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ISSN: 1998-2003, Volume: 6, Issue: 3, Page: 317-329, January - February, 2012


Md Mamunur Rashid1*

Md Mamunur Rashid (2012). Proposed Research Direction for Sustainable SMEs in Bangladesh.
Bangladesh Res. Pub. J. 6(3): 317-329. Retrieve from

Small and Medium Enterprises (SMEs) are the single largest industrial sector
of the Bangladesh economy.SMEs are renowned for vehicles of economic
growth, labor intensive, poverty alleviation, enhancing the standard life.
Moreover, sustainable SMEs development of Bangladesh can also role to
achieve above vision by 2021. There are 142.319 million people of 147570
square kilometer area of Bangladesh. It is shown that highly density people
live in Bangladesh. According to vision 2021 of Bangladesh Government,
GDP can be raised 8% by 2013 and 10% by 2021. Hence, Contribution of
industrial sector mainly SMEs to national GDP can be doubled by 2021. In
this perspective Government of Bangladesh (GOB) has taken industrial
policy2010 to increase the industry sector‘s share in GDP 40 percent from
28 percent by 2021, with the proportion of the workforce employed in the
sector concurrently rising 25 percent from 16 percent of the country’s total
labor force. Hence, SMEs can link for over 99 percent of private sector
industrial establishments providing job opportunities to around 70 to 80
percent of the non-agricultural labor force, if hinders of SMEs, can be
removed . A unified system/mathematical model can be developed for
investigating the risk of sickness or failure of SMEs. For these purpose states
of the art of review have been done on business model and then provide
a research direction for SMEs/ business models to achieve the vision 2021 in
Key Words: Vision 2021 of GOB, Mathematical Model, SMEs, Research direction.
A business for Small and Medium Enterprise (SME) is an organization that provides
goods and services to others who want or need them. The success or failure of an SME
depends on the following key areas of internal and external activities and environment,
e.g., management, marketing, finance, production, distribution, research and
development, labor, government policies and regulations, and business environment.
SMEs are one of the indispensable ways to economic self-sufficiency around the world.
Small and Medium Enterprises (SMEs) are in general labor-intensive industries with low
capital investment; From the Government of Bangladesh literature and policy is shown for
considering private sector-led industrial development to achieve rapid economic growth
and also to strengthen the process of industrialization. The government has identified the
SMEs as a priority sector. Thus in Bangladesh, SME businesses have come to the forefront of
economic activity. Manufacturing sector in Bangladesh has been contributing at a
consistent rate of around 15 percent over the last decade. SMEs in manufacturing and
services combined have 19 percent share of gross domestic product (GDP). A nationwide
survey claims that Micro, Small and Medium Enterprises’ (MSMEs) value addition accounts
for 20 to 25 percent of Bangladesh’s GDP [1]. There are about 6 million micro, small and
medium enterprises (MSMEs) in Bangladesh in 2003 [1-2]. It is adopted only 28% labor

*Corresponding Author’s Email:

Bangladesh Institute of Management, 4, Sobhanbag, Mirpur Road, Dhaka-1207, Bangladesh.
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force. Besides, 4.2 million SMEs in Japan are employed 70% of Japan’s labor force by
invested vigorously in “innovation” and “human resources” [3]. Improving the
performance and sustainability of local entrepreneurs and SMEs, which represent the
backbone of economic activity, can help to achieve vision 2021[4]. The importance of
SMEs in Bangladesh for industrialization and how important role-play this sector to build up
the economy of the country is studied many papers for Bangladesh [5-13]. To achieve a
planned and organized industrialization to meet the challenge of free market economy
and globalization through SMEs are also analyzed of those papers. In spite of their
importance to the national economy, it appears that many of the businesses fall sick
either at their birth or within a few years of their operation and this phenomenon is
It is also necessary to monitor the sickness of public and private enterprises in
industrial sector and take proper measures for these sick industries especially for SMEs. An
industrial unit is considered sick when its financial position is not satisfactory and it
becomes worse year after year. When its current liabilities are more than current assets,
the organization may not be in a position to pay its liabilities. Industrial sickness or business
failure happens to units of all sizes small, medium and large, but small units are exposed to
bigger threats because they simply do not have the backup of extra finance and
resources that larger companies possess and also because of the extremely poor ability to
source finance from banking institutions although some areas SMEs loan are providing
from SME foundation of Bangladesh and banking institution. The consequences of
industrial/business sickness/failure to a country or society is enormous: loss of employment,
loss of production, wastage of limited national resources, nonpayment of bank loans
creating a default culture and nonpayment of statutory dues such as corporate tax,
customs and exercise duties, and utility charges to public authorities . This paper is focused
for state the art existing literature study of SMEs/ business model in comply with
government policy to develop a mathematical model for the SMEs of Bangladesh for
investigating SMEs risk and measure for achieve the competitiveness in the globe.

