Asian Business Review, Volume 2, Numebr 2/2013 (Issue 4)

ISSN 2304-2613 (Print); ISSN 2305-8730 (Online)

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Problems and Prospects of SME Financing in Bangladesh

Md. Shahnur Azad Chowdhury1, Md Kazi Golam Azam2, & Serajul Islam3
1AssistantProfessor, Department of Business Administration, International Islamic University Chittagong, Bangladesh
2Lecturer,Department of Business Administration, International Islamic University Chittagong, Bangladesh
3Associate Professor, Department of Business Administration, International Islamic University Chittagong, Bangladesh

ABSTRACT
The present study is conducted to analyze the potential of SMEs in the economy of Bangladesh. Data were collected
from 100 SME units by using simple random technique. A structural questionnaire was developed to get the responses
from different SME units in the country. For Bangladesh SMEs have assumed special significance for poverty reduction
programmes and potential contribution to the overall industrial and economic growth. Some of the constraints related
SME financing are identified and some pointers for the future are provided through the study.

Key words: SME, GDP, Economy

1 INTRODUCTION

B angladesh is an agricultural based country, where

around 85% people are living at village with activities
of agriculture, in this perspective Bangladesh can
growth. Unfortunately, the issue seems to be as unre-
solved as it always has been. Though the majority of the
issues are with the SME themselves, the banks also have
achieve industrialization through agriculture based small major issues in designing financial products for the SMEs.
and cottage industry to start aggressively. Small and me- As a developing country Bangladesh has a lot of potential-
dium enterprises (SMEs) make up the largest portion of ity in SME sector. Our Study is here to know the SME fi-
the employment base in many developing countries and, nancing and its problems & prospect with a suggestions
indeed, are often the foundation of the local private sector. and recommendations regarding the issue.
Now the SMEs are not only concentrated to low-tech, tra-
ditional, and agro-based economic activities; these are Objectives of the study
spread over other non-traditional manufacturing and ser-  To identify the potentiality of SME in the economy
vice sector as well. In fact, the SMEs are recognized as in respect of the contribution to Gross Domestic
engines of economic growth worldwide. To achieve high product (GDP).
and sustained economic growth, a triggering force is  To detect the problems of SME financing.
mandatory to exit from endemic poverty and socio-  To provide necessary recommendations to over-
economic deprivation. The entrepreneurs behind could— come the problems.
and should—play a much larger role in development, but
too often are held back by a lack of ready access to financ-
ing from local formal sector financial institutions. Here 2. METHODOLOGY OF THE STUDY:
lies the scope of commercial banks to offer banking facili- Qualitative data were gathered from the qualitative sur-
ties to this ‘missing middle’ by offering different products vey by questioning 100 SME consumers. The research
that are specially featured for this segment. On a long process by Howard and Sharp (1983) was followed for
term perspective these commercial banks expect to gradu- this research which could be summarized as follows:
ally develop the creation of an entrepreneurial class across  Formation of research question.
Bangladesh through proper financing and training. Com-  Reviewing of secondary data.
mercial banks are also developing their procedure and  Decide research approach.
operational guideline supported by structured recruit-  Collect information.
ment process and subsequent training with a view to mit-
 Analyse data.
igating credit risks and other risks for a smooth flow of
 Present findings.
SME financing. Most businesses in Bangladesh are in need
of small short-term loans to help finance their working
capital needs or purchase of fixed assets. So when a bank 3. LITERATURE REVIEW
brings about a momentous difference in these peoples Under Bangladesh bank regulation state-owned commer-
lives by meeting their demand, the bank is more than a cial banks and private owned commercial banks are the
bank. It’s a promise - a promise to rise against all adversi- target of SME loan disbursement.40% of total loans are
ties; a promise to quality livelihood; a promise to bridge reserved for the small entrepreneurs because it is treated
ordinary people with extraordinary opportunities.SME as core media of reducing unemployment. The solutions
financing has been identified as a major obstacle to SME rest in a combined set of actions along the lines. In the FSS
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2020 work on SME development it was presented that the SMEs as having a maximum of 100 employees and less
Least Developed Countries (LDCs) in the east have started than $3 million in revenue.
