Introduction

SME’s constitute the dominant source, 80%, of industrial employment in Bangladesh.

About 90% of the industrial units fall into the category of SME. The actual performance
of SME’s, however, varies depending on relative economic efficiency, the macro-
economic policy environment and the specific promotion policies pursued for their
benefit.

In Bangladesh, a sustained level of development of small and medium enterprises

(SME’s) is highly needed to reach in order to alleviate poverty. Considering the country’s
level of economic growth, composition of resources, level of global integration,
urbanization etc., there is ample scope for development of diversified and non-
traditional SME’s in the country. However, low productivity, lack of access to
information, high import of finished products etc. put the SME’s in a challenging
situation. In this context, the role of the government both in terms of policy and
operations is strongly felt.

Of those SME’s some of them are really going for a good run even worldwide. Products
such as garments, shrimps and handicrafts are some of the successful example. In our
report we will try to focus on the barriers, opportunities and other related factors about
the export oriented SME’s in Bangladesh.
Origin of the Term Paper

This term paper has been prepared as a part of the partial fulfillment of the course
“Business finance” (FIN-201 of the Business Administration Department of the East West
University. Our course instructor Ms. Sarahat Salma Chowdhury has assigned us this
report as a part of the course “Businees Finance”. He has authorized the task of writing
this term paper on a group basis.

Objective of the Report

The objective of the survey to learn the practical implementations of the theories taught
in the course Business Finance (FIN-201)). In additional to serve this purpose it tries to
find out all the necessary information that one person needs to know about SME.
 General objective: To determine the problems of SME’s in Bangladesh and
international context.
 To determine the problem based on depth interview & secondary data etc.
Scope of the Report
In our term paper, we have given the basic ideas regarding SME’s. But we could not get
into the details of every aspect of SME’s. It is a qualitative research, so we collected data
form various websites, research papers & taken in-depth interview in Uttara from
different SME’s businessman.

Methodology
For this term paper we have collected data and information from various sources such
as websites, newspapers etc. The primary data we have gathered from interviews.
Secondary data source comprised of relevant books, lecture notes, research papers,
websites etc.

Limitation
It is quite impossible for us to prepare a report without limitations. Lacking of
information was a big factor. We had to depend heavily on secondary data. We
conducted the term paper during our ongoing course, thus facing serious time
constrains. So the lacking of information for comparison & lack of time was the two
major limitations of this tem paper.
Literature Review
In the context of Bangladesh, the development of Small and Medium Enterprises (SMEs)
can be considered as a vital instrument for poverty alleviation and ensure the rapid
industrialization. In this paper the authors have tried to identify the problems of SMEs of
Bangladesh. The performance of SMEs of Bangladesh especially in terms of employee
turnover rate, quality assurance, allocation of funds, marketing activities have been
found significantly below the international standard. The sector gets negligible support
from government. The rate of development of SME is not up to the expectation. In
order to overcome the problems a few suggestions for the development of SMEs are
given by the authors.

SME in Bangladesh
Different countries and organizations define SME differently. The Government of
Bangladesh has categorized SME into two broad classes. They are:

1) Manufacturing enterprise
2) Non Manufacturing activities

1) Manufacturing enterprise: Manufacturing enterprises can be divided into

two categories:

(i) Small enterprise: an enterprise would be treated as small if, in current

market prices, the replacement cost of plant, machinery and other
parts/components, fixtures, support utility, and associated technical services
by way of capitalized costs (of turn-key consultancy services, for example),
etc, excluding land and building, were to up to Tk. 15 million.

(ii) Medium enterprise : an enterprise would be treated as medium if, in current

market prices, the replacement cost of plant, machinery and other
parts/components, fixtures, support utility, and associated technical services
by way of capitalized costs (of turn-key consultancy services, for example),
etc, excluding land and building, were to up to Tk. 100 million.
 2) Non-manufacturing activities (such as trading or other services)
Non-manufacturing activities can be divided into two categories:

(i) Small enterprise: an enterprise should be treated as small if it has less than
25 workers, in full-time equivalents.

(ii) Medium enterprise: an enterprise should be treated as small if it has

between 25 and 100 employees.

