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SMALL & MEDIUM ENTERPRISE MANAGEMENT

AN OVERVIEW OF SME
The Least Developed Countries (LDCs) in the east have started refocusing their attention on SMEs to enhance their role in bringing about structural changes in their economies. For Bangladesh, SMEs have assumed special significance for poverty reduction programs and potential contribution to the overall industrial and economic growth. The economy of Bangladesh is at the crossroads. Rapid liberalization has put most existing industries under severe strain because of their inability to compete with consumer goods being freely imported after the withdrawal of quantitative restrictions and the drastic reduction of import tariffs.

SME: AROUND THE WORLD


According to the European Union (2003) SMEs are defined as enterprises which have at most 250 employees and an annual turnover not exceeding 50 million Euros. Further there is the distinction of small enterprises they have fewer than 50 staff members and less than 10 million Euros turnover and micro-enterprises (less than 10 persons and 2 million Euros turnover).

According to the World Bank (2006) medium enterprises are defined as enterprises which have at most 300 employees and an annual turnover not exceeding 15 million US dollars. Further there is the distinction of small enterprises they have fewer than 50 staff members and up to 3 million US dollars turnover and micro-enterprises have up to 10 persons and $100,000 turnover. In the UK, sections 382 and 465 of the Companies Act 2006 define a SME for the purpose of accounting requirements. According to this a small company is one that has a turnover of not more than 5.6 million, a balance sheet total of not more than 2.8 million and not more than 50 employees. A medium-sized company has a turnover of not more than 22.8 million, a balance sheet total of not more than 11.4 million and not more than 250 employees. It is worth noting that even within the UK this definition is not universally applied.

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In the USA, the definition of small business is set by a government department called the Small Business Administration (SBA) Size Standards Office. The SBA uses the term size standards to indicate the largest a concern can be in order to still be considered a small business, and therefore able to benefit from small business targeted funding. The concern cannot be dominant in its field, on a national basis. It must also be independently owned and operated. Unlike the UK and the European Union which have simple definitions applied to all industries, the US has chosen to set size standards for each individual NAICS coded industry. The most common size standards are 500 employees for most manufacturing and mining industries, 100 employees for wholesale trade industries $6 million of annual receipts for most retail and service industries$28.5 million of annual receipts for most general & heavy construction industries $12 million of receipts for all special trade contractors $0.75 million of receipts for most agricultural industries Breaking down the SME definition, Industry Canada defines a small business as one that has fewer than 100 employees (if the business is a goods-producing business) or fewer than 50 employees (if the business is a service-based business). A firm that has more employees than these cut-offs but fewer than 500 employees is classified as a medium-sized business.

In India the Small Scale Industries (SSIs) are industrial undertaking in which the investment in fixed assets in plant and machinery, whether held on ownership terms or on lease or by hire purchase does not exceed Rs. 10 million. The Small Scale Service And Business (Industry related) Enterprises (SSSBEs) are industry related service and business enterprises with investment in fixed assets, excluding land and building up to Ps. 1 million. According to the SME bank of Pakistan, SME means an entity, ideally not a public limited company, which does not employ more than 205 persons (if it is manufacturing concern) and 50 persons (if it is trading/service concern) and also fulfils the following criteria of either a and c and c or b and c as relevant; (a) A trading/service concern with total assets at cost excluding land and buildings up to Rs 50 million. b) A manufacturing concern with total assets at excluding land and buildings up to Rs 100 million. c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.
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SME IN BANGLADESH
Different countries and organizations define SME differently. The Government of Bangladesh has categorized SME into two broad classes using the following definition (fixed investment implies exclusion of land and building, and valuation on the basis of current replacement cost only): 1. Manufacturing enterprise 2. Non Manufacturing activities 1. 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 Micro Small Medium Large


3

0-9 10-49 50-99 Above 99

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BANGLADESH BANK (BB) REDEFINES SME


1. MEDIUM INDUSTRY/ENTERPRISE In , manufacturing, medium industry/enterprise would be those with assets worth Tk 100 to 300 million (minus land and factory building, and including replacement value) and/or 100 to 250 workers. In service industry and in business, medium enterprises will be those which employ 50 to 100 and have assets (defined as above) worth Tk 10 to 150 million. The circular said if a business fits into any of the criterion for a large industry, it will be considered a large industry though its other characteristics may be that of a medium one.

2. SMALL INDUSTRY/ENTERPRISE In manufacturing, small industry/enterprise would be those with assets worth Tk 5 to 100 million (defined as above) and/or 25 to 99 workers. In service industry and in business, small enterprises will be those which employ 10 to 25 and have assets (defined as above) worth Tk 500,000 to 10 million.

3. MICRO INDUSTRY/ENTERPRISE In manufacturing, micro industry/enterprise would be those with assets worth Tk 500,000 to tk. 5 million (defined as above) and/or 10 to 24 workers or less. In service industry and in business, micro enterprises will be those which employ 10 or less people and have assets (defined as above) worth Tk 500,000 or less.

4. COTTAGE INDUSTRY/ENTERPRISE In manufacturing, cottage industry/enterprise would be those with assets worth Tk 500,000 to 5 million (defined as above) and/or 10 to 24 workers or less. In service industry and in business, cottage enterprises will be those which employ 10 or less people and have assets (defined as above) worth Tk 500,000 or less.

5. WOMEN ENTREPRENEURS If a woman is the proprietor of a proprietary business or the owner of at least 51 percent of a partnership or a private company registered under joint stock companies, then she would be considered a woman entrepreneur.

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POTENTIALITY OF SME BUSINESS


The contribution of SMEs in the economic development of a nation is historically proven and is admirable for a developing country like Bangladesh. These are the enterprises with less capital investment and more labor absorption, less technology oriented, using local resources, catering to local/regional demands. Thus the development of SMEs will leads towards 1. increase in per capita income; 2. generation of immediate employment opportunity ; 3. women empowerment; 4. development of socioeconomic infrastructure 5. poverty alleviation; 6. earning foreign currency; 7. reducing export cost; 8. expansion of existing industries; 9. new product development; 10. promotion of more equitable distribution of national income; 11. effective mobilization of untapped capital & human skills; 12. leads to dispersal of manufacturing activities all over the country; 13. leads to growth of villages, small towns & economically lagging regions; 14. achieving economic stability; 15. promotes to balanced regional development; 16. development of living standard etc.

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PROBLEMS OF SME BUSINESS DEVELOPMENT


The major constraints for SMEs are lack of adequate investment, lack of modern technology, high rate of interest on bank loans, irregular/inadequate supply of power, poor physical infrastructure and high transportation cost, poor information about market opportunities and requirements, inadequate availability of raw materials, lack of skilled technicians and workers, lack of research & development facilities, fierce competition, absence of effective and transparent legal system, difficulties in accessing technology, credit constraints, low access to business services, constraint of quality of human resources, low awareness, low lobbying capacity, rapid changes in policy environment. 1. Resource scarcity In Bangladesh scarcity of raw materials hinder the ability of SME to be export oriented and limits its ability to reach more advanced stages of international business.

2. High employee turnovers Due to limited growth of SME most of the skilled employees leave SMEs. SMEs are knowledge creators but poor at knowledge retention.

3. Absence of modern technology One of the main barriers for the development of SME in Bangladesh is inadequate technologies. Many SMEs have failed to adopt modern technology.

4. Poor physical infrastructures Inadequate supply of necessary utilities like electricity, water, roads and highways hinder the growth of SME sector. Moreover unfavorable geographical conditions increase the transportation cost.

5. Financial constraints Availability of finance hinders the growth of SMEs in Bangladesh. Bangladeshi bank considers SMEs as high risk borrowers because of their inability to comply with the banks collateral requirements. Only about 15-20% of the owners of SMEs own any immovable property. Bankers issue loan on the basis of ownership of immovable property as collateral risk. As a result it automatically excludes rest 80% SMEs from the list of privileged clients of the banks. Whatever collateral SMEs can manage gets used up in talking the term loan leaving them with no means to seek working capital loans from banks. Because of low access to institutional financing SMEs rely on inefficient financing services from informal sources.

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6. Lack of uniform definition In Bangladesh the definition of SME has changed overtime in different industrial policy announced by the government in different year. Absence of uniform definition makes the formulation and implementation of SME policy difficult.

7. Lack of SMEs has very limited use of information technology (IT) Accounting package is used by 1-2% of the SMEs. The use of computers is revealed by say 15% of the SMEs, while the use of the Internet for business purposes applies to say 8-10% of SMEs.