refocusing their attention on SMEs to enhance their role in Under European Union definition: ‘The category of mi-
bringing about structural changes in their economies. cro, small and medium-sized enterprises is made up of
(2006) . Dr. Sharif Bhuiyan found like many other coun- enterprises which employ fewer than 250 persons and
tries, informal sector in Bangladesh does not exist in a which have an annual turnover not exceeding 50 million
vacuum. There are clear interconnectedness, partnership euro, and/or an annual balance sheet total not exceeding
and continuity with the formal sector – maintaining a two 43 million euro.’ Small and medium enterprises are thus
way flow of labor, goods, finances etc between the two defined as firms with 10 to 250 employees, and more than
sectors. In Bangladesh rapid transformation of the infor- 10 million euro turnover or annual balance sheet total.
mal sector may not be possible, feasible and/or sustaina- Under Bangladesh Bank‘s regulations Small Enterprise
ble. Policy initiatives to formalize the informal sector refers to the firm/business which is not a public limited
should therefore adopt a gradualist approach (2007). Dr company and complies the following criteria:
Khondaker Golam Moazzem showed that in the Sixth Serial Sector Fixed Asset other than Employed
Five Year Plan (6th FYP) acceleration of GDP growth No. Land and Building (Tk.) Manpower
(from 6.1 percent in FY 2010 to 8.0 per cent in FY2015) has (not above)
been targeted through excelling the performance of indus-
01. Services 50,000-50,00,000 25
trial sector, particularly of the manufacturing sector. The
growth of the manufacturing sector will have to be at- 02. Business 50,000-50,00,000 25
tained through improvement of existing enterprises and
03. Industrial 50,000-1,50,00,000 50
also by creating new ones. However, an overwhelming
number of these enterprises are micro (having less than 10 Source: Bangladesh Bank
workers), small (10-49 workers) and medium (50-99
workers) enterprises, usually called MSMEs/SMEs (2008). Definition of Medium Enterprise:
S. M. Akterujjaman came into a conclusion that SMEs are Medium Enterprise refers to the establishment/firm
a fundamental part of the economic fabric in developing which is not a public limited company and complies the
countries, and they play a crucial role in furthering following criteria:
growth, innovation and prosperity. Unfortunately, they Serial Sector Fixed Asset other than Employed
are strongly restricted in accessing the capital that they No. Land and Building Manpower
require to grow and expand, with nearly half of SMEs in (Tk.) (not above)
developing countries rating access to finance as a major 01. Services 50,00,000-10,00,00,000 50
constraint (2010). S. M. Nasrul quadir and DR. Moham-
mad Saleh Jahur argued that SMEs of Bangladesh have 02. Business 50,00,000-10,00,00,000 50
been vulnerable to frequent policy changes of Govern-
03. Industrial 1,50,00,000-20,00,00,000 150
ment from time to time. Besides, they are facing severe
competition in and outside the country. As a result, the Source: Bangladesh Bank
profitability of SMEs has got squeezed and many of them
have got financially distressed. Besides, Entrepreneurs of
5 SCOPES OF SMES
SMEs (2011). Iftikhar Hussain, Zeeshan Farooq and Wa-
heed Akhtar opined that Across the South Asia, the con- The structural arrangements of Bangladesh’s industries
tribution of SMEs to the overall economic growth and the show that jute, textiles, paper, steel and engineering, ce-
GDP is high. It is estimated that SMEs contribute 50% of ment, chemical, fertilizer and pharmaceutical industries
Bangladesh’s industrial GDP and provide employment to are under the big and medium scale industries. On the
82% of the total industrial sector employment. In Nepal, other hand, specialized textile industries (including gar-
SMEs constitute more than 98% of all establishments and ments), backward linkage industries, hand-operated
contribute 63% of the value-added segment. In India, welding, food processing and food linkage industries,
SMEs' contribution to GDP is 30 %.( 2012). leather, ceramics, light engineering including automo-
biles, basic metal engineering, small scale chemical engi-
neering, rubber industries, paper printing and publishing
4. DEFINITION OF SMALL ENTERPRISE
industries, small fabrication industries, non-metal mineral
Enterprise may be segmented based on its capital invest- products, batteries, electrical, electronics, handicrafts,
ment, size, and production volume and so on. Egypt de- agro-based industries, multilateral jute goods, silk indus-
fines SMEs as having more than 5 and fewer than 50 em- tries, fruit processing, poultry farming, fisheries, tea-
ployees, Vietnam considers SMEs to have between 10 and gardening and processing, vegetable seed farming, flori-
300 employees. The World Bank defines SMEs as those culture and agro-forestry, and printing industries, ginning
enterprises with a maximum of 300 employees, $15 mil- and baling, construction industries, transportation (in-
lion in annual revenue, and $15 million in assets. The In- cluding automobiles), cinema and photography, patholog-
ter-American Development Bank, meanwhile, describes ical laboratories, cold storage, furniture, computer indus-

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tries, fast food, frozen food, etc, under service industries, businesses contribute nearly 39% of the country’s national
and many other sectors are included in the SMEs. But income. Comparable figures in many other developed
there are 11 booster sectors of SMEs in the Industrial Poli- countries are even higher.
