Is it another losing bet?

Four years after its launch, Bangladesh's dedicated stock market board for small and medium enterprises (SMEs) is floundering-raising questions about the effectiveness of its regulatory design and the country's broader commitment to nurturing its entrepreneurial base.

The SME Board of the Dhaka Stock Exchange (DSE), introduced in 2021 with fanfare, was intended to offer small manufacturers and startups an alternative financing channel to bank loans.

But with only 15 companies listed and a modest Tk1.44 billion ($12 million) raised, the board's impact has fallen well short of expectations.

The shortfall highlights a deeper structural issue: complex listing requirements that are largely inaccessible to the overwhelming majority of Bangladesh's small businesses.

"Most SMEs operate as sole proprietorships with only basic trade licenses issued by local authorities," said Dr A.K. Enamul Haque, Director General at the Bangladesh Institute of Development Studies.

"These enterprises lack the institutional and financial capacity to meet such rigorous regulatory demands."

The situation is compounded by a chronic funding gap.

The International Finance Corporation (IFC) estimates that Bangladesh's SME sector faces a financing shortfall of nearly 90 per cent.

Entrepreneurs typically resort to high-interest loans from banks and non-bank financial institutions, constraining growth and investment.

By contrast, countries such as Japan, South Korea, and China have built their industrial revolutions on the back of SME-friendly policy and financing ecosystems.

In China, for instance, the use of intellectual property as collateral has opened up access to finance for early-stage companies.

Japan's Meiji-era reforms established a modern banking framework that enabled small businesses to flourish.

The core criticism of Bangladesh's SME Board is that it was never designed with the realities of small businesses in mind.

Key entry barriers include the requirement for three consecutive years of audited financials and the exclusion of sole proprietorships-two features that disqualify most of the country's estimated 7.8 million SMEs.

"Requiring profitability in the most recent year disqualifies many promising startups that are not yet cash-positive but remain investment-worthy," said Sumit Podder, CEO of MTB Capital Ltd., a merchant bank that advises firms on listings.

"The rules need to be tailored to the actual composition of our SME sector. We need different tracks for manufacturing businesses, tech startups, and service ventures," he added.

Even after minor rule changes in 2022, experts argue that the SME Board remains too rigid. Entrepreneurs and financial market players say there is little awareness or trust in the platform, and that government policies have not evolved to support SME capital raising.

At the policy level, frustration is mounting.

The SME Foundation, a government-backed body tasked with promoting small business development, has tried to bridge the gap through training and awareness campaigns.

But its officials say they are constrained by the design of the listing process itself.

"We've conducted joint training sessions with the DSE, but most listing conditions are out of sync with ground realities," said Suman Chandra Saha, Deputy General Manager of the SME Foundation.

"For example, requiring three years of audited statements instantly disqualifies a majority of small businesses."

His colleague, Mohammad Jahangir Hossain, General Manager of the foundation's Research and Policy Advocacy Division, echoed the concerns.

"A major overhaul is needed if we want the SME Board to function as a genuine financing alternative."

Yet the country's capital markets regulator, the Bangladesh Securities and Exchange Commission (BSEC), remains cautious.

Abul Kalam Azad, BSEC Director and spokesperson, defended the current approach.

"We introduced updated SME listing rules in 2022, which are quite comprehensive. As of now, there is no plan to revise these rules in the near future," he said, adding that no formal task force recommendation for amendments has been submitted.

The restrictive nature of current regulations has also discouraged startups, despite growing interest in venture capital and digital innovation.

"Startups often have the ideas and talent but not the financial track record. We've submitted proposals to the BSEC on how to make the board more startup-friendly," said Shawkat Hossain, CEO of Bangladesh Venture Capital Ltd.

"If ignored, startup listings will remain a non-starter."

He said: "We need not just policy support but also regulatory flexibility to unlock the full potential of SME and startup capital raising."

This disconnect is also visible on the ground.

Tania Wahab, the proprietor of Karigor, a leather goods manufacturer in Dhaka's Hazaribagh area and winner of multiple national SME awards, said she had not even heard of the SME Board.

"I have bank loans, and they are expensive. We are never told about capital market options," she said. "These issues should be reflected in broader policy initiatives."

The timing of the board's underperformance is particularly unfortunate.

Bangladesh's economy is grappling with high inflation, tepid investment, and rising unemployment.

A well-functioning SME capital market could serve as a much-needed engine for growth and job creation.

But unless significant changes are made-including regulatory relaxation, targeted awareness campaigns, and integrated government policy-the SME Board risks becoming another stillborn initiative in the country's long list of financial sector reforms.

"The intention behind the SME Board is commendable," said Podder of MTB Capital. "But without adapting to market realities, it cannot serve its intended purpose."

farhan.fardaus@gmail.com