8. Lack of entrepreneurship skills Conservative attitude towards risk, lack of vision, ability to make plan and implementing those hinder the growth of SME in Bangladesh.

9. Participation of women entrepreneurs Equality of opportunity is a major problem for SME. Female entrepreneurs are treated discriminately. They are not well represented in business organization. Government does not provide adequate institutional assistance for women entrepreneurs. 10. Access to Market and lack of awareness regarding the importance of marketing tool for SME, owing a retail space is very expensive in the major cities in Bangladesh. As a result many customers are not interested to buy products and services from SMEs. Because they cant judge the quality until they physically examined the product. Most of the cases SMEs in Bangladesh are not able to use the Integrated Marketing Communication (IMC) tools. But these tools play the role of important stimulus to motivate the customers and retain them. The country does not have enough marketing capability and resources to invest in marketing.

11. Bureaucracy the inadequate government supports are top ranking constraints for SMEs. Unnecessary layers of Bureaucracy and red-taps reduce the competitiveness of SME and raising the cost of transactions and operations

12. Absence of transparent legal system The absence of an effective and transparent legal system discourages SMEs in exploring into risky ventures of business. There are a number of unnecessary formal requirements to start and run business that create high compliance costs and become barriers to SME development, growth and market entry.

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13. Lack of commitment to innovation and customer satisfaction to keep in pace with international competition, firms of all size are challenged to improve and innovate their products processes constantly. But in Bangladesh SMEs are still not relating the importance of satisfying and retaining customers by offering novel and desired benefits.

14. Lack of quality assurance Govt. has failed to frame a national quality policy, provide adequate support systems and establish a national quality certification authority. As a consequence SME of Bangladesh has failed to ensure the quality of their products and services both in local and international market.

15. Lack of research and development facilities It is observed that investment in R&D is still negligible in.

16. Fierce competitions with the cheaper foreign goods Fierce competition with the cheaper goods of China, Taiwan, Korea, India, and Thailand also pose threat to SME in Bangladesh.

17. Fiscal Policies i. Value Added Tax: The main components of indirect tax in Bangladesh are Value Added Tax (VAT), Supplementary Duty and Excise Duty. VAT is imposed on producer, manufacturer, importer, exporter or service renderer under the Value Added Tax Act, 1991, on goods or specified services, at the rate of 15% at every stage of transfer. VAT paid against the input is adjustable against the VAT on output to be collected from the buyers and the net sum stands payable on delivery of goods or specified services to the VAT authority. Exemption is allowed to certain goods or service or certain taxpayers. All cottage industries, except those producing particular products, are exempted from VAT. But, manufacturer, producer or service renderer (other than cottage entrepreneurs), whose annual turnover does not exceed Taka 1.5 million are required to pay Turnover Tax at the rate of 2.5 per cent in lieu of 15 per cent VAT. This limit is too low for small industries. As a result, small industries are subjected to the same 15 per cent VAT as their large-scale counterparts. In addition, supplementary duty is imposed at variable rates on certain categories of consumption goods across all size categories.
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Finally, excise duty applies to a limited number of items irrespective of size classification. Thus, in terms of indirect taxes, there is virtually no differentiation between SMEs and their large-scale counterparts, which is considered inequitable by most SMEs. ii. Tax Holiday: Similarly, there are no differentiated treatments of SMEs either with respect to duty on capital machinery or direct taxes. There are provisions of tax holidays for enterprises of all size categories subject to rules and procedures set by the National Board of Revenue. To avail themselves of tax holiday, enterprises recommended by the relevant sponsoring agencies have to get the approval of the National Board of Revenue which is a cumbersome and lengthy process. The tax holiday, however, is not available to sole proprietorship enterprises which are the usual form of small and cottage industries in Bangladesh.

iii. Wealth Tax: Wealth tax is payable by an individual if his net wealth exceeds Taka 2.5 million. As per existing law, no wealth tax is payable by a company, the usual legal form of a large industry. On the other hand, the legal form of small industries is usually sole proprietorship, and hence these enterprises have to pay wealth tax on their business capital. Thus, fiscal policy in Bangladesh is not particularly tailored to provide support to SMEs, which is pointed out by most SME entrepreneurs as a critical policy constraint hindering SME growth.

18. Legal, Regulatory, and Administrative Constraints As mentioned earlier, policy reforms of the past decade have brought about substantial relaxation in the investment sanctioning procedure. No prior approval is now required for investments involving own finance. However, there is scope for further improvement in the following procedural aspects relating to investment regulations:

i. Trade License: Investors are required to procure trade license from local government bodies by paying statutory fees. The process involves unnecessary delays, harassment and side payments. The procedure needs to be simplified and the issuance of the license made automatic subject to payment of requisite fees and declaration by the investor that the proposed investment is in conformity with the rules and regulations and zoning restrictions of the local government authority.

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ii. Registration under Factories Act: According to the Factories Act 1965, all manufacturing units employing 10 or more workers are required to be registered with the office of the Chief Inspector of Factories and Establishments. The job of the Factory Inspector is to oversee the working condition and safety measures in the factory. In practice, the regulation has proved to be a major source of delay, harassment and unofficial payments for the investors particularly for those in the SME sub-sector as the existing regulations do not differentiate between different size categories with respect to safety and working conditions requirements. To relieve the investors of these problems the requirements relating to safety and working conditions should be defined separately and realistically for the SMEs and the discretionary powers of the Inspector should be minimized. Registration should be automatic once the investor has declared that the requirements have been complied with.

iii. Clearance from the Department of Environment: All industries are also required to obtain a certificate from the Department of Environment in respect of proper arrangement for anti-pollution and safety measures. Here again, the requirements should be clearly stated for the type and size categories of industry and the investor should be allowed to go ahead with investment on the basis of the undertaking that the requirements will be complied with.

iv. Registration with Sponsoring Agency: Registration with sponsoring agencies such as the Bangladesh Small and Cottage Industries Corporation (BSCIC), Board of Investment (BOI) or Bangladesh Export Processing Zone Authority (BEPZA) is voluntary unless an enterprise wants to avail itself of government incentives. To keep track of private investment in various sub-sectors, it would be useful to make registration with the sponsoring agency mandatory. However, to relieve the investors of possible hassles, registration procedure should be simplified requiring minimum information to be provided by the investor, and registration should not be held up until the proof of investment has been produced as the current practice appears to be.

v. Contract Enforcement and Resolution: This is a constraint, which is faced by both large and small firms. Inadequacy in the system for contract enforcement and resolution arises from archaic legal system where procedure of adjudication is long drawn out and cumbersome and the system is corrupt. As a result it is not difficult to delay a scheduled date for hearing. SMEs with low sustaining power often lose out in the long drawn out court battle.
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19. Financial Constraints i. 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.

In the past, the government has attempted to provide SMEs with access to finance through targeted lending. There was a government directive that 5 per cent of a bank's loan portfolio be set aside for small and cottage industry financing. A new bank, namely, the Bank of Small and Cottage Industries (BASIC) was set up in 1988 with the objective of financing the small and cottage industries. There were also attempts to channelize fund received from international agencies such as the Asian Development Bank (ADB) to the sector through private banks.

There were provisions of favorable debt equity ratio, special interest rates and credit guarantee scheme. The central bank also issued directives to both public and private commercial banks regarding working capital loans, use of standardized documentation procedure and time limits for credit sanctioning and loan disbursement. Notwithstanding all these arrangements for financing of SMEs, the actual delivery of institutional credit to this sector has been grossly inadequate. The following seem to be the key factors inhibiting flow of institutional finance to the sector. ii. Project Preparation and Evaluation: The first problem entrepreneurs face in seeking institutional finance is with regard to preparation of the project proposal. In spite of directives from the central bank to follow standardized procedure, the loan application process has still remained lengthy and cumbersome. The entrepreneur often lacks the ability to formulate a proper project proposal. Even when he prepares the proposal drawing on outside expert services, there is no guarantee that the proposal will be evaluated properly as the financial institutions themselves lack adequate capability for proper project evaluation.