cy 2005 which are Electronics and Electrical, Software De- In many developing countries including Bangladesh,
velopment, Light Engineering and Metal Works, Agro- manpower is relatively abundant. It is, therefore, impera-
processing/Agri-business/plantation agricul- tive that their full and effective utilization should become
ture/specialist farming/tissue-culture and related busi- a focal point of socio-economic policies. Emphasis has to
ness, leather-making and leather goods, Knitwear and be laid on SME sector to absorb the surplus manpower in
ready-made garments, Plastics and other synthetics, these countries. In fact, developing of SME sector has been
Healthcare and diagnostics, Pharmaceuti- requires less capital outlay and at the same time it pro-
cals/Cosmetics/Toiletries and Fashion-rich personal ef- vides more employment than the large-scale sector. Sec-
fects, wear and consumption goods. ond, a SME unit does not require highly sophisticated
technology. It can, therefore, be useful in backward areas
where the people have yet to be trained to meet the chal-
6. IMPORTANCE OF SMES
lenge of sophisticate technology.
It is said internationally that Small and medium Enter- Bangladesh is highly resourceful with so many seasonal
prises (SMEs) account for about 50 percent of GDP and 60 fruits and also lots of agricultural products. Pineapple and
percent of employment. SMEs are estimated to contribute mango are best used to produce jam/jelly/juice etc under
between 25 and 35 percent of world manufactured ex- SME. Tomato sauce and potato chips are popularly used
ports. In terms of industrialization, Japan drew special all over the world. SME is most suited for processing the
attention to the professionals and policymakers in the in- items. If we can add more quality to the products and en-
ternational arena. Statistics show that Japan has achieved sure proper marketing, tremendous demand will be creat-
its industrial development heavily based on SMEs. Some ed in domestic and export market. In RMG industries
of the world’s best performing economies, notably Taiwan (knit) circular machines are used for knitting of the items.
and Hong Kong, are heavily based on small enterprises. In The circular machines can also be set at household level to
much of the developing world, the private sector econo- perform job works to feed RMG industries for ultimate
my almost entirely comprises of SMEs. Contribution of export of T/Polo Shirts etc. This is a subcontracting sys-
SMEs in some selected countries shows that it has provid- tem where RMG industries supply yarns to the entrepre-
ed very significant proportion of GDP and employment in neurs having circular machines. The system has already
their national economy. been introduced in Dhaka and Narayangonj areas with
Country SMEs as Contribution Contribution growing demand. Shoe making by small industries as job
% of all of SMEs to of SMEs to works of big shoe companies like BATA is a glaring ex-
Enterprises GDP (%) employment ample of SME product. BATA supplies raw materials to
Bangladesh 80.00 20-25 40.00 lots of small factories at household level in Dhaka city and
gets the product (shoes) completed through subcontract
India 97.60 80.00 - system. SMEs are a fundamental part of the economic fab-
Pakistan 60.00 15.00 80.00 ric in developing countries like Bangladesh, and they play
a crucial role in furthering growth, innovation and pros-
China 99.00 60.00 92.00 perity.
