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Institutional Financing of SME in Bangladesh





Institutional Financing of SME in Bangladesh

Submitted By:


Program- BBA

Premier University, Chittagong

Submitted in partial fulfillment of the requirements for the Bachelor of Business Administration.

Submitted To:

Ms. Nilufar Sultana

Lecturer, Dept. of Finance & Banking,

Faculty of Business Studies,

Premier University, Chittagong.


Letter of Transmittal



Ms. Nilufar Sultana

Faculty of Business Studies

Premier University, Chittagong

Sub: Letter of Transmitter on Term Paper

Dear Madam,

This is my pleasure to submit my term paper report on “Institutional financing of SME in Bangladesh” which I was assigned. It was a great opportunity for me to acquire knowledge and experience in respect of the functions, procedures and operational activity, other than my topic of study.

I have concentrated my best efforts to achieve the objectives of the assignment study and hope my endeavor will serve the purpose. However, I will always be ready to provide any further clarification that you may require.

Sincerely Yours,


Program: BBA

Batch Number: 16

8th Semester


Major: Finance

Premier University, Chittagong,



I have the pleasure to express my gratitude to the Almighty God who has given me the strength and opportunity to complete the supposed subject matter. It is indeed an immense pleasure and honor to have the opportunity to submit this report on the Institutional financing of SME in Bangladesh.

No report is fulfilled without the help of others. I like to remember and give thanks to those persons who extend their hand to make my report comprehensively.

At first, I like to thanks to our honorable Sir Mr. Iftekhar Uddin Chowdhury (Dean of Faculties) who give the permission to make a report.

I also convey thanks to my internship Supervisor Mrs. Nilufer Sultana (Lecturer, Faculty of Business Studies) for the guidance and help in preparing the report.

Finally, I would like to convey my gratitude to the Authors of all the books, which I have followed to prepare this project.


In the context of Bangladesh, the development of Small and Medium Enterprises (SMEs) can be considered as a vital instrument for poverty alleviation and ensure the rapid industrialization. In this paper I have tried to identify the problems of SMEs of Bangladesh. The performance of SMEs of Bangladesh especially in terms of employee turnover rate, quality assurance, allocation of funds, marketing activities have been found significantly below the international standard.

The role of Small and Medium Enterprises (SMEs) is indispensable for overall economic development of a country particularly for developing countries like Bangladesh. Since this sector is labor intensive with short gestation period, it is capable of increasing national income as well as rapid employment generation; achieving Millennium Development Goals (MDGs) especially eradication of extreme poverty and hunger, gender equality and women empowerment. SME sector has played a vital role in economic development of some prosperous countries of Asia. Our neighboring countries have also given due importance on SME. Terming SME as ‘employment generating machine’ they stressed on SME development for higher economic growth, narrowing the gap of income inequality and poverty alleviation. The present government has also put much emphasis on the development of SME sector considering it as ‘the driving force for industrialization’.

Table of Contents


In almost every part of the world, limited access to finance is considered a key constraint to private sector growth. This is especially true for SMEs of our country as they are facing different types of problems for availing institutional finance though SMEs play dominantly important role in the national economy of Bangladesh by making up over 90 per cent of industrial enterprises, providing employment to 4 out of 5 industrial workers and contributing to over one-third of industrial value-added to gross domestic product (GDP). The relative SME share in manufacturing value-added is much higher and estimated to vary between 45 to 50 per cent of totaling value-added generated by the manufacturing industries sector.

Further as important sources of new business creation and developing new entrepreneurial talents, these industries provide the much needed dynamism and vitality to the national economy. Implementation of poverty alleviation action programs and strategies is a systematic and continuous effort in Bangladesh. For that purpose, the Poverty Reduction Strategy of the government has clearly identified some core principles and parameters both at macro and micro levels for reducing the existing poverty level at least half within 2015 as targeted in the Millennium Development Goals (MDGs). Rapid and sustainable growth of SMEs is undoubtedly one vehicle for accelerating national economic growth to the point of having a measurable impact in the way of reduction of poverty and unemployment, generation of more employment. More than 90% of the industrial enterprises in Bangladesh are in the SME size-class. Generally, SMEs are labor intensive with relatively low capital intensity. The SME also posses a character of privilege as cost effective and comparative cost advantages in nature. The SME policy strategies have been formulated to assist in the achievement of the goals and targets the MDGs set by the Government. Contribution of SMEs to the economy is shown in the table - 1.


Objectives of the Study

In this paper we have tried to identify the factors that influence the development and growth of the SME sector of Bangladesh. Thus the specific objectives of the study are as follows:

← To appraise the present situation of SME in Bangladesh.

← To know how SME works

← To identify the problems of SME in Bangladesh.

← To recommend solutions to overcome the problems.