According to Bangladesh Bureau of Statistics different enterprises are defined as;

No of employees Name

0-9 Micro

10-49 Small

50-99 Medium

Above 99 Large

The Ministry of Industries, Government of Bangladesh has been identified following 11

booster sectors;
1. Electronics and electrical
2. Software-development
3. Light engineering and metal-working
4. Agro-processing/agro-business/plantation agriculture/ specialist farming/tissue-
culture
5. Leather-making and leather goods
6. Knitwear and ready-made garments
7. Plastics and other synthetics
8. Healthcare & diagnostics
9. Educational services
10. Pharmaceuticals/cosmetics/toiletries
11. Fashion-rich personal effects, wear and consumption goods.
Definition of SME in Bangladesh
Government of Bangladesh uses the definition of 10 to 99 workers as SME’s according
to the Industrial Policy 1999. However, this definition is hardly applicable to non-
manufacturing enterprises. The relative market share of the enterprise compared to
others in the same sector is perhaps a more appropriate indicator of size in defining an
SME. (Rabbani & Sulaiman, 2005)

A small enterprise in the context of Bangladesh would usually exhibit most, if not all, of
the following characteristics Mannan (2006):

 They would be sector & location neutral. They can be found in formal or informal
sector.
 They are more likely to be located in a rural area, a rural township, bazar or
growth center, or in an urban periphery.
 They would employ a mix of family & hired workers.
 They would use little or no division of labor.
 They usually produce goods for low-income consumers.
 They hardly follow any modern management and/or accounting systems.
 They would exhibit low to midlevel worker skill.
 They would usually be local raw material based.
 They would depend on personal marketing endeavors.
Findings in the Survey based on SME:
Interviews:

Based on the Question based interview the following areas have been identified as the
basic problem areas. We select Uttara as concentration area according to our faculty
member. We have selected four industries, such as Food, Healthcare, Electronics and
General stationeries. They provide us information according to their financial planning
and condition which help us to understand about their financial constraints, non
constraints, limitations and scope. Our interview criteria is to select small enterprise first
and then go for medium enterprise with due respect to same industry.

Financial Constraints
The most critical constraints that small and medium scale manufacturers mention are
the lack of sufficient capital to operate the business. It is been seen in most of the cases,
businesses started using own savings, borrowing from friends and relatives, while
banking source come after that. It is not so easy to rise fixed and working capital from
banks, since banks are not so willing to provide loan of small size for high monitoring
cost. On the other hand, potential small-scale entrepreneurs are also not so much
interested due to procedural hazards and requirement of long time, which may make
the necessity of taking loan futile. Also, without having collateral it is often difficult to
get the loan, at the same time a high rate of interest commensurate with large-scale
enterprise make the loan unattractive to small entrepreneurs. In terms of procedural
aspects, banking method of selecting a potential project based on project evaluation
and requirement for undocumented extra payment to bank officials often become
difficult for the small entrepreneurs to comply with. Thus, the way to get bank loans
need to be simplified for the small entrepreneurs.

Non-financial Constraints
Although it is not so difficult to start a business in the country, there are various other
constraints that make the overall process slower and cumbersome to operate. In case of
getting trade licenses for operating business, the entrepreneurs face unnecessary delays
and have to make undocumented payments. Similarly, registering the firms to the
concerned office often requires long-time and unofficial payments. In case of getting
clearance from the department of environment, the entrepreneurs face long delay. The
process of registration with BSCIC or BEPZA, although not mandatory, also needs to be
made easy and simple.
SMEs of Bangladesh also face technological constraints, especially in terms of lack of
availability of modern technology, high cost for machinery, lack of innovation of new
and quality products etc. Very little investment occurred in the research and
development of products, methods, techniques etc. In terms of infrastructure
constraints, the most important one is power constraints. There is lack of uninterrupted
and quality power supply for industrial units. On the other hand, tariff rate for power
supply is relatively high, even firms cannot operate due to low voltage of electricity.
SMEs often complain about poor backward and forward linkages. Distribution channel is
not well developed in the country and it makes the overall cost high. Often raw
materials are not available in the local market. Labor force available for manufacturing,
management activities are not well qualified and less skilled. Public-private linkage in
terms of development of skilled professionals, developing product quality, improving
management system is absent.
In general, development of SMEs largely depends on clearing these obstacles that make
business costly and less competitive. It implies that it is not always financial constraints
that obstruct the starting and operating of SMEs. Regulatory, technological and human
resource constraints are also vital for the SMEs. Government policies in this regard need
proper focus, which requires both budgetary and other administrative supports,
including strengthening of institutional capacity especially of the concerned public
institutions.

Family owned business:

In this survey we find that most of the businesses (small & medium entrepreneurship)
SME are family owned business. Most of the time the person behind the desk
introduced himself as employee but at the end of the day somehow he connected with
the family. The main thing is this SME is family business. They are doing business not for
any competition or not for enhancing themselves. They are only doing business for their
day by living. Lack of professionalism leads them a far behind, most of the time out of
the competition. This type of SMEs only is doing business to fulfill their timely need not
for any purpose.

