One key effort must be developing a robust financial sector that can facilitate access to affordable finance for the SME sector.
Across all countries in Asia, small and medium-sized enterprises (SMEs) have been instrumental in creating jobs and bolstering economic growth which is essential for accelerating inclusive growth, promoting shared prosperity, and eradicating poverty. Excerpts of a 2018 report from the Asian Development Bank (ADB) indicate that SMEs account for 96 percent of all Asian businesses, contributing two out of three private-sector jobs on the continent. Similarly, Bangladesh benefits immensely 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).
Furthermore, data from the Bangladesh’s Ministry of Planning reveal 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 livelihood for a large proportion of the country’s population, particularly for new entrants in the job market. With 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 plagued with several snags that are constraining growth in the sector; notable among these challenges is limited access to affordable finance for SMEs. In spite of the many attempts to improve access to finance for SMEs in Bangladesh, these efforts have yielded minimal results.
This is largely attributed to the fact that the relationship between suppliers and demanders of funds in the SME sector is characterized by asymmetric information problems and high transaction costs; these factors escalate collateral requirements and cost of borrowing for SMEs, which eventually constrains growth in the SME sector. 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.
In 2013, a study indicated that more than 40 percent of SMEs do not have access to formal credit. The study further suggests that there is a substantial credit gap and an unmet demand for formal credit even for SMEs that have access to finance. To provide a sustainable panacea to the credit gap situation in the SME sector, policymakers should address the asymmetric information problem that defines the relationship between borrowers and lenders in the SME sector. A 2018 study conducted by the ADB that collected data from manufacturing enterprises, local financial development and sub-districts in Bangladesh shows that the expansion of the branches of banks mitigates the probability of default risk as it reduces the asymmetry of information between SMEs and banks; this enhances access to loans for credit worthy SMEs at relatively lower costs. The study also indicates that bank density in Bangladesh has a positive and a significant impact on the performance of a firm, thus an increase in the branches of a bank scales-up a firm’s output, gross value added and to some extent labor productivity.
For a country that is expecting to graduate from the United Nations list of Least Developed Countries (LDC) by 2026, it is imperative for Bangladesh to build a resilient 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. This initiative will spur the growth of the SME sector and also reduce cost of monitoring for financial institutions; with this model SMEs in Bangladesh can access affordable credit that will be essential to the growth of the sector, economic growth and inclusive growth.
Although there are commendable efforts that provide financial assistance to SMEs at the sub-district level, there is still room for improvement. 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 laudable, as it focuses on entrepreneurs and owners of SMEs in rural areas that were not able to access the financial package last year. The objective for implementing 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 affected. This has led to a slowdown of economic activity and deceleration 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 labor earning, which has disrupted about two decades of progress made by poverty alleviation programs in the country.
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.