Most of the data has been collected from secondary sources. So the researchers work has been based on published information and data available in any form such as books, journals, magazines, newspapers etc. devoted to SME sector. Secondary information has been collected from Ministry of Industries, SME foundation, Bangladesh Bureau of Statistics, MIDAS, Financial Institutions and from other SME related organizations. Relevant articles and literature in this context has also consulted. In this article we have analyzed the data of last six years of SMEs of Bangladesh. I have tried to analyze the performances of SMEs by applying simple statistical analysis i.e., growth percentage, average etc.


← There is not uniform definition of each category of SMEs with generic classification around the country.

← There is a need for improving different aspects of financial services of SMEs, such as seed money, leasing, venture capital and investment funding.

← There is a lack of long-term loans; interest rates are high, Guarantee/Security issues, exchange risks etc.

← BSCIC fails to provide needed services to the small industries due to manifold reasons; primarily due to its unorganized management.

← Primary and Secondary data were not available.

← There was the shortage age of adequate literature on SME.

← This report was prepared in very tight time schedule and it may not analyze all the entire report.

Structure of the report

This report is divided into 5 parts. They are: Introductory aspects, Theoretical aspects, Analytical aspects and Conclusionary aspects.

Introductory aspects contain background of the topics, objectives, methodology and limitations of this report.

In Theoretical aspects, I will present the definition and brief description of SME. Present scenario of SME in Bangladesh, size and number of SME’s and Success of SME in Bangladesh.

In Analytical aspects, I will present the SME financing, importance of financing SME and process of financing in SME.I will also present Rules & Regulations of Bangladesh Bank for SME and also represent comparative analysis of SME loan of six different banks of Bangladesh.

In Conclusionary aspects, I will represent the findings and also give some suggestions and concluded with reference, websites name and also include appendix.

Chapter 2

SME Defined in Bangladesh

SME (Small and Medium Enterprises):

SME business is non-public limited companies but a business for self-employment or for social welfare.

>According to the latest circular of BANGLADESH BANK, the definition of Small & Medium Enterprise sector is given below:

►Small Enterprises – Small enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteria-

1. Service Concern- Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and / or employing up to 25 workers.
2. Business Concern - Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and / or employing up to 25 workers.
3. Manufacturing Concern - Having an investment of Tk. 50,000 to Tk. 1,50,00,000 excluding land & building and / or employing up to 50 workers.

►Medium Enterprises – Medium enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteria-

1. Service Concern- Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000 excluding land & building and / or employing up to 50 workers.
2. Business Concern - Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000 excluding land & building and / or employing up to 50 workers.
3. Manufacturing Concern - Having an investment of Tk. 1,50,00,000 to Tk. 20,00,00,000 excluding land & building and / or employing up to 150 workers.

Partition of SME Enterprises: SMEs in Bangladesh are also defined for purposes of industrial policies by Ministry of Industries (MOI). Historically, this definition has been in terms of fixed investment brackets, and a dual mode definition is in place, separate for manufacturing establishments, and service establishments.

>According to the Industrial policy 2005, small and medium enterprises shall be categorized using the following definitions:

Manufacturing enterprise:

Small enterprise- an enterprise should be treated as small if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures, support utility, and associated technical services by way of capitalized costs (of turn key consultancy services, for example), etc, excluding land and building, were to be up to tk. 15 million;
Medium enterprise-an enterprise would be treated as medium if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures, support utility, and associated technical services by way of capitalized costs (such as turn key consultancy services), etc, excluding land and building, were to be up to tk. 100 million;

Non-manufacturing enterprise:

Small enterprise – an enterprise should be treated as small if it has less than 25 workers, in full time equivalents;
Medium enterprise - an enterprise would be treated as medium if it has between 25 and 100 employees.

Present Status of the SME Sector in Bangladesh

Size, Type and Spread of SMEs

Because of the definitional problems mentioned above, information on SME is not readily available in Bangladesh. BBS conducts annual surveys of the manufacturing sector, called the Census of Manufacturing Industry (CMI), but as mentioned earlier the BBS lumps under the “Large” category information on all units with 50 or more workers and hence the information cannot be separated in most cases for the 50-99 workers size category, which is the more commonly used cut-off size limit for medium enterprises. Moreover, there is quite a bit of backlog in the processing of the CMI data. The latest available published CMI report is for the period 1999-2000. The prime agency for the promotion of small and cottage industries in Bangladesh is the Bangladesh Small & Cottage Industries Corporation (BSCIC). BSCIC is required to maintain information and data bank on small and cottage industries in Bangladesh and accordingly the agency carries out nation-wide surveys of the sector at some time intervals. However, the latest such survey by BSCIC was conducted in the late 1980s and it was based on the definition of small and cottage industries given in the earlier industrial policies that used capital rather than employment size as the cut-off limit. Fortunately, BBS carried out a nation wide census of all non-farm economic activities in 2001 and 2003 and a preliminary report based on the census has been made available recently. The report presents data by employment size category but there is no information on the size of fixed assets. The previous such national census of non-farm economic activities was carried out by the BBS in 1986. Information available from the recent BBS report has been presented in table-2. The following appears to be the main features of this sector in Bangladesh:

Table 2: Size and Composition of SME in Bangladesh – 2001/03


Changes in the Size and Structure of SME over Time

A comparison of the data from the Economic Census 2001 & 2003 with the data from the previous census of 1986 (Table 3) suggests that the importance of the SME sector has changed marginally during the inter-census period.