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iii. Collateral Requirements: One of the main factors that have hampered flow of institutional finance into SMEs is banks' pre-occupation with collateral based lending. Traditionally banks have used fixed asset ownership, particularly land ownership as the basis for judging credit-worthiness. This puts SMEs at a relative disadvantage, as large entrepreneurs are often able to get around the problem because of their influence and contacts by putting up collateral of dubious valuation. The solution to this problem lies in banks seeking deposit relationship with owners of SMEs and using cash flow rather than asset ownership as the criterion for credit-worthiness. An expanded credit guarantee scheme will have to play a vital role in this regard.

iv. 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 SMEs will continue to bear the brunt of this institutional malice. At present SME sector is facing a lot of problems in Bangladesh. Problems are as follows; 01. Lack of long-term capital in the capital market and bond market; 02. Lack of adequate investment; 03. Lack of modern technology; 04. Lack of local technology 05. Lack of skilled technicians and workers; 06. Lack of research & development facilities; 07. Lack of long-term capital availability through banking channels; 08. lack of credible statistics 09. Lack of transparency and accountability in government decision making 10. Lack of an appropriate education system to support an industrial economy 11. Lack of an industry-friendly social and political environment
12. Lack of good governance 13. Lack of regulatory bodies 12

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14. Government control on public utilities

15. High interest rates in the banking sector;; 16. High customs' duties; 17. Inefficient support infrastructure: a. In the utilities sector, specifically in power; b. In port services, including land ports; c. High transportation costs; d. A largely inefficient, and very costly, telecommunications system; 18. Inadequate availability of raw materials; 19. Irregular/inadequate supply of power; 20. Inadequacies of markets/incomplete markets 21. Poor information about market opportunities and requirements 22. slow process of deregulation and privatization 23. Too many holidays; 24. Other hostile/inimical conditions 25. Fierce competition; 26. An uneven playing field between the private sector and the public sector 27. Absence of effective and transparent legal system 28. Dumping of products, largely by smuggling; 29. Widespread tariff anomalies; 30. Widespread corruption; 31. Complicated and cumbersome customs procedures, aggravated by extensive arbitrary powers exercised by customs officers; 32. Low productivity and a highly politicized labor sector; 33. Inconsistency among different government policy statements; 34. An inefficient and corrupt judicial system; 35. Political instability, leading to frequent strikes;

CAREER IN SME BUSINESS

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STARTING SME BUSINESS SHOULD ONE OPERATE SME BUSINESS?


PREFERENTIAL CRITERIA Enterprises which as well as meeting the size requirement shall have a) proven credentials as an entrepreneur (for example, membership in well-recognized social occupational groupings, successful track record) with requisite presence and facilities on the ground; b) an above-average insiders equity participation; c) certifiable professional specialization of top-management in relevant production skills; d) the stamp of approval from globally-recognized quality-assurance bodies (ISO 9001:2000, for example); e) High management commitment to innovation. f) Women entrepreneurs will be accorded preference, wherever appropriate. g) Other things being equal, smaller enterprises shall be given preference in terms of benefits from interventions by the government and civil society initiatives. h) A preferential criteria be set based on the size of an enterprise smallest getting the top priority. i) Women entrepreneurs shall be given preference in conjunction with the above criteria.

BOOSTER SECTORS For promotional support the following 11 booster sectors has been identified and the list shall be reviewed every three years: 1. Electronics and electrical-computer components, peripherals, stabilizers, UPS, amplifiers, switches, plugs, printed circuit boards (PCBs), etc.---is legitimized owing to rising demand, as they provide among the foundation of industrialization and urban development. Given the per capita income of Bangladesh, they are characterized by high degree of linkage effects: while their growth spurs the demand for investment goods required in their production (backward linkage), the forward linkage part is likely to come from requirement for repair/maintenance services.

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2. Software-development is worthy of selection because they intensively use knowledge of digital and/or web technologies. This is therefore easily accommodated on the basis of structural change. Furthermore, the marginal budget share of software-services in the

countries in the Western world---the engines of the global division of labor---is a lot higher than the ABS. This is therefore a industry facing rising demand, too.

3. Light engineering and metal working is an industry in which local nature of the markets to be served implies that the typical output batch is fairly small, compared with minimum efficient scale (MES) of globally-branded companies. This offers a certain extent of natural protection from competition. In addition, this industry is suffused with both backward and forward linkages.

4. Agro-processing/agri-business/

agriculture

plantation

/specialized

agriculture

industry in Bangladesh has a future for itself. Its selection is anchored in strong comparative advantage and rising demand. However, the Taskforce would recommend that it had better be the agro-processing industries of the non-traditional type, of the kind that moves away from rice milling and flour milling. We need agro-processors who essentially meet the following criteria: a) Intensively use farm produce that boast plentiful marketed surplus, and in addition are complementary to fixing nitrogen in the soil; b) Have enterprises and entrepreneurs who can deal with what it takes to successfully negotiate the hurdles implied by increasingly rigorous phyto-sanitary, and other epicurean restrictions in the importing countries;

5. Leather and footwear is driven by the recognition that the livestock sector in Bangladesh has ways to go in terms of matching the yield rates even in neighboring India--not to speak of China (where they are even higher). This suggests that leather production in Bangladesh has ways to go. Clearly, the production of footwear, in large part for exports, is a natural ambition for a SME roadmap. This industry is really suffused with backward and forward linkages.

6. Knitwear can be rationalized in terms of rising demand and strong comparative advantage.

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7. Plastics and other synthetic products (such as resin) have been known to lead factor substitution, and have been selected on this basis. This sub-sector has registered the highest growth rates.

8. Healthcare & Diagnostics: The Taskforce recommends this subsector largely based on its rising demand domestically. Moreover, growing size of domestic market for specialized diagnostics has started to create opportunities for legitimate import substitution.

9. Educational Services: Bangladesh is clearly surplus in human beings. To convert human beings into human resources must surely be a service industry worth hundreds of billions of Taka worth of potential market size. And quality education that keeps successfully following the money trail meets the bill of both rising demand, and structural change.

10. Pharmaceutical, cosmetics and toiletries: In 2005 and beyond, Bangladesh is one of the few countries in South Asia to benefit from an exclusion from the patent regime being globally introduced by World Trade Organization (WTO). This by bringing forth some significant competitive advantages of pharmaceutical companies will likely create opportunities, especially in the medium-enterprise category, for that industry in Bangladesh. It is important therefore to accent public assistance in that particular direction in order to take advantage of such a market possibility.

11.

Fashion-rich personal effects, wear and consumption goods:

The Taskforce

accepts at least one booster sector to be selected based on the need to concentrate efforts for promoting women entrepreneurs. The Taskforce believes that when it comes to leadership in matters of aesthetics, fashion and design delicacies, women entrepreneurs have an innate advantage. SWOT analysisunderstanding the SWOT of the business environment

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SWOT ANALYSIS (FINANCIAL)


STRENGTH Government of Bangladesh is with positive mindset towards the SME Financing Central Bank (Bangladesh Bank) continuously monitors and supervises SME Financing of banks and non-bank-financial institution according to the National Credit Policy. In recent years, banks and financial institutions have been providing finance to the SME sector and the volume of finance is showing an increasing trend. Refinance scheme of Bangladesh Bank Banks are financing SME cluster industries. NGOs have been running micro credit programs.

WEAKNESS Administrative costs for SME financing are also higher for close monitoring and supervision than the large industries. Higher interest rate (18-25% or more in banks and 30-35% or more in NGOs) Real estate security for loans (land and buildings) No credit rating agency for SMEs. No Credit Guarantee Corporation Few Venture Capital investment. No business startup loan provided by the banks. Few SME development fund Limited budget of the government particularly for financial support to the SMEs. Limited financial scheme for the SMEs.

