[🇧🇩] Cottage Industry in Bangladesh

[Saif]

For shared prosperity, formalisation of work is vital

The informal sector plays a crucial role in creating local jobs, especially for women and youth in Bangladesh.

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Micro-, Small and Medium-sized Enterprises Day
For shared prosperity, formalisation of work is vital

Md Bilal Hussain, 73, learnt weaving from his father. Born in a family of weavers, he believes weaving is in his blood, inherited from his ancestors. His last employer confirms that Bilal is the best weaver he ever had. He is excellent at weaving silk sarees and salwar kameez.

Bilal worked for 57 years—42 with his last employer and 15 years with another. At retirement, he earned Tk 6,200 a month on average, being paid Tk 1,400 for each piece of clothing he made. Bilal retired in November 2023. His failing eyesight and aching body compelled him to stop although he did not want to. His low earnings never permitted him to save anything. He is not getting any retirement benefits as his employment was informal. Devoid of benefits, he is now at the mercy of his sons for the rest of his life and believes the Almighty will provide for him.

Ferdous Munsi, the owner (malik) of the small saree-making cottage enterprise where Bilal worked, explained the business. He spends Tk 2,000 on raw materials, mostly imported, for each saree and pays workers like Bilal Tk 1,400 to make the saree. This then retails at Tk 4,000. His gross profit does not even cover the rent of the space and the holding cost of inventory for the off season. He is critically aware of the low wages his workers are getting, but can do nothing about it.

This is the reality in the informal sector. The Bangladesh Labour Force Survey 2022 shows that close to six crore (60 million) people, 84.9 percent of total working population in Bangladesh, are in informal employment. It is noteworthy that out of the total employed women in Bangladesh, 96.6 percent are in informal employment. Similarly, 92.7 percent of youth aged 15-27 years are employed informally. Informal employment can be both in formally registered businesses and in the unregistered ones.

Economists opine that some level of informality is expected in a growing economy like Bangladesh, where an effective business governance system and procedures are yet to be established. There are several reasons for the widespread informality in the country. Studies have suggested that the ineffectiveness of public services like registration, licensing and tax processing of businesses are among the main reasons. On the other hand, lack of clear incentives to formalise, limited understanding of the process of formalisation, and limited employment opportunities are other impediments.

The consequences of the high informality are severe: low tax to GDP ratio, widening inequality, stagnant industrial competitiveness in sectors other than ready-made garment (RMG) and low labour productivity, and low product and service quality. Informality also hinders the potential of the industrial sector to participate and benefit from growing international value chains and export market opportunities. These are extremely critical as Bangladesh prepares to graduate from LDC status and enters the global market on the basis of competitiveness and productivity.

While the prioritisation of formalisation in the Industrial Policy 2023 is a welcome step, there is a dearth of studies on the potential positive impact of formalisation and Bangladesh's capacity to formalise to inform policymaking. Furthering the formalisation agenda is imperative for the country if it is to achieve the ambition of economic diversification and modernisation of the private sector to become competitive globally. The implementation of the policy requires an integrated effort from the whole of the government, the private sector, and workers' organisations. The success of ongoing labour sector and social protection reforms are also key to addressing informality.

The informal sector, which comprises cottage, micro-, small and medium enterprises, not only operates closest to local communities, but plays a crucial role in creating local jobs, especially for women and youth in Bangladesh. As we commemorate the Micro-, Small and Medium-sized Enterprises Day today, we recognise that it is a vital sector at the heart of our societies with tremendous potential to accelerate decent job creation and achievement of the SDG goals.

To fully harness its potential, a transition to formalisation is necessary to ensure that the millions of workers in the sector do not end up like Bilal—destitute after a fully productive working life.

Gunjan Dallakoti is small and medium enterprise development specialist at the International Labour Organization (ILO).​

 

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Lack of funding slows SME policy implementation

A lack of necessary funding and coordination among the affiliated organisations has been one of the main reasons for the slow implementation of the SME Policy 2019, leaving many provisions unrealised, said Ashraf Ahmed, president of the Dhaka Chamber of Commerce and Industry (DCCI).

