THE SMALL AND MEDIUM ENTERPRISES
(SME) IN BANGLADESH: AN OVERVIEW OF
THE CURRENT STATUS
DR. MOMTAZ UDDIN AHMED
VICE CHANCELLOR
STATE UNIVERSITY OF BANGLADESH
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1.0 The Case for the SMEs
The SMEs1 worldwide are recognized as engines of economic growth. The
commonly perceived merits often emphasized for their promotion especially in the
developing countries like Bangladesh include their relatively high labour intensity,
dependence on indigenous skills and technology, contributions to entrepreneurship
development and innovativeness and growth of industrial linkages. The case for
fostering SME growth in Bangladesh is irrefutable as these industries offer bright
prospects for creating large-scale employment and income earning opportunities at
relatively low cost for the un-and unemployed especially in the rural areas
strengthening the efforts towards achieving high and sustained economic growth
which are critically important prerequisites for triggering an exit from endemic
poverty and socio-economic deprivation.
These promotional arguments for the SMEs, while universally emphasized
are often put forward by their ardent advocates in a small versus large context and
thus arouse serious debates concerning their economic viability. Much of such
controversies may, however breakdown if the intrinsic virtues specific to SMEs and
unavailable to large-scale industries are correctly identified and carefully exploited.
A combined interaction of the forces of product-mix, locational factors,
technological advantages and market advantages create opportunities for SMEs to
grow and prosper at all levels of development which are often ignored by the
traditional approach to their economic strengths and development potentials.
The growing economic significance of the SMEs as sources of new business
creation and employment generation in the developed, OECD countries especially
since 1970s is now widely recognized in an increasingly growing volume of
literature (OECD1997). The recent structural shifts in industrial production from the
Fordist approach of mass production to more flexible and adaptable production
regime in response to constantly changing market opportunities have led to a notable
resurgence of these industries in the West. The re-emergence of the SMEs in the
developed world makes economic case for fostering development of these industries
more stronger than ever before.
1 Following the industrial Policy 1999 (IP- 1999), “Small Industries” are defined as industrial
enterprises employing less than 50 workers and/or having a fixed capital investment of less than Tk.
100 million “Medium industry” covers enterprises employing between 50 and 99 workers and/or
having a fixed capital investment between Tk. 100 and 300 million. “Cottage Industry” covers
household-based industrial units operated mainly with family labour.
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2.0 Place of SMEs in the National Economy of Bangladesh
Any precise quantitative estimate of the importance of SMEs in Bangladesh
economy is precluded by non-availability of comprehensive statistical information
about these industries at the national level.
The latest BSCIC estimates suggest that there are currently 55,916 small
industries and 511,612 cottage industries excluding handlooms. Including
handlooms, the number of cottage units shoots upto 600,000 units indicating
numerical superabundance of the SCIs in Bangladesh. Quoting informal Planning
Commission estimates, the SMDF puts the number of medium enterprises
(undefined) to be around 20,000 and that of SCIs to be between 100,000 to 150,000.
This wide variation in the BSCIC and Planning Commission estimates of the
numerical, size of the SMEs might be due to at least two reasons: (a) different set of
definitions of the SMEs and (b) different coverage of SME families. This strongly
suggests the need for adopting and using an uniform set of definitions for SMEs by
all Government agencies to help formulation of pro-active SME promotion policies.
Whatever the correct magnitude, the SMEs are undoubtedly quite
predominant in the industrial structure of Bangladesh comprising over 90% of all
industrial units. This numerical predominance of the SMEs in Bangladesh’s
industrial sector becomes visible in all available sources of statistics on them
(Ahmed, M.U 2001).
Together, the various categories of SMEs are reported to contribute between
80 to 85 per cent of industrial employment and 23 per cent of total civilian
employment (SEDF, 2003)2. However, serious controversies surround their relative
contribution to Bangladesh’s industrial output due to paucity of reliable information
and different methods used to estimate the magnitude. The most commonly quoted
figure by different sources (ADB, World Bank, Planning Commission and BIDS)
relating to value added contributions of the SMEs is seen to vary between 45 to 50
per cent of the total manufacturing value added.