OPPORTUNITY Several banks offer collateral free loans up to a certain limit. There are many banks with attractive loan product for the SMEs. Financing women entrepreneurs with lower interest rate (9-10) and collateral free loan up to 25 lacs taka. Equity Entrepreneurship Fund (EEF) is available in agro processing and software sector. Small Enterprise Fund (SEF) fund of Bangladesh Bank at lower interest rate
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THREAT Banks consider SMEs as high risk borrower A lion's share of SME loans (80%) is availed of for trading purpose, instead of manufacturing/service industries which is a threat for economic development in the country. Informal loan is increasing because of limited access to formal loans. Inflexibility, inefficiency, political interventions and corruption of the public sector financial institutions. Banking regulations are not always considered to be favorable which discourage the SME entrepreneurs to get loans from the banks

IDEA GENERATION: METHODS OF IDEA HATCHING, PROCESS OF IDEA VALIDATION & IMPLEMENTATION
Methods of Generating/Hatching Idea 1. Focus Group 2. Brain Storming 3. Problem Inventory Analysis

DEVELOPMENT OF BUSINESS PLAN FOR STARTING SME

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MANAGEMENT OF SME BUSINESS VARIOUS ASPECTS OF SME MANAGEMENT

i. General management ii. Office management iii. iv. v. vi. vii. viii.
Marketing

management management management

Production

Export-import Accounting Financial

management

management management

Development

1. Dealing with Tax 2. Dealing with Bank/Financial Institution 3. Getting Utility connections and dealing with 4. Getting Quality Certificate 5. Doing Business across the boundary 6. Intellectual Property Rights and Trade mark 7. Clearances and Permissions 8. Availing different benefits

MARKETING OF SME BUSINESS PRODUCTION AND OPERATIONS IN SME BUSINESS

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FINANCIAL MANAGEMENT IN SME BUSINESS


Availability of finance is a major constraint to formation and growth of SMEs in Bangladesh. Banks are reluctant to expand their SME credit portfolio because they do not consider SME lending an attractive and profitable undertaking. This is so because SMEs are regarded as high risk borrowers because of their low capitalization, insufficient assets and their inability to comply with collateral requirements of the banks. Administrative costs are also higher because close monitoring and supervision the SME operation becomes necessary. A study (2004) by Micro Industries Development Assistance and Services (MIDAS) revealed that sources of finance are mostly friends and family member in case of SME. MIDAS tried to identify the sources of funds of SMEs. These are: Sources of funds Percentage of finance Informal sector Family members NGO Bank 41% 20% (interest free) & 4% (with interest) 17% 18%

A stable macro-economy, an open trade and investment regime, and a competitive financial sector are argued to be most essential ingredients for a vibrant private sector. But with a law and order situation below the optimum level, corruption well above the level of acceptance and unstable political situation, the domestic environment of Bangladesh does not come to any help, rather hinders the prosperity of SME in this country.

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LABOR AND OTHER LEGAL ASPECTS OF SME BUSINESS


This section is required for the potential entrepreneurs. As a potential entrepreneur you have to decide some very preliminary legal issues which are mandatory for your business start up. First: Selecting the type of ownership. Options are 1. 2. Sole Proprietorship Partnership

Proprietorship You can start your business by simply taking trade license from designated authority of your area. Prior to taking the trade license you have to decide: a. Location of your business to find out the designated authority b. Type of your business to get the appropriate trade license Selecting designated authority from location of your business i. If you business location is in City Corporation area such as Dhaka, Chittagong, Khulna, Rajshahi, Sylhet or Barishal you have to take trade license from respective desk of the City Corporation. ii. If your business location is in municipal area, then you have to take trade license from the municipal authority of the respective area. iii. For other cases apart you have to take trade license from respective designated local government authority such as union parishad, Thana parishad etc. Select type of your business 1. Commercial 2. Manufacturing You require trade license for commercial business. The renewal of your license is necessary in every year.

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Dhaka City Corporation [DCC] Trade License for a Commercial Firm Zonal Office Website: www.dhakacity.org Step 1: Procure the proper form from the proper office. Dhaka City Corporation (DCC) has two forms for a trade license depending on the type of business. A commercial firm must use the K Form. Even though the ten zonal offices use the same K Form, a business must buy the form from its respective zonal office. A seal and the initials of the officer selling the form is what distinguish it from that of other zones. The form costs Tk. 10. Step 2: Get certification from the local ward commissioner. After the form is completed it has to be submitted to the local ward commissioner for validation. Step 3: Collect License Book by Tk. 50 and submit application with supporting documentation to DCCs zonal office. For the K Form, a rent receipt for the premises where the business is operating from or, if owned, the municipal tax payment receipt has to be provided. Supporting documents include: 3 copies of PP size photo of owner Rent receipt or premises ownership proof Step 4: Await enquiry by the Licensing Supervisor (LS). Upon submission of the form, the LS usually goes to the business entity for a visit to verify the information provided. Step 5: Pay predetermined fee and collect trade license. After inspection by the LS is concluded, the business is asked to go to the DCC office to pay the predetermined fee and collect their trade license. The fee schedule depends on the business category under which the application was filed. Step 6: Signboard fee When collecting the trade license, a signboard fee has to be paid as well. For all types of business the signboard fees will payable 30% of the License fee

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Dhaka City Corporation [DCC] Renewal Process for a Trade License Zonal Office Website: www.dhakacity.org Step 1: Pick-up Demand Bill from the license book (This book is valid for five years). Upon checking the expiring trade license, the LS fills in the particulars in a demand bill and gives the booklet to the business. The demand bill is a four page booklet similar to a bank deposit slip. The same information is filled into all the pages: one page is for the bank and one is for the business. Step 2: Pay relevant fee at designated bank. Deposit designated bank through demand bill. And it will automatically renew the license.

Dhaka City Corporation [DCC] Trade License for a Manufacturing Firm Zonal Office Website: www.dhakacity.org Step 1: Procure the proper form from the proper office. The Form will have to be purchased for Tk. 10 from the DCC zonal office where the manufacturing firm has to submit its application. Step 2: Get certification from the local ward commissioner. The completed form has to be validated by the local ward commissioner. Step 3: Submit application with supporting documentation. Supporting documents include: 3 copies of PP size photo of owner Rent receipt or premises ownership proof No objection certificate from the neighborhood A written undertaking on a Tk 150 non-judicial stamped paper Fire License from the local fire department Environmental Certificate from DOE Step 4: Await enquiry by the Licensing Supervisor (LS).Upon submission of the form, the LS usually goes to the business entity for a visit to verify the information provided.

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Step 5: Pay predetermined fee and collect trade license. After inspection by the LS is concluded, the business is asked to go to the DCC office to pay the predetermined fee and collect their trade license. The fee schedule depends on the business category under which the application was filed. Step 6: Signboard fee. When collecting the trade license, a signboard fee has to be paid as well. For all types of business the signboard fees will payable 30% of the License fee.

Dhaka City Corporation [DCC] Renewal Process for a Trade License Zonal Office Website: www.dhakacity.org Step 1: Pick-up Demand Bill from the license book (This book is valid for five years) Upon checking the expiring trade license, the LS fills in the particulars in a demand bill and gives the booklet to the business. The demand bill is a four page booklet similar to a bank deposit slip. The same information is filled into all the pages: one page is for the bank and one is for the business. Step 2: Pay relevant fee at designated bank. Deposit designated bank through demand bill. And it will automatically renew the license.

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Partnership: You can start your business by simply taking trade license from designated authority of your area. a. In this case you have to submit a partnership deed along with other required documents while applying for trade license. b. You can go for limited company by registering in RJSC You can start your business by simply taking trade license from designated authority of your area. Prior to taking the trade license you have to decide: a. Location of your business to find out the designated authority b. Type of your business to get the appropriate trade license Selecting designated authority from location of your business i. If you business location is in City Corporation area such as Dhaka, Chittagong, Khulna, Rajshahi, Sylhet or Barishal you have to take trade license from respective desk of the City Corporation ii. If your business location is in municipal area, then you have to take trade license from the municipal authority of the respective area. iii. For other cases apart you have to take trade license from respective designated local government authority such as union parishad, thana parishad etc Select type of your business
1. 2.

Commercial Manufacturing ****same procedure like Proprietorship

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Incorporating a Company: Business in Bangladesh may be carried on by a company formed and incorporated locally or by a company incorporated abroad but registered in Bangladesh. The incorporation or registration is done by the Registrar of Joint Stock Companies and Firms under the provisions of the Company's Act 1994. Companies could be classified in following categories:

Limited Companies: a. Company Limited by Shares i. Public Limited Company and ii. Private Limited Company b. Company Limited by Guarantees.

Unlimited Companies: Unlimited companies and companies limited by guarantees may or may not have share capital.

Private Limited Company : Restricts the rights to transfer the shares, Limits the number of its members to minimum 2 and maximum 50 excluding the persons employed in the company Prohibits any invitation to the public to subscribe for the shares or debentures of the company and Entitles to commence business from the date of its incorporation. Public Limited Company: On the other hand a public limited company: May issue invitation to the members of the public to subscribe the shares and debentures of the company through a prospectus which complies with the requirements of the Companies' Act 1994 and the Securities and Exchange Commission Act 1993 as amended from time to time. Has minimum 7 members but there is no maximum limit. Have at least 3 Directors. May a private company converted into a public company.

