanwhile, SME Foundation has identified 171 clusters of SMEs in different regions of Bangladesh. Alongside a number of training institutes, non-governmental organisations (NGOs) are also working to help SMEs.

Still small entrepreneurs continue to face problems related to finance, information, training and marketing.

The government has been working on a SME Policy. Business Initiative Leading Development (BUILD) is involved in this initiative. A number of meetings have already been held with concerned stakeholders to address the issues faced by SMEs.

A Need Assessment Workshop, organised in joint collaboration between the BSCIC and BUILD under the PRISM (Poverty Reduction through Inclusive and Sustainable Markets) project of European Union, was held to identify problems at the core.

* TECHNOLOGY: One of the areas where SMEs are lagging behind is technology. In most of the cases, SMEs preserve their customer data in email and spreadsheets. These can be lost through power failures, human errors or system disruption. SMEs can take steps to scale up their technological resources to ensure future growth. Better communication technology and payment management software to support flexible workforce are important for SMEs. The trend towards global market orientation and trade liberalisation are likely to force SMEs to implement quality systems. To sustain competitiveness, SMEs can embrace quality management techniques efficiently, as large organisations need assurance of high quality goods and services from SMEs.

* LOGISTICS: In recent times, there has been a surge in the demand of some Bangladesh products like silk sarees, jute-based handicraft items and more in foreign countries. SMEs can exploit this growing demand. In the local market, small entrepreneurs take the help of courier services to send goods after receiving orders through F-commerce. But for overseas customers, shipment by air is 40-60 per cent more costly. BUILD believes that an Express Shipment Delivery can be beneficial in this case. It can take advantage of the Bangladesh-Bhutan-India-Nepal Motor Vehicles Agreement (BBIN MVA). Courier support is not reliable as the Courier Service Policy of Bangladesh is not updated. Also, SMEs are not familiar with payment gateway systems. They can only advertise their products through their websites. Otherwise they have to depend on intermediaries and bear additional cost. The situation is likely to improve as Bangladesh Bank is working on a payment gateway system.

Some sector-specific issues also came up in the Need Assessment Workshop. In case of exporting handicraft products, a single quality standard needs to be maintained. But the sector does not have a specific HS (Harmonised System) code. A Handicraft Policy 2015 has been prepared. But it is yet to be implemented. There is no design or development institution for handicrafts in Bangladesh though this sector mainly depends on diversified design and quality. The marketing expenditure for SMEs, especially for handicraft products, is high as they have to visit international markets to export their products individually without specific support which are being enjoyed mostly by the large entrepreneurs. Some stakeholders feel that the government should bear at least 80 per cent of expenditure for SMEs that need to visit the international market for the first time. But this has not been included in the Handicraft Policy. Also, the existing cash incentives for handicrafts can be increased from present 20 per cent to 30 per cent. This will boost exports.

* TRAINING: There is no mechanism through which experts can be engaged in the handicrafts sector to develop master craftsmen. At the moment, only left over raw materials from large industries are being used by some handicraft producers to make beautiful aesthetic products. More training and engagement of master craftsmen can ensure better quality in these products and lead to higher revenue.

* MARKETING: There is ample scope for value-addition in jute-based product manufacture by some SMEs. Problems are unique in this sector, as most owners and managers of most of these SMEs do not know how to communicate with buyers and connect with the corporate world. They lack basic marketing skills and tools. For example, corporate gift items made from jute is enjoying a high demand in the country now. But local producers are facing competition within the country from Chinese products.

* INNOVATION: Product and service innovation is a must for the SME sector of the country. Unfortunately, the sector lacks innovative personnel and processes. Strong R&D is required along with skill development for this purpose.

* FINANCIAL SUPPORT: Most SMEs face a perpetual problem with finances as bankers do not want to finance small entrepreneurs. Despite Bangladesh Bank's provision of collateral free loan of up to Tk 2.50 million for women entrepreneurs, women-owned businesses still face severe challenges in getting loans. Other challenges faced by them are short grace period for repaying the loan and short tenure to repay the loan (the repaying time for loan against working capital is one year and two-three years against machineries).

For female entrepreneurs, banks usually want two to three guarantors. One guarantor is sought from the immediate family of the finance seeker. This can be the husband, father or brother of the entrepreneur. The remaining two guarantors can be from the business itself or otherwise. Getting such guarantors is a big challenge and can be quite complex for many small entrepreneurs. But there have been successful cases also, as some entrepreneurs have received collateral-free loans from banks like Janata bank, MIDAS, Eastern bank etc. BRAC Bank has been a pioneer in providing collateral-free loans to SMEs. The bank provides loan of upto Tk 10 million. When looking for guarantors, BRAC bank tries to understand the familiarity of the product that will be made. High interest rates, bureaucratic hassles, cumbersome documentation process, loan processing fees and lengthy processes are other areas that need to be addressed.

It has also been noted that the time taken to procure raw materials is extremely high. This often delays the timely delivery of products. Better storage facilities can be set up in every division to help the entrepreneurs. Jute Diversification Promotion Centre (JDPC) has come forward in this regard. But the organisation is not big enough to meet the demand of the entire SME sector of the country.

Additionally, tariff on some locally-manufactured products is at times much more than imported products. For example, the tariff on boiler is 40 per cent. But importing it into the country as capital machinery is only one per cent.

TECHNOLOGY ROADMAP: A Technology Roadmap needs to be prepared, based on the sector-wise demand. Use of technology can be increased to enhance product quality alongside innovation. In this respect, the SME Foundation has documented the technology required for light engineering sector. They have a booklet available in the website for the sector. Similar steps can be taken for all the different sub-sectors that fall under SMEs, as well.

As far as marketing is concerned, there exists a big information gap. Entrepreneurs are not aware of the need of the corporate buyers. This gap needs to be closed through better communication between the different stakeholders.

In case of bank loans, besides fixed assets other assets such as patent, intellectual property etc can be considered as collaterals by bank.

More trainings and awareness programmes can help SMEs further.

The issue of refinancing was one of the biggest challenges in the SME sector. Although Bangladesh Bank has several refinancing schemes, scheduled banks do not seem very keen to be involved in these schemes as they have to bear all the risks associated with it. A separate meeting with all the Scheduled Banks and Bangladesh Bank to discuss this problem has been recommended. Increasing the loan payment period while keeping the interest rate at the same level, was another suggestion.

Bangladesh Bank has identified 35 sectors for cash incentives. But bureaucracy in the banks is not helping the entrepreneurs of these sectors. The paperwork and processes can be simplified to help the entrepreneurs.

If the government wants to help and acknowledge SMEs as a job-creating engine, policy support would need to become more practical, based on practical needs of the sector.

Ferdaus Ara Begum is Chief Executive Officer of Business Initiative Leading Development (BUILD).

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