Bangladesh Bank report says: Development of SMEs can curb poverty

from The New Nation

Higher growth of the Small and Medium Enterprises (SMEs) can help cut poverty to a satisfactory level by eliminating various prejudices against labour intensive and creating jobs for the skilled manpower in the SME sector.

This was revealed in the just released Bangladesh Bank annual report for fiscal 2006-07.

The report said, the key reasons behind the SMEs are not entering into manufacturing are financial constrains, dismal state of utilities, technology and policy discriminations. On the others hand, Bank and others financial institutions generally prefer large enterprise clients because of lower transition costs, and greater availability of collateral.

The SMEs also fall outside the reach of micro finance schemes, and thus compelled to depend on formal sources of funds at much higher interest rates, the Bangladesh Bank report said.

The BB report, however, said that other interrelated problems like shortage of short and long term finance, lack of modern technology and lack of promotional support services are major obstacles in the way of development of the SMEs sector.

Considering these obstacles, the report said, Bangladesh Bank has adopted a preferential lending policy to promote the SME sector in line with the government development policies.

An amount of Taka 2.27 billion was refinanced through different banks and financial institutions under some schemes during the fiscal 2006-07.

In the country, the annual report said, financing small and medium enterprises (SMEs) from banking sector is a long-standing demand that has been high on the agenda of the economists and the policymakers.

In Bangladesh the SMEs account for about 45% of manufacturing value addition. They account for about 80%of industrial employment, about 90% of total industrial units and about 25% of total labour force. Their total contribution to export earnings varies from 75- 80% based on the Economic Census 2001-2003.

The total number of SMEs is estimated at 79754 establishments, of which 93.6% are small and 6.4% are medium. The 2003 Private Sector Survey estimated about 6 million micro, small, and medium enterprises defined as enterprises, with fewer than 100 employees which contributed around 20-25% of GDP.

The report observed that the SMEs demand for bank loan, especially, medium and long term financing is relatively high.

The Banks are reluctant to extend loans, especially, term loans to SMEs and the reasons for banks' reluctance to extend loans to SMEs are perception that the current legal system is unable to protect their interests, funding costs are relatively high, shortage of access to long-term capital, inability to conduct proper due diligence and the current unavailability of information.

The report pointed out that financing of SMEs by the scheduled banks is explicitly supported by the refinancing facilities provided by Bangladesh Bank. The scheduled banks generally avoid working capital financing for SMEs, while the refinancing facilities help in favor of term loans.