Small and medium-sized enterprises (SMEs) play a crucial role in development of economies across the world. It is common knowledge that this primordial economic backbone creates job opportunities, develops communities, and offers creativity and innovation.
Globally, SMEs represent around 90 per cent of businesses and over 50 per cent of employment. In developing countries these numbers are even higher as most formal jobs are generated by SMEs, accounting for seven out of 10 jobs. As the global workforce grows, jobs shrink and automation creeps in, the fate and future of SME development have garnered attention of many governments.
In emerging and transitioning economies, SMEs are responsible for the lion's share of economic activities that pertain to productivity enhancement and poverty alleviation. In the case of Bangladesh, SMEs hold the key to sustainable local development and can prove essential in attaining the larger Sustainable Development Goals (SDGs).
Bangladesh has transformed into an 'Asian Tiger'. Although there is reason to be optimistic, Bangladesh still has a long way to go if it intends to periodically restructure and strive for new waves of development paradigm. The World Bank reported that Bangladesh has around 10 million SMEs contributing around 23 per cent to the gross domestic product (GDP) while generating 80 per cent of the employment in the industrial sector and engaging 25 per cent of the countries' entire labour force. Compared to Bangladesh, contributions of SMEs to GDP stands roughly at 80 per cent for India, 60 per cent for China and Indonesia, 52 per cent for Sri Lanka, 42 per cent for Vietnam, and 37 per cent for Thailand. There are good reasons to focus on bolstering SME contributions if Bangladesh is to match its Asian counterparts.
KEY CONSTRAINTS FOR SME GROWTH: Key constraints for SME growth in Bangladesh are access to information and finance. The financing gap is estimated at $2.8 billion. This problem is compounded further by the fact that financing needs of 60 per cent of women-led SMEs are still unmet, even though their loan repayments are close to 95 per cent.
The government has made some strides towards policy formulation to facilitate SMEs by launching a comprehensive SME Finance Policy in September 2019. Bangladesh Bank policies and programmatic interventions have helped entrepreneurs in gaining better access to information and finance. The central bank has even instructed commercial banks to give out up to Tk 2.5 million in SME loans to each woman entrepreneur without any collateral.
FINTECH: Innovators across the world are pointing out that the SME market is the next wave of focus for Fintech (financial technology) companies. From digital payments, peer-to-peer lending, to using alternative data to expanding credit scoring, to modernising trade finance with distributed ledgers, we are witnessing a boom of innovation in the SME spectrum through exploration of technologies such as blockchain, artificial intelligence (AI), big data, robotics, predictive analytics, and internet of things (IoT). Fintech companies with their innovation and new-age techniques are reaching out to the last-mile customer. These technologies are also allowing banks to move away from traditional funding methods based on collaterals. A new breed of lenders has emerged, and they are progressively using psychometric testing and digital verification to evaluate their lending.
TRACEABILITY: In the case of Bangladesh, a practical and genuine concept that can create a big impact on the SME scene is traceability. According to the United Nations Global Compact, traceability is the ability to identify and trace the history, distribution, location and application of products, parts and materials, to ensure reliability of sustainability claims, in the areas of human rights, labour (including health and safety), environment and anti-corruption. Traceability has become an important mechanism for satisfying increasing demand of customers, governments, suppliers, buyers, development actors, and non-governmental organisations (NGOs) who desire more information about origins of their products and materials as well as conditions under which they were produced and transported.
The drivers for adopting traceability in the developed world include contractual requirements outlined by procurers or regulatory food safety laws within their jurisdiction. Failure to adhere to these requirements can adversely affect the financial and reputational standing of SMEs. Beyond legal minimums, the United Nations Global Compact noted that SMEs may also be driven to adopt traceability initiatives as a means to improve efficiency in productivity and resource planning, and to protect against external risks arising outside their supply chain footprint. Major Agri-buyers have already implemented sophisticated traceability systems that use technologies such as barcodes and Radio Frequency Identification (RFID) to track produce from farm to processor to consumer. Supply chain management, food safety, product certification, digitisation of transaction records, and ethical concerns are reasons for such encouraging adoption worldwide. Implementing traceability solutions can lead to an increase in the market base and appeal. In many cases, this allows SMEs to offset costs involved in adopting these solutions by charging premium prices for their products and services, especially for export. Such adoption plays a major role in advancing good business practices, financial probity and identifying the most effective interventions that help SMEs improve their productivity and sustainability standing.
