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At the core of our potential

  • Published at 11:10 pm July 10th, 2018
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SMEs are the key to sustainable growth. This is the first of a two-part op-ed

In developing countries, small and medium enterprises (SMEs) are what help to achieve sustainable economic growth. SMEs play a vital role in the country’s overall production networks - hence they remain core to the economic growth of such nations.

Today, the financial crisis has halved our economic growth potential. Investment plans, talents, and ideas are not being utilized because of uncertainty and lack of funding. The impact on real economic activity could be more pronounced everywhere, because SMEs, being today’s engine for growth, rely more on bank loans than their counterparts in some other economies.

It is therefore crucial that banks resume their normal role of providing liquidity and supporting investment in the real economy before it is too late.

Bangladesh’s banking sector is witnessing the accumulation of bad loans at an alarming rate, many and, perhaps, some known borrowers continue to default on loans. Though some have blamed the situation on the lack of good governance, however, other political influence has further aggravated the situation to a point of no return.

Figures provided by the central bank revealed that the amount of default loans stands at Tk74,303 crore. Bad debt has been dogging the banking sectors in Bangladesh with the total amount of capital deficit mostly in state-owned banks.

Unfortunately, recently, both public and private commercial banks are in a state of shortage of liquidity. Most banks are raising rate of deposit to attract customers as well as to retain the existing deposits. Also, in most banks, the advance deposit ratio (ADR) is over the prescriptions of Bangladesh central bank guidelines.

In contrast, the vibrancy of SMEs for growth remains unattended, though it is the major growth driver for the country’s economy. A sustainable financial sector is purely dependent on its key deliverer, and SMEs are the originators of future entrepreneurs who will eventually create and accumulate the positive figures of the Bangladesh economy at large.

“Entrepreneurs will be able to avail support for starting a new business, expansion of existing ones, management and technical training, consultancy services from these centres,” Prime Minister Sheikh Hasina said, reiterating that her government would establish SME advisory centres in all district and upazilas, which will act as one-stop centres to provide service to entrepreneurs on her inaugural speech at the opening session of the National SME Fair 2018 at BICC.

Recently, Bangladesh and Turkey have signed two MoUs to enhance cooperation in the area of SMEs, after the official talks between Prime Minister Sheikh Hasina and her Turkish counterpart Binali Yildirim.

SMEs are found in a wide array of business activities in the country, ranging from the single artisan producing agricultural products for the village market, to the coffee shop at the corner, to a small, sophisticated engineering or software firm selling its wares in the local market. 

The role of the government in the format of SME development and financing has been overwhelming, as Bangladesh Bank continues to motivate/advise all financial institutions to expedite SME sector disbursement and uphold to commensurate with the model and initiatives of Bangladesh Bank. 

In addition, the Asian Development Bank (ADB) continues to remain, along with JICA, in support in order to expand the country’s economically vital non-urban SME sector. SMEs make up 75% of the domestic economy. There are over 6,000,000 SMEs and micro enterprises in Bangladesh, according to Asian Development Bank (ADB).

In a recent survey, it proved that the sector now contributes more than 25% to the national GDP and accounts for about 40% of manufacturing output, 80% of industrial jobs, and nearly 30% of the total labour force.

However, among the many compelling reasons why SMEs fail to realize their full potential and why banks and similar financial institutions are at times reluctant to extend a lending hand to SMEs, as it cites that inadequate finance is prominent in most cases.

However, to ease such matters, the government and central bank have already stipulated specific targets and guidelines set forth in different forms to intensify the rationales in this field. 

The survey based on regular operational modes, suggest that the challenges form SMEs perspective are:

a. Access to finance-related constraints are high-interest rates on bank loans, lack of institutional credit, non-availability of working capital, low levels of technology adoption, lack of adequate investments, etc

b. Operation-related challenges are low levels of productivity, lack of skilled technicians and workers, and lack of research and development facilities

c. Institutional lack of marketing facilities and market access, absence of clear-cut regulatory policies, and inadequate infrastructure

In this regard, such a market gap demands that SMEs in Bangladesh get rated by an experienced and competent SME rating agency, which can deliver detailed credit reports with scoring/rating, research assistance on SME cluster, training and overall sectoral studies.

The concluding part of this op-ed will be published tomorrow. 

Tarique Afzal is a banker.