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LESSONS:

Small and Medium-Sized Enterprise Development Project: Completion Report

sector: Finance | country: Bangladesh

Definition of SME (small and medium-sized enterprise). The Ministry of Industries defines enterprises as cottage, micro, small, medium, and large enterprises, on the basis of’employment’ and’fixed investment’. As SMEs, by definition, refers to small and medium-sized enterprises, the nomenclature is frequently misunderstood and used inappropriately to address cottage and micro enterprises as well. Surveys show that cottage and micro enterprises constitute 97% of all industries by number and employ 41% of the nonagricultural workforce. The SMEDP (Small and Medium-Sized Enterprise Development Project) financed 13,645 enterprises having on average 6.4 employees per enterprise, indicating that a vast majority of beneficiaries are cottage and micro enterprises.

Data availability. There is no comprehensive, standardized, and updated database on the SME (small and medium-sized enterprise) sector that also includes cottage and micro enterprises. It is challenging to acquire reliable basic statistics, such as the number of SMEs and SME employment. The Sixth Five- Year Plan, 2011 – 2015 recognized the lack of data as a barrier to understanding the role of SMEs. In the absence of reliable key statistics, alternative inferential methods have been used extensively to assess the SMEDP’s (Small and Medium-Sized Enterprise Development Project) performance parameters. The change in the definition of SMEs, incompatible presentations of data by various agencies, and complex definitions have complicated the understanding of the SME sector and its contribution to the national economy.

NBFIs (nonbank financial institutions) find the refinancing scheme more valuable. The funds disbursed through NBFIs increased to 48% of total facility for the SMEDP (Small and Medium-Sized Enterprise Development Project) compared to 20% for the previous SMESDP (Small and Medium Enterprise Sector Development Program). At the national level, banks and NBFIs disbursed SME loans at a rate of 87.8% and 2.2% in 2013. This disproportionate performance can be explained by the higher cost of NBFI funds as compared with banks, as the refinancing scheme provided them an opportunity to reduce their weighted average cost of capital. This indicates that NBFIs would be more interested than banks in any innovative interventions in the financial market.

Women entrepreneurs. The SMEDP (Small and Medium-Sized Enterprise Development Project) disbursed 6.4% of the total facility to women-led SMEs, falling short of the target of 15.0%. Initial disbursements under this component were slow due to a lack of market awareness among women entrepreneurs. The target was also overly optimistic to comply with the provisions set out in the Refinance Scheme for Women Entrepreneurs of SME, given that the percentage of SME loans disbursed to women entrepreneurs was 3.4% – 3.9% during 2010 – 2013. The interest rate cap at 10.0% on loans to women-led SMEs might have also eroded PFI’s (participating financial institution’s) motivation for such lending, as PFIs usually lend to general SMEs at a much higher rate.

Subloan database. The reimbursement applications made by the PFIs (participating financial institutions) to the implementing agency were not standardized; the PFIs used different spellings in fields and the fields were different as well. This made analyzing the subloans for all 13,465 SMEs (small and medium-sized enteprises) (on the basis of location, industry, etc.) virtually impossible. The database would have been more effective if a standard reporting template with all required fields and their probable values had been prefixed.

Lessons from Validation

Bangladesh: Small and Medium-Sized Enterprise Development Project

The lessons drawn by the project completion report (PCR) from the findings are suitable. There is a need to clearly differentiate cottage and microenterprises from small and medium-sized enterprises (SMEs). Often, the SME nomenclature has been misunderstood and used inappropriately to also include cottage and microenterprises. There is also a need to have more reliable and standardized data on the SME sector that includes cottage and microenterprises. The refinancing scheme provided by the project gave nonbank financial institutions (NBFIs) an opportunity to reduce their weighted average cost of capital and has been a valuable intervention to them. The target of 15% of the credit facility disbursed to women was overly optimistic considering that disbursement to women was only 3.9% at the national level and women entrepreneurship a relatively new development in Bangladesh. The 10% cap on interest rate to women-led SMEs discouraged participating financial institutions (PFIs) from lending to them since the interest rates on loans to SMEs were generally higher. Standardized reporting should have been adopted for reimbursement applications made by the PFIs to the implementing agency. This could have standardized the database for sub-loans and allowed analysis thereof. This validation adds that indicators should have been added to measure the portfolio quality of SME lending by PFIs and its impacts on the performance of borrowing SMEs, such as their assets, profitability, and employment.

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