Japan 99.7 69.50 72.0 Small and medium enterprises (SMEs) play a major role in
Hon Kong - - 61.50 economic development in every country, including in Af-
Entrepreneurs form Hong Kong, Japan and Korea have rican countries. Studies indicate that in both advanced
taken advantage of Bangladesh’s cheap and easily traina- economies and developing countries SMEs contribute on
ble labour and its infrastructure facilities to manufacture average 60 percent of total formal employment in the
products for the export market. manufacturing sector (Ayyagari et al, 2007). For African
The Industrial Revolution of 1760-1850 represents a good economies, the contribution of the SME sector to job op-
testimony of the inherent innovative spirit of SMEs, which portunities is even more important. Taking into account
are increasingly challenged in the present century particu- the contribution of the informal sector, SMEs account for
larly after winds of economic change cum technological about three-quarters of total employment in manufactur-
innovations and industrial liberalization , have swept var- ing (Ayyagari et al, 2007).
ious economies of the world. These challenges notwith-
standing, SMEs have remained as much important and
7 FINDINGS AND THEIR ANALYSIS
relevant economic catalysts in industrialized countries as
they are in the developing world. In many developed The questionnaire survey covered 100 major small and me-
countries, more than 90% of all enterprises are within the dium enterprise businesses that are from Trading & Trad-
SME sub-sector while 80% of the total industrial labor ers, Agro Processing Products Import & Export, Wood &
force in Japan, 50% in Germany and 46% in USA small Steel Furniture, Sea Services Company, Importer Exporter

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& Commercial Agent in International Market, General & Table 7.4 shows that nearly 40 percent sells in the retail
Merchant Commission Agent. This is shown in Table 7.1. market, 10 percent sells to niche markets, 20 percent sells
Table 7.1 SME Subsectors to industries, and 30 percent sells to foreign markets.
SME Subsectors No Percent Cumulative Clearly, the linkage between the large industries and the
Trading & Traders. 30 30% 30% SMEs is the weakest of all according to our findings.
Agro Processing Products Im- 10 10% 40% Moreover, some said that they will be interested to find
port & Export. new markets abroad to sell their products.
Wood & Steel Furniture. 20 20% 60%
Table 7.5 Full time employees in SMEs
Sea Services Company. 10 10% 70%
Number of full time employees Percentage
Importer Exporter & Commer- 20 20% 90% Less than 25 60%
cial Agent in International Mar- 25 to 49 30%
ket. 50 to 74 10%
General & Merchant Commis- 10 10% 100% 75 to 99 00%
sion Agent .
100 or above 00%
Total 100 100%
Total: 100%
Source: Field survey
Source: Field survey
Table 7.5 shows that nearly 60 percent of them employs
Table 7.2 Characteristics of sample SMEs by ownership
less than 25 full time employees per firm, while the next
pattern
largest group consists of 30 percent of the SMEs employed
No Percent Cumulative between 25-49 and the rest employ between 50-74 persons.
Sole Proprietorship 70 70% 70%
Partnership 30 30% 100% Table 7.6 Reasons for taking credits by SMEs
Private Limited Company 00 00% Reasons for seeking credits % of Re-
Public Limited Company 00 00% spondents
Total 10 100% To start the business. 20%
Source: Field survey To rent/lease premises 00%
Table 7.2 shows that our sample survey collected data To procure equipment from local markets 20%
from four types of SMEs. Nearly 70% of them are regis- To procure equipment from international 10%
tered under sole proprietorship act, 30 % are under part- markets
nership act. Majority of the small entrepreneurs are either To procure raw material from local markets 10%
registered as the sole proprietorship or under Partnership
To facilitate works in process 30%
Company.
