Widespread possibilities of CMSME in Bangladesh

Across all countries in Asia, small and medium-sized enterprises (SMEs) have been contributing largely in creating jobs and boosting economic growth which is essential for accelerating inclusive growth, promoting shared prosperity, and eradicating poverty. Citations of a 2018 report from the Asian Development Bank (ADB) indicates that SMEs account for 96 percent of all Asian businesses, contributing two out of three private-sector jobs in the continent. Similarly, Bangladesh benefits enormously from SMEs. According to the SME Policy 2019 from the country’s Ministry of Industries, the SME sector in Bangladesh is made up of about 7.8 million enterprises that contribute close to 25 percent of the country’s gross domestic product (GDP). 

Additionally, data from the Bangladesh’s Ministry of Planning reveals that between 2009 and 2014, the SME sector contributed 1.5 million jobs in the country; accounting for 80 percent of industrial employment and almost 25 percent of the country’s entire labor force. These enterprises serve as a major source of living for a large section of the country’s population, particularly for new entrants in the job market. About 2 million young people joining the country’s labor force every year, it is not surprising that a large share of the youth population are interested in working in the SME sector. 

According to the International Labor Organization (ILO), the findings of the school-to-work transition survey (SWTS) indicates that while one-fifth of students in Bangladesh would want to work in the public sector or government, about 48.7 percent prefer working in family businesses. This reality presents a daunting task for policymakers and development organizations in Bangladesh, as the country’s SMEs sector is overwhelmed with several hitches that are constraining growth in the sector; notable among these challenges is limited access to affordable finance for SMEs. Despite of the many attempts to improve access to finance for SMEs in Bangladesh, these efforts have produced minimal results. 

According to the World Bank the SME sector in Bangladesh has a financing gap of $2.8 billion; about 60 percent of women-owned SMEs are denied access to finance because they do not have collateral. This has been the state of the SME sector for many years. 

For a country that is expecting to graduate from the United Nations list of Least Developed Countries (LDC) by 2026, it is essential for Bangladesh to build a strong SME sector that could revitalize local economies, create jobs and promote shared prosperity. One way this could be achieved is to expand the branches of banks at the sub-district level. Another way is Agent Banking, which was introduced in Bangladesh in 2013, with the central bank awarding 28 agent banking licenses with an aim to provide a secure alternative delivery channel of banking services to the underprivileged and under-served population who lives in remote locations. 

Furthermore, easement of procedure and cost of lending to CMSMEs is a great concern for country like Bangladesh. A local study suggests that can be brought down through digital inclusion. For any entity that wishes to be included in the digital framework, it must have a digital identity. A centralized trade license system could be a solution to simplify this process. Transaction conducted by a CMSME may well be routed through existing MFS which can be directly correlate with the linked transaction history. Subsequently, MFS platform shall bring ease to the CMSME in receiving loan proceeds and enable them serving debts as well. An application named ‘TallyKhata’ available in the market is a good instance of how this can be attained. The way to reduce cost of providing credit to a CMSME is to figure out the creditworthiness of the entity. This is better achievable electronically; it would not be feasible to sit and interview and go over documentation of certain entities. This is where the digital identity and the linked transaction history come together to help provide a low-cost, electronic credit management mechanism. 

These initiatives will aid the growth of the SME sector and reduce cost of monitoring for financial institutions; with this model SMEs in Bangladesh can access affordable credit that will be essential to the enable faster growth of the sector, economic empowerment with inclusive expansion.

Although there are praiseworthy efforts that provide financial assistance to SMEs at the sub-district level, there is still room for expansion. For instance, the SME Foundation has an agreement with 11 banks and non-bank financial institutions to disburse loans to entrepreneurs and cottage, micro, small and medium enterprises (CMSMEs) across most of the districts in Bangladesh. This initiative is impressive, as it focuses on entrepreneurs and owners of SMEs in rural areas that were not able to access the financial package earlier. The objective to carry out this initiative is to facilitate the country’s economic recovery amid the COVID-19 pandemic. The impact of the pandemic on the economy of Bangladesh has been profound. All sectors of the economy, including the SME sector have been badly affected. This has led to a slowdown of economic activities and paced down of economic growth. According to a 2021 World Bank report, the country’s GDP growth declined sharply, down to 2.4 percent in fiscal year 2020. This has caused losses in employment and individual earning, which has interrupted about two decades of progress made by poverty alleviation programs in the country. However, in response, Bangladesh government has put forward BDT 200 Billion (FY21) and BDT 200 Billion (FY22) stimulus packages through Bangladesh Bank targeting CMSMEs mostly to revive production and employment. To observe the success of implementation of the stimulus packages, the disbursement, enterprise, gender, employment, and macroeconomic dimensions were assessed with the data of implementation status of the COVID-19 CMSME Stimulus Packages by different bank groups and NBFIs during FY21. Overall, the CMSME Stimulus Packages helped mitigating the impact of the crisis. 

To accelerate growth and build back a better economy that could provide decent jobs to the youth and promote inclusive growth and reduce poverty; policymakers, development organizations and relevant stakeholders should focus on developing a robust financial sector that could facilitate access to affordable finance for the SME sector. When this is achieved, SMEs in Bangladesh can easily access the required financial services at a lower cost. This will stimulate growth in the SME sector and eventually boost economic growth, foster inclusive growth, shared prosperity and reduce poverty for our country.

Shahinure Sultana is Deputy General Manager, 

Agrani Bank Limited