While the SMEs are characteristically highly diverse and heterogeneous,
their traditional dominance is in a few industrial sub-sectors such as food, textiles
and light engineering and wood, care and bamboo products. According to SEDF
sources quoted from ADB (2003), food and textile units including garments account
for over 60% of the registered SMEs. However, as identified by various recent
studies, (Ahme, M.U. 2001, ADB 2001, US-AID 2001) the SMEs have undergone
significant structural changes in terms of product composition, degree of
2 The robustness of SME contributions to employment generation is a common phenomenon in most
developing countries in that the magnitude varies between 70 to 95 per cent in Africa and 40 to 70 per
cent in the countries of the Asia-Pacific region (Ahmed, M.U. 1999).
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capitalization and market perpetration in order to adjust to changes in technology,
market demand and market access brought by globalization and market
liberalization.
3.0 Growth and Structural Transformation of SMEs
Despite data limitations some rough indications may be provided regarding the trend
of SME sector growth as presented the Table 1.
Table 1
Growth of SSIs sector (Excluding Handlooms) in Bangladesh
Year No. of Units Employment
Small Cottage Small Cottage
Value Added (TK.)
Small and Cottage
Combined
1981 24590 321743 322110 855200 17987
1991 38294 405476 523472 1331032 21154
2001 (end of June) 55916 511621 808959 166724 29323
Average Annual
Growth Rate
(% change)
6.36 2.95 7.55 4.73 3.15
Source: Ahmed, M.U., 2001.
In terms of number of establishment, the SME sub-sector has exhibited
notable dynamism, registering reasonably high growth rates over the decades of
1980s and 1990s. This numerical expansion of the SMEs has contributed towards
substantial new business creation in the industrial economy of Bangladesh. Available
evidence (Ahmed M.U. et.al 1992) suggests that the SMEs were responsible for
giving birth to 60 percent of the new industrial enterprises during 1980s.
Growth in SME employment seems to have been even better during the same
period. The dismal performance in value added growth is explained by the weak and
faulty data base used by the BBS to estimate the parameters. This phenomenon of
gross underestimation of SME value added resulting from weak estimation
procedures used by the BBS has been confirmed by many researchers (Bakht 2001).
Indeed, when revised estimates of value addition in the SMEs are made using
the new system of national accounts3, the annual compound rate of growth of value
3 The revised value added estimate made by the BBS is based on a New System of National Accounts
(i.e. SNA 1993) which classifies the economy into 15 sectors compared to 11 in the old system and
uses 1995/96 us the base year compared to 1984/85.
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added (Table 2) by the SME sector not only shots upto 7.7 per cent per annum during
1989/90 and 1994/95, it exceeds that of the large-scale industries during most of the
1990s. This trend exhibits dynamism and vibrancy of the SME sector except in late
1990s when growth of the sector tapprred off slightly due to extensive damages
caused to the sector by the 1998 floods, especially to its production and capital stock.
Table 2
Structural Change of SSIs in Bangladesh
Industry No. of Units, 1978 No. of Units, 1991
Seb-sector No % of total No % of total
Rice Mills 12242 51.00 13482 35.21
Bakery 2167 9.02 2765 7.22
Flour Mills 1315 5.42 1718 4.45
Light Engineering Works 1120 4.66 2252 5.88
Printing & Publishing 995 4014 1775 4.64
Readymade Garments 757 3.15 2365 6.18
Saw Mills 713 2.97 1023 2.67
Soaps 143 0.59 351 0.92
Plastic Products 74 0.31 725 1.89
Automobile Servicing & Repairing 296 1.23 550 1.44
Total 19822 82.59 27006 70.52
Source: Ahmed, M.U., 2001
Another important indicator of SME dynamism is reflected through changes
in product composition and structural transformation occurred to the sector overtime
and shown in Table 3.
4. In order to determine policy priorities for sub-sector development within the SME sector an
exercise was carried out under the JOBS study (JOBS 1998) for identifying dominant sub-sectors. On
the basis of employment criterion, the following sub-sectors at four-digit levels turned out to be
dominant in descending order: Bakery, Specialized handlooms, Dyeing and printing, Footwear,
Plastic Products, Steel Furniture, Electrical goods, and Engineering workshops.
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Table 3
Manufacturing GDP in Constant 1995/96 Prices by Size Category
Yearly Compound
Rate of Growth
(%)
Year Value Added
in Large
Industry
(Million Tk.)
