Facilitating cottage, micro, small and medium enterprises in the pandemic

Cottage, micro, small and medium enterprises (CMSMEs) in Bangladesh are having an increasingly challenging time under the COVID-19 pandemic. 94 per cent of enterprises experienced a significant loss of sales in 2020, with a 49 per cent decrease in sales on average for micro-enterprises. This is likely to decline further in 2021. The struggle for survival is not new for CMSMEs. These enterprises operate on slim margins (IFC, 2020), have a high dependence on the supply chain, and face cash-flow issues. The pandemic has aggravated these problems.

Furthermore, they face low customer demand, business closure due to state lockdown policies, and reduced opportunities to meet new clients. CMSMEs account for about 99 per cent of all business units in Bangladesh. Studies mention that 99 per cent of about 7.7 million CMSMEs in the country are in distress, failing to pay wages to workers and struggling with the impact of the economic slowdown caused by the COVID-19 outbreak.

STIMULUS PACKAGES AND DISBURSEMENTS: The government announced stimulus packages in different categories for industries to recover from the economic crisis caused by the pandemic outbreak. These include a package of USD 3.55 billion for large-scale industries and services sector, a package of USD 2.37 billion and an additional package of USD 35.5 million for CMSMEs, a package of USD 1.51 billion for export-oriented industries, a package of USD 591 million for farmers and a package of USD 355 million for people of low-income groups. Due to the slow disbursement of working capital loans for the CMSME sector initially, the government introduced a credit guarantee scheme of USD 236 million to encourage banks to extend loans to CMSMEs.

However, financial service providers disbursed only 60 per cent of the CMSME package until January 2021 and 75 per cent until May 2021. The finance ministry noted that only 10.8 per cent of this went to low-income farmers, and cottage and micro enterprises. Bangladesh Bank data indicate that of the USD 1.78 billion earmarked for the CMSMEs, the largest share has gone to small and medium enterprises engaged in manufacturing and service, with very few cottage and small enterprises in manufacturing or trading receiving these loans.

The wellbeing of CMSMEs is vital for socio-economic development both at the national and enterprise level. CMSMEs together account for 80 per cent of industrial employment. Their contribution to the GDP is said to be 25 per cent , and their export contribution is said to be 75 per cent. CMSMEs impact Bangladesh's national strategic plans such as Vision 2021 (based on the Perspective Plan 2010-2021) and Vision 2041 (the Perspective Plan of Bangladesh 2021-2041, which seeks to eliminate extreme poverty, reach the upper-middle-income country status by 2030). COVID-19's impact on CMSME might also adversely affect the country's graduation from the least developed country to the status of a developing country. This is scheduled to happen in 2026 according to the government.

STAKEHOLDERS NEED TO TAKE A MORE STRATEGIC VIEW OF CMSMES: Lenders' inability to serve all CMSME's is a symptom, not the root problem per se. Many CMSMEs cannot meet bank requirements and are unwilling to apply for the package because of the lengthy process. A survey by the Dhaka Chamber of Commerce and Industry (DCCI) earlier found that 59 per cent of the CMSMEs found the disbursement process complex, and 18 per cent of them were still unbanked, while many said that the loan amount is insufficient.

This is not all. The trade licensing and licence renewal is a lengthy process that CMSMEs do not want to go through as the opportunity costs are high. Formalisation of CMSMEs has perils too - many CMSMEs still do not want to be account for value added tax (VAT). Is there a way that will promote the formalisation of CMSMEs? Some initial thoughts could include a more straightforward registration and renewal process, with increased ceilings to counter the additional burden of taxes.

FORMALISATION ALONE WILL NOT HELP CMSMES:  Bangladesh must develop strategies to promote and enhance entrepreneurship at the grassroots. These may include incentives for digital adoption where agent banking and mobile money providers offer cash incentives for business transactions of CMSMEs. Digital literacy and awareness campaigns are designed for CMSMEs through the network of Union Digital Centers (UDCs). The role of Microfinance institutions (MFIs) to support CMSME entrepreneurs needs to be formalised. MFIs can emerge as a viable alternative to fund MSMEs due to their vast network across Bangladesh and experience in handling high-volume, low-value portfolios.  MFIs in the country serve 32.34 million CMSMEs already. If the government channelled the relief funds directly via MFIs - many more CMSMEs would have received support during these times of distress.

Similarly, data disaggregated by gender and geography -- for example, any data that allows comparison between women and men CMSMEs, or comparison between CMSMEs in Sylhet and Rajshahi -- could inform and enhance policy-making to support CMSMEs. 

CATEGORISATION OF CMSMES: The most important and strategic step, however, will be to refine the categorisation of CMSMEs for improved targeting.  The current bundling of CMSMEs includes medium enterprises, which often take the form of large factories. A smaller, well-defined group of the cottage, micro, and small enterprises can help the government provide better-targeted support. For example, New Zealand has a specific Small Business Strategy catered toward enterprises with 20 or fewer employees.

The definition of small enterprise in Bangladesh is not drastically different from that of New Zealand. Still, the fundamental contrast is that there isn't a policy specifically for small businesses. Also acknowledged by the  Industries Minister of Bangladesh, the definition of medium enterprises needs to evolve for the betterment of CMSMEs and 7.8 million Bangladeshis who are directly and indirectly linked to CMSMEs.

Anik Muntasir Chowdhury and Akhand Tiwari are international financial inclusion consultants from MSC, a boutique consulting company that works on financial, social, and economic inclusion. [email protected] and [email protected]