Chapter 01: Introduction

1.1: Background of the study

This study aims to identity how one of the Private Commercial Banks(PCBs) of Bangladesh is
operating its SME banking function and how it’s contributing to improve the SME sector of the
country. In a labour surplus country like Bangladesh, the SME sector accounts for 25 percent of
Bangladesh GDP; more than twenty-one million people are employed by SME enterprises at a
comparatively low wage; the overall share of small and medium-sized enterprises (SMEs) in the
industrial sector was 20.15 percent in fiscal year 2020; according to the latest Economic Census
2013, total number of establishment in industrial sector was 78,18,565 of which 78,13,315 or
99.9 percent were CMSMEs; in addition, despite the impact of the COVID-19 pandemic and the
containment measures in the form of a state wide lockdown, the sectorial share of cottage
industry (3.94) remained unchanged(Bangladesh Bank). So from all of these data we can easily
realise how significantly SMEs are contributing to our national economy. Despite these
contribution and role playing, SME sector still facing problems regarding finance and
cooperation from financing institutions specially commercial banks. So in this study I tried to
identity how one of the well known commercial banks of our country is functioning its SME
banking to establish itself as a friendly SME supporter and how it is handling the challenges
regarding that.

SME development is one of the instruments of employment and income generation, human
development and poverty alleviation, export promotion, stimulation of private ownership,
competition and entrepreneurship and hence the driving forces behind the growth of a vibrant
industrial market economy. Small and medium enterprises (SMEs) have long been considered
as the principal driving force of the economy of Bangladesh. SME has generated considerable
interest among the policymakers, academics, business circle and the international donor
agencies in recent times.

The concept of SME is not new in Bangladesh but there is a lack of consciousness among people
especially among most financial institutions in regards of cooperation. The biggest impediment
to SMEs is the lack of sufficient capital needed to operate business. Most businesses often have
to start with their own savings or by borrowing from friends and relatives, with bank financing
coming later. Banks remain extremely reluctant to lend to small scale entrepreneurs who do
not have any startup equity despite sound business models. A World Bank (WB) paper titled
'Bank financing for SMEs around the world' which used data from 91 banks from 45 countries,
reports banks are less exposed and charge higher interest rates and fees to SMEs relative to
large firms. A number of studies using firm-level survey data have shown that SMEs not only
perceive access to finance and the cost of credit to be greater obstacles than large firms do, but
these factors also constrain SME performance more than in large firms. Hence there are so
many obstacles that are facing by SMEs owner regarding having finance particularly from the
private commercial banks.

But it's a progressive matter that Private commercial Banks(PCBs) of Bangladesh are trying to
alleviate the problems regarding the finance related problems facing by SMEs of Bangladesh.
Though they are facing too many challenges when working with this crucial segment of the
economy specially when handling credit and credit risk management. But they have been
remaining the largest contributor to dynamite this crucial segment by providing various cordial
service and fulfilling SME owners' needs and wants.

Shahjalal Islami Bank Limited is one of the well reputed private commercial banks in Bangladesh
that started SME financing from the year of its starting. Appealing the significant contribution of
SME in the economic condition of cross section of population, Shahjalal Islami Bank Limited
(SJIBL) has accorded added priority to this sector in its pursuit of expansion of investment
portfolio. Moreover, it has been giving strategic importance to SME sector and as a result it has
given enormous importance on cottage & micro enterprise financing, cluster financing, new
entrepreneurship development financing, promoting rural people as well as rural women
entrepreneurship, creating business network for CMSE entrepreneurs and financing in
untapped areas to the unbanked new entrepreneurs. SJIBL also managed to retain high asset
quality withstanding the unprecedented challenges faced by the financial sector and economy
as whole.
The current study attempts to explore the current situation of SME banking performance of
Shahjalal Islami Bank Limited through putting four specific objectives in mind such as how its
SME banking is fulfilling the need of customers and contributing In the economy; the challenges
that are facing regarding SME banking; SME credit management; SME credit risk management
and if there is any impact of SME financing on the financial performance of Shahjalal Islami
Bank Limited.