Objectives of the Study

This study has tried to identify the prospects and possibilities of SMEs in Bangladesh and
also the reasons of industrial sickness and their rehabilitation process to strengthen our
industrial sector in proposed mathematical model. The objectives of the study and
discussion sections are in the following:
¾ To study the definitions of SMEs in Bangladesh.
¾ To study importance of SMEs in Bangladesh.
¾ To examine specific problems and prospects of SMEs.
¾ To determine market, technology and skill for SMEs.
¾ To identify the potentially of SMEs in Bangladesh.
¾ To identify overall measure requirement for SMEs.
¾ A review state of the art of the business/SMEs model.
¾ A proposed method for SMEs solvency investigation.
Above objectives are illustrated respectively in details sections 3 to 10.

Definitions of SMEs in Bangladesh

The definition of what constitute an SME varies between countries. According to circular
no.403 dated June 12, 2008 of Ministry of Industries (MOI), Government of Bangladesh
(GOB); the definition of SME is following tables 1-2 with compared to Industrial Policy (IP)
Table 1: Manufacturing SMEs in Bangladesh
Criteria : any one of the Small Small Industries Medium Medium
two to be met Industries (IP 2010) Industries Industries (IP
2008 2008 2010)
Value ( replacement cost) 0.5-15 5-100 15-200 100-300
of fixed assets excluding
land and building in million
Nos. of Workers 10-50 25-99 50-150 100-250
Sustainable SMEs in Bangladesh 319

Table 2: Non-Manufacturing SMEs in Bangladesh

Criteria : any one of the Small Small Medium Medium
two to be met Industries Industries (IP Industries 2008 Industries (IP
2008 2010) 2010)
Value (replacement cost) 0.5-5 0.5-10 5 -10 10-150
of fixed assets excluding
land and building in BDT
Nos. of Workers 10-25 10-25 25-50 50-100
Source: [14]
SMEs in Japan definition are illustrated in table 3. It is shown that SME new
definitions of Bangladesh of IP2010 in compare to Japan is suitable.
Table 3: SMEs in Japan
Industries Capital size (¥m) Number of employees
Manufacturing and others 300 or less 300 or fewer
Wholesale 100 or less 100 or fewer
Retail 50 or less 50 or fewer
Services 50 or less 100 or fewer
Source: [15]
According to Public policy 2010, SMEs definition can be generally implemented as
a system of laws, regulatory measures, courses of action, and funding priorities concerning
a given topic promulgated by a governmental entity or its representatives. Hence, a
government entity of Bangladesh can be created for executed the SMEs definition

The Importance of SMEs

The SMEs can share in manufacturing value added varies from 20 to 25 percent.
Their contribution to national exports is also significant. The greater proportion of the SMEs
(58 percent of establishments and 55 percent of jobs created by them in 2006) is in rural
locations which offer better prospects for industrial dispersal. However, their location in
certain administrative divisions/districts reflects regional concentration. There has been
increased women’s involvement in SMEs, especially home-based micro enterprises
engaged in the production of clothing and textiles (boutiques and handicrafts, weaving
and spinning), livestock and dairy, and retail sales. Relatively small enterprises owned by
women entrepreneurs are mostly of the sole proprietorship type which needs low
investments. The SMEs are now considered as the main engine of the economy in
The SMEs contributions in Bangladesh are illustrated in following table 4.
Table 4: SMEs contribution in Bangladesh
Aspects Role of SMEs
National Gross domestic product 25%
Gross manufacturing output 40%
Industrial Jobs 85%
Total labor force 25%
Total exporting earning 89%
Percent of business Over 95%
Absorbed industrial workers 70% to 80 %
Source: [16]