Value Added
in Small
Industry
(Million Tk.)
Share of Large
Industry in
Manfg. GDP
Large
Industry
Small
Industry
1989/90 111126 45037 71.2 - -
1990/91 117817 48316 70.6 6.0 7.3
1991/92 126462 51929 70.9 6.7 7.4
1992/93 137846 55925 71.1 7.4 7.5
1993/94 149220 60334 71.2 71.2 7.6
1994/95 166297 65220 71.8 8.4 7.7
Annual
Average from
1989/90 to
1994/95
134795 54460 71.2 8.4 7.7
1995/96 175732 70619 71.3 5.7 8.3
1996/97 182704 76091 70.6 4.8 8.0
1997/98 199668 81240 71.1 6.3 7.6
1998/99 208033 81849 71.8 5.8 5.8
1999/00 217083 85122 71.8 5.8 5.5
Annual
Average from
1995/96 to
1999/00
196644 7/884 71.3 5.5 5.5
Annual
Average from
1989/90 to
1999/00
162908 65607 71.2 6.9 6.6
Source: Ahmed, M.U. 2001.
It will be noted form the Table that broadly four industry categories such as
food and allied products, textiles and apparels, and engineering and fabricated metal
products are currently dominant in the SME sector. However, at the disaggregated
levels, important structural changes appear to have taken place in the sector between
1978 and 1991. For example, at the four-digit level, while three out of the top ten
industries accounted for 82% enterprises and 63% of gross output in 1978 and 70 %
of enterprises and 53% of gross output in 1991, the number of top industries has shot
upto seven, spreading over light engineering, readymade garments, printing and
publishing and wood and wood products.
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The other new industries which have grown in importance in the SME sector
in the recent years are plastic products, electrical goods, electronics, artificial
jewellery, wooden and steel furniture, television and radio assembling and soaps and
detergents. This is reflective of a structural change taking place in the SME sector
from traditional to relatively modern product categories, perhaps with higher
capitalization and use of better production techniques.
Summarizing the findings of various major studies the SMDF lists the
following important positive changes taking place in the situation of the SMEs in
Bangladesh:
- SMEs have diversified their activities
- Entry and exit into the sector has become easier
- The RMG industry has contributed significantly to SME development by
providing them with orders for accessories and packaging materials
- The development of the footwear industry has increased subcontracts to
SMEs
- Small-scale entrepreneurship has grown significantly in agro-processing in
general and in poultry in particular.
4.0 Constraints to SME Growth
It is important to understand the operational strengths and weaknesses of the
SME sector for pragmatic policy making and effective implementation of such
policies.
Given an excessive heterogeneity and almost a bewildering diversity in the
type, composition and characteristics of the members of the SME facilities it is
exceedingly difficult to have any precise diagnosis of their operational constraints.
Over the years many studies have been carried out to identity the operational
bottlenecks encountered by the SME entrepreneurs. One of the most recent studies
(Sarder, J. 2001) based on a small sample of 19 entrepreneurs identified the
following (as perceived by the respondents) as the major difficulties faced by them:
- lack of modern technology
- lack of adequate investments
- irregular/inadequate supply of power
- high rate of interest on bank loans
- inadequate availability of raw materials
- absence of clear-cut government policies
- fierce competition
- lack of skilled technicians and workers
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- lack of research and development facilities.
These are very commonly perceived and also perhaps generally encountered
difficulties of operation of the SMEs. However, a close scrutiny and careful
interpretation tends to reveal that lack of institutional credit, non-availability of
working capital, low levels of technology, low productivity, and lack of marketing
facilities and market access problems are the major bottlenecks to SME growth in
Bangladesh. In the recent years, domestic law and order conditions, unreliable power
supply and stiff competition both in domestic and international markets seem to have
been the added dimensions to the SME operational bottlenecks. However, systematic
and in-depth studies based on sufficiently large samples are needed to precisely
identify the operational woes of the different categories of the SMEs.
5.0 SME Assistance Policies and Institutional Arrangements
The economic efficiency and overall performance of the SMEs especially in
the developing countries are considerably dependent upon macroeconomic policy
environment and specific promotion policies pursued for their benefit. It is thus
important to examine the policy environment and institutional support within which
the SMEs operate.
