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STAMFORD UNIVERSITY

BANGLADESH

Assignment
SME financing by commercial banks in
Bangladesh
Course name: Principles of Accounting
Course Code: HUM 313

Submitted to:
FARHANA HABIB

Submitted by:
LOKNATH SAHA
ID: CEN 04907483
Civil Engineering Dept.
STAMFORD UNIVERSITY BANGLADESH

Date of Submission: 24.11.2016

Introduction

The development of small and medium enterprises (SMEs) in developing countries is


generally believed to be a desirable end in view of their perceived contribution to
decentralized job creation and generation of output. SMEs constitute the dominant
source of industrial employment in Bangladesh (80%), and about 90% of the industrial
units fall into this category. The actual performance of SMEs, however, varies
depending on the relative economic efficiency, the macro-economic policy environment
and the specific promotion policies pursued for their benefit.
In Bangladesh, SMEs playing a significant role for the development of our economy by
creating employment opportunity and producing important alternative machines and
machinery parts for saving huge foreign currency for our country. So as a part of our
development strategy, we should intensify our efforts to develop this sector to grow
industrial base and volume of foreign trade. As we know that in this age of globalization,
it is impossible to stop the flow of foreign goods to any country. Only quality products
can meet the challenges in global market. For meeting this situation SMEs need to
upgrade their technological capabilities and production facilities in order to produce
quality products at a competitive price.

The evidence for the re-emphasis on the SMEs is manifest in the Governments own
policy intent, in any reasonable survey of the literature, and in any compilation of
economic statistics regarding the industrial sector. Though the SME sector is becoming
gradually a rising industrial sector of our country and contributing more and more to our
export, this sector faces several common problems like lack of technical know-how,
shortage of long-term financial support, lack of skilled workers, marketing link, R & D,
knowledge on safety measures, hygiene, environmental pollution, etc. We need to
acquire proper institutional knowledge in the fields of technological and managerial
education and ask academics and researchers to work more vigorously for the sectors
rapid development.
SMEs in Bangladesh produce a multitude of labour intensive goods including, consumer
items, toys small tools and paper products for the domestic market. Further
development of these industries offers various investment opportunities. Export-oriented
production in SMEs has gained momentum in the past few years. Entrepreneurs from
Hong Kong, Japan and Korea have taken advantage of Bangladeshs cheap and easily

trainable labour and its infrastructure facilities to manufacture products for the export
market.

Background of the report

After Liberation of Bangladesh, intensive efforts were undertaken to accelerate the rate
of industrialization in the country. At the beginning, import substitution and subsequently
export-led economic growth strategy was pursued for industrialization. In order to attain
this objective, large amount of industrial credit was funneled to the industrial sector. But
the whole exercise of industrialization came to a halt with the massive diversion of
resources to other non-priority sectors. Policy makers, of late, have come to recognize
the contribution of SME sector towards economic development in the country. Small and
medium enterprises have been recognized as one of the most important means for
providing better economic opportunities for the people of least developing countries like
Bangladesh. A developing economy like that of ours suffers from many peculiar
problems such as disproportionate pressure of population on agriculture due to lack of
rural industrialization, unemployment and underemployment of human and materials
resources, unbalanced regional development etc. The contribution of small and medium
enterprises in the solution of these problems is beyond doubt, provided they are
organized and run on scientific basis.

Small and medium enterprises are particularly suitable for densely populated countries
like Bangladesh where SME sector can provide employment with much lower
investment per job provided. Out of 11% employment of the civilian labor force provided
by the manufacturing sector, about two thirds are estimated to be provided by the small
and cottage industries sector. Again, development of small industries facilitates the
effective mobilization of capital and labor resources. They also help in raising standards
of living of people in rural areas. Contribution of SME sector to GDP remained above
4% during the period from 1985-86 to 1999-00. Moreover, the present contribution of
SME sector to GDP is approximately 5% and SME sector employs 25% of the total
labor forces, thus this sector is the present available sector for creation of jobs (Saha,
Sujit R. 2007).