➢ The share of SME in the number of establishments in the 10+ size group has slightly declined from 95.6% in 1986 to 93.4% in 2001/03 while the share in employment came down from 49.8% to 43.9%.

➢ The urban SME employment grew at an annual rate of 4.6°/ raising the share of urban SME in the employment in 10+ size group from 57% in 1986 to 63.8% in 200.

➢ Non-manufacturing SME grew at a higher rate during the period causing the share of manufacturing n SME employment to decline from 41, 3% in 1986 to 37.5% 2001/03.

Table 3: Size and Composition of SME in Bangladesh –2001/03 [pic]

Size and Structure of Manufacturing SME

The evidence from the Economic Census 2001 & 2003 (Table-4) shows that small manufacturing in Bangladesh consists of some 26 thousand enterprises employing nearly 488 thousand persons while there are some 2311 manufacturing establishments under the medium category engaging about 156 thousand persons. In the 10+ size group, manufacturing SMEs account for nearly 88% of the manufacturing establishments but about 29% of manufacturing employment. The Economic Census did not have information on value added.
However, other sources suggest that the share of 5MB in manufacturing value added in Bangladesh in the 10+ group is likely to be around 26%. The small manufacturing enterprises are almost evenly distributed between rural and urban areas both in terms of number of establishment and employment. But in the case of medium manufacturing enterprises there is a higher incidence of urban establishment and urban employment.

Table 4: Size and Composition of Manufacturing SME in Bangladesh

The evidence from the Economic Census on the composition of manufacturing SME (Table-3) suggests textiles, non-metallic mineral such as brick and clay products, food products, furniture, and plastic products as dominant industry categories.

SMEs - number and success

No one knows for sure how many SMEs there are in Bangladesh today. It was around 1978 that the BSCIC (Bangladesh Small and Cottage Industries Corporation), under the Ministry of Industries, conducted a survey to find out the number of cottage and small industries of the country. Inspite of the question about the validity and dependability of the survey, in absence of any other effort by the Bangladesh Bureau of Statistics (BBS) or any other agency, this initiative did provide a useful benchmark but it was never updated. The International Consultancy Group (ICG) of the UK, in collaboration with the Micro Industries Development Assistance and Services (MIDAS), conducted in 2003 the National Private Sector Survey of Enterprises in Bangladesh with funding from the Department of International Development (DFID) of the UK Government, the United States Agency for International Development (USAID), the Swiss Agency for Development and Cooperation (SDC) and the Swedish International Development Cooperation Agency (SIDA).

The survey results drew the conclusion that there were approximately 6 million micro, small and medium enterprises (MSMEs), which included enterprises with up to 100 workers employing a total of 31 million people, equivalent to 40 per cent of the population of the country of age 15 years and above. About three quarters or more of the household income in both urban and rural areas is provided by the MSMEs (Table 5).

Table 5: Percentage of Household income contributed by MSME’s


The high level of income contribution was attributed to the fact that the enterprises worked ten hours per day, 28 days per month for eleven months a year. The survey also found that the industrial structure of SMEs consisted of primarily wholesale and retail trade and repairs (40 per cent), production and sale of agricultural goods (22 percent), services (15 percent), and manufacturing only (14 per cent). Thus the survey brought out very prominently the fact that the large untapped potential for expansion in manufacture and production could be exploited (or contributing more significantly to the national economy. Another vital finding of the survey under discussion was that SMEs contributed BDT 741 ($ 12.5) billion or nearly 25 per cent of the GDP (BDT 2,996 billion) in 2003. Those who tend to look down on micro and small industries may be shocked to note that enterprises employing 2-5 workers are credited for having contributed 51 percent share of the total SME contribution to the economy, followed by 26 percent by those having only one worker and 10 per cent by those having 6-10 workers (Table 3). The sectoral contribution of SMEs to the GDP is also interesting. Manufacturing contributed the highest proportion (38 per cent), followed by Agriculture (24 per cent) and, closely following, wholesale and Retail Trade and Repairs (23 per cent) (Table 6).

Table 6: Contribution of MSME’s TO GDP by size and enterprise


Table 7: Contribution of MSME’s TO GDP by sector (Taka)


For LDCs like Bangladesh, SMEs are a highly cost-effective route to industrial development. The present size of the population in the 2-14 years age group is approximately 16 million. They will be candidates for new jobs. Together with another 10 million inactive people still looking for employment, the total size of the new entrants to the job market may be said to be around 25 million. What would it cost to provide employment to these 25 million?

In 1998 the Swiss Agency for International Development Cooperation (SDC) had conducted a study of small enterprises with the help of Bangladesh Unnyan Parishad (BUP).The study was conducted with 47 small enterprises of 19 categories in 40 thanas (police districts) under 10 districts.