The Present Problem and Prospects of SMEs in Bangladesh

The SME sector continues to suffer from lack of access to finance, infrastructure
bottlenecks, unreliable power and low levels of technological competence, difficult
market access and regulatory barriers. Other important challenge includes sharp market
competition both in existing and new markets. Sophisticated consumer preferences and
market standard and various non-price factors such as quality, health and safety and
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ecological compatibility of products and processes which determine competitive
advantage also pose significant challenge. In the changed market perspective,
introduction of new products and processes, more innovative design, shorter product
cycles and smaller output batches, greater mass customization, and more just-in time
delivery etc have become the critical determinates of survival and growth of the SMEs.
According to Saha, Sujit R. (1997) [10], “Industrial/SMEs sickness: A study of the
selected projects financed by the DFIs in Bangladesh” PhD Thesis (unpublished), Rajshahi
University, has presented following data in table 5 and 6.
Table 5: Internal causes of sickness
Aspects of causes In percentage (%)
Marketing problem 31
Management inefficiency and lack of entrepreneurial skills 22
Faulty project planning and appraisal 14
Imbalance of machinery and inappropriate technology 12
Implementation delay ( mobilization of equity, etc) 12
Others ( diversions of funds labor problem, etc) 9
Table 6: External causes of sickness
Aspects of causes In percentage (%)
Delay in loan sanction and disbursement 22
Non-availability/ shortage of working capital 21
Power problem 15
Changes in govt. policy ( import liberalization) 13
Non-availability/irregular supply of raw material and other critical 11
Natural calamities 05
Smuggling, political unrest 05
Others 9
According to Bhattacharya, D et al (1998) [17], “Sick Industries in Bangladesh”- A
report of the study was commissioned by ministry of industries, GOB and Bangladesh
Institute of Development studies, Dhaka reveals that the highest incidence of sickness are
shown in table 7.
Table 7: List of sick Industries
Name of Sick Industry In percentage (%)
The manufacturing of textiles 19.6
Food manufacturing 14.3
Textile manufacturing 8.8
Non electrical machinery 5.7
Leather and its product 5.4
It was appeared from that study is shown in table 8.
Table 8: According to small, medium and large scale basis sickness in percentage
Scale of the Industry Sickness in percentage (%)
Small 72.5
Medium 19.7
Large 4.1
According to Alam, Z. (2007) [13], SMEs in Bangladesh: A roadmap for economic
development, the problems by the sample respondents for SMEs in Bangladesh are
following in Table 9.
Sustainable SMEs in Bangladesh 321
Table 9: A survey of SMEs for sickness
Sl. No Particulars No of respondents %
1 Inadequate government policy 45 90
2 High rate of interest on bank loans 40 80
3 Lack of accurate data 30 60
4 Lack of skilled technicians and workers 35 70
5 Lack of government subsidy 42 84
6 Inadequate supply of power 44 88
7 Poor quality of product 46 92
8 Insufficient marketing information 38 76
9 Lack of research and development facilities 25 50
10 Absence of integrated package assistance 48 96
World Bank [18] survey for SMEs are shown in table 10
Table 10: Issues identified in percentage
Particulars In percentage, %
Lack of finance 55
Shortage of skill labor 39
Getting business site 38
Bribes 21
Orders/Marketing of product 28
Lack of Knowledge 12
Government interference 12
Raw material 10
License for work 8
New Technology 8
Contribution of SMEs in Bangladesh to GDP by sector are shown in table 11
Table 11: Contribution of SMEs in Bangladesh to GDP by sector
Particulars Total contribution in %
Agriculture 24
Fishing 4
Manufacturing 38
Construction 1
Wholesale & retail trade and repairs 23
Hotel & restaurants 4
Transport, storage and communication 1
Real-estate, renting and business activities 2
Education 0
Health and social works 0
Other service activities 2
Total 100
Source: [19]
According to Benchmarking regional SME policies: Identifications of policy
Intervention areas for Bangladesh” Economic policy paper prepared by DCCI under the
DCCI-CIPE/ERRA project (July, 1999-January 2007) [8] is shown in Table 12:
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Table 12: At a glance SMEs in Regional Countries
Aspects Name of Country
Bd* Bhutan India Nepal Pakistan Srilanka
Number of Enterprise in million 0.6 - - 0.047228 2.88 -
Share in total industrial units in % 90 85 95 - 90 -
Share in total industrial - - - - -- -
investment in %
Share in industrial output in % 40
Share in GDP in % 30
Contribution to total civilian 23 70
employment in %
Share in national exports in % 35 25 14
Contributions to industrial 80-85 98 78
employment in %