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Lack of funding slows SME policy implementation
Dhaka chamber calls for reforms in the new scheme

Various refinancing and credit guarantee schemes should be introduced for small and medium enterprises on the basis of their needs and nature, said an expert. Photo: Star

A lack of necessary funding and coordination among the affiliated organisations has been one of the main reasons for the slow implementation of the SME Policy 2019, leaving many provisions unrealised, said Ashraf Ahmed, president of the Dhaka Chamber of Commerce and Industry (DCCI).

The goals and objectives of the SME policy should be determined in conjunction with the industrial policy and the five-year plan should be set targeting the future goals of the entire industrial sector, he said.

The SME Policy for 2019 expired in June this year and the latest policy should be included in the budget and work plan formulation activities of different organisations, the Dhaka chamber president said.

He made the comments at an event, titled "Reform of SME Policy-2019 for Sustainable Growth and Innovation", at its office in the capital's Motijheel yesterday.

An agro-based economy will not alone be sustainable for the overall economy, rather the country should go for industrialisation, he said.

Service sector export should also be enhanced, he added.

It will not be possible for many SMEs to survive without increasing the flow of liquidity, Ahmed said.

He also highlighted new models of financing, such as electronic nano-financing, electronic channelling, automation of licensing and its renewal, availability of high-level skills, intellectual property protection, and high-speed broadband internet for the development of the SME sector.

Moreover, he suggested a comprehensive database of SMEs so that the informal sector can be brought into the formal sector.

There is a lack of coordination among government agencies, said Mirza Nurul Ghani Shovon, president of the National Association of Small and Cottage Industries of Bangladesh.

If the government does not arrange the required funds for the implementation of the new SME Policy, it will remain unimplemented again, he said.

He also suggested keeping the arbitration system and bringing the informal SME sector under the new SME policy, he said.

The government is trying to formulate an SME policy of global standards and for that cooperation from all stakeholders will be needed, said Salim Ullah, an additional secretary for policy, law, and international cooperation of the industries ministry.

All the shortcomings of the previous policy will be addressed, and the new one will try to reflect the requirement of all stakeholders for the betterment of the SME sector, he said.

There is a need to have various refinancing schemes and credit guarantee schemes because there are different types of SME entrepreneurs, and their needs are also different, said Nawshad Mustafa, director of the SME and special programmes department of the Bangladesh Bank.

He also stressed the need for having a common facility centre to promote small and cottage entrepreneurs across the country. Anwar Hossain, vice chairman of the Export Promotion Bureau (EPB), reiterated the importance of automation in all client service activities of the government.

The EPB is also trying to make its services automated soon, he said, adding that the backward linkage industry should be strengthened, especially the SME sector.

The National Board of Revenue (NBR) should consider introducing a simplified tax filing process, especially for the cottage, micro, small and medium enterprises (CMSMEs), as too much documentation process is a burden for them, Hossain said.

The SME sector will not develop without the government's patronisation, said Mosharref Hossain, associate professor at the Bangladesh Institute of Bank Management.

He suggested establishing an SME innovation lab where small innovators will get a place to flourish.

The SMEs should also get easy access to finance and the government should have a separate seed fund or venture capital or startup fund for the SME entrepreneurs, he said.

A roadmap is also needed to implement the policies, Hossain added.​

 

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Flood-hit SMEs seek govt assistance

Devastating floods in August and the following months have made life miserable for dairy and livestock farmers as well as small entrepreneurs, who are now struggling to meet operational expenses and repay bank loans after losing most of their belongings.

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Flood-hit SMEs seek govt assistance

Devastating floods in August and the following months have made life miserable for dairy and livestock farmers as well as small entrepreneurs, who are now struggling to meet operational expenses and repay bank loans after losing most of their belongings.

Some businesses and homes have been directly damaged by the floods while others experienced a sharp decline in sales, according to various entrepreneurs and leaders of business associations.

Nazma Akhter, an entrepreneur from Begumganj upazila in Noakhali district, lost 10 of the 50 cows on her farm, which was submerged under three feet of water during the recent floods.

