A difficult period for Bangladesh’s small businesses
Along with the dollar crisis, exchange rate fluctuation, and higher capital requirement, the overall adverse business environment due to macroeconomic pressures have roughly impacted CMSMEs
Zahangir Alam is a small entrepreneur based in Dhaka's Karwan Bazar area. He imports various types of stationeries from abroad and provides them to offices in Dhaka.
But he has been persistently struggling to open up LCs in the last few years.
"Big businessmen and corporations easily get massive amounts of loans from banks, but a small businessman like me has to wait a long time to open an LC," Zahangir told TBS.
Due to the devaluation of the Taka against US Dollar, securing all the required capital together has become very challenging.
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Moreover, cottage, micro, small, and medium enterprises (CMSMEs) all across the country are inflicted with myriads of such challenges.
With over 78 lakh industries which account for around 25% of the total GDP, the CMSME sector is a key pillar of our economy. CMSMEs also generate jobs for around 2.1 crore people.
But ever since the Covid-19 pandemic and subsequent economic setbacks, this key economic sector has been navigating a rough terrain. Besides the dollar crisis, exchange rate fluctuation, and higher capital requirement, the overall adverse business environment due to macroeconomic pressures have roughly impacted small businesses.
It is important to remember that the SMEs employ a large portion of our population and a mammoth total of our GDP originates from small businesses. If the situation is let loose and proper policy initiatives are not taken to save them, their capacity to sustain employment levels and positive contribution to the GDP growth will be severely compromised.
According to Bangladesh Bank data, CMSME financing by banks and NBFIs (Non-bank Financial Institution) in Bangladesh was Tk153,496 crore in 2010, Tk185,428 crore in 2021, Tk220,489 crore in 2022, and Tk229,312 in 2023.
The growth rate stagnated to 4% in 2023, which was respectively 20.8% and 18.9% in 2021 and 2022.
Cascading effects of macroeconomic challenges
The Covid-19 pandemic, followed by the Ukraine War, pushed the world to a brink of unprecedented economic crisis. Most countries have come out of the crisis by now but Bangladesh's economy is still suffering.
And that challenging macroeconomic environment has inflicted sufferings on the country's small and medium enterprises as well, in the forms of diminishing profit margins to heightened capital requirements.
High inflation rates significantly increased the cost of goods, in effect, narrowing the profit margins of the SMEs.
Along with this comes the challenge of the fluctuating exchange rate, which has disrupted market predictability. As a result, it has further exacerbated inflationary pressures and made the overall scenario difficult for businesses reliant on imports.
Access to finance an uphill battle for SMEs
Just like small entrepreneur Zahangir revealed, access to finance is an uphill battle for small businesses. A survey dating back to 2013 found that more than 40% of the country's SMEs lacked access to formal loans.
The World Bank says that there is a staggering $2.8 billion financing deficit in Bangladesh's SME sector. This is a major obstacle for SMEs- the country's economic backbone- to grow and flourish.
The current dollar crunch is further adding to the already existing woes. The crisis that has been going on for over two years now has inflicted a major blow to the businesses which require opening LCs for importing raw materials and finished goods.
The CMSMEs especially find themselves at a distinct disadvantage compared to larger corporations as the banks, in the face of liquidity constraints and heightened credit default risks, are prioritising big businesses for import financing, leaving SMEs struggling to secure essential supplies.
Challenges with financial institutions and call for government assistance
While access to formal finance is a challenge for small businesses, challenges within the banking sector are also mounting, with liquidity crunch exacerbated by economic uncertainties. This, in effect, has constrained their ability to extend credit to SMEs on favourable terms.
It is important to remember that the SMEs employ a large portion of our population and a mammoth total of our GDP originates from small businesses.
If the situation is let loose and proper policy initiatives are not taken to save them, their capacity to sustain employment levels and positive contribution to the GDP growth will be severely compromised.
Policy reforms need to be undertaken, aiming to ease CMSMEs' access to finance. The government also has to take sufficient measures to stabilise exchange rates, and ensure equitable access to dollars for import purposes.
Moreover, initiatives to alleviate the liquidity crunch faced by financial institutions could provide much-needed relief to SMEs navigating these turbulent economic waters.
Besides the challenges, the potential of the CMSMEs of Bangladesh remain brighter than ever. With targeted interventions and collaborative efforts, these enterprises can overcome current obstacles and emerge stronger in the post-pandemic era.