Contribution to manufacturing value 45-50 80 35
addition in %
Bd*- Bangladesh
In these aspects, the lists of Problems of SMEs in Bangladesh are shown in table 5.
Table 13: Problems of SMEs in Bangladesh
Sl. No. Name of Problem
1 Disorder market intelligence
2 Innovation in management, design and production process with flexible
mechanism are not complying with competitive market.
3 In Bangladesh has not proper access facility to technological networks to meet
international standard due to know how and skill difficulty.
4 Lack of credit/finance/capital
5 Lack of Training/Skill requirement/ Human Resource Development based on
6 Require of Research and Development
7 Limited information on potential markets and clients
8 Need special incentives for export oriented industries from GOB
9 Lack of Market penetration
10 Lack of Infrastructure
11 Lack of Measurement of SMEs performance
12 The existing information asymmetry between funds providers and a SMEs
13 No unified well-specified system of the Government of how and why SMEs fail
14 In identifying industrial sickness, not only financial criteria , while also some
important non-financial criteria cannot be taken presently consideration
Market, Technology and Skill for SMEs
SME can strengthen for achieve the competiveness in the world market through
ICT based knowledge managements ; ICT network of infrastructure ; reorient the existing
fiscal and regulatory framework and government support institutions for SMEs
development; nurture and partner civil-society institutions through services, leadership,
initiation , counseling for SMEs development; promise can be offered financial incentives;
enhance the opportunities for marketing of SME products ; enhancing subcontracting
facilities and diversification of export . Moreover, SMEs can be emphasized through
motivation, the development for dealing with information and communication
technology, loan allocation, skill development program for entrepreneurs. GOB can be
given priority women entrepreneurs in the SME sector. At least 15% of total sanction will be
held in reserve in favor of the women entrepreneurs and the interest rate will be 10% only.
Besides, the Government of Bangladesh (GOB) can play role as a facilitator for SMEs
development to remove operational bottlenecks, neutralize market failures, necessary
promotional support, formulated emphasizing increase in the flow of formal credit into the
sector focusing on micro enterprises and women entrepreneurs through introduction of
new and innovative credit schemes and financial instruments. For enhancing
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entrepreneurial skills, suitable courses on entrepreneurial development can be introduced
at school, college and also university levels. Strengthening of partnership among
entrepreneurs, R & D institutions, universities and other stakeholders can be encouraged
by the government to facilitate supply of quality products through sustainable innovative
technology. Inter-firm linkages and networking through subcontracting could be
encouraged to enhance external competitiveness. The international value chains of
productions can be integrated with the global (ASEAN) and regional (SAARC) for getting
new market. The SME Foundation web portal [20] can be made cost effective and user
friendly to SME entrepreneur. As a result, the SMEs entrepreneurs can make
independently own web site from this web portal. This web portal can work as hub for
information of SMEs in Bangladesh. The SMEs can be used of the ICT and e-commerce
facilities and services in production, marketing and networking. Enhance international
competitiveness of the agro-based food products can be included with international
food safety standards. The SME policies and strategies can be made sensitive to needs of
woman entrepreneurs in SMEs through safeguards women’s interests as equal partners in
business development activities. Effective coordination at the national level can be
fostered through dialogue among relevant stakeholders and also considered the others
developed country like Japan SMEs policy.
Potentiality of SMEs in Bangladesh
Bangladesh can be achieved proper industrialization to remove hinders for
sustainable SMEs Development in Bangladesh. Besides GOB can take proper initiative to
achieve our desired industrialization by implementation the Industrial policy -2010 [14, 35,
39-40] and rehabilitating the sick industries. In this regard , industrial policy 2010 have to
implement properly to set yearly basis indicators setting and tracking this indicators by
quarterly. By offering various facilities and incentives, although any visualize industrial
development have to show properly in Bangladesh. Moreover, GOB can initiative a
partnership policy with foreign or private investor with transparency. Presently in
Bangladesh foreign investors are enjoying more facility than national/local investor. While
