How access to finance can multiply the growth of SMEs
Just as in other countries in Asia, the socio-economic impact of SMEs in Bangladesh is immense. Although there are commendable efforts that provide financial assistance to SMEs at the subdistrict level, there is still room for improvement
In both developed and developing economies, small and medium-sized enterprises (SMEs) play an essential role in driving economic growth and accelerating inclusive growth. In Asia, SMEs are instrumental in creating jobs and propelling economic development.
Highlights of a 2018 report from the Asian Development Bank (ADB) suggest that SMEs account for 96% of all Asian businesses, contributing two out of three private-sector jobs on the continent. Just as in other countries in Asia, the socio-economic impact of SMEs in Bangladesh is immense.
According to the SME Policy 2019, from the Ministry of Industries, the SME sector in Bangladesh is made up of about 7.8 million enterprises that contribute close to 25% of the country's gross domestic product (GDP).
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Data from the Ministry of Planning (Planning Division) reveals that between 2009 and June 2014, the SME sector contributed 15 lakh jobs in the country; accounting for 80% of industrial employment and almost 25% of the country's entire labour force.
These enterprises serve as a major source of livelihood for a large proportion of the country's population, particularly for new entrants in the job market. With about two million young people joining the country's labour force every year, it is not surprising to find out that a large share of the youth population are interested in working in the SME sector.
Problems persisting in the SME sector
According to the International Labour Organisation (ILO), the School-to-work transition survey (SWTS) indicates that while one-fifth of students in Bangladesh would want to work in the public sector or government, about 48.7% prefer working in family businesses.
This reality presents a daunting task for policymakers and development organisations in Bangladesh, as the country's SME sector is plagued with several snags that are constraining growth in the sector. Notable among these challenges is the limited access to affordable finance for SMEs. Despite the many attempts to improve access to finance for SMEs in Bangladesh, these efforts have yielded minimal results.
This is largely attributed to the fact that the relationship between suppliers and demanders of funds in the SME sector is characterised by asymmetric information problems and high transaction costs. These factors escalate collateral requirements and the cost of borrowing for SMEs, which eventually constraints growth in the SME sector.
According to the World Bank, the SME sector in Bangladesh has a financing gap of $2.8 billion; about 60% of women-owned SMEs are denied access to finance because they do not have collateral. This has been the state of the SME sector for many years.
In 2013, a study by ADB indicated that more than 40% of SMEs do not have access to formal credit. The study further suggests that there is a substantial credit gap and an unmet demand for formal credit even for SMEs that have access to financing.
To provide a sustainable panacea to the credit gap situation in the SME sector, policymakers should address the asymmetric information problem that defines the relationship between borrowers and lenders in the SME sector.
Where lies the solutions?
Another study conducted in 2018 by the Asian Development Bank (ADB), that collected data from manufacturing enterprises, local financial development and sub-districts in Bangladesh show that the expansion of the branches (network) of banks mitigates the probability of default risk as it reduces the asymmetry of information between SMEs and banks. This enhances access to loans for credit worthy SMEs at relatively lower costs.
The study also indicates that bank density in Bangladesh has a positive and significant impact on the performance of a firm, thus an increase in the branches of a bank scales up a firm's output, gross value added and to some extent labour productivity.
For a country that is expecting to graduate from the United Nations list of Least Developed Countries (LDC) by 2026, it is imperative for Bangladesh to build a resilient SME sector that could revitalise local economies, create jobs, and promote shared prosperity. One way this could be achieved is to expand the branches (network) of banks at the sub-district level.
This initiative will spur the growth of the SME sector and also reduce the cost of monitoring for financial institutions; with this model SMEs in Bangladesh can access affordable credit that will be essential to the growth of the sector, economic growth and inclusive growth.
Although commendable efforts provide financial assistance to SMEs at the subdistrict level, there is still room for improvement. For instance, the SME Foundation has an agreement with 11 banks and non-bank financial institutions to disburse loans to entrepreneurs and cottage, small and medium enterprises (CMSMEs) across most of the districts in Bangladesh.
This initiative is laudable, as it focuses on entrepreneurs and owners of SMEs in rural areas that were not able to access the financial package last year. The objective for implementing this initiative is to facilitate the country's economic recovery amid the Covid-19 pandemic.
The Covid effect
The impact of the Covid-19 pandemic on the economy of Bangladesh has been profound. All sectors of the economy, including the SME sector, have been affected. This has led to a slowdown of economic activity and a deceleration of economic growth.
According to a World Bank report of 2021, the country's GDP growth declined sharply, down to an estimated 2.4% in FY20. This has caused losses in employment and labour earnings, which has disrupted about two decades of progress made by poverty alleviation programmes in the country.
To accelerate growth, build back a better economy, promote inclusive growth and reduce poverty, the policymakers, as well as development organisations and relevant stakeholders, should focus on developing a robust financial sector that could facilitate access to affordable finance for the SME sector.
When this is achieved, SMEs in Bangladesh can easily access the required financial services at a lower cost. This will stimulate growth in the SME sector and boost economic growth, foster inclusive growth, shared prosperity, and reduce poverty.
Alexander Ayertey Odonkor is an economic consultant, chartered economist, and chartered financial analyst with a keen interest in the economic landscape of emerging economies.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