1.2 Rationale of the study

This research was conducted to identify how one of the well known commercial banks of
Bangladesh, Shahjalal Islami Bank Limited, is performing SME banking. This study would carry
huge significance because it dealt with SME sector which is said as one of the major engines for
economic growth of Bangladesh.

So it is essential to study the overall health of SME sector. One of the major constraints in this
sector is financial difficulties. As all the SME owners aren’t affluent with wealth. So there is
always a concern for them to arrange money for starting or maintaining their venture. Here
commercial banks of Bangladesh can play a major role to assist this sector through financial,
informational, motivational and maintenance support. This study tried to identity how Shahjalal
Islami Bank Limited, one of the renowned private commercial banks of Bangladesh, is
functioning its SME banking to contribute the economy as well as to understand like other
commercial banks, what are the challenges that appear while serving SME sector and how does
it manage credit and the risk associated with providing credit to the SME owner.

There are lots of research work have been done on SME and how it is contributing to the
economy and how it can be turned into a resilience sector to dynamite the country's economy
as it has proved itself as a major contributor to the economic aspect. But there are few
constructive research have been conducted yet on how can commercial banks contribute to
uplift SMEs and how they should handle the risks, uncertainties, hurdles and challenges faced
while dealing with this. Moreover, from the research work we also got that the financial
performance of any commercial bank is strongly correlated with their SME banking
effectiveness. So, it would be useful for the bank owner to deeply understand the importance
of effective SME banking operation and undertake necessary steps to be success with that in
order to survive first and remain competitive to the industry where SME has got substantial
attention to the industrial leader and the well performers. So this study is going to be very
useful for several parties such as the SME owners, the bank owners, the researchers and
scholars, the community of developing countries like Bangladesh and the government of any
country.

To the researcher

Considering past events and those of current times, this research would continue to play a
great role to the researcher. It will help them to be more knowledgeable in the area of this
research such as SME banking. It is one of the ways of capacity building.

To the owners and managers of commercial banks

The result of this study will be of immense benefit to the banks. It will help the commercial
banks recognize the role SMEs play in the economy and when to provide them with enough
fund so as not to hinder the growth and development of the economy as well as to earn profit
and reputation by cordially serving SME sector.

To the community of Bangladesh

This research will induce further academicians of the country and beyond its boundaries to
conduct other studies in the related fields. University students will be able to know the
contribution of commercial Banks in the economic development of SMEs. The study will also
serve as a guide to any person carrying out a similar research work.

To SMEs

SMEs will get information on contribution of commercial banks in its economic development
and this will enable SMEs to be courageous to work with commercial banks. The small business
owners will be able to recognize the best or appropriate means to procure loans and be
educated on the various ways loans can be obtained and the equivalent collateral to give in
exchange for loan.
1.3: Statement of the problem
Small and medium enterprises (SMEs) are treated as the engines of growth and drivers of
innovation worldwide. They play a significant role in driving economic growth and generating
jobs. In Bangladesh, SMEs are playing a vital role for the country's accelerated industrialization
and economic growth, employment generation and reducing poverty. SME financing is a topic
of significant research interest to academics and an issue of great importance to the
policymakers of Bangladesh and around the world. Economic as well as technical and social
arguments warrant the promotion of SMEs. SMEs need money to start-up, expansion, material
purchase, purchase of equipment and machineries and maintain sound working capital
requirements. SMEs in Bangladesh collect their fund from various sources like personal savings,
family, friends and close relative, loans from financial institutions and NGOs. All the above
mentions sources, commercial banks provide a vital role in financing SMEs as well as non
financial services. Previous study on SME showed that, on an average banks provide near about
20% percent loan in SMEs sector from their total loan disbursement each year. Continuous
effort from Government and central Bank to promote SMEs finance, the number of loans
products and loans balance for SMEs finance in banks is increasing substantially. The aim of the
study is to access the contributions of the Shahjalal Islami Bank Limited in financing the SMEs
and the products and services it provides to the SMEs to fulfilling the needs of SME.