A summary of the findings of these studies may be seen in Annex-III. It showed that the average employment size per enterprise was 15, ranging from 5 in coir processing to 29 in food processing.

The size of investment varied from industry to industry and enterprise to enterprise. The highest investment was found to be BDT 3.5 million ($60,000) for food processing and the lowest BDT 12,747 ($216) for coir processing. The average investment per enterprise in the sample was found to be BDT 1.1 million ($18,700). If you put these figures together (even though this was not a particularly scientific analysis), the investment per employment works out to BDT 73,694 ($1,250). At this rate, the total investment required to provide employment to 25 million new jobs would be BDT 1,842 ($31) billion for the small enterprises sector.

To compare what it might cost to provide employment to 25 million new jobs in the large industry sector, one needs only look at some of Bangladesh's large fertilizer factories. Chittagong Urea Factory Limited (CUFL) is said to have cost BDT 14 billion ($237 million) to build, and it employs 982 people (all categories). The Jumuna Fertilizer Factory (JFF) cost BDT 12.60 billion ($213 million) and employs 1,082 people. Thus CUFL and JFF respectively required BDT 14.26 and 11.63 million ($241,000 and 198,000) per person employed. Investment costs per person employed in large industries thus worked out respectively at 100 and 78 times those of SMEs. As for micro-enterprises promoted by the Grameen Bank and NGOs like BRAC, Proshika, Swanirvar Bangladesh, ASA, etc., for self-employment of the very poor (80 per cent of whom are women) the investment required per employment is BDT 5,000 ($85) or less.

Thus no elaborate argument is needed to establish the case of promoting micro as well as small and medium enterprises as the most cost-effective and advisable means of providing employment and injecting dynamism into industrial growth, both for poverty alleviation and for contribution to the GDP.

Chapter 3

Financing SMEs and Entrepreneurs:

Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialized countries, as well as in emerging and developing economies. SMEs constitute the dominant form of business organization, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 60-70% net job creations in OECD countries. Small businesses are particularly important for bringing innovative products or techniques to the market.

Why is financing SMEs so important?

SMEs are vital for economic growth and development in both industrialized and developing countries, by playing a key role in creating new jobs.

Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business. But if they are successful, there comes a time for all developing SMEs when they need new investment to expand or innovate further. That is where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, capital markets or other suppliers of credit.

This “financing gap” is all the more important in a fast-changing knowledge-based economy because of the speed of innovation. Innovative SMEs with high growth potential, many of them in high-technology sectors, have played a pivotal role in raising productivity and maintaining competitiveness in recent years. But innovative products and services, however great their potential, need investment to flourish. If SMEs cannot find the financing they need, brilliant ideas may fall by the wayside and this represents a loss in potential growth for the economy. The “bagless” vacuum cleaner and the “wind-up” radio or flashlight which need no batteries are now common household items, but nearly failed to see the light of day because their inventors could not find financial backing to transform their ideas into production.

Already, differences are emerging between countries in terms of how easy it is for innovative SMEs to grow and develop. This sector has been very dynamic in the United States and a few other countries, but has lagged in many continental European countries and Japan, to the detriment of job creation and competitiveness.


How big is the SME financing gap?

While the SME financing gap is more pervasive in emerging markets, business financing overall is not a problem in OECD countries (Figure 1), where banks are adopting strategies to cope with reducing the risk of lending to SMEs and where there are well-established systems for raising money through banks and capital markets.

Many countries that do not report an overall financing gap for SMEs say that they do have a financing problem when it comes to innovative SMEs, precisely because they do not fit the mould applied in traditional SME financing. Since innovative SMEs tend to be newcomers to the market, or seeking financing for a new type of product or service, and usually have negative cash flows and untried business models, they represent a higher risk to banks and cannot be assessed in the same manner as traditional SMEs or large firms.

One fundamental problem in dealing with the SME financing gap is lack of basic information about just how big such a gap may be. Often the only evidence is in the form of complaints from SMEs themselves and this is difficult to use in analysis or for comparison. Moreover, the definition of an SME varies between countries and financial institutions, some only compile figures by size of loan, not by size of the company borrowing, and some do not keep regular statistics of SME lending at all. And this is just in OECD countries – outside the OECD area, information is even scarcer.

How easy is it for SMEs to borrow from banks?

In most countries, commercial banks are the main source of finance for SMEs (Figure 2), so if the SME sector is to flourish it must have access to bank credit.

The overall SME financing gap is particularly pressing in non-OECD countries, since the bulk of them report a widespread shortage of financing for all categories of SMEs. Even though SMEs account for a large share of enterprises, and represent potential employment and economic growth in emerging economies, they receive a very low share of credit. Indeed, most of them are denied any access to formal financial markets.