To build inventory 00%
To hire skilled labour 10%
Table 7.3 Initial fixed investment in the SMEs
To ensure quality control/ISO certificate 00%
Investment Number Percent
To finance equity share 00%
Below Tk 300000 30 30%
Total 100%
Between Tk 300000 to Tk 1 Crore 70 70%
Source: Field survey
Between Tk 1 Crore to Tk 10 Crore 00 00%
Table 7.6 Survey results show that there are at least ten
Between Tk 10 Crore to Tk 25 Crore 00 00%
reasons for which SMEs seek loans from financial institu-
Total 100 100%
tions. The first reason is to initiate the business. Nearly 20
Source: Field survey percent of the SMEs took credit to start their business.
Table 7.3 shows that 30 percent of the SMEs surveyed had Nearly 20 percent clients seek loans to procure equipment
initial investment of below Taka 300,000.Other 70 percent
from local markets.10 percent are for to procure equip-
were with initial investment between Taka 300,000 and
ments from international market and 30 percent are for to
1,00, 00,000. Table 5.3 shows the distribution of sample
facilitate work in process.
SMEs with their initial fixed Investments.
Table 7.7 How long SMEs need the loan
Table 7.4 Markets in which SMEs sell their product
How long SMEs need the loan % of Respondents
SMEs Selling to % of Responses
1 year 30%
Retail Market 40%
2 year 70%
Niche Market 10%
3-4 year 00%
Industrial Market 20%
More than 4 years 00%
International Market 30%
Total 100%
Total Responses 100%
Source: Field survey
Source: Field survey Table 7.7 shows that for how many years these SMEs
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needed the loan? Survey results show that most of them clients
needed the finance for a period of 2 years. The period of Collateral requirements 20%
time (the average) shows in details in table 7.7. Total 100%
Source: Field survey
Table 7.8 Interest charges on loan to SMEs Table 7.11 shows that most of the institutional sources fail
Interest charges on loan to SMEs % of Respondents to provide SME loans due to high interest rate, approxi-
13% 10% mately 60% SME loan holders response about that but
13.50% 30% some also think that too much paper work is also respon-
14% 50% sible for failure.
14.50% 10%
Total 100% Table 7.12 Why SME clients are more dependent with
Source: Field survey BASIC, BSRS, BSB, RAKUB etc
Table 7.8 Survey results show that most of the SMEs got % of Respondents
the loan at an interest rate of 14 % For high esteem security 00%
Low interest rate 80%
Table 7.9 Preferred source of taking loans. Government institution 20%
Preferred source of taking loans % of Respondents Total 100%
Private Commercial Banks 80% Table 7.12 shows that most of the SME clients are more
Foreign Direct Investment 00% dependent for loan to BASIC, BSRS , BSB,RAKUB etc due
Nationalized Commercial Banks 20% to low interest rate than other private commercial banks
Total 100% or nationalized commercial banks
Source: Field survey
Table 7.9 shows that most of the SMEs got their finance Table 7.13 How do the SME entrepreneurs get loans from
from private commercial banks (80 percent).Besides SMEs banks?
used retained earnings to finance their activities. Howev- % of Respondents
er, in terms of the preferred source of taking credit or get Credit approval against the bank 100%
finances, SMEs stated that Private commercial banks are Fixed deposit against the loans 00%
their most favored sources of finance. Their next choice is Fulfilling adequate collateral re- 00%
the nationalized commercial banks. Nearly 20 percent quirements
preferred Nationalized Commercial Banks and reinvest- Total 100%
ment of profits. Source: Field survey
Table 7.13 shows that almost all of the SME entrepreneurs
Table 7.10 Waiting period between loan application & get loans from banks via credit approval against the bank.
sanction Some clients get loans via fixed deposit against the loans
Period between loan application & % of Respondents but it provides less amount what they applied for.
sanctions
2-3 Month 60% Table 7.14 Where are the credits used
3-4 Month 40% % of Respondents
4-5 Month 00% Meeting salary & daily expenses 00%
5 Month or more 00% Purchase of raw materials 60%
Total 100% To pay their creditors 20%
Source: Field survey Over draft facilities 20%
Table 7.10 shows that on average it took 2-3 months for an Total 100%
SME to get their loan money for starting the business. If Source: Field survey
they were to get a loan for rental/leasing of premises, the Table 7.14 shows that 60% entrepreneurs used the credit
waiting period increased to 3-4 months. However, we to purchase raw materials and 20% used it to pay their
found in some cases it needs more time to sanction a loan creditors and the rest are for enjoying overdraft facilities.
by SMEs.