Various recent studies (Ahmed, M.U. 2001, ADB 2001, USAID 2001) show that SMEs
have undergone significant structural changes in terms of product composition, degree
of capitalization and market penetration in order to adjust to changes in technology,
market demand and market access brought by globalization and market liberalization.
The official data show that the share of private investment in Bangladeshs GDP in the
late 1990s, which may be considered as the post-reform era, has remained more of less
constant at around 15% (Bhattacharya, 2002). This may be interpreted as an evidence
of stagnant private sector activities in the country.
The recent private sector survey estimates the contribution of the micro, small, and
medium enterprises (MSMEs) is 20-25% of GDP (Daniels, 2003). While 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, cane
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.
Despite these contributions in the economy of the country, Banking sectors are not
interested in financing the small and medium enterprises; rather there is a decline in the
amount of advances by the Banking sector. There are approximately 52 Banks
operating in our country and all are serving large enterprises rather than SMEs though
only the small enterprises contribution is 5% in GDP of Bangladesh in 2007. But why?
What are the causes for which Banks are not interested in financing this sector? From
recent statistical data of Sonali Bank of Bangladesh, we see that the credit recovery rate
is 51.44% in this sector. Why this recovery rate is not large enough? Why the SMEs are
failing to payback their credit to the lenders? We have tried to find out the answer of
these questions in this research paper.

Purpose of the report


Based on the above discussion the following objectives are set for the study:

To review the role of SMEs in the economy as well as current status of SMEs and
their financing by Banks in Bangladesh.

To find out the reason why the Banks are not interested (problems) to finance the
SMEs.

To review the present role of Regulatory Authorities in SME financing and


development.

Scope of the report

This study has focused upon the liquidity and profitability of private banks in
Bangladesh. I hope this study will help me to know more clearly about the
liquidity and profitability of private banks in Bangladesh.

Methodology of the report

The study was conducted mainly based on secondary information although some
information relating to entrepreneurs have been collected primarily. The sources of data
include Office Records, BIBM Library, Different Research Paper regarding SMEs,
Different Publications on SMEs of different banks and some websites.
Sample banks of DNCBs, PCBs, and FCBs from the sample frame, was selected
purposively considering the amount of loan size, interest rate, loan processing fees,
period of loans, mode of finance and management.
Policies relating to SME financing such as fiscal policy, monetary policy and internal
policies of commercial banks was examined thoroughly with a view to find out the
influence of existing policies on SME financing. Trend and pattern of bank financing to
SME was analyzed by classifying the financing in terms of areas, rate of interest, types,
category, and banks.

Limitations of the Report


Since this research is only for academic purpose, there were some limitations in this
study. These are mentioned below:
1. Discussion about the Small and Medium Enterprises is a vast subject, but only
some selected areas are covered in the research paper.
2. The study is basically based on secondary data.

3. The main limitation while preparing this report was time. So it was not possible to
focus everything deeply.
4. Lack of Informations source.
5. Lack of sufficient privileges.

This is my truthful declaration that the report is prepared only on secondary data.

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 up to 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
Bangladeshs industrial sector becomes visible in all available sources of statistics on
them (Ahmed, M.U 2001).

SME Banking and services in Bangladesh

Historically, Bangladesh followed a development strategy in which private investment


was controlled through a host of regulations involving investment sanctioning, credit
disbursement, import licensing, foreign exchange allocation, etc. While these regulatory
barriers thwarted private investment in general, the impact fell unevenly on SMEs. This
was because of the relative inability of the SMEs to cope with the regulations compared
to their large-scale counterparts. Thus, the policy regime was largely biased against the
SMEs although, paradoxically, promoting SME development was a stated objective of
successive governments. In a bid to render its industrial sector internationally
competitive and to move towards greater efficiency in its production structure,
Bangladesh implemented a number of economic reforms during the 1980s,
underwritten by the familiar structural adjustment policy. These included deregulation of
sanctioning procedure and relaxation of other regulatory barriers, easing of import
procedure, reducing trade barriers, following a market oriented exchange rate policy,
and implementation of fiscal, monetary and public enterprise reforms. These reforms
helped remove a large part of the policy bias against SMEs that prevailed earlier.
Recent studies confirm that these reforms had positive impacts reflected in a fairly rapid
growth of the sector during the past decade. However, because of their structural
weaknesses, the SMEs may need more pro-active policies for their development in
addition to the further removal of the policy biases.