Though promotion of SME development has been a stated objective of
successive governments ever since Pakistan days, the broad macro policy regime has
continued to remain biased against SME development in many ways. Allocation of
public sector investments, trade policies and taxation policies in particular have
mostly been anti-SME development in character and contents (ADB, 2002).
The specific promotional policies and support measures such as extension
services, financial and physical support form the public sector agencies and the
development partners have also not always been adequately effective. Weak and
inefficient management and lack of proper implementation of the various policy
support measures have rendered various assistance relate business advisory services,
such as training, credit marketing and physical infrastructural facilities (through
BSCIC’s Industrial Estates Programme), much less effective than desired. The
private sector efforts through participation of MIDAS, BASIC and selected NGOs
(especially GB, BRAC and Proshika) have not so for been adequate especially in
SME promotion. The SMEs because of their structural weaknesses, such as, scale
barriers, inefficient management and weak technological capacities therefore need
pro-active policies and institutional support in addition to removal of existing policy
biases.
Though BSCIC has been the key public sector agency responsible for
supporting SME promotion for a long time, its operational efficiency remains weak
for a number of structural and administrative and managerial bottlenecks.
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While “ getting the Government out of business” and greater participation of
the private sector are now emphasized as key strategies for development, some
public sector participation for desirable monitoring of selected essential public
services such as, effective legal and judicial procedures, commercial contracts, land
settling arrangements etc. will still be necessary.
6.0 Concluding Remarks and Proposed Agenda for Action
6.1 The economic arguments for SMEs should be more broad-based and
include and emphasize the various special merits intrinsic and specific
to their smallness per se.
6.2 An 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-thougtout decision is needed to ascertain
whether “SME” is the correct term to identify ‘Small’, ‘Cottage’ and
‘micro’ industries in Bangladesh.
6.3 A sufficiently large sample survy should be carried out to generate a
bench mark national level data base both for accurate estimation of
the SME contributions to the national economy and for formulation of
comprehensive policies for the sector.
6.4 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 intersectoral linkages the SMEs should be
declared as a ‘priority sector’ and backed by formulation of a proactive
SME development policy.
6.5 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.
6.6 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.
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7.0 Selected Referneces
Ahmed Momtaz Uddin: Globalisation and Competitiveness of Bangladesh’s Smallscale
Industries ( SSIs): An Analysis of the Prospects and Challenges, in CPD/UPL
published, Bangladesh facing the Challenges of Globalisation, IRBD, 2001
Ahmed Momtaz Uddin: Development of Small-scale Industries in Bangladesh in
the New Millennium: Challenges and Opportunities, Asian Affairs, Vol. 21, No.1,
Jan-March, 1999.
Ahmed Momtaz Uddin et.al: Small and Medium-Scale Enterprises in Industrial
Development Academic Publishers, Dhaka, 1992.
Ahmed Momtaz Uddin: The Economics of Small-scale Industries Revisited, micro,
Dhaka, 2003.
Asian Development Bank (ADB), Bangladesh: Strategic Issues and Potential
Response-Small and Medium Enterprise Development and Export Expansion,
Dhaka, 2002
Asian Development Bank (ADB): High Level Workshop on Strategic Issues and
Potential Response Initiatives in the Finance, Industry and Trade Sector, November,
2001, Dhaka.
Jobs Opportunities and Business Support (JOBs) Programme: Growth potentials
of Small and Medium Enterprises: A Review of Eight Sub-Sectors in Bangladesh, A
Report prepared by Dr. Zaid Bakht, BIDS, for JOBS Sub-sector Study, 1998.
Organization for Economic Cooperation and Development (OECD):
Globalisation and Small and Medium Enterprises (SMEs), Vol. 1, Synthesis Report,
OECD, Paris 1997.
Sarder Jahangir: An Assessment of Operational Conditions of Cottage, Small
Medium Enterprises (CSME) in Bangladesh, Repor Repared for FBCCI, Dhaka,
2001.
Small Enterprise Development Facilities (SEDF/World Bank): The SME Sector:
Taking Stock of the Present Situation, mimeo, Dhaka, 2003.
USAID: Bangladesh Enterprise Development Assessment Report, Vol. 1, 2001