Table 7.15 What are the obstacles faced by the SMEs in
Table 7.11 Why institutional sources fail to provide SME getting loans
loans % of Respondents
Reasons for what institutional % of Respondents Lack of collateral assets 20%
sources fail to provide SME loans High interest on govt. bonds 20%
High interest rate 60% Lack of ability to draw business plan 20%
Too much paper work 20% High rate of non performance loans in 10%
Lack of proper contact with SME 00% banking sector
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Lack of long term relationship 30% to support the entrepreneurs when they are in crisis.
Total 100%
Source: Field survey 8. SUMMARY OF FINDINGS
Table 7.15 shows that the main obstacles faced by the
SMEs in getting loans due to lack of long term relation- Most of the SMEs are found to have borrowed fund for
ship with the financial Institutions,almost 30% client think their initial setup and for procurement of raw materials.
about that and the rest obstacles are lack of collateral as- At the same time, it has been found that the initial waiting
set, High interest on government bonds, Lack of ability to period for getting fund for these activities is the highest 3-
draw business plan, High rate of nonperforming loans in 4 months (average). This remains as a major obstacle for
banking sector. the SMEs .Most have supported the view that government
should participate in these activities by setting up special
Table 7.16 The major impediments in the banking sector funds for this. Considering these, a government-
that have serious ramification on SMEs access to finance sponsored fund to help SMEs to set up initial business
% of Respondents would help the sector. Such endeavor is not uncommon in
other countries that we have studied
Too much paper work 30%
Good communication with pro- 10% In the survey, it was found that 20% mentioned that col-
spective clients lateral requirement is a major obstacle to secure loans for
Hazardous in lengthy process 50% them. On the top of this, 30 percent has mentioned about
Institutional barriers 10% the long and tedious paperwork required for processing
Total 100% of loans as a major obstacle. Considering these, providing
Source: Field survey a state guarantee for credit to genuine small and medium
Table 7.16 shows that The major impediments in the banking entrepreneurs was considered as an option for SMEs with
sector that have serious ramification on SMEs access to fi- good standing. Most of the SME entrepreneurs supported
nance is the Hazardous in lengthy process.50 percent clients the view that government should provide mortgage and
are not interested to go in a lengthy process.30% clients think guarantee free loan up to a certain limit. Such practice is
too much paper work is also a major impediments. not uncommon in other countries.

Table 7.17 Is restructuring of the Credit Information Bu- More than 20 percent of the small and medium entrepre-
reau (CIB) with resources a must to help SMEs and finan- neurs were found to have no training in terms of preparing a
cial institutions for SMEs finance and development? sound business plan for taking credits. Under the circum-
% of Respondents stances, the risk of running business increases. Investors re-
Yes 100% sponded favored the idea of developing a financial incentive
schemes based on ranking of sound business plan. Such
No 00%
practice would help the sector to mature using sound busi-
Total 100%
ness plan and through training. We can observe from the
Source: Field survey
following that Japan, USA has also used such schemes to
Table 7.17 shows that all of the SME entrepreneurs agree to
promote sound business record keeping in the SMEs.
restructure the CIB to get information regarding credit histo-
ry, bank and firm’s performances etc and to help SMEs and Based on the results of the survey, entrepreneurs support
financial institutions for SMEs finance and development. an institutional network under private-public partnership
to accumulate and redistribute funds for SMEs financing.
Table 7.18 Does government or the private institutions can Of them, most believe restructuring of the public and pri-
play a better role so that the outcomes from the interac- vate support institutions are necessary for the policy to be
tions between players from both sides are maximized? effective.
% of Respondents
Need a public private partnership 10% Most of the SMEs responded positively of the above poli-
Govt. should provide mortgage 60% cy recommendation based on the questionnaire survey.
free loan up to a limit
The survey result shows that most of the SMEs support
Should set up an special fund by 20% venture capital formation through SMEs financing.
the Govt.