SME Financing: present status & Contribution to our Economy:

SME (Small and Medium Enterprises)

SME business is a non-public limited companies but a business for self-employment or


for social welfare.
>According to the latest circular of BANGLADESH BANK (Date 26/05/2008), the
definition of Small & Medium Enterprise sector is given below:

Small Enterprises Small enterprises refer to those enterprises which are not any
Public Limited Companies and which fulfill the following criteria-

1.Service Concern Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding
land & building and / or employing up to 25 workers.
2.Business Concern Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding
land & building and / or employing up to 25 workers.
3.Manufacturing Concern Having an investment of Tk. 50,000 to Tk. 1,50,00,000
excluding land & building and / or employing up to 50 workers.

Medium Enterprises Medium enterprises refer to those enterprises which are not
any Public Limited Companies and which fulfill the following criteria-

1. 1.
Service Concern Having an investment of Tk. 50,00,000 to Tk.
10,00,00,000 excluding land & building and / or employing up to 50 workers.
2. 2.
Business Concern Having an investment of Tk. 50,00,000 to Tk.
10,00,00,000 excluding land & building and / or employing up to 50 workers.
3. 3.
Manufacturing Concern Having an investment of Tk. 1,50,00,000 to Tk.
20,00,00,000 excluding land & building and / or employing up to 150 workers.

Partition of SME Enterprises: SMEs in Bangladesh are also defined for purposes of
industrial policies by Ministry of Industries (MOI). Historically, this definition has been in
terms of fixed investment brackets, and a dual mode definition is in place, separate for
manufacturing establishments, and service establishments.

>According to the Industrial policy 2005, small and medium enterprises shall be
categorized using
the following definitions:
Manufacturing enterprise:

Small Enterprises

An enterprise should be treated as small if, in current market prices, the replacement
cost of plant, machinery and other parts / components, fixtures, support utility, and
associated technical services by way of capitalized costs (of turnkey consultancy
services, for example), etc., excluding land and building, were to be up to tk. 15 million;
Medium enterprise
An enterprise would be treated as medium if, in current market prices, the replacement
cost of plant, machinery and other parts / components, fixtures, support utility, and
associated technical services by way of capitalized costs (such as turnkey consultancy
services), etc., excluding land and building, were to be up to tk. 100 million;
Non-manufacturing enterprise:
Small enterprise an enterprise should be treated as small if it has less than 25
Workers, in full time equivalents;
Medium enterprise an enterprise would be treated as medium if it has between 25
And 100 employees.

Some data with a national scope those are pertinent to characterizing SMEs in
Bangladesh, as of 2001-2003. There are some 78,440 private sector establishments of
various sizes in Bangladesh with some 3.5 million workers employed in them.

Contribution of SMEs in the Economy:


In view of present economic development effort in Bangladesh the SME sector plays an
important role. These are reflected in the following performance /activities of this sector:

During the Fourth Five year plan, a total of 0.35 million jobs were created against the
target of 0.4 million.
Contribution of SME sector to GDP remained above 4.5% during the period
from2000-01 to 2004-2005 despite decline in the amount of advances by the banking

sector to this sector.


