Small and medium enterprises (SMEs) are the most important business segment of any economy. SMEs are getting the highest priority from policymakers for their proven multidimensional contributions to socioeconomic environment of a country since long. These enterprises are easy to start, require only minimum capital, employ a comparatively higher number of people and produce goods that meet local demands as well as contribute to export earnings. It's a booster for any economy.
The importance of SME sector in growth of a developing country like Bangladesh is immense. Currently, the country's most industries fall in the SME category. Its role is also expanding fast to attain certain ability to produce import-substituting products.
Relocation trend of industries from an economy of higher production cost to locations of lower production cost could be an added advantage for Bangladesh if we can project the potential of our SME sector to the global relocating enterprises.
The Bangladesh economy is transforming from an agriculture-dependent economy into an industrialised one.
The SME sector helps us to save valuable foreign currency by reducing import dependence. In addition, micro-small-and-medium-scale entrepreneurship is perhaps the most accessible type of entrepreneurial activity for migrants and members of their families, backed by remittances, cross-border social networks and private savings.
Definition of SMEs is based mainly on indicators of replacement cost (invested amount), number of people employed, yearly revenue, etc. Earlier, micro enterprise was included in the SME category and named as MSME. Now, cottage industry is also included in the category which has been renamed as CMSME. The Bangladesh Bank revised the 'Master Circular on SMEs' on September 05, 2019.
The SMEs play a vital role in employment in various countries. For example, SMEs make up 87.7 per cent of employment by enterprises in the Republic of Korea, 80.3 per cent in Thailand, and 71.8 per cent in Cambodia. Similarly, SMEs are contributing to GDP (gross domestic product) growth and increasing export earnings of these countries. They generate 60 per cent of GDP in Indonesia and China, 47.6 per cent in the Republic of Korea, 45 per cent in Singapore, and 43.7 per cent in Japan.
Japanese, Chinese and Korean businesses are suffering from higher production cost due to increase in value of factors of production there. However, Bangladesh has many competitors in attracting foreign investments. For example, countries like India, Pakistan, Vietnam, and Cambodia are also hungry for foreign investments.
Therefore, we have to undertake an aggressive drive with proper preparations to attract more foreign direct investment (FDI) into Bangladesh. In a labour-surplus country like ours, the SMEs can play a substantial role in providing impetus to development of a modern manufacturing sector and in creating jobs outside of agriculture and informal services.
CMSMEs have potential to become the lifeline of the Bangladesh economy. Industrialisation helps to create employment, and increase GDP growth and export earnings. Agriculture has the highest point of value addition but in case of industry production, capacity of a certain land is unlimited. Well-managed industries are equally beneficial to both entrepreneurs and workers. But SME sector in Bangladesh faces a lot of financing constraints such as poor quality of collateral, inadequate documentation and ill-defined business plans.
The 7th Five-Year Plan (2016-20) recommends a three-step strategy for development of the CMSME sector. The first step relates to consolidation of naturally developed capabilities mainly serving the domestic market; the second one focuses on making the entry of SMEs into the export market easier and the third step emphasises the enhancement of capacities to thrive into the global market.
For promoting agro-processing and small-scale rural enterprise, a value chain approach will have to be followed by integrating input providers, traders, processors and service producers.
To promote growth of CMSMEs, numerous development projects should be considered and they may include providing incentives to agro-based industries; special assistance for expansion of rural industries; education and skills development; and support for infrastructures and adopting technology. Also areas need to be identified for building 'cluster' where CMSMEs have a comparative advantage and higher growth potential and it is an essential element of a strategy for development of this sector. This will mean exploring market opportunities on a sustained basis and mobilising the required support services for promotion of these industries once such niches are identified.
Moreover, a comprehensive credit policy for CMSMEs developed by the Bangladesh Bank should be duly implemented. Under this policy, commercial banks and other financial institutions are required to disburse CMSME credit as per targets set by the central bank and also send disbursement reports to Bangladesh Bank. The financial institutions will be required to develop loan products that relate better to a specific type of credit needed in CMSMEs.
Within the CMSMEs category, four segments -- Cottage, Micro, Small & Medium Enterprises (CMSME) -- have maximum potential to attract more local and foreign investment. Because CMSMEs are lower capital-and-technology-intensive, and require small amount of investment capital. Therefore, it is easy to run a CMSME compared to a large enterprise. This segment is considered the engine of growth around the world. For development of CMSME sector in Bangladesh, a combined effort should be made by regulatory authorities and stakeholders.
Mir Mahmudul Haque Chowdhury is a banker.