the non-residence Bangladesh national (NBR) are enjoying same facility like foreign
investor. Bangladesh is an agricultural base country, where around 85% people are living
at village with activities of agriculture, in this perspective Bangladesh can achieve
industrialization through agriculture base small and cottage industry to start aggressively.
Yet in this observation, agricultural industry can employ limited resources of Bangladesh
for industrialization. In this perspective, specific following sectors can take consideration
of Bangladesh Government. There are agro based SMEs, frozen foods based SMEs,
electronics SMEs, leather and leather goods SMEs etc. Hence smooth industrialization can
be implemented by collectively government, foreign, local investor or any one among of
them. Besides, Government can rethink regarding to rehabilitate the sick industries and
trying to keep the industry in the main stream of production. A proactive approach can
be developed for SME personnel by including the advancement of technological and
technical skills in its business strategy. An SME can be procured funds from venture capital
investors in order to expand operations overseas. A financial institution has been
improved its assessment abilities through collaboration with local companies and experts.
An SME can be procured personnel by interacting with universities. An SME can operate a
characteristic evaluation and compensation system, including 360 degree evaluation by
superiors, subordinates and contemporaries. An SME can decide its wages through
discussion involving the president and all other employees. Hence SME can act
proactively on educating and training its employees. An SME can achieve a work life
balance through information sharing with employees. An SME can be procured personnel
by interacting with universities. An SME can be operated a characteristic evaluation and
compensation system, including 360 degree evaluation by superiors, subordinates and
contemporaries. An SME can be decided its wages through discussion involving the
president and all other employees. Hence SME can act proactively on educating and
Training its employees. An SME can be achieved a work life balance through thorough
information sharing with employees. Bangladesh Small and Cottage Industries
Corporation (BSCIC) for SMEs Development [36-38] can be increased of industrial
production and productivity, employment opportunities, poverty alleviation, socio
economic development and accelerate overall economic growth of Bangladesh; BSCIC
can be implemented 74 industrial park ; 15 skill Development Centers and Monotype
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Industrial Estates likes 1) Hosiery Industrial Estate; 2) Industrial Estate and Research
Center for Jamdani; 3)Tannery Industrial Estate; 4) Active Pharmaceutical Ingredients
(API) Industrial Park; 5) Electronics Complex at different places of the country to facilitate
the industrial development in a manner. The SME foundation can be worked for
specifically SMEs sustainable development in Bangladesh as following areas:
implementation of SME Policy/ Strategies; Research; Credit Wholesaling; Capacity Building
& Skill Development; Access to Technology; Access to Information; Women
Entrepreneurship Development and Business Support Service. SMEs in Export policy in
2009-2012 have got opportunity for highest priority for export in Bangladesh. These are
agro-products and agro-processed products; light engineering products including auto-
parts and bicycles; footwear and leather products; pharmaceutical products; software
and ICT products; home textile and toiletries products. Benefits and facilities to be
provided to the highest priority sectors are following: project loans at reduced interest
rates on a priority basis; Income tax exemptions ; possible financial benefits or subsidies
consistent with WTO agreement on agriculture, and agreement on subsidies and
countervailing measures, including concessionary rates for utility services such as
electricity, water and gas; export loans with soft terms and at reduced interest rates; air
transport facilities at concessionary rates; duty draw-back/bond facilities etc.
Overall Measure Requirement for SMEs
Many measures are discussed in sections 1-7. Moreover the following measures
can be implemented as soon as possible to sustainable SMEs Development in
i) The government can establish an SME bank to provide collateral-free bank loans to
SME entrepreneurs.
ii) Transfer of modern technology can support for upgrading the product quality.
iii) The appropriate infrastructure facilities such as water, electricity and gas can be
ensured for SMEs.
iv) The government can be taken initiatives to promote SMEs products abroad or help
establish cooperatives to conduct marketing in the same sector, then the sector can