SME sector employs 25% of the total labour force. As a result, this sector is the
present available sector for creation jobs.
SME sector help alleviate poverty, increase income level of rural people and promote
agro-industrial linkage in Bangladesh.
SME sector requires lower energy supply, lower infrastructure facilities and this
sector imposes less environmental risk. They contribute towards better utilization of
local resources and skills that might otherwise remain unutilized.
Small industries being labour oriented are capable of generating more employment.
They are necessary to maintain and retain traditional skills and handicrafts.
They are the only medium for diversification of rural economy and for peaceful and
concurrent socio-economic development of all classes of people. From the above
discussion, we can say that SMEs are playing an important role in our economy in
various ways.

In Bangladesh, SMEs playing a significant role for the development of our economy by
creating employment opportunity and producing important alternative machines and
machinery parts for saving huge foreign currency for our country. So as a part of our
development strategy, we should intensify our efforts to develop this sector to grow
industrial base and volume of foreign trade. As we know that in this age of globalization,
it is impossible to stop the flow of foreign goods to any country. Only quality products
can meet the challenges in global market. For meeting this situation SMEs need to
upgrade their technological capabilities and production facilities in order to produce
quality products at a competitive price.
Banks that are providing SME services in Bangladesh:

Bangladesh Bank

Sonali Bank

Janata Bank

Agrani Bank

Rupali Bank

AB Bank Ltd

BRAC Bank Limited

Eastern Bank Limited

Dutch Bangla Bank Limited

Dhaka Bank Limited

Islami Bank Bangladesh Ltd

Pubali Bank Limited

Uttara Bank Limited

IFIC Bank Limited

National Bank Limited

The City Bank Limited

United Commercial Bank Limited

NCC Bank Limited

Prime Bank Limited

SouthEast Bank Limited

Al-Arafah Islami Bank Limited

Social Islami Bank Limited

Standard Bank Limited

One Bank Limited

Exim Bank Limited

Mercantile Bank Limited

Bangladesh Commerce Bank Limited

Mutual Trust Bank Limited

First Security Islami Bank Limited

The Premier Bank Limited

Bank Asia Limited

Trust Bank Limited

Shahjalal Islami Bank Limited

Jamuna Bank Limited

ICB Islami Bank

Moon Bank Limited

United Bank Limited

Loan documents needed for SME financing by banks:


Criteria for loan selection are similar among financial institutions. Most frequently requested
documents by financial institutions as a part of the loan application process include:
Personal guarantee
Business plan
Appraisal of assets to be financed
Purchase agreement
Cash flow projection
Personal financial statement
Formal application for financing
Business financial statement

Tin certificate
Citizenship certificate
Bank solvency certificate
Vat certificate
Export license

Portfolio size of Different Banks in SME sector:


>In 2010 Sonali Bank provide 30.46% of total loan in SME sector. Janata Bank
provides 47.47%
of total loan and Basic Bank provide 73.71% of total loan in SME sector. So
we can say that
Basic Bank spend more money in SME sector from their loan portfolio. This is
the situation of
government bank. Private bank also provide a great portion of loan in SME
sector from their
total loan amount. In 2011 Jamuna Bank provide 4.00%, Pubali Bank provide
7.48% and SCB
provide 16.00% loan in SME sector from their loan portfolio.
>In 2011 Sonali Bank provide 22.57% of total loan in SME sector. Janata Bank provides 50.36%
of total loan and Basic Bank provides 72.47% of total loan in SME sector. So we can say that
Basic Bank spend more money in SME sector from their loan portfolio. This is the situation of
government bank. Private bank also provide a great portion of loan in SME sector from their
total loan amount. In 2011 Jamuna Bank provides 20.19%, Pubali Bank provides 5.14% and
SCB provides 15.45% in SME sector from their loan portfolio.
>In 2012 Sonali Bank provides 19.02% of total loan in SME sector. Janata Bank provides
53.03%
of total loan and Basic Bank provide 61.60% of total loan in SME sector. So we can say that
Basic Bank spend more money in SME sector from their loan mix. This is the situation of
government bank. Private bank also provide a great portion of loan in SME sector from their
total loan amount. In 2011 Jamuna Bank provides 11.50% of total loan amount, Pubali Bank
provide 4.82% of total loan and SCB provide 15.25% of total loan in SME sector.