SMEs operating in the agricultural sector, particularly fisheries and livestock, who are already contributing 8.0 per cent to the country's GDP, can benefit immensely through adoption of traceability solutions. Bangladesh has a staggering 1.3 million fishponds. A 2008 estimate puts the country's livestock population of cattle at 23 million, buffalo at 1.3 million, goat at 21.6 million, sheep at 2.8 million, chicken at 212.5 million and duck at 39.8 million. Although there is an abundance of livestock, Bangladesh is still lagging in adoption of technology when it comes to smart, efficient, responsible and sustainable production, especially at a time when traceability solutions for smallholder farmer management are increasingly becoming popular worldwide.
CLOUD-BASED THIRD-PARTY DIGITAL PLATFORM PROVIDERS: Cloud-based third-party digital platform providers are simplifying information, credit and market access services. Such platforms offer a suite of tools to manage value chain actors by organising farmers, farmer groups, and field staff to manage finance, production and logistics in compliance with standards and by providing full traceability that starts from the farmers' field to market shelves. Apps allow stakeholders to communicate with producers and farmers through SMS (short text message), track input loans, oversee movements of goods in storage facilities, monitor quality of training, and perform surveys and assessments. Since these are cloud-based platforms, such solutions can be used in any geography and sectors without having to install a programme on their own servers.
Development workers and NGOs working with farmers use mobile phones with traceability solution clients and synchronised data with cloud-based servers while businesses and financial institutions get access to real-time information through their web browser.
SMALLHOLDER FARMERS: Smallholder farmers, in particular, can leverage traceability solutions to grow quality produce and reach formal markets improving transparency in procurement. Effective monitoring and adherence to food safety and sustainability standards, would eventually contribute to higher produce prices for farmers. Exporters with new and meaningful data at their disposal can estimate yields and make informed decisions on production planning. This alternative source of data also enables financial institutions to provide input loans in accordance with assessments of risk. The use of Information and Communications Technology (ICT) in monitoring farming and production activities allows NGOs to provide more targeted advice to farmers at the right time, thus linking multiple stakeholders on one platform, increasing communication flow and transparency at every point of the value-chain. This results in minimising any leakages and fraud between planting and sales of the produce. This can be, for example, extremely beneficial to the agriculture sector of Bangladesh where consumers are increasingly demanding fresh produce with a traceable and transparent supply chain process. Moreover, these survival cognitions are important to guarantee unimpeded growth of the SME sector as a whole.
Digital information collected at the individual entrepreneur level could be used to work with financial institutions. Lenders with access to alternative data can develop proxy credit scoring models to reasonably assess SME credit risk at scale, thus expanding their reach. The proliferation of SMEs is not an athame to large enterprises or traditional financial gatekeepers who have historically assumed the lever of institutional finance, nor is it a call for their capitulation at the court of development sustainability.
TOP-DOWN INVERSION OF THE FINANCIAL PARADIGM: This top-down inversion of the financial paradigm could prove beneficial for the Bangladesh economy in the long run. A classic example is Germany's 'Mittelstand', which is the prime mover of the German economy, flourishing side by side with large enterprises.
Traceability technology may not necessarily be the all-encompassing narrative that guarantees sustainable SME growth. This core premise has to be combined with other facets like financial services and access to technology. The focus should be on how permeation of traceability can help create value and sustainability footprint in Bangladesh's SME sector so that it can better contribute to attainment of the SDGs.
There is no 'silver bullet' for driving the SME growth in Bangladesh. Ultimately, multiple approaches, initiatives, technologies, and actors should be considered to spur greater transparency and provide more sustainable outcomes for the SME sector in Bangladesh with traceability as its central functioning ethos.
M Adnan Kabir is a Lecturer at University of Liberal Arts Bangladesh (firstname.lastname@example.org); M M Zimran Khan is an Associate Project Analyst working on Financial Inclusion at the Asian Development Bank (email@example.com)
The views expressed in this article are those of the authors and do not necessarily
reflect those of the organisations they work for.
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