be facilitated to achieve sustainable growth.
v) Small and cottage industry sector can be separated from the SME sector for
competitiveness achievements for sustainability.
vi) Law and order situation can be regulated for sustainable SMEs Development in
vii) Illegal imports and non-tariff barriers can be removed for SMEs development.
viii) A research and development (R&D) can be run in the BIM.
ix) SMEs related policy can be made as an Act/law like Government of Japan, India etc
for sustainable development of SMEs.
A Review State of the Art of the Business/SMEs Model.
There is a wealth of literature available on business failure, particularly on
developing predictive business/SMEs failure models. Since 1960s many empirical and
mathematical models have been developed, viz. multivariate discriminant analysis (DA),
multi-level discriminant analysis (MLM), logit and probit models (LPM), integrated time
series and logit models (TLM), utilities additives discriminate analysis (UTADIS), artificial
neural networks (ANN), etc. All these models are based on selected financial ratios which
are formed from the information contained in income statement (profit & loss account)
and balance sheet. So, the use of these models is limited to the existing business firms. In
recent years, some research works have been directed to develop models to predict
success or failure of a prospective business using methods like multi criteria decision
making (MCDM).
Back to 1920, a long span of time, various studies have been published which
examine the financial ratios of firms in order to assess the predictability of a business entity
going bust [21]. With a view to discriminate between a sample of bankrupt firms and a
matched sample of healthy firms, a linear solvency model is developed with a few
significant ratios whose weights are appropriately determined. The model produces an
overall score, which is a point value in a scale called Z-scale or solvency thermometer
Sustainable SMEs in Bangladesh 325
with a cutoff point at either zero or any other value. From the cut-off point, the higher up
the scale, the more solvent the enterprise is; the lower down the scale, the more insolvent
it looks. From late 1960s to the present day, failure prediction and financial distress have
been much discussed in the accounting and credit management literature. The topic has
developed to a major research domain in corporate finance. Since the first failure
predictions models of Altman and Beaver [22-23], many studies have been dedicated to
the search for the best corporate prediction model, based on publicly available data and
statistical techniques. Altman [22] model and Toffler-Tisshaw [24] model were developed
by using multivariate approach in which financial ratios were combined and analyzed
extensively by statistical methods like discriminate analysis (DA).
DA produces a given classification for a firm, where the idea is to discriminate
between defaults and non-defaulters. A scoring function provides a score from
observable attributes. Comparing discriminant function scores to cut-off values (c)
separate firms according to its credit risk. If Zi > c then the firm is classified as non-
bankrupt. If Zi < c then the firm is classified as bankrupt. Coefficients or weights in the
discriminant function ( ) and cutoff score (c) are all determined from performing the
discriminate function estimation. Thus, DA is based on an extensive analysis of a large
number of empirical studies. DA is comparing the classification results and/or the
prediction abilities to corporate failure prediction models based on different modeling
methods. Although the alternative methods are computationally more complex and
more sophisticated than the classic cross-sectional models, it is not clear whether they
can produce better performing corporate failure prediction models or not. Linear
Probability Models (LPM) assumes a linear relationship between predicted outputs and the
input variables. In the context of bankruptcy prediction, this is a major limitation. LPM
makes the probability Pi for a given firm i of an event a linear function of the firms
attributes X1…Xn. It can be shown that the error term is heteroskedastic and not normally
distributed. Having these statistical drawbacks, it is not recommended using for
bankruptcy prediction model [25]. Because of the problems with the linear probability
model, alternative models have been developed at the end of 70’s and in 80’s. These are
known as Binary Logit and Probit Models (BLPM). The Probit and Logit functions produce a
non-linear relationship (more precisely an s curve) between the dependent and
independent variables and give a predicted probability tends towards 1 in both models.
When the function arguments get very low (and negative), the probability tends towards
0. The models can be formulated as:
Probit: Z=β0+β1Χ1+β2Χ2+β3Χ3+…+βnΧn+εI (1)