Developing skilled manpower 10% Most of the entrepreneurs suggested HRD and training pro-
Total 100% grams for entrepreneurs through government initiatives.
Source: Field survey
Maximum entrepreneurs want the government to help
Table 7.18 shows that 60% SME entrepreneurs think that
government should provide mortgage free loan up to a government agencies and financial institutions in devel-
limit to the major SME entrepreneurs.20% responses that opment of skilled manpower to deal with SMEs more effi-
it is necessary to set up an special fund by the government ciently and effectively.

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In the survey, around 80 % of the entrepreneurs prefer the SMEs financing process.
Chamber of Commerce and Industries to take leadership
in training and education of the entrepreneurs. Technical Training and Development: Relevant associations of
institutions, Universities, and NGOs are the next in line of Chamber of Commerce and Industries should take the
preferences for potential training institutions. leadership role in promoting SMEs training and develop-
ment.
In the survey,100 percent of the investors feel that lack of
special client relationships with the management of the Sub-contracting arrangements: Government should come
financial institutions and lack of knowledge about the cus- up with policies in collaboration with private support or-
tomer and the bank are one the five key factors why SMEs ganizations to link up SMEs and suppliers of manufactur-
finding it hard to get loans from financial institutions. ers and raw materials under the same industry (both
backward and forward linkage service providing firms)
In the survey, though on average most of the loan is taken based on subcontracting / outsourcing agreement. If de-
from financial institutions like BASIC, RAKUB and other veloped and implemented accordingly, this types of coop-
support services from private institutions, most of the inves- eratives would lead to higher value addition and econo-
tors expressed the view of getting more financial support mies of scale.
from institutions that would exclusively deal with SMEs.
Government, associations of Chambers of Commerce and
Industry, credit information bureau (CIB), Bangladesh
9. RECOMMENDATIONS Bank and Stock Exchange Commission (SEC) and re-
Special SME Development Fund: Government should set nowned auditing firms should jointly prepare a reliable
up special funds to raise the required equity capital for database, where necessary information about the existing
SMEs with the potential entrepreneurs. and potential entrepreneurs and formal creditors will be
available. The date base will be accessible only to the con-
Credit Guarantee Scheme: Government should provide cerned authorities. This would ensure transparency and
mortgage and guarantee free loan up to a certain limit accountability while choosing the right entrepreneur and
under the credit guarantee scheme. the right project among the pool of applicants.
Financial Incentive Scheme: Government should develop Specialized Financial Institution: There should be creat-
financial incentive schemes for SMEs through a ranking ed a separate financial institution to deal exclusively re-
system for their sound business plan and feasibility study. garding SME financing and promotion of their goods and
services, both in domestic and foreign market.
Institutional Network: Development should be done on
institutional network through public-private support part- Credit rating system: Alternative to existing financial
nership would be more effective in SMEs financing by pool- tools and leasing, the “downgrading” of banks to pre-
ing the unused or surplus funds available around the coun- ferred target groups, especially SMEs and “upgrading” of
try. To make it viable, restructuring of the existing public successful non- governmental organizations (NGOs) and
agencies as well as private support institutions are required. private support organizations could help to provide fi-
nance to Microenterprises and SMEs. Such approaches
Alternative Credit Scheme: As an alternative to collateral
can eliminate the need for credit guarantees.
based financing, loan should be provided to potential
SMEs based on previous years cash flow statements (i.e.,
like project financing). 10 CONCLUSION
Venture Capital: Venture capital formation for SME fi- It is interesting to observe that the conditions for small
industry development that we find today, being at the
nancing should be highly encouraged through enforce-
threshold of total globalization, are very much the same as
ment of proper rules and regulations by the Stock Ex-
observed several-decades ago. In spite of the criticism and
change Commission (SEC) and other key players includ-
neglect of the SME sector on the grounds of inefficiency
ing the Bangladesh and private support organizations.