The characteristics of the banking system in emerging markets frequently inhibit SME lending. Many banks are state-owned, their credit may be allocated on the basis of government guarantees or in line with government targeting to develop specific sectors. Often banks are subject to ceilings on the interest rates they can charge, which makes it difficult to price credit in a way that reflects the risk of lending to SMEs. Many banks may have ownership and other ties to industrial interests and will tend to favour affiliated companies. In a market where banks can earn acceptable returns on other lending, it will not develop the skills needed to deal with SMEs.

Market-based banking, where banks are accountable for achieving high returns to shareholders and maintaining high prudential standards, is gaining acceptance on a global level. This model creates a competitive market where there is more incentive for banks to lend to SMEs, but many emerging markets have been comparatively slow in implementing this model.

As OECD countries have competitive financial markets, SMEs do not generally have a problem in obtaining bank loans since banks perceive SME finance as an attractive line of business and are developing, or have developed, effective techniques to deal with them. They are replacing their traditional risk assessment models with new techniques to distinguish high- and low-risk SME borrowers, and to identify those likely to expand and survive. Banks are also altering the nature of their products, with an increasing proportion of their revenue coming from fees for services rather than interest on loans, which favours lending to entities such as SMEs.

Nonetheless, OECD governments are convinced that there are still enough instances of market failure in SME finance to justify focused government intervention. Countries have launched a number of programmes to use public funds to facilitate SME lending, and the available official surveys suggest that banks’ efforts to develop the SME market, supported in some cases by a moderate amount of government guarantees, have resulted in a situation where a large share of SMEs have access to bank financing.

Where can innovative SMEs find funding?

Despite the importance of innovative SMEs, they face particular problems when attempting to access financing in most OECD countries, as they represent a higher risk than traditional SMEs or large firms. They are thus not really candidates for traditional bank loans. Moreover, banks are mindful of the fallout from the burst of the “” bubble after the steep rise of Internet-related start-ups in the late 1990s.
Instead, innovative SMEs rely on investors who will provide risk capital, generally in return for a share in the company. The risks for the investor are high, but so are the potential rewards if he or she is backing a winner.
Financing for innovative SMEs is complicated by the fact that these firms are likely to require a range of financing vehicles at different stages of their development (Figure 3). The “seed” money to start up the company generally comes from friends, professional contacts and family. The SME may also be able to tap into government funds or university grants for developing prototypes or carrying out feasibility studies. Increasingly, “business angels” are seen as a vital link in the financing chain at the early stage of business development, as they bring business experience to the table as well as their own capital. As SMEs begin to grow, but have yet to establish the track record or size and collateral that would give them access to bank financing, they tend to turn to other types of risk capital offered by venture capitalists, who favour larger projects at later stages of the business cycle. Funds are usually obtained from institutional investors, especially pension funds, but financial intermediaries and the corporate sector are also major investors.
Although there are many countries (including some in the OECD) where the venture capital industry is still under-developed, the global venture capital industry is now a relatively mature industry that has succeeded in mobilizing hundreds of billions of dollars from institutional investors and deploying these funds to attractive business opportunities throughout the world.

In contrast to the formal venture capital sector, the role played by early stage risk capital, although not well known, is more relevant for innovative SMEs, and thus represents an opportunity for government policy intervention.

How to bridge the SME financing gap?

Governments can play an important role in supporting the SME sector, particularly where there is market failure or where incomplete markets inhibit the provision of adequate financing on terms suitable for the SME’s stage of development. Government measures to promote SMEs should be carefully focused, aimed at making markets work efficiently and at providing incentives for the private sector to assume an active role in SME finance. Where necessary, banking systems should be reformed in line with market-based principles.

Governments should also act to improve awareness among entrepreneurs of the range of financing options available to them from officials, private investors and banks. Micro-credit and micro-finance schemes play an important role in developing countries and efforts should be made to boost their effectiveness and diffusion.

Any provision of official funding should respect the principle of risk sharing, so official funds should only be committed in partnership with funds from entrepreneurs, banks, businesses or universities. Governments should also look at whether government technical support can be used generates the emergence of business angels and to make the existing business angel systems operate more efficiently.

Policy makers need to ensure that the tax system does not inadvertently place SMEs at a disadvantage. They should also review the legal, tax and regulatory framework to ensure that it encourages the development of venture capital.

At the same time, national policies should encourage diverse forms of institutional savings and institutional investors should be regulated flexibly.

The market for corporate control should be allowed to function efficiently for both domestic and foreign entities.

In order to assess the success of such actions, governments need to be able to measure the size of the SME financing gap and evaluate the impact of government actions. OECD and non-OECD governments have asked the OECD to take the lead in establishing international benchmarks to facilitate comparisons of the relative performance of markets in providing financing to SMEs and entrepreneurs and to shed light on outstanding financing gaps and issues.