z 1
− y2

Pi=F(Z)= e 2 dy (2)

Logit : Pi= (3)
1+ e
− β 0 + β1 X 1 + β 2 X 2 + ...+ β n X n )
Pi = The bankruptcy probability of firm i;
f=The cumulative normal probability function;
X1,…, Xn= Firm characteristics (financial ratios, size/age etc);
β1,...,βn = Parameters to be estimated;
εi = Error term;
Both Logit and Probit models allow direct specification of hypotheses regarding
how the default probability is affected by economic and financial variables. A drawback
of BLPM is capable to find out the two states of financial distress, i. e., bankrupt and non-
bankrupt, while in reality there are more states of financial distress [26]. Multinomial Logit
Models (MNLM) allow for more states to approximate the continuum of the firm’s financial
health, instead of the conventional failing or non-failing dichotomy [27]. MNLM estimate
the probabilities that a firm will enter several states (1, 2…up to N states). Example of states
in the context of financial distress could be:
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State 0: Financial stability
State 1: Omitting or reducing dividend payments
State 2: Omitting or reducing loan payments
State 3: Formal bankruptcy and liquidation
The MNLM can be formulated as:
β 0 , j + β 1, j X 1 + ...+ β n , j X n
Pi (Y=j)= J
+ εi (4)
i =0
− ( β 0 , j + β 1, j X 1 + ... + β n , j X n )