and non-optimal use of productive factors compared to
Bank Syndication Scheme: Forming bank syndication larger industries, SMEs are beginning to be extolled for
between micro finance institutions and commercial banks their greater dependence on labor-intensive production
for SMEs financing. Micro finance institutions should techniques, lower requirements of imported inputs and
provide recommendation and credit history to commer- better geographical dispersion. In both developed and
cial banks for SME development. under developed economies commercial banks play a
very useful and dynamic role. Capital is the main factor of
HRD in Financial institutions and in Government offic- modern production and entrepreneurs are helpless with-
es: Government should provide Human Resource devel- out adequate funds. Banks should help them and mobilize
opment and training program for financial institution the capital of the country for productive purposes respon-
employees and related government officials to smooth out sible for economic development and government also

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Asian Business Review, Volume 2, Numebr 2/2013 (Issue 4)
ISSN 2304-2613 (Print); ISSN 2305-8730 (Online)
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should come forward to patronize the entrepreneurs.
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Science, Tokyo Institute of Technology, Japan. Questionnaire
Amit Bouri ,Mark Breij ,Magatte Diop ,Randall Kempner ,Bailey
Klinger ,Keely Stevenson ,Report on Support to SMEs in Devel- 1. What type of businesses should be included under SME
oping Countries through Financial Intermediaries, Dalberg, sector?
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Bitila Shosha,SME Challenges in Albania, International Review of Retail market, Niche market, Industrial market or Interna-
Business and Social Sciences Vol. 1, No. 40-48 tional market?
Bracker, J.S., Keats, B.W. and Pearson, J.N. (1988) ‘Planning and fi- 5. What is the number of full time employees in SMEs?
nancial performance among small firms in a growth industry’, 6. What are the reasons for which SMEs seek loans from fi-
Strategic Management Journal, 9: 591-603. nancial institutions?
Dahi Emine ,PhD Scholar, Financial Challenges That Impede Increas- 7. For how long SMEs need the loan?
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Dr Khondaker Golam Moazzem, Micro, Small and Medium Enter- nances: - private commercial banks, foreign direct invest-
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Dr. Mrs Ann Ogbo and Agu Chidiebere Nwachukwu, The Role of 10. Terms of the time lapse between initial application for the
Entrepreneurship in Economic Development: The Nigerian Per- loan and its ultimate Delivery?
spective, European Journal of Business and Management, ISSN 11. Why institutional sources fail to provide SME loans?
2222-1905 (Paper) ISSN 2222-2839 (Online), Vol 4, No.8, 2012 12. Why do most of the SME entrepreneurs choose BASIC,
FSS 2020 International Conference “SME Issues, Challenges and Pro- BSRS, BSB, RAKUB, etc.?
spects” Peter Mousley, Finance and Private Sector Department, 13. How do the SME entrepreneurs get loans from Banks?
Africa Region, World Bank 14. Where are the credits used?
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Business Management Vol. 6 (4), pp. 1581-1589, face in getting loans with low interest rate from financial
www.academicjournals.org/AJBM,ISSN 1993-8233 ©2012 Aca- institutions?
demic Journals 17. What are the major impediments in the banking sector that
Milken Institute, Stimulating Investment in Emerging-Market SMEs, have serious ramification on SMEs access to finance?
October 2009 , European Commission-2003,( Extract of Article 2 18. Is restructuring of the Credit Information Bureau (“CIB”)
of the Annex of Recommendation 2003/361/EC) with resources a must to help SMEs and financial institu-
S. M. Akterujjaman, “Problems and Prospects of SMEs Loan Man- tions to get information regarding credit history, bank and
agement”: A Study on Mercantile Bank Limited, Khulna Branch firm’s performances etc., for SMEs finance and develop-
Volume– V, Issue– 02, July-December, 2010. ment?
S. M. Nasrul Quadir and Dr. Mohammad Saleh Jahur, Determinants 19. Does government or the private institutions can play a bet-
of Success and Failure of Entrepreneurs of SMEs in Bangladesh- ter role in providing human resource development and
An Explorative Study , European Journal of Business and Man- training for entrepreneurs and employees of the financial
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Sharif Bhuiyan, Legal machanism Empower Informal Business- tween players from both sides are maximized?
Bangladesh, The National Consultation Conference organized

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