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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
Introduction
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.
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.
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.
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.
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.
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.
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.
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
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
Tin certificate
Citizenship certificate
Bank solvency certificate
Vat certificate
Export license
>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 .