j= States of the world (j=1,2…n)
Pi (Y=j) = The probability of firm i being in the state j
X1,…, Xn= Firm characteristics (financial ratios, size/age etc)
β0, j,…, βn, j = Parameters to be estimated ;
εi = Error term;
Note that for each state, we get a model for the predicted probability of being in
this state with a given set of parameters. As for the binary Logit and Probit model, the
method of estimation is maximum likelihood. MNLM allows for a direct specification of
hypotheses regarding how various probabilities of financial distress are affected by
economic and financial variables. Again, this makes the transition from financial theory to
empirical specification smooth. Besides, a problem that might occur with MNLM is the
existence of “inconsistent” set of probabilities when ordered different states of financial
distresses. Apart from this, testing the parameters or the model as a whole causes no
problem. The difference in range of the variables and the treatment of special cases are
methodological issues to be tacked by ‘simple-intuitive models’ [28]. The research on
developing business failure prediction models has been focused on building classification
models to distinguish among failed and non-failed firms. Such models are of major
importance to decision makers (credit managers, managers of firms, investors etc). They
serve as early warning systems of the failure probability of a corporate entity. Time series
and Logit Models integrated (TLM) econometric approach could be well-fitted into a
theoretical multifactor framework. The economic factors driving the credit risk of obligors
are economic, geographic or industry variables that influence the credit standing of
obligors directly or indirectly. This is unlike the BPLM and MNLM where, we estimate
individual default probabilities for each firm. The interpretation of the parameters is
intuitive as it measures the default or migration rate sensitivities to economic factors.
According to an economic model, one could test the sign and parameter values of the
Logit function as well as testing alternative model. In addition to pure statistical models,
various types of simulation techniques and mathematical programming models have
taken the way into the literature of bankruptcy prediction. Here we will describe 3 various
approaches i) Recursive partitioning ii) Neural Network and iii) Mathematical
Programming Models.
Recursive Partitioning (RP) is a non-parametric classification technique. The
method starts with the sample of firms, their characteristics, the actual group classification,
the prior probabilities and the misclassification cost. That is the cost of classifying a
bankrupt firm not bankrupt and a not bankrupt firm bankrupt. Neural Network (NN) is an
advanced form of nonlinear optimization using various weights and transformation
functions on the input data. The most common type of NN is the multiplayer perception
network, when this network is configured without a middle layer; it is similar to multiple
regressions. One characteristic is that each node processes several inputs that result in
several outputs, serving as inputs to other nodes of the network, until we reach a stage
where we get the modeled output. Mathematical Programming Approaches (MPA) is a
distribution free optimization method or search technique. It is flexible as goals can be
directly built into the model. But again, there are some serious drawbacks. Coefficient
estimates from MPA do not have any real theoretical interpretation. These parameters or
weights are determined purely by the scope of minimizing misclassification. And, similar to
NN, there are no diagnostic or specification tests available for estimated models to
Sustainable SMEs in Bangladesh 327
determine whether the model under consideration is adequate. The significance of
business failure prediction models has been a major motivation for researchers to develop
efficient approaches for the development of such models [29]. The relative performance
of disaggregating method, namely the (UTilities Additives DIScriminate analysis) UTADIS
method and three of its variants are compared to three well-known multivariate statistical
and econometric techniques namely discriminate analysis, Logit and Probit. These
methods have been investigated regarding their discriminating and predicting ability [30].
Some specific barriers have reduced the use of several quantitative techniques to predict
business failures. The purpose of quantitative technique was to discriminate between a
sample of bankrupt firms and a matched (by industry and asset size) sample of healthy
firms [31]. A linear solvency model was thereby developed with a few significant ratios
whose weights were appropriately determined in order to maximize the predictive power
of the model [32]. A new ratio–based multivariate methodological approach for signaling
corporate collapse, called Multi-level modeling (MLM). MLM provides informed
stakeholders in a corporation with a tool that would help them signal impending collapse
with a high degree of accuracy compared to multiple discriminate analysis (MDA), which
is the mainstream benchmark methodological approach. MLM helps stakeholders take
appropriate measures, if possible, to save their company from collapse [33]. Since 1990,
another promising approach to bankruptcy prediction, based on the use of neural
networks, has been evolved. Artificial Neural Networks (ANN) is a computer program to
process information, in parallel, similar to the human brain. ANN’s store information in the
form of patterns and are able to learn from their processing experience. Unlike MDA and
Logit analyses, ANN imposes less restrictive data requirements (the requirement for
linearity, for example) and is especially useful in recognizing and learning complex data
relationships. However, ANN’s “black boxes” is its inability in revealing how they weigh
independent variables [34].
From the above discussion, it is interesting to note that no unified well-specified
theory of how and why businesses/SMEs fail. It can be realized that in identifying industrial
sickness, not only financial criteria but also some important non-financial criteria should be
taken into consideration. The problem of identifying industrial sickness will be done by
business failure prediction model, which can be used by the government authorities,
business organizations and financial institutions. It is essential to study and develop
business failure prediction model for both academic and business purposes in
Bangladesh. This study will be focused and confined only on selected SMEs, whose easy
availability of financial statements can help in analyzing their strength. The purpose of this
study is to increase the understanding of business failure prediction, creating more valid
business failure prediction models and diminishing the current gap between theory and
The general and immediate environments of a failing company are playing a
subordinate role. For these reasons, numerous researches have been done on business
failure models, where interest in insolvency prediction has long been confined to
academies, with most of the published materials restricted to business and accounting
journals specializing in esoteric and complicated subjects. Insolvency prediction models
have not gained greater use in the business community because of its difficulty in
calculating the results.
A Proposed Method for SMEs Risk/Failure Investigation
The proposed research can be followed the step-by step methodology as outlined
1. Conceptual analysis of Business failure prediction.
1.1 Definition
1.2 Previous studies of Economic or Financial Theory
1.3 Perspectives of Business Failure Prediction
1.4 Framework for Business Failure Prediction
1.5 Finnish perspective
2. Interviews
2.1 Taking interview from related persons and industries and collecting data from
existing reports, journals, and policies of the government.
Rashid 328
2.2 Data will be collected from various sources and analyzed and presented in the
textual or literary form and tabular forms by using statistical tool.
2.3 Firms’ conception of Business Failure Prediction Model
2.4 Complements the conceptual analysis
3. Model Development
3.1 Evaluation of prior models
3.2 Model Estimation.
3.3 Statistical Validation.
3.4 Interpretation and analysis of the model
The results obtained from the present proposed research can be expected to
bring new insights in the development planning of our industrial and service sectors
especially SMEs, which will help in increased industrial output and exports. The outcomes
of the proposed models can also be expected to predict business failure in Bangladesh
prior to few years and then take appropriate preventive measure for survival. Hence, a
mathematical model for business failure prediction can be developed in complies with
Bangladesh perspective. After developed this model can be run and implemented on the
personal computer. Al last, this results from developed model can be got by inferential
statistics tools. Therefore, SMEs can make to economic development of Bangladesh to
achieve the vision 2021 to overcome the above crucial problems by developed a
generic mathematical model for SMEs.
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