Chapter 4

SME Assistance Policies and Institutional Arrangements

The economic efficiency and overall performance of the SMEs especially in the developing countries are considerably dependent upon macroeconomic policy environment and specific promotion policies pursued for their benefit. It is thus important to examine the policy environment and institutional support within which the SMEs operate.
Though promotion of SME development has been a stated objective of successive governments ever since Pakistan days, the broad macro policy regime has continued to remain biased against SME development in many ways. Allocations of public sector investments, trade policies and taxation policies in particular have mostly been anti-SME development in character and contents (ADB, 2002). The specific promotional policies and support measures such as extension services, financial and physical support form the public sector agencies and the development partners have also not always been adequately effective. Weak and inefficient management and lack of proper implementation of the various policy support measures have rendered various assistance relate business advisory services, such as training, credit marketing and physical infrastructural facilities (through BSCIC’s Industrial Estates Programme), much less effective than desired. The private sector efforts through participation of MIDAS, BASIC and selected NGOs (especially GB, BRAC and Proshika) have not so for been adequate especially in
SME promotion. The SMEs because of their structural weaknesses, such as, scale barriers, inefficient management and weak technological capacities therefore need pro-active policies and institutional support in addition to removal of existing policy biases.
Though BSCIC has been the key public sector agency responsible for supporting SME promotion for a long time, its operational efficiency remains weak for a number of structural and administrative and managerial bottlenecks. While “ getting the Government out of business” and greater participation of the private sector are now emphasized as key strategies for development, some public sector participation for desirable monitoring of selected essential public services such as, effective legal and judicial procedures, commercial contracts, land settling arrangements etc. will still be necessary.

Concluding Remarks and Proposed Agenda for Action

The economic arguments for SMEs should be more broad-based and include and emphasize the various special merits intrinsic and specific to their smallness per se.

← A uniform set of definitions should be designed and used by all pertinent agencies (i.e. BBS, Ministry of Industries/ BSCIC, Planning Commission and NBR) with respect to classification of enterprises by size. In this context, a well-thought out decision is needed to ascertain whether “SME” is the correct term to identify ‘Small’, ‘Cottage’ and ‘micro’ industries in Bangladesh.

← A sufficiently large sample survey should be carried out to generate a bench mark national level data base both for accurate estimation of the SME contributions to the national economy and for formulation of comprehensive policies for the sector.

← Given heavy reliance of the national economy on the SMEs for generating employment and income especially for the poor in the rural areas, development of entrepreneurship, new business creation and development of intersectional linkages the SMEs should be declared as a ‘priority sector’ and backed by formulation of a proactive SME development policy.

← Within the SME sector, the fast growing sub-sectors exhibiting greater dynamism and prospects for sustained future growth should be declared as ‘thrust sector’ and supported by adequate incentives on a priority basis.

← In the proposed SME development policies, provisions should be made to develop separate and specialized institutions in three areas: (a) finance, (b) technology and (c) skill development, in addition to rationalizing the existing policies and institutions. In this context, a strategic ‘Public-private Sector’ partnership and cooperation should be carefully developed keeping in view the current emphasis on fostering industrial development through private enterprises systems.

Chapter 5

Regulations of Bangladesh Bank’s Small and Medium Enterprise (SME) Credit Policies & Programmes

1. For small entrepreneurs credit limit will be ranged from BDT 50,000 (USD 617.28) to BDT 5,000,000 (USD 61,728).

2. Banks and financial institutions may sanction up to BDT 2,500,000 (USD30,864) to women entrepreneurs against personal guarantee. In that case, group security/social security may be considered.
3. Each bank/financial institution shall fix the interest rate on SME loan sector/sub-sector wise.

4. However, bank/financial institution will inform Bangladesh Bank sector/sub-sector wise rate of interest immediately and ensure disbursement of refinanced fund to the clients (women entrepreneurs) at Bank rate +5% interest.

5. Banks/financial institutions may provide collateral free credit facilities up to BDT 2,500,000 (USD 30,864) against Personal Guarantee in SME sector especially for small and women entrepreneurs. Credit can also be provided against hypothecation of products and machineries, if needed.

6. However, banks and financial institutions shall follow their own rules and banker-customer relationship to determine collateral for credit facilities more than BDT 2,500,000 (USD 30,864). Banks and financial institutions shall apply their own due diligence method in selecting clients/entrepreneurs.

7. Bangladesh Bank is providing refinance facility to banks and financial institutions at bank rate (at present 5%) in SME sector. The fund obtained at bank rate through BB refinance window should be disbursed at bank rate + not more than 5% interest to the client level (in case of women entrepreneurs).

Flow Chart of Small & Medium Enterprise Loan processing


Chapter 6

Comparative analysis of SME loan of six different banks

6.1. Loan Size


Among the Banks Eastern bank Limited offer the highest loan amount to customer where as BRAC Bank offer the lowest loan to its customer.

6.2. Rate of Interest


In terms of interest rate Mercantile bank and BRAC bank offer the lowest rate of interest to its customers. The highest rate is charged by Prime bank limited. Mercantile bank is the only bank that offer fixed rate for any loan customer.