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Necessary forms for incorporation and registration are available with the Office of the Registrar of Joint Stock Companies and Firms. Nominal fees are charged for registering the memorandum and articles of Association. Registrar of Joint Stock Companies and Firms [RJSC] Certificate of Incorporation 24-25 Dilkusha C/A, Dhaka 1000 Website: www.roc.gov.bd Phone: 9564005 Step 1: Obtain a Name Clearance Certificate. Do a preliminary name search on the RJSC website (www.registrarofcompaniesbangladesh.com) on a plain paper submit an application for the proposed name (It is recommended to submit 3-7 alternate names) For each name submission pay Tk. 5 at the cash receipt counter. Submit a Deed of Settlement for the proposed business entity The Deed of Settlement should include: Capital structure of company Partners names and equity share Designate a person who will process the application Collect a money receipt for the fee paid Note: (A company registration application must be submitted within 30 days of obtaining a name clearance certificate.) Step 2: Prepare Articles and Memorandum of Association for the company. Step 3: Deposit appropriate stamp fee at the Bangladesh Bank. Collect Treasury Chalan to this effect. Step 4: Procure appropriate forms from RJSC. Complete the forms: (For a Private Limited Company forms no. I, VI, IX, X, XII) (For Public Limited Company two additional forms, XI and XIV are required.) Pay scheduled registration and filing fees and submit application including valid name clearance certificate and stamped Articles of Association and Memorandum of Association. Copies of Tax Identification Number Certificates for each director should also be attached with the application.
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SME BUSINESS SUPPORT SERVICE FINANCIAL SUPPORT FOR SME IN BANGLADESH


The SMEs worldwide are recognized as the most effective vehicle for sustainable economic growth. In Bangladesh, a sustainable level of development of small and medium enterprises (SMEs) is highly needed to reach the targets set by The United Nations (UN) in the millennium Development Goals (MDGs) to alleviate poverty. This urgency is reflected in the Governments pro-poor policies, especially in the poverty reduction strategy paper (PRSP). Small and Medium Enterprises in Bangladesh have recently been considered as an important vehicles of poverty reduction strategy. For the first time, the comprehensive Industrial Policy 2005 highlighted SME development as a flagship policy area for balanced and sustainable industrial development in Bangladesh. Availability of finance is thought to be a major constraint to formation and growth of SMEs in Bangladesh. Banks are reluctant to expand their SME credit portfolio because they do not consider SME lending an attractive and profitable undertaking. This is so because SMEs are regarded as high risk borrowers because of their low capitalization, insufficient assets and their inability to comply with collateral requirements of the banks. Administrative costs are also higher because close monitoring and supervision the SME operation becomes necessary. Despite all these facts banks and financial institutions have been providing finance to the SME sector and the volume of finance is showing an increasing trend. Most importantly the share of private sector banks in disbursement of credit to the SME sector has been increasing in recent years comparatively at a higher rate than the NCBs and state owned DFIs. There is an issue of interest rate charged by banks and financial institutions for SME finance. Very often it is argued that the interest rate on SME loan is too high and needs to be lowered. For entrepreneurs, though the supply of and access to finance is very important, the cost of fund is also a factor for their sustainability and expansion. The banks and financial institutions should consider the fact that if the rate of interest is too high, then the profitability of entrepreneurs, especially for those of the innovative projects will be adversely affected.

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Bangladesh Bank (BB) has also undertaken programs to provide relatively cheaper funds to the banks and financial institutions which might encourage them for SME financing. The central bank introduced a refinance scheme for SMEs (small and medium enterprises) in May 2004 using three sources of funds -- Tk 10 crore from BB's own resources, US$ 20 million (Tk 140 crore) from International development Association under enterprise growth and bank modernization project and Tk 3 crore from Asian Development Bank. Now BB has around Tk 900 crore under different funds dedicated for SMEs and women entrepreneurs. All scheduled banks and financial institutions (FIs) are eligible to avail of this facility at a 5 percent interest rate.

Non-bank financial institutions (NBFIs) such as finance and leasing companies require real estate security for loans (land and buildings) in nearly every case the exceptions being very large firms, firms with longstanding client relations with the banks, or firms benefiting from either political favor or a close relationship with a bank director. Several banks offer unsecured loans up to 50,000 or one lakh taka, but these amounts are insufficient for SMEs. Another option is to finance equipment purchases through a leasing company, but this is relatively unattractive due to onerous collateral requirements and high interest rates--in the range of 25 percent, including fees. SME loan is basically term financing and repaid on installment basis, but historically the business people in our country are accustomed to and prefer continuous loan (cash credithypo, overdraft etc) causing slow pace of disbursement of SME loans. SME loan is predominantly supervisory credit and requires more manpower to conduct supervision, monitoring and recovery works and as such, big chunk of profit is not possible over night. Besides, the private sector banks are more profit oriented and prefer financing to big and corporate customers towards achieving year on year increased profit target. Credit rating agencies provide independent assessments of the credit worthiness of a company. Although such agencies already operate in Bangladesh they are focus almost exclusively on large corporations. BRAC Bank, which is the leading bank in SME financing, has taken the initiative to introduce credit rating for SMEs for the first time in the country. It has done this by signing an agreement with the US-based Dun & Bradstreet to do ratings of SMEs in Bangladesh. The procedure will be simple. A SME loan applicant will have to pay for the credit rating agency to assess their business and its credit worthiness. Based on the assessment of the credit agency the bank will decide on whether to give the loan and at what
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interest rate. The amount the Dun & Bradstreet will charge each customers has yet to be decided. Instead of taking land and housing structure as collateral, the banks should take machinery and raw materials as security for giving loans to the SMEs. According to Economic Review 2007, a government document, a total of 48 commercial banks are operating in Bangladesh. These banks have 6,562 branches, of which 3,839 are in rural areas. Private banks operate only 490 branches in rural areas. Private commercial banks are increasingly trying to penetrate rural areas to tap business potential Broadly, four categories of institutions cater to the financial needs of the SMEs in Bangladesh 1. Commercial banks 2. Non-bank financial institutions (NBFI) (i.e. leasing companies) 3. Specialized Banks and Development Financial Institutions (i.e. BASIC, MIDAS Financing Ltd. etc) and 4. Selected Microfinance Institutions (MFIs, such as BRAC, ASA, PKSF and Shakti Foundation) Additionally, the Bangladesh Bank (BB), the central bank of the country also arranges various credit lines (i.e. refinancing schemes) from time to time to accelerate flow of institutional funds to the SMEs. The financial products that are on offer for lending to the SME sector (i.e. limited term loans and working capital loans, overdraft facilities, trade credits, limited lease finance and higher purchase facilities etc.) are extremely narrow. This restricts the SME market for loans and the borrowers to shop around for sustainable loan products of their preference and needs. There is an issue of interest rate charged by banks and financial institutions for SME finance. Very often it is argued that the interest rate on SME loan is too high and needs to be lowered. For entrepreneurs, though the supply of and access to finance is very important, the cost of fund is also a factor for their sustainability and expansion. Availability of finance hinders the growth of SMEs in Bangladesh. SMEs need finance to enable them undertake productive investment in order to expand their business, to introduce new products, and to market them. Banks are shy to lend to SME activities, as they do not consider them as attractive and profitable undertakings. SMEs are also regarded as high-risk

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borrowers because of their low capitalization, insufficient assets, and high mortality rates and consequently, they are not offered any attractive deals in terms of loans and interest rate. SMEs in the export sector also have the problem of access to working capital and there is no credit insurance policy for them. Because of low access to institutional financing SMEs rely on inefficient financing services from informal sources. Most of the banks have taken up aggressive marketing policy to augment their exposure in SME and Retail Credit. A lion's share of SME loans (80%) is availed of for trading purpose, instead of manufacturing/service industries. Eventually, the purpose of SME loans to support the economic development of the country may not be served properly. SME loan is predominantly supervisory credit and requires more manpower to conduct supervision, monitoring and recovery works and as such, big chunk of profit is not possible over night. Besides, the private sector banks are more profit oriented and prefer financing to big and corporate customers towards achieving year on year increased profit target. Bangladesh Bank re-finance scheme for SME is laudable. As per Bangladesh Bank guidelines, SME is broadly categorized in 3 sectors: a) manufacturing, b) trading and c) service. While manufacturing and service sectors are prioritized allowing almost 100% refinance but trading sector hardly gets 20% refinance, though it constitutes more than 80% of total SME portfolio. Besides, refinance has to be claimed on quarterly basis and replenishment is made after one month and above. As such, refinance package may not be so attractive to the banks. NGOs have been running micro credit programs for the poor of Bangladesh for over 30 years now. Their works in micro credit primarily create self-employment for the beneficiaries, who include the hardcore poor and women. Special Initiatives of the Government In the past, the government has attempted to provide SMEs with access to finance through targeted lending. There was a government directive that 5% of a banks loan portfolio be set aside for small and cottage industry financing. 1. BASIC Bank: BASIC Bank was established in 1989 to finance small and cottage

industries. It is mentioned in its Memorandum of Articles that at least 50% of its loan-able fund should be invested in Small Scale Industries (SSI). In 2003, the bank lent Taka 51.29

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billion to SSI sector to a number of 418 projects. The bank offers moderate interest rates on SME lending compared to other private commercial banks and foreign banks. For financing small and cottage industries in the private sector, the Bangladesh Bank has been providing refinance facility to this bank since 1999. A sum of Taka 250 million was disbursed to BASIC in FY 2004 under this scheme.