However, there are some problems faced by banks in Financing Small Enterprises. Some of
them are non availability of required documents, absence of good transaction record with bank,
problems linked with business address, bad repayment history, lack of financial capacity,
inadequate net worth, lack of security and guarantee, minimum experience in business, lack of
managerial quality, unstructured financial information. So how does SJIBL handle these SME
banking related problems is another particular issue that can be helpful for all the commercial
banks. Moreover, we will deal with another problems face by Commercial banks regarding
credit providing. In this study, we will see the manner in which SJIBL manages its credit and the
risk associated with the credit provided to the SME owners. So these are the problems for what
this study is about. Through this study, we would see how the problems are dealt in the light of
SJIBL which would be helpful for all commercial banks of Bangladesh.
1.4: Objectives of the study
The crucial Objective of the study is to development an understanding about the SME banking
activities of the selected bank, Shahjalal Islami Bank Limited and to relate them with the
theoretical and practical knowledge acquired from the banks and other sources.

1.4.1: Major objective

The main objective of the study is to highlight how effectively Shahjalal Islami Bank Limited-
SJIBL manages its SME Banking.

1.4.2: Specific objectives

1/To become familiar with how effectively SJIBL is serving the needs of its SME clients.

2/ To assess how the challenges regarding SME banking are handled by SJIBL.

2/To analyse the SME finance/credit management of SJIBL.

3/To know the manner of SME-credit risk management of SJIBL.

1.5: Scope and limitation of the study

1.5.1: Scope of the study
The report will provide some opportunities to learn various aspects of SME banking. The area of
concentration of this report is focused in a broad objective and some specific objectives. The
scope of this study will focus on the SME banking services offered by a commercial bank,
Shahjalal Islami Bank Limited, with a particular emphasis on understanding the current state of
SME banking in Bangladesh. The purpose of this research is to investigate the SME banking
services provided SJIBL and assess its effectiveness in serving the needs of small and medium-
sized enterprises.

Additionally, the study will look at the current trends and challenges faced by SMEs in
Bangladesh and how SJIBL is addressing these challenges through its SME banking services. The
study will also assess the effectiveness of the bank's SME banking services. The study will focus
on the following areas:

 ‌Assess the effectiveness of the SJIBL's SME banking services, including customer
satisfaction and feedback.
  ‌Evaluate the overall performance of the bank in terms of loan portfolio and financial
sustainability.
 ‌Analysis of the products and services offered by SJIBL for SMEs, including loan products,
deposit products, and other financing options.
 ‌Examination of the process of application and approval of SME loans, including the
required documentation, eligibility criteria, and decision-making processes.
 ‌Assessment of the level of satisfaction of SME customers with the SME banking services
offered by SJIBL, including an evaluation of the customer service, loan disbursement
process, and repayment terms.
 ‌Identification of the challenges faced by SMEs in accessing banking services and
suggestions for improvement.

The study will be limited to the SME banking services offered by SJIBL and will not cover the
services offered by other financial institutions or non-bank lending institutions. The data
collection will be based on primary sources, including surveys, interviews, and observation, as
well as secondary sources, such as published reports, research papers and case studies. The
study will also be limited to a specific geographic location. The study will be conducted over a
period of 1.5 Months from 01/01/2023 to 15/02/2023.

1.5.2: Limitations of the study

On the way of the study, I have faced the problems that are given below that may be terms as
the limitation or shortcoming of the study;

Short Time Period

The first obstruct is time itself. Due to the time limitation(just 1.5 months), the scope and
dimension of the study has been curtailed. For an analytical purpose adequate time is required.
But I got a short time period for prepare the report.

Data Insufficiency

It was very difficult to collect the data because all of the employees are very busy. For the time
limitation they could not able to supply all kinds of necessary topic related data.

Lack of Records
Sufficient books, publications, facts and figures narrowed the scope of accurate analysis. If this
limitation were not been there, the report would have been more useful and attractive.

Poor Library Facility

Most of the commercial banks have its own modern, rich and wealthy collection of huge and
various types of banking related books, journals, magazine, papers, case studies, term papers,
assignment etc but the library of selected bank is not well ornamented and decorated.

Lesser Experience

Experience makes a man efficient. I am doing such kind of research activity for the first time.