6.3. Loan Processing Fee


All the bank does not provide detail about loan processing fees to their customers. The prime bank limited and BRAC Bank limited only charges .50% as loan processing. And Mercantile bank Charge TK. 500 for loan processing.

6.4. Period of loan


Among the bank the highest loan maturity date is offered by Dutch-Bangla Bank Limited and Mercantile Bank offer the lowest maturity period.

6.5. Mode of Finance


All the banks provide SME financing facilities do not provide long term loan to its customers. Among the banks Prime bank and Dhaka bank both provide term loan and working capital loan to their customer. Other banks either provide term loan or working capital loan to its customers.

6.6. Portfolio size of different bank in SME sector


From the table we can see that BRAC bank has the highest investment in the SME sector followed by Eastern Bank Limited in second position. While the Prime bank Ltd., Dhaka Bank Ltd., Mercantile Bank Ltd. and Dutch- Bangla Bank Limited are third, fourth and sixth respectively.


6.7 Comparative analysis of SME loan of different bank (performance part)


From the above analysis and findings of the study, it is obvious that there is a lot of market potential for MBL in SME loan. As we came to know from the analysis that BRAC bank is the most dominant player in the market and except BRAC bank other players are more or less similar category. But since the market yields a high growth potential and BRAC bank having basic infrastructure and a larger customer base it is very difficult for the other bank to cope with BRAC bank unless they build some alliances to develop such infrastructure to serve the client at better service. Initially, it will require a huge concentration, but the bank is financially sound to incur such amount of investment in new line of business. Other than the investment MBL should improve their credit facilities, customer service, and add attractive features to the product to attract every class of people.


6.7 Comparative analysis of SME loan of different bank (performance part)


From the above analysis and findings of the study, it is obvious that there is a lot of market potential for MBL in SME loan. As we came to know from the analysis that BRAC bank is the most dominant player in the market and except BRAC bank other players are more or less similar category. But since the market yields a high growth potential and BRAC bank having basic infrastructure and a larger customer base it is very difficult for the other bank to cope with BRAC bank unless they build some alliances to develop such infrastructure to serve the client at better service. Initially, it will require a huge concentration, but the bank is financially sound to incur such amount of investment in new line of business. Other than the investment MBL should improve their credit facilities, customer service, and add attractive features to the product to attract every class of people.

Chapter 7


I think at present SME sector is facing a lot of problems in Bangladesh. Some major problems are as follows;

Resource scarcity
In Bangladesh scarcity of raw materials hinder the ability of SME to be export oriented and limits its ability to reach more advanced stages of international business

High employee turns over
Due to limited growth of SME most of the skilled employees leave SMEs. Levy (2003) observed that SMEs are knowledge creators but poor at knowledge retention.

Absence of modern technology
One of the main barriers for the development of SME in Bangladesh is inadequate technologies. Many SMEs have failed to adopt modern technology.

Poor physical infrastructures
Inadequate supply of necessary utilities like electricity, water, roads and highways hinder the growth of SME sector. Moreover unfavorable geographical conditions increase the transportation cost.

Financial constraints
Availability of finance hinders the growth of SMEs in Bangladesh. Bangladeshi bank considers SMEs as high risk borrowers because of their inability to comply with the bank’s collateral requirements. Only about 15-20% of the owners of SMEs own any immovable property. Bankers issue loan on the basis of ownership of immovable property as collateral risk. As a result it automatically excludes rest 80% SME’s from the list of privileged clients of the banks. Whatever collateral SME’s can manage gets used up in talking the term loan leaving them with no means to seek working capital loans from banks. Because of low access to institutional financing SME’s rely on inefficient financing services from informal sources.

Lack of uniform definition
In Bangladesh the definition of SME has changed overtime in different industrial policy announced by the government in different year. Absence of uniform definition makes the formulation and implementation of SME policy difficult.

Lack of information
Miah (2006) has observed that SMEs have very limited use of information technology (IT). Accounting package is used by 1-2% of the SMEs. The use of computers is revealed by say 15% of the SMEs, while the use of the Internet for business purposes applies to say 8-10% of SMEs.

Lack of entrepreneurship skills
Conservative attitude towards risk, lack of vision, ability to make plan and implementing those hinder the growth of SME in Bangladesh.

Participation of women entrepreneurs
Equality of opportunity is a major problem for SME. Female entrepreneurs are treated discriminately. They are not well represented in business organization. Government does not provide adequate institutional assistance for women entrepreneurs.

Access to Market and lack of awareness regarding the importance of marketing tool
For SME, owing a retail space is very expensive in the major cities in Bangladesh. As a result many customers are not interested to buy products and services from SMEs. Because they can’t judge the quality until they physically examined the product.
Most of the cases SMEs in Bangladesh are not able to use the Integrated Marketing Communication (IMC) tools. But these tools play the role of important stimulus to motivate the customers and retain them. The country does not have enough marketing capability and resources to invest in marketing.