2.

Palli Karma-Sahayak Foundation (PKSF): Financing by NGOs has opened a

channel of valuable, door-step cheap and convenient method for the SME sector of Bangladesh. Govt. created PKSF is providing impressive interventions in the SME sector indirectly. PKSF is providing sizeable and timely loans at lower than market rate to the large NGOs who are able to meet the demand of a big chunk of the MF market for loans. Most NGOs help create income generating activities (IGA) which contribute to the growth of the SME sector beside contributing to poverty alleviation programs. The Government established PKSF in May 1990 to work as an apex organization for the development of micro finance sector in Bangladesh. PKSF is distributing micro-credit among the poor through 225 large and small NGOs. Most of the beneficiaries are women. Refinance Scheme for Small and Medium Enterprises: To help overcome the financial constraints of this sector and induce the banks and other financial institutions to provide credit facilities to the SME sector, particularly the small entrepreneurs, Bangladesh Bank introduced a refinance scheme with a special fund of Taka 10 billion effective from May 01 2004. To encourage the banks and financial institutions to provide credit to the SMEs, the Government introduced a Tk. 100 million Refinancing Scheme through Bangladesh Bank. The World Bank and the Asian Development Bank (ADB) will provide US$ 10 million and US$ 30 million respectively to support this scheme. About 3000 SMEs have received credit under this scheme. For the development of agro-product processing and software industries, the Government allocated Tk 100 million to Equity Development Fund in the revised budget of FY 2005-06. So far, 212 projects have been financed from this Fund. This fund also enhanced to Tk 200 million in FY 2006-07 for this Fund. To build up agro-based farm and industries, a credit support to the tune of Tk. 100 million is allocated in the current fiscal year under the Agro-based Industries Assistance Programme. In FY 2006-07, the allocation is Tk 150 million to this Programme. Initially, only the small enterprises having fixed investment not exceeding Taka one million will be entitled to have credit facilities up to Taka 0.5 million in individual cases under this scheme. The participating banks and financial
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institutions will apply their own interest rates on the loans made to the borrowers but Bangladesh Bank will charge Bank Rate (currently it is 5%) to the lender banks and financial institutions under this scheme. Till June 2005, a total number of 2681 enterprises have been financed by different banks and financial institutions under this program. Critiques are saying that only participating financial institutions are getting benefit from this scheme, final borrowers remain out of any direct benefit. They are also saying that this program is also not taking account of micro and small enterprises for special consideration. 3. Credit and Development Forum (CDF): Credit and Development Forum (CDF), the network NGO for the microfinance sector of the country is working consistently for capacity building of the MF-NGOs spread in the rural areas. CDF is currently engaged in negotiating with the NCBs and some private sector Banks for loan funds to meet the demand for revolving loan fund of many of its MF network members. CDFs unique position as the trainer, capacity builder, publisher and collector of the MF sectoral data has created a reliable and dependable support source for the microfinance NGOs of the country. FINANCIAL SUPPORT OF SME FOUNDATION FOR SMEs 1. SME Loan; Credit Wholesaling Program SME Foundation introduces a convenient loan facility with single digit interest rate for manufacturing business under Credit Wholesaling program with MIDAS and Mutual Trust Bank Ltd. Loan amount ranges from BDT 50 thousand to BDT 7.5 lacs Interest rate 9% per annum Flexible loan tenor Easy repayment procedure

SME Foundation will receive Tk. 10 crore from in the first phase from ADB soon. The fund would be channeled through the Bangladesh Bank after signing a tripartite deal among the Finance Ministry, central bank and SME Foundation. The collateral-free loans will be disbursed to the potential SME sectors at 9% interest rate through different banks and financial institutes under credit wholesaling program of SME Foundation.

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Financing for SME cluster groups under the Credit Wholesaling Program An agreement under credit wholesaling program of SMEF was signed between SMEF and NCC Bank Ltd. for financing in Saidpur Small Garment Cluster and Kaluhati Shoe Cluster on April 26, 2011. Amounting Tk. 43.00 lac was distributed at 9% interest rate among the 19 entrepreneurs at Kaluhati Shoe Cluster in Rajshahi. Amounting Tk. 99.00 lac was distributed at 9% interest rate among the 25 entrepreneurs at Syedpur Small Garment Cluster.

SME Financing Fair Mentioning that considering the fact of limited access to different financial services is the key hindrance of SMEs in their development, expansion and growth, SME Foundation has taken initiatives of organizing seven financial fairs in all divisional districts in association of Bangladesh Bank. 2. Credit Guarantee & Credit Rating System Bangladesh Bank has a mandate to establish Credit Guarantee Corporation. SMEF has undertaken policy advocacy program for the establishment of a Credit Guarantee Corporation in Bangladesh. Furthermore, SME Foundation will assist Dun & Bradstreet Rating Agency Bangladesh Limited (DBRBD) in their credit rating activities for SMEs. It may be mentioned here that DBRBD has published top 500 Bangladeshi companies based on various financial parameters. Financial Constraints 1. Access to Finance SMEs encounter great difficulties while raising 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. In the past, the government has attempted to provide SMEs with access to finance through targeted lending. There was a government directive that 5 per cent of a bank's loan portfolio be set aside for small and cottage industry financing. A new bank, namely, the Bank of Small
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and Cottage Industries (BASIC) was set up in 1988 with the objective of financing the small and cottage industries. There were also attempts to channelize fund received from international agencies such as the Asian Development Bank (ADB) to the sector through private banks. There were provisions of favorable debt equity ratio, special interest rates and credit guarantee scheme. The central bank also issued directives to both public and private commercial banks regarding working capital loans, use of standardized documentation procedure and time limits for credit sanctioning and loan disbursement. Notwithstanding all these arrangements for financing of SMEs, the actual delivery of institutional credit to this sector has been grossly inadequate. The following seem to be the key factors inhibiting flow of institutional finance to the sector. 2. Project Preparation and Evaluation The first problem entrepreneurs face in seeking institutional finance is with regard to preparation of the project proposal. In spite of directives from the central bank to follow standardized procedure, the loan application process has still remained lengthy and cumbersome. The entrepreneur often lacks the ability to formulate a proper project proposal. Even when he prepares the proposal drawing on outside expert services, there is no guarantee that the proposal will be evaluated properly as the financial institutions themselves lack adequate capability for proper project evaluation. 3. Collateral Requirements One of the main factors that have hampered flow of institutional finance into SMEs is banks' pre-occupation with collateral based lending. Traditionally banks have used fixed asset ownership, particularly land ownership as the basis for judging creditworthiness. This puts SMEs at a relative disadvantage, as large entrepreneurs are often able to get around the problem because of their influence and contacts by putting up collateral of dubious valuation. The solution to this problem lies in banks seeking deposit relationship with owners of SMEs and using cash flow rather than asset ownership as the criterion for credit-worthiness. An expanded credit guarantee scheme will have to play a vital role in this regard. 4. 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

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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 SMEs will continue to bear the brunt of this institutional malice. 5. Credit guarantee scheme There is no Credit Guarantee Corporation in Bangladesh. A credit guarantee system may be introduced for helping the SMEs in conducting their business smoothly specially during the time of necessity. If any SME cannot obtain funds from financial organizations, because of inadequate guarantees or low credit worthiness, the body created under the provision of the proposed Credit Guarantee Scheme can come forward to help with financing. When a small SME borrows from a financial institution the proposed body can issue guarantee for the loan. If an SME is unable to pay on a loan, the proposed body can make payment on its behalf. Moreover, government can also form an SME credit insurance body for issuing such guarantees. This link between guarantees and insurance will provide for a safely managed system. 6. Venture Capital Scheme A publicly-mandated venture-capital scheme should be created to give a stimulus to the morale of entrepreneurs who commit in-house capital to projects with novel and potentially innovative processes and technologies with demonstrable potential for commercial success. Such products have a-typical high risk and high return. 7. Special SME Development Fund Access to resources, especially financial resources, is one of the major requirements to develop successful SMEs in the country. Improved access would help develop better products/services, disseminate new technical skills/knowledge and improve management techniques. Financial resources should be offered at a reduced price, which would help small entrepreneurs invest in the development of new products and ideas. Without these resources it is difficult to pursue such innovations. Financial resources are required not only for the financing of working capital requirements, but also for start up capital. There is an absence in the market of financial instruments such as venture capital, which could favorably provide resources to innovative products and new ideas. The funding of SMEs by Bangladesh Bank under EEF seems inadequate and requires wider coverage at a higher scale. Commercial bank lending operations at the SME level need to be widened. The initiative of the SME Foundation through credit wholesaling should focus on these issues while financing commercial banks in order to provide credit to enterprises. Women-led SMEs need more attention as women entrepreneurs face various types of hurdles in securing loans from banks. A number of commercial banks have opened windows for women entrepreneurs,