Target given by Bangladesh Bank:


>In Bangladesh, several Banks are financing the SME sector but as mentioned earlier ,many of
them do not have good experience regarding the loan servicing in this sector. Many banks are
facing problem to recover the loan amount provided in SME sector. For this reason still many
banks are not willing to invest in this sector. Form 2010 Bangladesh Bank gives target to
government banks and private banks to provide loan in SME sector.

>In 2010 Bangladesh bank gives target to Sonali Bank to provide 1360 crore tk. in SME sector.
But at the end of 2010 Sonali bank provides 2495 crore tk. which is 183% on their total target.
The loan performance of Soanli bank in 2011 was really very good. The target loan of janata
bank was 2300 crore and they provide 3471 crore tk. in SME sector which indicates their
achievement is more than their target that is 150%. Target of basic bank was 660 crore tk. And
their total loan on SME sector was 2386 crore tk and their achievement was 361.5%. in 2011
target amount of Jamuna bank was 350 crore tk and their total loan amount was 212 crore tk and
their achievement rate was 60%. Target amount of Pubali Bank was 500 crore tk and their total
disbursement was 247 crore tk and their achievement rate was 49.60%. The target amount of
Standard Charted Bank was 550 crore tk and their total disbursement was 496 crore tk and their
achievement rate was 90%. Here we see that Government banks provide more loans in SME
sector than the private banks.
> In 2011 Bangladesh bank gives target to Sonali Bank to provide 3500 crore tk. in SME sector.
But at the end of 2011 Sonali bank provides 673.50 crore tk. which is 19.24% on their total
target. The loan performance of Soanli bank in 2011 was really very poor. The target loan of
janata bank was 2000 crore and they provide 2011.16 crore tk. In SME sector which indicates
their achievement is more than their target that is 101.59%. Target of basic bank was 2800 crore
tk. And their total loan on SME sector was 2001.16 crore tk and their achievement was 71.83%.
In 2011 target amount of Jamuna bank was 472.50 crore tk and their total loan amount was
704.72 crore tk which is more than their target amount and their achievement rate was 149.08%.
Target amount of Pubali Bank was 250 crore tk and their total disbursement was 144.68 crore tk
and their achievement rate was 57.87%. The target amount of Standard Charted Bank was
899.30 crore tk and their total disbursement was 710.03 crore tk and their achievement rate was
78.95%. Here we see that Government banks provide more loans in SME sector than the private
banks.
> In 2012 Bangladesh bank gives target to Sonali Bank to provide 800 crore tk. in SME sector.
But at the end of June 2012 Sonali bank provides 114.97 crore tk. which is 14.37% on their total
target. The target loan of janata bank was 1980 crore and they provide 1054.42 crore tk in SME
sector which is 53.25% of their target. Target of basic bank was 2900 crore tk. And their total
loan on SME sector was 1505.06 crore tk and their achievement was 51.90%. In 2012 target
amount of Jamuna bank was 520 crore tk and their total loan amount was 395 crore tk which is
76.01% of target amount. Target amount of Pubali Bank was 300 crore tk and their total
disbursement was 147.26 crore tk and their achievement rate is 49.09%. The target amount of
Standard Charted Bank was 899.30 crore tk and their total disbursement is 515.03 crore tk and
their achievement rate is 57.27%.

Findings:
SME foundation claims that they disburse SME loan on single digit. Bangladesh Bank gives
target to commercial bank to disburse loan on 10 Percent interest rates. But in reality Public
banks give loan on about 14 to15 percent and private banks give loan on about 18 to 19 percent.

