Create and Implement an SME Policy:

Given heavy reliance of the national economy on the SMEs for generating employment and income especially for the poor in the rural areas, development of entrepreneurship, new business creation and development of intersectional linkages the SMEs should be declared as a ‘priority sector’ and backed by formulation of a proactive SME development policy The government should define a secure and stable policy for SMEs. Ironically, SMEs in Bangladesh have developed and survived in an environment having no policy. Development of a predictable, user friendly and stable policy regime for the SMEs should be priority work of the government. In order to frame a targeted policy for SMEs data collection needs to be done. A sufficiently large sample survey should be carried out to generate a benchmark

national level database both for accurate estimation of the SME contributions to the national economy and for formulation of comprehensive policies for the sector. A uniform set of definitions should be designed and used by all pertinent agencies (i.e. BBS, Ministry of Industries/BSCIC, Planning Commission and NBR) with respect to classification of enterprises by size. In this context, a well-thought out decision is needed to ascertain whether “SME” is the correct term to identify ‘Small’, ‘Cottage’ and ‘micro’ industries in Bangladesh.

In the proposed SME development policies, provisions should be made to develop separate and specialized institutions in three areas: (a) finance, (b) technology and (c), skill development, in addition to rationalizing the existing policies and institutions. In this context, a strategic ‘Public-private Sector’ partnership and cooperation should be carefully developed keeping in view the current emphasis on fostering industrial development through private enterprises systems.

Existing regulatory and promotional agencies (i.e. BSCIC, BOI) will be important stakeholders in implementing the country’s SME policy. Regulatory corporations should be given full independence within the approved budget. They should not be policed for every aspect of their operations. As long as they stay within the budget limits they should be fully independent. But their performance should be evaluated against given freedom and punished or rewarded as necessary.

• Thrust Sectors and Linkages

Within the SME sector, the fast growing sub-sectors exhibiting greater dynamism and prospects for sustained future growth should be declared as ‘thrust sector’ and supported by adequate incentives on a priority basis. Special endeavors are needed to develop the culture of utilizing horizontal and vertical linkage opportunities and contracting. Strong legislation is needed to ensure that the deals between contracting parties are fair and there is provision for strong measures to prevent breach of contract. Subcontracting can open avenues for development of backward and forward linkages and provide huge opportunity for the SMEs. One way for SMEs to attain sufficient scale to earn contracts is through clustering. Clustering and networking can help SMEs boost their competitiveness. Clusters are sectoral and geographical concentration of SMEs, faced with common opportunities and threats. Business networks and industry clusters are a powerful means for overcoming the size constraints of SME and for succeeding in an ever more competitive market environment. Collaborative actions involving SME and large firms, supporting private and public

institutions and local and regional governments, offer new opportunities for developing specific locational advantages and the competitive strengths of clustered firms.

• NGO Competition

A final area that should be examined in the SME policy is the governments NGO policies with respect to NGOs undertaking commercial enterprises. SMEs complain of facing discriminatory competition from the commercial activities of some large NGOs. However, smaller SMEs may be receiving valuable assistance in the form of training and market information from the NGOs. The feeling in trade and industry circles is that NGOs should be promoting small businesses and not becoming competitors themselves, which may crowd out private enterprises. More research and dialogue on the role of NGOs in promoting SMEs is necessary.

• Create an enabling environment for SMEs

An enabling economic environment comprises sound macroeconomic and structural policies, good infrastructure, fair policy of competition, and efficiently functioning institutions.

• Legal and Regulatory Framework:

There is a pervasive lack of confidence in the legal and regulatory framework of the country which is characterized by weak and non-transparent administrative and judicial systems, lack of information, lack of accountability of the public sector institutions, and unfriendly attitude of the regulatory bodies. Weak legal procedures discourage private sector activities and make the investors unsecured. It is therefore important to introduce a business friendly legal and regulatory framework.

• Quality Policy:

Product quality is an integral part of international competitiveness worldwide. There is a

need for national quality policy, which should define the goals and the actions of the country towards quality. Such policy has to be explicitly explained, harmonized with international needs and knowledge, accepted and applied by governments as well as by non-governmental organizations in order to increase the competitiveness of national products and services, to facilitate the dynamic diffusion of quality culture, to strengthen the quality infrastructure and, finally, to support international trade. The certification of quality systems allows enterprises to show that they fulfill the requirements of globalized market economies. The Government can promote quality awareness and help SMEs in safeguarding the required

quality through National Quality Assurance Schemes. The national standardization authority should focus more on the adoption of international standards in order to increase the competitiveness of the indigenous companies in the world markets.

• Trade policy:

Import tariffs have been lowered and quantitative restrictions virtually eliminated. Import

liberalization has also exposed domestic producers to competition from cheaper foreign goods. Since subsidies and all kinds of compensatory paybacks would be unacceptable under WTO obligations, only the non-monetary but vitally important gains from an SME friendly regulatory environment and liberal policy regime can compensate for the trade loss. To encourage domestic production, there should be attractive gap between import duty on raw materials and finished products in favor of the former. Also, to enable domestic producers, particularly the SMEs, to prepare themselves to face external competition there is need for adequate forewarning about impending policy direction. If the government makes prior announcements of its impending trade policy changes, particularly with respect to tariff schedules, investors will be aware of the degree of competition they will be facing and will make cautionary adjustments in their investment and production plans.

• Regulatory constraints:

Clear, implementable, laid-down rules bound by specific timeframes and electronically recorded exchanges (where possible) are a must in all Government regulating offices.

• Infrastructure:

Supply of power, gas, water, and telephone should be uninterrupted and obtaining connections hassle free. Quality of essential services will have a critical place in the development and growth of SMEs.

• Transportation cost:

Transport costs have become an important element of international competitiveness. Various competitors of Bangladesh are geographically located close to important world centers of commercial activities and thus are in an advantageous position compared to her. Apart from the structural factor of geographical location, the sea-ports of Bangladesh are terribly inefficient which increases the cost of doing business and erodes the competitive advantage of local industries. Inland transportation is also subject to such problems as illegal toll collection, bad road communication, congestion, and frequent disruption due to political programmes and labor unrest.

There is a great need for improving different aspects of financial services for SMEs, such as seed money, leasing, venture capital and investment funding. There is a lack of availability of long-term loans for SMEs. Interest rates are still high and exchange rate risks are considerable. All these factors limit the development of SMEs. Finance, both short and long term, should therefore be provided at market cost. One of the main factors that have hampered the flow of institutional finance into SMEs is banks’ pre-occupation with collateral. Traditionally banks have used fixed asset ownership, particularly land ownership, as the basis for judging creditworthiness. Innovative and flexible credit instruments can be developed for the SMEs if the regulatory framework now under consideration by Bangladesh Bank allows such innovation. The central bank should seriously hear the views of the SME sector and the NGOs in this regard and frame rules in their favor. Banks are shy to lend to SMEs because of high processing and monitoring costs of loans to SMEs. A new bank, namely the Bank of Small Industries & Commerce (BASIC) was set up in 1988 with the objective of financing the small and cottage industries. There were also attempts to redirect funds received from international agencies such as the Asian Development Bank (ADB) to the sector through private banks. These policy interventions did not succeed. The Basic Bank has shifted its position to the typical retail bank mode leaving the SME sector as underserved as before. Basic Bank needs to be brought back to its original role of a facilitator and financier for the SMEs. Export-oriented SMEs should also be supported with the services of an Export Credit Agency to mitigate their risk of exporting and help facilitate the provision of working capital from banks and other financial institutions.

Chapter- 9