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mainly in their urban branches. These are commendable initiatives but they need to be extended to sub-urban and rural areas. 8. Improve banking rules and regulations Banking regulations are not always considered to be favorable to entrepreneurs, especially those who operate small-scale businesses. Firstly, small-scale businesses face relatively higher interest burdens against their loan, although banks argue that there are higher risks involved in the financing of SMEs. Secondly, small businesses, in most instances, do not follow formal accounting practices, which make it difficult for banks to assess the financial condition of these businesses. Hence bank officials are often reluctant to make the extra effort to formalize the accounting practices of these business units for the provision of credit. Thirdly, it is more difficult for women entrepreneurs to get credit from banks. Fourthly, entrepreneurs often cannot obtain credit from the international market due to some restraints in banking rules and regulations. In order to ease the problems and constraints confronted by SMEs, adequate attention and support is required from financial institutions.

CONCLUSION In the current situation in Bangladesh, it would not be possible to recover the cost of Business Development Services, in full, from the beneficiaries in the SME sector. Therefore, some sort of subsidization would be necessary for providing services on a regular basis. No organization providing exclusively Business Development Services can be sustainable without a strong financial base or a regular flow of low-cost fund from outside. It will not be feasible on the part of any organization in the private sector to provide all lands of Business Development Services in view of the huge cost involved specially in developing Small Enterprises. SME Foundation has been established for improvements in the sanctioning and other administrative procedure affecting SMEs, further simplification, transparency and accountability are necessary to promote SME Development. CRITERIA OF SECTORAL TARGETING We present the detailed discussion of these rationales in Appendix-2 to this report. For present purposes, we merely present these criteria of sectoral targeting, in their bold relief. We believe the following are the main operative criteria:

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1. Strong comparative advantage: Sectors in which factor endowments are such as to confer strong comparative advantage compared with others qualify as a booster. Comparative advantage will be judged in terms of the sectors domestic resource cost (DRC).

2. Rising demand: commodities for which marginal budget shares are higher than average budget shares are those for which demand is rising at a higher-than-average rate.

3. Backward and forward linkages: Some processing industries---agro-processing is an apt example--- can capture well forward and backward production linkages with other sectors.

4. When the playing-field is not level: Markets virtually never perform as in the text-books, but are frequently skewed due to vast economic inequalities, asymmetric distribution of information, knowledge, and social-networking connections. Careful public interventions are needed so that a broad symmetry of resources can be made to prevail.

5. The need for structural transformation is not transparent to the uninitiated. The technology shelf---the inputs, and how they can best be combined---and the demand-mix are not static but is evolving fairly continuously. This forces on markets the responsibility of signaling the need and, more difficult, the nature of structural transformation that can facilitate survival. In this context, Governments are supposed to have a superiority in terms of access to strategic information versus the private-sector. Based on this, the creation of new institutional delivery chains can legitimately be posited, to deal with the imperative of structural transformation in the economy.

6. Structure of incentives: manufacturing vs. trading. In globalization, the formidable market power of global brands result in a structure of economic and financial incentives in the market place that is inimical to the domestic manufacturer versus the importer. It is arguable that a similar shift in the business mindset is enveloping Bangladesh: trading is a safer, smarter, richer and bulkier business than domestic manufacturing is. Managing workforces is nightmarishly difficult, as technical workers are exceedingly foot-loose, and manually-skilled workers are fractious. Manufacturing requires a much greater presence on the ground, and visibility invites extortion in the semi-anarchic conditions in Bangladesh.

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SHORT-TERM POLICIES Framing and carrying out policies for SME development 1. The Government shall make an unambiguous policy statement declaring that the Government consider SMEs, especially small enterprises, as an integral and important element in the cause of economic growth and poverty alleviation in Bangladesh.

2. An SME Advisory Panel shall be constituted to perform the services of a specialist braintrust for the Ministry of Industries (MOI). Likewise, an SME Cell shall be set up in MOI to help implement the SME policies. The present SME Taskforce shall continue to exist so as to monitor the state of the implementation of its recommendations. 3. The Panel may comprise a few of the members of this Taskforce, other subject-matter specialists representative of the booster industries themselves, one or two certifiable role models of mass awareness-raising to generate mass interest in technopreneurial careers. In the medium term, the Advisory Panel and the SME Cell will eventually morph into what we call a SME Foundation (this is further detailed under the rubric of medium-term recommendations of the Taskforce). The Panel will report to the Minister of Industries. The tactical plan of action is about what it will take to move SMEs forward the way they should. 4. A roadmap and a tactical plan of action, may be conceived and then detailed by SME Advisory Panel and the SME Cell.

MEDIUM-TERM POLICIES The OECD have recently opined that one of the major challenges of transitional and developing countries in this age of sweeping globalization is to ensure rapid development of the SME sector by harnessing scarce human and institutional capacities in availing of trading and investment opportunities. In consonance with this imperative, the Taskforce puts forward a package of medium-term recommendations.

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The formation of a Small and Medium Enterprises Foundation Over the medium term and beyond, the Government must remove all remaining obstacles impeding the formation of an SME Foundation. While the Ministry of Industry will still remain the sovereign source of all policies, the proposed SME Foundation will become the focal point for all planning, developmental, financing, awareness-raising, incubation, advocacy, monitoring and evaluation services in the name of all SME development as a crucially- important element of poverty alleviation.

TACTICAL PLAN OF ACTION


1. Strategic skills upgrading: The tactical plan is needed to move from gap analyses to

skills upgrading based on the product(s) in the booster-sectors identified in this report, paying careful attention to the requirements of the production clusters in the inner cities (such as Dholai Khal, Mirpur,and the like).

2.

Enabling environment: An enabling environment in which both extent and aspiring

entrepreneurs find within an easy reach most of what they direly need---information, counseling, mentoring, access to finance, technology and the means to market.

3.

Supply chain for technopreneurship: A serious effort shall be made for fostering a supply

chain for technopreneurship. Bangladesh needs role models that can get intelligent and diligent people excited about creating value through successful entrepreneurship. The SME Panel/SME Cell and the SME Foundation conceive programs in popular media, and anchor(s) for them to match, modeled after some widely-accepted success stories. 4. SME Web Portal: An online-community, availing of relevant information and

communication technologies, of both extant and aspiring SME entrepreneurs, shall be hosted on a SME Web portal in the SME Cell/SME Foundation, for the divining of technology, product and market trends, for career-counseling to benefit science/technology graduates, for technopreneurial problem-solving session(s), for mentoring using guru-disciple symbiosis.

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5.

Towards a virtual SME front-office: A Web-based virtual front-office providing all start-

up assistance to SME entrepreneurs (application forms, FAQs, limited directory-assistance, success stories, horror stories, etc) and an one-stop-service, with all interactions between the user and the system stored on databases shall be established in the interest of providing institutional memory.

6.

Exports-friendly content on the SME portal: Information regarding standards of labor

and output pertaining to overseas markets to benefit export-oriented SMEs shall be put in place on the Web portal.

7.

Electronic-governance with a human touch: Such structures of electronic-governance

shall be supplemented, at least for a time, by human touch, with adequate budget to match, to physically attend to the needs of small entrepreneurs who take recourse to them. This is based on the recognition that a totally hands-off delivery of all requisite services to SMEs is an ideal whose achievement was likely to only happen in stages.

8.

High-performance communications backbone:

A high-performance fiber-optics

communications backbone shall be put in place in six of the countrys largest metro-markets (namely, Dhaka, Chittagong, Rajshahi, Khulna, Sylhet and Barisal) so that the launch of some serious ICT-centric applications to benefit e-governance to the profit of development is not unduly handicapped by woefully inadequate bandwidth. SME

9.

