SMEs deserve more, get less

It's been over two decades since the term SME—small and medium enterprises—began making rounds in seminars, policy discussions, and development plans in Bangladesh. In that time, an SME Foundation was established, a national SME policy was introduced, and various industrial clusters were identified for SME development. The central bank rolled out dedicated financing guidelines, while commercial banks set up SME desks and lending targets. The definition has since broadened, now commonly referred to as CMSME—cottage, micro, small, and medium enterprises.

Given all this focus, one might assume SMEs are a new addition to our economy. In reality, they have always been the backbone of Bangladesh's industrial landscape. Large industries employing thousands are few and far between; most people work in small-scale operations.

This trend isn't unique to Bangladesh. Across advanced economies like the European Union, SMEs—defined as firms with fewer than 250 employees or under €50 million in annual sales—make up 99% of all businesses, account for 67% of total employment, and contribute 57% of economic value. 

In Germany, where the SME definition includes firms with up to 500 employees, the share is even more striking. A decade ago, 99.95% of all firms in Germany were SMEs, generating 70% of employment and 62% of exports.

Germany's SME model: A blueprint for others

German SMEs—or Mittelstand—are characterised by two distinct features: support for fresh talent and a deep commitment to innovation. Over 83% of all apprentices in Germany are employed by SMEs. These enterprises invest about 15% of Germany's total R&D spending, highlighting their focus on quality and long-term competitiveness.

Interestingly, 81% of German SMEs employ fewer than five people, and 86% generate under €1 million in annual sales. Many are family-owned, often passed down through generations, preserving traditions while excelling in niche global markets.

Inspired by Germany's SME success, the SME Foundation of Bangladesh—backed by Friedrich-Ebert-Stiftung (FES)—conducted a study to explore lessons from the German experience. The study underscored the value of:

• Focusing on quality and innovation, not low pricing.
• Strengthening vocational education and offering uniform wages across sectors.
• Supporting family-owned businesses and their long-term legacy.
• Promoting relationship-based banking through regional banks, which share liability and trust with firms.

The German industrial policy does not apply a "one-size-fits-all" approach. Instead, it develops region-specific plans, supporting firms based on local conditions and potential. The SME Foundation study proposed similar recommendations for Bangladesh, including:

• Clear classification of micro and SMEs.
• A long-term SME development strategy.
• Greater access to finance.
• Emphasis on innovation and technical education.
• Cluster-based development and global networking.
• Support for family-run enterprises.

Five years on: Where are we now?

It's been five years since the SME Foundation received the Germany study. Yet there's little evidence to suggest these lessons have been applied. The Foundation's website offers limited data. Even basic statistics—such as the number of CMSMEs in the country, their contribution to GDP, employment, or exports—are outdated.

When the current interim government's economic task force reviewed the SME sector, it had to rely on data from 2013. Back then, CMSMEs accounted for 30.5% of manufacturing employment, and their gross value added was estimated at 53%. Another study suggested there are about 11 million small economic units in Bangladesh, employing 34 million people. Of these, 88.9% are small, 11% micro, and 0.8% medium-sized.

The task force estimated that SMEs account for 84% of national employment, with micro firms contributing 7.1% and medium firms 9%. Such numbers are regularly updated and easily accessible in countries like South Korea, Indonesia, and Malaysia. There, SMEs are recognised as economic lifelines and receive robust policy attention.

Regional lessons: Action speaks louder than strategy

In South Korea, SMEs make up 99% of enterprises, employ 81% of the workforce, and generate 39% of exports. Most jobs are created by micro firms. Korea has even established a separate Ministry for SMEs and Startups, recognising the sector's value. 

In June, the ministry honoured 100 long-standing business owners, and in May, it hosted a global exhibition for SME-made beauty products.

Korea's SMEs & Startups Agency, founded in 1979, now operates both domestically and in international markets like Germany, the US, Japan, and China. Its policies treat micro, small, and medium enterprises separately and are backed by over 20 dedicated laws, supporting everything from innovation to integration with large firms. Special laws support businesses led by families, women, and people with disabilities.

Indonesia also depends heavily on SMEs, which represent 90% of businesses and 70% of jobs. Most of these are micro firms employing fewer than four people and generating under Tk22 lakh annually. However, only 27% of Indonesian SMEs have access to formal financing. The sector also faces bureaucratic hurdles, with over 40 government agencies involved in SME affairs.

In Malaysia, SMEs—mainly service-oriented—comprise 49% of the workforce, 12% of exports, and 39% of GDP. While the involvement of over a dozen ministries in SME development may seem overwhelming, the system ensures these firms are supported from multiple angles.

Vietnam presents another telling example. With 95% of enterprises categorised as SMEs, the sector contributes 31% of GDP. A decade ago, Vietnamese SMEs struggled with poor financial and marketing support, limited technology, and little access to international markets. High inflation and interest rates worsened the situation, pushing many into bankruptcy. But the Vietnamese government took swift, practical steps, and the sector has since made significant strides.

In Bangladesh, the SME Foundation, formed in 2007, remains the apex body for CMSME development. It provides skills training, financing support, and market linkage opportunities, such as trade fairs, including one planned for November.

Over a decade ago, the Foundation mapped 177 industrial clusters and identified 11 priority sectors, including agro-processing, light engineering, RMG, plastics, handlooms, leather, and healthcare. Yet physical progress in these clusters has been sluggish. The Foundation has not significantly advanced SME development, mainly due to a lack of financial, legal, and logistical support. It relies on a Tk200 crore endowment fund, which it deems insufficient for its operations.

A recent report by the economic task force, led by economist Dr KAS Murshid, highlighted this limitation. The report recommended:

• Strengthening the SME Foundation.
• Establishing a one-stop service centre to handle trade licensing, tax, VAT, training, and business promotion.
• Simplifying SME registration and licensing.
• Enacting an SME Act.
• Offering fiscal incentives for export-oriented SMEs.
• Creating a dedicated SME Bank, or repurposing Palli Sanchay Bank until then.
• Enhancing Bangladesh Bank's credit guarantee scheme.
• Allocating more resources to SME financing.

The task force also proposed a permanent SME marketplace—Dhaka HAAT—at the Purbachal trade fair grounds to exhibit SME products. It called for better ICT support, innovation promotion, and skills training to increase competitiveness, many of which are familiar recommendations that have yet to see real implementation.

The problems facing SMEs in Bangladesh are not unknown. Nor are the solutions. What sets countries like Germany, South Korea, and Vietnam apart is their commitment to action. They implement what they already know. In contrast, Bangladesh is still debating definitions, data, and strategy.

Most of the task force's proposals could be implemented without massive investment or legal overhauls. With proactive steps from the Ministry of Industries, the Ministry of Commerce, and Bangladesh Bank, SMEs can move forward without waiting for the perfect definition or the latest dataset.

The future of Bangladesh's economy rests not on a few large industries, but on the vast potential of its small ones. What they need now isn't more reports, but real support.

Titu Datta Gupta. Sketch: TBS