Small and medium enterprises (SMEs) have long been considered as the principal driving force of Bangladesh's economy. Along with stimulating private ownership and entrepreneurial skills, SMEs are flexible and can adapt quickly to changing market demand and supply, generate employment, help diversify economic activity, and make a significant contribution to exports and trade.
Although in Bangladesh the SME Foundation and IFC-SEDF's efforts to create awareness among the banks and NBFIs to be more focused on SMEs are laudable, the sector still needs greater support from both financial institutions and the government.
Especially at a time such as now, when the impact of the global crisis is becoming more evident, in terms of declining export orders and remittance inflow, boosting the SME sector, the economy's thrust sector, should be an imperative.
Financial constraints
The biggest impediment to SMEs is the lack of sufficient capital needed to operate business. Most businesses often have to start with their own savings or by borrowing from friends and relatives, with bank financing coming later. Banks remain extremely reluctant to lend to small scale entrepreneurs who do not have any startup equity, despite sound business models.
It is very difficult for SMEs to raise fixed and working capital from commercial banks, as banks are unwilling to issue small loans due to the high monitoring and supervision costs, considering SMEs to be high risk borrowers because of their low capitalisation, insufficient assets, and high mortality rates. SMEs are usually also charged very high interest rates. Bank procedures are also prohibitive - project evaluation processes and the requirement for undocumented payments to bank officials often make it difficult for small entrepreneurs to comply with.
A World Bank (WB) paper titled “Bank financing for SMEs around the world”, which used data from 91 banks from 45 countries, reports banks are less exposed and charge higher interest rates and fees to SMEs relative to large firms. A number of studies using firm-level survey data have shown that SMEs not only perceive access to finance and the cost of credit to be greater obstacles than large firms do, but these factors also constrain SME performance more than in large firms.
However, the WB found through its survey of banks that most banks (80 percent or more), independent of where they operate and of ownership type, perceive the SME segment to be large with good prospects.
The impact of the global crisison SMEs
The global recession has directly affected Bangladesh's remittance inflow and exports. However the knock on effects of declining exports and remittance inflows on SMEs is also of great concern. Since workers' remittances traditionally help finance consumption and SME investment, the declining inflow of remittances poses a potential threat to the SME sector. The global crisis has exacerbated conditions for SMEs, especially in terms of access to finance and credit availability.
Most SMEs around the world are suffering from falling demand. Credit tightening has been severe in spite of the drastic easing of monetary conditions by central banks. Interest rate spreads have risen to unprecedented levels, thereby partially offsetting the effects of the easing of monetary policy. A concerted effort is needed to support SMEs to revive growth and job creation in developing countries.
SMEs in developed countries have also been hit hard by the global crisis. During the 'Turin Roundtable' held in Italy in March 2009, various stakeholders including governments, representatives of SMEs and financial and international institutions, attested that SMEs have been suffering due to the crisis.
Given the importance of SMEs in Bangladesh's economy, I would suggest a number of recommendations put forward during the Turin meeting, which could also be applicable to developing countries:
Resolving the problem of insufficient working capital
The most widely used measure has been the extension of SME loans and loan guarantees. What was learned from previous crises was that capital injections into banks were not sufficient to increase lending and that government guarantees were also required. In countries where SMEs are export-oriented, governments are also expanding export credit guarantees. To deal with cash flow problems, countries reported a number of temporary tax measures they had undertaken such as tax cuts and deferrals. It was suggested that governments give priority to reducing taxes that are profit insensitive, that is, taxes that are paid regardless of whether the SME is making a profit, like payroll taxes.
Assisting innovative start-ups and high-growth SMEs
There was a general consensus that it is necessary to ensure that innovative start-ups and high- growth SMEs have access to adequate funding at times of economic recession. Some governments are stimulating the provision of private risk capital through co-investment and are also reducing or eliminating taxes on capital gains for investment in SMEs by venture capital funds.
Improving the SME and entrepreneurship financial environment in the long term: As SMEs often lack face-to-face contact with bank managers due to the impersonal structure of the modern banking system, banks could consider balancing their scoring approach to SME worthiness assessment with adequate room being left for 'relationship banking'.
To some extent, decision making on SME loans to local branches could help in cases where circumstances and viability of individual businesses need to be better accounted for.
In conclusion we need to develop an effective strategy to support a key engine of economic development and employment.
First and foremost, a standard definition of SME needs to be established by the government, in consultation with different stakeholders including donor agencies, NGOs, and private sector entrepreneurs the current opacity remains a barrier to targeted action. Given the constraints in the traditional banking system, limitations in the provision of finance needs to be addressed creatively - the government should provide grants, perhaps in coordination with donor agencies, to provide financial support to selected SMEs which have good potential and wide linkages.
More SME development funds may be created to subsidise projects and venture capital SME investments should be encouraged. The tax and VAT regime should be reviewed to be less prohibitive to SME growth.
Finally, technical support is critical for SMEs to grow and evolve through sector specific business support incubators and funding for collaboration with technical universities and vocational colleges.
No comments:
Post a Comment