Lack of Expertise:
As we mentioned before, they are doing business to satisfy their personal need, they do
not have any expertise or professional minded employees. Owner of this type of SMEs,
they do not have clear goals. Beside this they do not have any specific mission or vision.
As long as their business is running good, they are happy.

In the survey, we also able to find out employees do not have proper knowledge about
the business. They have lacking in technical knowledge. There is no training or
mentoring program for them, the basic idea about the business, how to run the
business, moral, ethics and principle of the business.
Less Government involvement:
The matter of fact is, there is no direct involvement of Government in the SMEs sector.
There is no Government funding in this sector. This is sad but true. May be there is a
loan facility but no SME owner is willing to take this facility. Our survey area of
concentration was Dhaka city. If we take a look into that then we can clearly see that
except a few exceptional no SME organization is taking the advantage. May be now-a-
days Private Banking Corporations are more interested to give SMEs loans which is
authorized by Central Bank or Bangladesh Bank. But Central bank does not give this
opportunity by himself.

No Monitoring Cell or Regulatory Policies for SMEs:

There is no monitoring cell and regulatory policy for the SMEs organization. Beside they
don’t have the proper guideline for running the SMEs.

Also, government is having the lack of One Stop Action centre where a pool of expertise
who can help the SME owners instantly.

Access to Finance:
SMEs encounter great difficulties while rising fixed and working capital because of the
reluctance of banks to provide loans to SMEs. Banks are shy to lend to SMEs because of
high processing and monitoring costs of loans to SMEs. The loan application forms for
investment financing from banks are long, tedious, and redundant. Since the removal of
the interest rate subsidy without the removal of interest band, financial institutions find
little incentive to lend to SMEs. SMEs find it difficult to use non real estate assets as
collateral to obtain loans from the banks.
Bureaucracy and Corruption:
Because of lack of proper autonomy and accountability the public sector financial
institutions are beset with inflexibility, inefficiency, political interventions and
corruption. Since the performance of the bank officials is not properly evaluated they
lack the incentive to bring a large number of suitable borrowers, particularly those in
the SME sector, within the fold of institutional financing. They adopt a passive and
inflexible attitude towards the borrowers either to avoid the risk of making an
inappropriate lending or to force the borrower to make side payments for more
favorable handling of the loan application. Until necessary reforms in the public financial
institutions are carried out, the SME’s will continue to bear the brunt of this institutional
malice.
Recommendations
The Check-Aim-Plan-Act cycle:

The planning cycle has four steps. It is Check-Aim-Plan-Act cycle

Check: It starts with check. Where are we right now? What does the short term future
look like?
Aim: The next step is aim. Are we on the trajectory to meet our apparitional goal? Does
our study need to change.

Plan: The third step is plan. What actions do we need to take to improve our
performance? What impact will these actions have on or performance?

Act: The last and forth step is act. How should we execute the plans and manage the
existing business?

Financial Improvement
Start-up capital
Fixed capital
Working capital
Expansion capital

Skill Development
Entrepreneurship and management development
Strategic planning
Skill development

Market Linkage
Market information and analysis
Marketing strategies and trade promotion
Factors Involved in the Development of SME Market
Conclusion
The multidimensional problems and challenges that SMEs of Bangladesh face need not
only budgetary support, but also need necessary improvement in the administration,
infrastructure etc. These are considered as serious constraints. Budgetary support
provided by the government has to some extent meet the major demand of the
entrepreneurs, such as financial requirement, availability of raw materials and
machineries. However, SMEs need necessary support in terms of administrative
regulations), efficient management of different public institutions and other required
fields. Besides corruption at related public institutions also make the small businesses
costly. Thus, a holistic approach is much needed for the potential and newly emerging
SMEs of Bangladesh, which may ensure the competitiveness of the whole value chain. In
this context, government may initiate public-private partnership approach to improve
the backwardness of different components of the value chain of SME products. There
are a number of good examples at hand, in this context and government should expand
such activities in different areas.
 References
Books

1. Scott Besley,Eugene F. Brigham (2006).Essential of Managerial Finance. Thomson

South-Western, 13th Edition.
2. Lawrence J. Gitman (2003).Principles of Managerial Finance. Pearson Edition, 10 th
Edition.

Websites

1. www.en.wikipedia.org
2. www.answers.com
3. http://en.wikipedia.org/wiki/SME
4. www.bing.com
5. www.google.com
6. www.yahoo.com