In Bangladesh, small and medium-sized enterprises (SMEs) have heterogeneous characteristics, which are evident in their various business activities. However, the discussion on SMEs has a fundamental problem related to definition and scope.
As the term SME is more popular, MSME is often referred to to include micro-enterprises. There are also references to CSMEs to include cottage industries. These definitional anomalies create problems in undertaking the right policies and programs for the improvement of these sectors.
In addition, the nature and extent of the challenges faced by cottage industries, micro and small enterprises are more acute than those of medium enterprises. Therefore, there is a valid argument for separating medium-sized industries to have a focused discussion on the problems and needs of micro-enterprises, small enterprises and small enterprises.
Bearing in mind the definition debates, in the article we will continue to use the term SME where small will mean micro, small business and small business.
SMEs play an essential role in the economic development of a country. Their functions relating to production, job creation, contribution to exports and facilitating an equitable distribution of income are vital.
Experiences from East and Southeast Asia suggest that SMEs can make a significant contribution to economic growth by stimulating competition, innovation, entrepreneurship and the diffusion of skills. However, in Bangladesh we have not yet been able to acquire the full potential of SMEs.
There is no consistent data on the contribution of SMEs to the national economy of Bangladesh. However, according to some reasonable estimates, SMEs contribute around 25 percent to GDP and 35 to 40 percent to employment.
A key aspect of the contribution of SMEs to the economy is their role in the different segments of the value chains of goods and services. And much of the activity of SMEs is informal.
Micro and small enterprises, among SMEs, enjoy low barriers to entry due to their informal character and small size. However, the low barrier to entry does not necessarily mean low entry and exit costs for these companies in proportion to their size. Therefore, a pandemic like Covid-19 can permanently force many micro and small businesses out of business.
There are three areas of challenges for SMEs in Bangladesh: finance, infrastructure and skills. These problems are common to many businesses. However, these problems are becoming more acute for SMEs, especially micro and small enterprises.
The financing challenges for SMEs are enormous. SMEs have limited access to institutional finance due to scale barriers and market failures resulting from policy failures and institutional rigidities. As a result, formal funding processes, through banking channels, are not easily accessible to them. Banks view SME financing as expensive and risky.
High barriers to entry into formal financing processes at affordable costs are significant obstacles to the growth and expansion of SMEs. Although, according to the instructions of the central bank, 20% of all bank loans must go to SMEs, in reality, SME entrepreneurs do not get this amount of loans.
This forces SMEs to take out loans through informal channels at higher interest rates.
SMEs face a number of supply side constraints related to inadequate infrastructure and difficulties in accessing appropriate technologies and information. Due to their small scale, it is costly and difficult to address infrastructure supply issues if SMEs are working in isolation. A cluster-based approach is therefore necessary to resolve the infrastructural deficiencies of SMEs.
The regrouping of SMEs can generate external economies of scale. The very idea of having an industrial park for SMEs, like the BSCIC industrial park, is very consistent with the promotion of external economies of scale.
However, the BSCIC industrial park initiative remained unsuccessful for various reasons. The main reason is the inability to integrate SME development policy into general industrial policy and to generate the political and programmatic support necessary to ensure the success of the field.
SMEs also face challenges related to inexperience in business, lack of technical knowledge, poor management skills, lack of planning skills and market research skills.
The current pandemic has had intense impacts on the SME sector.
According to quarterly enterprise-level surveys conducted by the South Asian Economic Modeling Network (SANEM) since June 2020, SMEs in Bangladesh have been more affected than large enterprises. In particular, the impacts are devastating for micro and small enterprises.
In addition, the business environment turned out to be more unfavorable for SMEs during the pandemic.
The April 2021 survey also found that SMEs were seriously lagging behind large companies in terms of economic recovery. While on average, in April 2021, large companies recovered 77.3% of their operations to their pre-pandemic state, midsize companies managed to record a 63.6% recovery and micro and small businesses recorded a recovery of 46.9%. .
Large companies have also received more stimulus packages than micro, small and medium enterprises. While 46 percent of large businesses surveyed received stimulus packages, this rate was 30 percent for medium-sized businesses and only 9 percent for micro and small businesses.
The adjustment costs induced by confinement and “strict” restrictions are very high for SMEs. Many SMEs lost their businesses during the crisis.
Given the difficulty of obtaining loans and other assistance through established means, the path to recovery for many SMEs is likely to be uncertain. However, the good performance of SMEs is essential for the recovery of the economy as a whole.
While the lockdown and “tough” restrictions limit the spread of the virus, they hamper the livelihoods of the poor and small businesses. The economy is unable to afford long-term suspension of economic activities. Although more than a year has passed since the start of the pandemic, there have been no effective health-related and sector-specific protocols, which can replace the lockdown and “hard” restrictions, to maintain economic activities.
Governments should undertake several policies and support measures to help the SME sector to emerge from the crisis.
Examples of these supports include deferring the payment of income and profit taxes, providing tax breaks, easing debt repayment schedules, and paying rents and charges. , the provision of soft loans (working capital) at low interest rates, the guarantee of wage subsidies for the protection of employment, the introduction of regulations to prevent large-scale layoffs and to allow modalities of alternative work.
As the SANEM survey shows, SMEs are less successful in benefiting from stimulus packages compared to their larger counterparts. Therefore, barriers to accessing stimulus packages by small and medium-sized enterprises need to be identified and addressed.
The author is executive director of the South Asian Economic Modeling Network.