Bangladesh Bank and SME foundation claim that no collateral securities are needed for
getting SME loan. But without collateral securities very few banks sanction SME loan to
entrepreneurs.
Banks are the major sources of finance for SMEs. More than 60 percent entrepreneurs
receive loan from banks for their ventures.
Bankers are not much interested on providing SME loan. As it requires continuous
monitoring, much attention and more investment on less return than industrial loan. There
is greater chance of SME loan to become bad loan than others.
Banks are disbursing credit under various programs like Small Enterprise Development
Project, Self-help Credit Program, and Projects for Small Entrepreneurs, Special Investment
Program and Agro-based Supervisory Industrial Credit etc for the promotion and development of
SMEs.
The memorandum and Articles of Association of the bank stipulates that 50% of loan able
funds shall be used for financing small scale and cottage industries. But in reality, banks are not
in conformance with these principles.
Many banks are facing problem to recover the loan amount provided in SME sector. For this
reason, still many banks are not willing to invest much in this sector.
From 2010, Bangladesh Bank gives target to government banks and private banks to
disburse loan in SME sector. Since then it has got momentum. So Bangladesh Bank is playing a
key role on SME loan disbursement.
The target of government banks given by the Bangladesh Bank to provide loans in SME
sector is normally more than the private sector.
In general, government banks provide more credit facilities in SME sector than Private
Banks.
About 62.5% of entrepreneurs take bank loan to operate their SME business which is
very remarkable
Banks near about two out of ten banks provide non-financial facilities like SME training,
awareness program etc and those are basically private bank.
Five out of ten bankers agree that banks play a vital role in the development of SME
sector in our country.
Foreign loan donation for SME sector remains idle for not proper disbursement of giving
amount and other problems relate with the loan distribution.

Conclusion:

SMEs are considered to be the seedbed for the development of entrepreneurial skills and
innovation. Small capital requirement makes easy entry and exit possible and private sector
entrepreneurial activities have many important spill over and positive externality effects.
However, liberalization of the economy along with rapid globalization has posed several
challenges to SMEs not only in international markets but also in the domestic economy. Since
SMEs are based on relatively small investment, their survival depends on readily available
markets with easy access. In todays world, market development is a much more challenging
task, which requires coordinated efforts by individual business enterprises and the Government.
Bangladesh has failed to maximize the benefits derived from the SME sector, which promises
and needs to play a pivotal role in promoting and sustaining the industrial as well as overall
economic growth.
Banks are the major sources of financing for SME sector. Many of the banks are not interested to
provide more loans in SME sector because sometimes they face difficulties to recover the loan
amount. SMEs are the growing sector in Bangladesh and here is a great possibility to develop the
socio economic condition through the development of SMEs. Banks have also a great possibility
to extend their business by providing loan in SME sector.

Recommendations:
Bindings should be given by Bangladesh Bank to other commercial banks about loan
disbursement on 10 percent or single digit interest rate. Otherwise, they have to face lawful
action even.
Commercial banks should consider SME loan as their Corporate Social Responsibility. So
here consideration will not be profit maximization only rather social welfare.
Banks can be inspired by giving award at the national level by the government as they
provide more loans on SME sector.
More non- financial facilities on SME sector can make the entrepreneurs greatly benefitted.
Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and
development of a country. Actually, SME works as the platform for job creation, income
generation, and development of forward and backward industrial linkages and fulfillment of
local social needs. So SME loan disbursement should be given more emphasis at the context of
Bangladesh.
SME foundation can play more vital and proactive role by disbursing their loan through
certain bank which will conform to their provision of single loan disbursement.

Bangladesh Bank and SME foundation with taking other companies as ROBI Mobile phone
can promote SME loan disbursement programs as many entrepreneurs are not much aware about
the facilities.
More rural people should be brought under SME loan facility coverage though it has the
risk.
Awards should be given at the individual level that will have contribution on SME loan
disbursement and other activities of SME. As we can get a man like Nobel Laureate Dr .
Muhammad Younus of Grameen bank.
Foreign donation for SME loan should be utilized with giving much emphasis as a greater
amount of money stay idle and Donors cannot move forward with giving more money for this
purpose as loan distribution amount is not at the satisfactory level .

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