International technology-exchange programs: Technology-exchange programs between

countries with similar stages of development, and with a similar maturity of the infrastructural development for SME shall be implemented in the interest of rapid technology transfer.

FORMULATION OF A PACKAGE OF CAPACITY-BUILDING AND TRAINING

1. Specialized professional expertise: Specialized professional expertise in carefully-chosen niches that the Panel of Advisors recommends has potential for a broad-based replication.

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Such training can be so packaged to such high standards that the recipients feel motivated to pay up user charges, however minimal.

2. Re-skilling boot camps: Re-skilling boot camps would need to be organized for each of the booster industries by rotation, with a view to provide periodic technology grounding in efficacious skills among workers in SMEs.

3. Institutional capacity for training: BSCIC/SCITI, BIM, and BITAC---where a lot of equipment, infrastructure and other resources are in place---should undergo a significant strategic reorientation of their own core competencies under the watchful eye of the Advisory Panel/SME Cell. In particular, the skills and competencies needed to enable SME hold their own in the booster-industries in the changed global business environment should be reemphasized in the ensuing revamping of these institutions.

4. Capacity for coordination among multiple institutions: Several public institutions (such as Atomic Energy Commission (AEC), Bangladesh Council of Scientific Investigation & Research (BCSIR), Leather Training Institute (LTI), the Textile colleges, the Ceramics Research Institute, the public universities, etc) have significant capacity for both product- and process-innovation of real value for SME development. The case for harnessing all that productive capacity in a coherent and harmonious manner can be over-emphasized. However, achieving this will require a great deal of institutional coordination among various Ministries of the government.

5. Technical assistance and investment: Towards this end (as stated above), technical assistance and investment are both urgently needed to appropriately accent the training and motivational in these institutions so that they can become durable fixtures of technical and managerial skills can be nurtured, in a format of public-private partnership.

6. Private-public collaboration: The selection of such training courses and then the delivery of such training is an important instance of public-private collaboration.

7. R & D with potentially high-impact profiles: R & D that lead to prototypes with a scope for replication in potentially high-impact product niches (eg in the field of mobile games, 3-D
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animation, or bio-optics, or the manufacture of computer-controlled industrial and medical appliances, or spurring the use of resin in new production applications, etc);

8. Curriculum development for vocational training:

Curriculum of vocational training

institutes be revised and reviewed to make it SME development friendly.

LONG-TERM POLICIES Education and Generational Ethos 1. Bangladesh should increase the number, and enhance the quality of technical education

in, the countrys polytechnic institutes in the interest of increasing the number of entrepreneurs.

2. Content of a kind that seed, early on in the global-view of the children, the attractiveness of entrepreneurial careers should be pressed into service.

3. Similarly, the accent on mathematics, science and technology fare should be made stronger in the educational curricula of schools and colleges in Bangladesh.

4. A census of all small and medium enterprises in Bangladesh should be conducted. This is likely to require a very large investment. 5. The legal and contractual framework prevailing in Bangladesh often increases especially small enterprises handicaps. A survey of SMEs should be launched in order to identify these insidious legal irritants. These should then be systematically weaned from the world of Bangladeshi SMEs.

6. A small-claims court needs to be instituted, with requisite resources and mandate to match.

In the policy strategies, smooth and sustainable development of SMEs all over the country will be considered as one of the vehicles for accelerating national economic growth including poverty alleviation, reduction of unemployment, and generation of more employment. Most of the industrial enterprises in Bangladesh are typically SME in nature. Generally SMEs are labor intensive with relatively low capital intensity. The SME also posses a character of
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privilege as cost effective and comparative cost advantages in nature. In this consonant, the SME policy strategies have been formulated in line with the acknowledged principles for achieving the Millennium Development Goals (MDGs) by the Government.

POLICY OF THE GOVERNMENT


The Government is committed to develop SMEs as the vehicles for quality of life improvement, economic growth and poverty alleviation of the common people. The primary role of the Government shall be that of a facilitator to aid naturally growing SMEs through removing market and policy obstacles, and secondly providing necessary promotional support The broad objectives of the policy strategies shall be to 1) Accept SMEs as an indispensable player in growth acceleration and poverty reduction,

worthy of its total commitment in the requisite overall policy formulation and execution; 2) The SME policy strategies shall essentially be linked with broad- based and integrated

manner in line with the poverty reduction strategy paper of the Government of Bangladesh. 3) Encourage and induce private sector development and promote the growth of FDI,

develop a code of ethics and establish good governance, ICT based knowledge management and customer supremacy in the market alliances. 4) Identify and establish the network of infrastructure and institutional delivery

mechanisms that facilitate the promotion of SMEs; 5) Re-orient the existing fiscal and regulatory framework and government support

institutions towards bolstering the goals of SME policy; 6) Nurture and partner civil-society institution(s) having credible management teams in

terms of the delivery of needed services, leadership, initiation, counseling, mentoring and tutoring; etc. 7) Create innovative but meritocratic arrangements so that deserving and especially small enterprises with desired entrepreneurial antecedents and promise can be offered financial incentives within industries prescribed on some well-agreed bases.
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8) Help implement dispute settlement procedures that proactively shield small enterprises especially from high legal costs and insidious harassment. 9) Take measures to create avenues of mobilizing debt without collaterals to match (either using debt-guarantee schemes or mapping intellectual-property capital into pseudo-venture capital) in order to assist small enterprises in dealing with their pervasive lack of access to finance. 10) Accord, systematically, precedence to small versus medium enterprises, within the limitations of governments resources. 11) Harness information & communications technologies, Internet Protocol (IP)-based infrastructure, and electronic-governance in an effort to parlay regulatory services, all kinds of useful information and mentoring inputs, with an accent on increasing the viability of SMEs in all sectors of the economy. NATIONAL TASKFORCE ON SME DEVELOPMENT The Government has constituted a National Taskforce on SME Development to draw up a realistic strategy for promoting rapid growth and vigorous competitiveness among SMEs in Bangladesh in the interest of accelerating the growth of the economy and reduction of poverty in the country. The composition of the The Taskforce has submitted its report with comprehensive recommendations for formulation of SME policy strategies and its implementation in three phases: short, medium and longterm. The government has accepted the recommendations. THE TASKFORCES CARDINAL GOALS ARE THE FOLLOWING (a) To recommend to the Government a body of what can be called SME Policy in Industrialization for Bangladesh; (b) To redefine the criteria of eligibility to the assistance package in terms of size of the enterprises; (c) To identify, on some well-agreed rational bases, a number of industries with a sizeable proportion of SMEs which then to create an assistance-package for; (d) To produce a fairly self-contained set of implementation guidelines for the Taskforces prescriptions to

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Reference
1. Moving Ahead, National Strategy for Accelerated Poverty Reduction II, General Economics Division, Planning Commission, Government of the Peoples Republic of Bangladesh, October 2008 2. 3. 4. 5. 6. 7. 8. 9. Meeting the challenges in SME Development in Bangladesh, Report by KATALYST, 09 September, 2006 http://www.un.org/millenniumgoals/ http://ec.europa.eu/enterprise/enterprise_policy/sme_definition/index_en.htm www.fbcci-bd.org/policy/Industrial_Policy_2005.htm http://74.125.113.132/ BBS data on enterprises include some units under the sub-sectoral captions of public administration and Defense, for instance. Smefbd.org Bangladesh Bureau of Statistics, 2004; BBS Business Registry, 2006

10. www.american.edu/carmel/ap1579a/ecom.htm 11. www.cellbazaar.com/ 12. www.jobsproject.org/content/publication/E-Commerce_in_Bangladesh_status.pdf 13. web.bizbangladesh.com/ecommerce_solutions_bangladesh.html 14. www.hg.org/law-firms/E~Commerce/Bangladesh.html 15. Centre for Policy Dialogue (CPD) (2006), An Analysis of the National Budget for FY2006-07, Dhaka. 16. bd-it.blogspot.com/2007/12/bangla-it-eef-fund-bangladesh-software.html 17. Centre for Policy Dialogue (CPD) (2006), An Analysis of the National Budget for FY2006-07, 18. bd-it.blogspot.com/2007/12/bangla-it-eef-fund-bangladesh-software.html 19. www.smef.bd.org 20. 33 Registration of companies.pdf 21. 3071-9241-1-PB.pdf 22. SME_Policy_Strategies2005 .pdf 23. ICT_role.pdf 24. business_manual_smef.pdf

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