Bangladesh’s backbone: Making the SME sector ready for tomorrow

The Small and Medium Enterprise (SME) sector is one of the most dynamic forces behind Bangladesh's economy. Accounting for around 25–30% of the national GDP and engaging nearly 80–90% of the country's workforce either directly or indirectly, it would not be an exaggeration to call this sector the backbone of our economy. 

Yet, despite this immense contribution, we still have a long way to go in preparing our SMEs for the future, particularly as Bangladesh approaches its graduation from Least Developed Country (LDC) status.

From my perspective as Chairperson of the SME Foundation, I believe the key to unlocking the next level of growth in this sector lies in three crucial areas: branding, compliance, and the smart and skillful use of technology.

Preparing for post-LDC challenges

Bangladesh is set to graduate from the LDC category in the near future, which will bring a new set of challenges and standards, especially for product quality, institutional compliance, and global competitiveness. If we do not prepare our entrepreneurs now, we risk being left behind.

This is the time to act. We must raise awareness among SME owners about the importance of building institutions that are compliant with international standards. We need to educate them on why these changes matter and how such steps will directly benefit them, both domestically and in export markets.

The productivity gap

One of the biggest barriers to SME development in Bangladesh is low productivity. I often cite a stark comparison: a Japanese SME worker, aided by artificial intelligence or modern machinery, can be up to 100 times more productive than a Bangladeshi counterpart. 

For example, where a Japanese or Korean worker might produce 20 units of a product in one hour, one of our workers may not produce more than one.

This is not just an issue of speed; it's a matter of cost, quality, and time management. Only when we increase productivity can we think about competing globally.

To address this, we are emphasising skills development. The SME Foundation, along with other institutions like the Bangladesh Industrial Technical Assistance Centre (BITAC), is offering training that will help our entrepreneurs and workers increase their output through better tools, technology, and practices.

Overcoming 'Digital Phobia'

Another major challenge is what I call "digital phobia." Many of our entrepreneurs are hesitant or fearful about incorporating digital tools into their business operations. They are unsure whether they will be able to manage a business in a fully digital environment.

To change this, we at SME Foundation are conducting extensive training on digital marketing, e-commerce, cybersecurity, and business intelligence tools. We teach entrepreneurs how to promote their products on social media platforms like Facebook, how to take professional product photos, and how to carry out secure and smooth transactions on e-commerce platforms.

We are also working in collaboration with Japan's Asian Productivity Organisation to introduce our entrepreneurs to the use of artificial intelligence (AI) in enhancing productivity.

Branding and compliance: Non-negotiable for growth

Many entrepreneurs still think that making a product is enough. But in today's world, without proper branding, you simply can't attract customers. Similarly, without compliance, particularly in export-oriented businesses, you face serious roadblocks.

We must explain to our entrepreneurs that compliance—having a trade license, TIN, or VAT registration—is not a burden but a gateway to opportunities. These credentials open the door to loans, partnerships, and larger markets.

I would also like to call upon the media to support us in promoting quality local products such as Jamdani, Benarasi, and other traditional crafts. Highlighting these products in a dignified and visible manner can significantly boost their global recognition and market potential.

Financing challenges: A systemic barrier

Access to finance remains one of the biggest obstacles for SME entrepreneurs. The main issue here is documentation. Many SMEs do not have trade licenses, TINs, or do not conduct transactions through formal banking channels. This makes it difficult for banks to assess their creditworthiness, and as a result, they are denied loans.

What's more, banks often demand similar documentation and follow the same loan assessment process for a Tk5 lakh SME loan as they do for a Tk500 crore corporate loan. This discourages banks from engaging with SMEs.

Entrepreneurs fear formal banking processes. For example, when asked why they don't conduct more transactions through banks, some express concern that the National Board of Revenue (NBR) might target them. We need to shift this mindset by helping them understand how formal transactions can build business credibility, expand market access, and open up financial support.

Some banks and NBFIs are now coming forward to support SME financing, and Bangladesh Bank has also introduced specific lending targets for SMEs. These are steps in the right direction, but much more needs to be done to make finance accessible.

At the SME Foundation, we operate a refinance scheme where entrepreneurs can get loans at a 6% interest rate—far lower than the commercial rate of 16%. However, the size of this fund is currently small. If the government can allocate more funds here, we can truly support genuine SMEs. It's worth noting that our loan recovery rate is 99%, which proves that SME entrepreneurs are trustworthy borrowers.

Supporting youth: From freelancers to entrepreneurs

One of our key initiatives is the "Freelancer to Entrepreneur" program. This is aimed at young people who are currently engaged in freelance work but want to build sustainable ventures.

Through this program, we teach them where to source affordable raw materials, how to reduce production costs, and how to market their products. The goal is to help them shift from job-seeking to job-creating.

Cluster-based development

So far, we have identified 177 SME clusters across various sectors, including handicrafts, footwear, pottery, leather, and weaving. These clusters are rich in local skills, raw materials, and market demand.

We are now working on a new round of cluster mapping to update and expand our reach. Each cluster is being developed with common facilities that can support mass production and quality control. However, to scale this model, we need additional funding.

That's why we are asking the government for direct allocation in the national budget to the SME Foundation. If we receive dedicated annual funding, our ability to develop infrastructure and provide services will be greatly enhanced.

Policy support: The need for a tailored approach

The SME sector needs more than just funding—it needs policy reform. We strongly recommend the introduction of a special tax regime for SMEs. Loan procedures must be simplified, and authorities need to build trust in small entrepreneurs.

Incentives should be offered to those who comply with regulations. Documentation processes must be streamlined. Entrepreneurs should be able to renew their licenses or pay VAT without facing harassment.

Also, considering the narrow profit margins of small businesses, high-interest loans become a burden. More low-interest, collateral-free loans need to be introduced and scaled up.

Despite the SME sector's size and importance, the SME Foundation's current capacity is limited. With nearly 10 million entrepreneurs across the country, we are still operating from a single rented office in Dhaka.

To truly serve our entrepreneurs, we must set up dedicated SME offices in every divisional city. These offices can act as one-stop centres for training, financial services, and business support.

Even reaching 100,000 entrepreneurs a year is difficult with our current setup. That's why we are working to expand both physically and digitally. The government is supporting our plan to build a permanent head office in Dhaka on land that we have requested through RAJUK.

If we want the SME sector to become one of the main engines of economic growth, we must focus on timely training, digital empowerment, and policy-level support.

The future of entrepreneurship lies in the hands of our youth. If we can create a supportive environment for them, it will lead to local job creation, greater export earnings, and a more resilient economy.

But we cannot do this alone. Government agencies, financial institutions, the media, and development partners must work together with us to realise this vision.

Let us build an SME ecosystem that is inclusive, modern, and globally competitive—because the future of Bangladesh depends on it.

This interview was conducted by The Business Standard's staff correspondent Jahir Rayhan