Wang (1995) observed that the inadequate government supports are top ranking constraints for SMEs. Unnecessary layers of Bureaucracy and red-taps reduce the competitiveness of SME and raising the cost of transactions and operations.
Absence of transparent legal system
The absence of an effective and transparent legal system discourages SMEs in exploring into risky ventures of business. There are a number of unnecessary formal requirements to start and run business that create high compliance costs and become barriers to SME development, growth and market entry.

Lack of commitment to innovation and customer satisfaction
Ernesto (2005) stated that to keep in pace with international competition, firms of all size are challenged to improve and innovate their products processes constantly. But in Bangladesh SMEs are still not relating the importance of satisfying and retaining customers by offering novel and desired benefits.

Lack of quality assurance
Govt. has failed to frame a national quality policy, provide adequate support systems and establish a national quality certification authority. As a consequence SME of Bangladesh has failed to ensure the quality of their products and services both in local and international market.

Lack of research and development facilities
It is observed that investment in R&D is still negligible in.

Fierce competitions with the cheaper foreign goods
Fierce competition with the cheaper goods of China, Taiwan, Korea, India, and Thailand also pose threat to SME in Bangladesh.


In order to overcome the above mentioned problems the following suggestions are recommended;

← Government must have to take adequate measures to ensure the uninterrupted supply of raw materials for SME.

← Government needs to take appropriate measures to fix the minimum salary/wages of the employees of SME. That will help to minimize the employee turnover.

← Government and financial institution may provide adequate finance for modernization and technological advancement.

← Development of infrastructure is essential for the optimum growth of SME. So government of Bangladesh needs to take appropriate policy strategy for the infrastructure development of Bangladesh.

← Government, financial institutions and Non Government Organizations (NGOs) may take necessary steps to ensure uninterrupted financial support to the prospective SMEs in Bangladesh.

← Due to the absence of uniform definition the policy formulation and implementations are not possible. Government should take initiative to develop a uniform definition of each category of SMEs. Govt. of Bangladesh should take the initiative to develop web pages exclusively for SME and an integrated SME database. It will reduce the barriers to SME access to global market.

← In order to ensure the retention of skilled workforce the government should make the entrepreneurial career attractive by minimizing the uncertainty.

← In order to encourage women entrepreneurship govt. may; involve women entrepreneurs in policy formulation and implementation. Arrange funds for women entrepreneurs. Provide necessary training to women entrepreneurs in rural and urban area of Bangladesh.

← SME foundation may take appropriate marketing tools to popularize their products.

← For minimizing red tapes and accelerating the growth of SME government may provide one roof service under the SME foundation.

← Appropriate legal framework is necessary to ensure the development of SME of Bangladesh.

← In this era of intense competition continuous planning and quality improvement act as a prerequisite for the survival of SMEs. In order to improve the quality SMEs can follow the Just in Time (JIT) philosophy and use Total Quality Management (TQM) and can ensure the improvement of quality and productivity at a time.

← Government should establish a credible certification authority especially for SMEs. So that this sector can obtain a technical evaluation of the quality of their products within a shortest possible time. The certification of the authority should be world wide accepted. Govt. may also provide assistance to SMEs during the certification process and promote the importance of product certification for international acceptance among the SMEs.

← Research and Development (R&D) is must for the development and growth of SME. So government must have to invest in R&D for ensuring the intensification of SME of Bangladesh.

← Restriction may be imposed on import of SMEs’ products which are available in Bangladesh.

Chapter 8


At last we can say, SME financing plays a contribution in Bangladeshi economy. It is a business which changes the traditional business successful to make employment from unemployment. The importance of SME sector is well-recognized world over owing to its significant contribution in achieving various socio-economic objectives, such as employment generation, contribution to national output and exports, fostering new entrepreneurship and to provide depth to the industrial base of the economy. Bangladesh has a vibrant SME sector that plays an important role in sustaining economic growth, increasing trade, generating employment and creating new entrepreneurship in our country.


• SMEs in Bangladesh -Abdul Awal Mintoo. CACCI Journal, Vol. 1, 2006.

• International Journal of Business & management,Vol.4 no 7,2009

• The Global Competitiveness Report 2011-2012 © 2011 World Economic Forum


• Bangladesh bank

• SMEs in Bangladesh and Their Financing: Md. Shamsul Alam. Md. Anwar Ullah. The Cost and Management. Vol. 34 No. 3. May-June 2006, pp. 57-72.

• Small and Medium Enterprise (SME) Credit Policies & Programmes. SME & Special Programmes Department. Bangladesh Bank

• Bangladesh Economic Review, 2003 & 2004, Ministry of Finance, Government of Bangladesh.









Table1. Contribution of SMEs in the GDP on Bangladesh


Source: ICG/MIDAS Survey, 2010
Note: US $ 1 = BDT 80.00

Table 2. Sector wise contribution of SME in GDP of Bangladesh (Taka)


Source: ICG/MIDAS Survey, 2009
Note: US $ 1 = BDT 78.00

Table3. Growth Pattern of SME


Table4. Growth Pattern of Manufacturing Sector


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