SMEs face business start-up challenges

Ferdaus Ara Begum | Monday, 7 November 2016

As per cost of doing business index, Bangladesh slipped 6.0 points from the year 2015 in case of starting a business, while  many countries have been moving ahead much faster by simplifying business start-up processes. In order to see more micro and SMEs (small and medium-sized enterprises) to be in new business, start-up challenges have to be addressed and policies concerned should be revisited in line with the experiences of other developing countries.
In Bangladesh, SMEs share about 90 per cent of private sector enterprises and 70-80 per cent of non-agricultural workforce (Source: Bangladesh INSPIRED). It is generally not widely known that this sector accounts for about 40 per cent of the country's gross manufacturing output. Unfortunately, this important sector has not been able to be fully developed due to various constraints such as unavailability of short and long-term credit, limited access to market facilities, technology, expertise and transparent policies etc. Over and above,  business start-up challenges for new SMEs have formed the hardcore of the problem. SMEs are the most defenceless segments and even banks and financial institutions try to avoid them. Even if there are a number of financing schemes, refinancing and venture capital policy are in place, SMEs are a natural sufferer in getting benefits out of these good policies. Chambers and associations are providing support but there is not any single entry point earmarked by the government from where SMEs and specially micro-entrepreneurs can get business start-up supports.
It is of course difficult to get government statistics about the contribution of SMEs to the gross domestic product (GDP).  In the year 2015-16, contribution of industries (manufacturing) was 20.77 per cent (Bangladesh Economic Review 2016), of which large- and medium-scale industries contributed 17.19 per cent and small industries 3.58 per cent. Over the last ten years, contribution of small industries remained almost the same. It was 3.22 per cent in 2005-06, meaning it increased only by 0.36 per cent during the period while in case of large and medium industries, it increased by 4.27 per cent. There is an overriding need to show separate contribution of medium industries so that total contribution of SMEs is clear to the policymakers so as to recommend policy prescription accordingly to boost the sector.
The government statistics do not show SMEs' contribution to the service sector. But a significant number of them are being engaged in services sector.  With the advancement of growth,  improved standard of life, need for services  will be increasing.  Services sector could be one of the potential areas wherein SMEs can also contribute. Policies should be in favour of increasing value addition to both manufacturing and services sectors.
As per statistics of the Bangladesh Bureau of Statistics (BBS), value added to the manufacturing sector shows a declining trend, which is a concern for SME development (Chart 1).
Chart 1 shows that except in textiles, almost in all other sectors, value addition has decreased. It seems that the value of the amount of goods and services that have been produced by SMEs in some particular sector as above has been reduced in terms of costs of all inputs and raw materials. This has been directly attributed to cost of production which is one of the alarming signals for new entrants preparing for a new venture.
As per economic census 2013, published by the BBS, there are 7.88 million establishments. The report defined SME as an enterprise or part of an enterprise that is situated in a single location and in which only a single (non-ancillary) productive activity is in operation or in which the principal productive activity accounts  for most of the value addition (BBS). Out of this 7.88 million, 4.55 million are permanent, 4.87 million temporary and 2.84 million economic households (households are those which have non-agricultural economic activities such as cottage industry, shop or workshop in or within its premise) at the national level. In the urban areas, there are 2.25 million establishments of which 1.59 million are permanent, 2.08 million temporary and 4.52 million are economic households. In the rural areas, there are 5.63 million establishments of which 2.96 million are permanent, 2.79 million temporary, and 2.39 million economic households. Interestingly, enterprises are much higher in the rural areas but economic households are higher in urban areas, meaning cottage industries and shops are higher in the urban areas whereas establishments are also increasing in rural areas. A number of SMEs are scattered all over rural areas of Bangladesh and contribute to economic development through different types of entrepreneurships.
Women entrepreneurs in some non-traditional sectors are coming up in a bigger way. These fields are electrical and electronics, agricultural farming, pharmaceutical, toiletries and readymade garments. In most of the cases, these enterprises are micro and small in nature and willing to be in extra-legal status and thus remain vulnerable to any internal and external shocks. As per a Directory of Women Entrepreneurs prepared by SME Foundation in 2016, about 7,062 women entrepreneurs, a significant number of whom is located in rural areas, is engaged in manufacturing and services sector. Simplification of business registry process, base-level civility, unified system and reduced domination of the National Board of Revenue (NBR) in collecting taxes could further boost the segment, creating opportunities for employment and reducing poverty.
SMEs mostly start their businesses with a trade licence from municipalities in urban areas and union parishads in rural areas. The number of trade licence-holders is not available from websites of the concerned organisations. The trade licence authority usually confirms the aspect concerning location of business, address and other related issues. They do not have to do anything involving regulation of the nature and type of business. Considering the number of establishments, license-holders are small in number. Renewal of trade licence is another issue. Because of avoiding hassles, a number of business enterprises avoid renewal. Rental of the premise, connections for utilities, machinery procurement, packaging and marketing are some other related issues for a new business. Specific guidelines with a checklist of total information required for establishing an enterprise could be helpful for SMEs.
According to statistics of the Registrar of Joint Stock Companies (RJSC), up to July 2016, the number of entities registered with them is10,196 including limited companies, registered under the Societies Act, partnership firms and trade organisations etc. If we consider the BBS figure about the economic establishments, we can see a significant number of industries/establishments  remain beyond the purview of RJSC registration and they run their businesses with trade licence only.
The government claims that the registration under RJSC has been automated but the private sector says they have now to provide papers both as hard  and soft copies, which means that their hassles have not been reduced rather increased. Automation needs serious determination of the organisation itself and also determination of the parent ministry and the government as a whole. The reason why it is necessary is that not a single organisation is self-sufficient. To get licence, they have to depend on banks and seek approval from income tax office and other organisations. So without an integrated approach, it cannot be automated.
The recently-announced Industrial Policy 2016 has clearly recognised the role of SMEs. Additionally, a SME policy strategy has been finalised which will replace the SME policy strategy prepared in the year 2005. So far, ten industrial policies have been announced and in all of these policies, SMEs have been given enough emphasis. Experiences say, a very few industrial undertakings graduated from micro to  small and small to medium and then to large industries. The SME policy should focus on this so that graduation phases are ensured. 
Under the recent industrial policy, the definition of SMEs has been up-scaled by enhancing the ceiling of investment to a significant level, meaning that  more and more enterprises established in the country will come under the purview  of SMEs. But it is apparent that these enterprises are facing a number of challenges. 
For the first time, this year's industrial policy has got an annexure (number-9) with a time-bound action plan which, we believe, will definitely help organisations concerned to be responsible for sharing and contributing largely so that support services for the SMEs get strengthened. A SME Development Strategy once announced needs a dedicated parent organisation with all capabilities to see its full implementation.
We would like to see that the rollout plan is made workable in coordination with all other related ministries. For a single ministry, it is almost impossible to accomplish the task of industrialisation. At the same time, even if SMEs are vital for the economy, the parent organisation of these enterprises is not yet clear. Once the Bangladesh Small and Cottage Industries Corporation (BSCIC) played a role but now the SME Foundation looks after some issues but it is almost aloof from the BSCIC. The Ministry of Industries was supposed to look after the state-owned industries. In the changed circumstances, when a SME Act is under preparation ( its strategy almost in the final stage), an implementing body with full authority for rolling out the plan of action for industrial development led by SMEs has to be put in place.
The writer is CEO, Business Initiative Leading Development (BUILD).
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