The businesswoman told The Daily Star that the floods have caused her over Tk 10 lakh in losses.

"I have been running the farm with loans from various banks and non-government organisations [NGO]. But I couldn't sell a single drop of milk in the past one month, which have compounded my financial difficulties."

"So far, there has been no government support. Without it, I may have to shut down the farm."

Similarly, Rahima Bibi, an entrepreneur from Noakhali sadar upazila, said the floods have washed away all the fishes and ducks of her pond and farm, causing an estimated loss of Tk 1.25 crore.

The 55-year-old said she had plans to repay about Tk 1 crore in loans taken from Janata Bank, Mercantile Bank and 10 NGOs by selling fishes in November and December.

She had also planned to use her farm's earnings for her daughter's wedding.

"But the floods have put me in great danger. How can I now pay the instalments of bank and NGO loans? It is impossible to recover if the government does not cooperate," she said in a voice filled with distress.

To highlight the gravity of the damages, the disaster management ministry and the Centre for Policy Dialogue (CPD) have released separate reports.

In both reports, the amount of financial loss was mentioned to be above Tk 14,000 crore.

The sudden August floods have claimed 74 lives and injured 68 others nationwide, according to the disaster management ministry.

The ministry calculated the financial toll based on damages to agriculture, housing, roads and overall infrastructure across 11 districts in the eastern part of the country, with Feni being the worst affected.

Some 9.43 lakh people were affected by floods and half of them were displaced from their homes and sought shelter elsewhere, it said.

In its study, the CPD said the government would need to increase its budget for relief distribution.

The think-tank said the damage was equivalent to 1.81 percent of the national budget and 0.26 percent of the country's projected gross domestic product (GDP) for fiscal year 2024-25.

The floods, triggered by heavy rainfall and upstream hill runoff, began on August 20 this year and rapidly spread through districts such as Feni, Cumilla, Chattogram, Khagrachhari, Noakhali, Moulvibazar, Habiganj, Brahmanbaria, Sylhet, Lakshmipur and Cox's Bazar.

Despite the widespread damage, flood victims in Mymensingh, Sherpur and Netrokona are reportedly suffering from insufficient relief supplies and a lack of drinking water.

Flash floods have stranded 280,000 people in these districts, according to data of the local administration.

The agriculture and fishing sectors were particularly hit hard in these regions.

Anwar Hossain, the owner of a light-engineering workshop from Station Road in Cumilla district, described how the floods have affected his business.

Before the disaster, Hossain used to sell more than Tk 1 lakh worth of goods daily, which plummeted to between Tk 20,000 and Tk 30,000 because of the damage to agricultural lands.

"I am now struggling to cover my workshop's monthly expenses, pay bank loan instalments and make interest payments."

Another entrepreneur from the same area, Mohammad Arif, who manufactures autorickshaws, reported that his sales have dropped by about 30 percent due to the floods.

Tapas Kumar Paul, president of the Rudra Paul Pottery Cooperative Society in Bijoypur of Cumilla, said the floods have destroyed the raw materials, stocks and homes of pottery makers across four villages.

The members of the association have counted losses of around Tk 35 lakh, Paul said, urging the government to assess the volume of the losses and extend immediate assistance to affected businesses.

Sajol Borakurmi, president of the Rangichhara Cooperative Society in Kulaura upazila in Moulvibazar, said collecting loan repayments has become extremely challenging.

"Most customers are now unable to pay their instalments and there is also a rush among people to take loans to repair their homes," he added.

After the floods, a team from the SME Foundation visited the affected districts, including Cumilla, and handed over a report to the industries ministry after gathering recommendations from entrepreneurs.

The small-and-medium enterprises (SMEs) are considered the lifeline of Bangladesh's economy, contributing about 25 percent of the country's GDP, said the state-owned organisation responsible for promoting SMEs.

In its report, the foundation said the raw materials, stock products and houses of many SME entrepreneurs have been damaged while many traders were not directly affected.

The buyer groups of many SMEs, mainly involved in agricultural, saw their sales fall by about three-fourths as they were unable to source enough products, with many farmlands being submerged, it said.

The foundation suggested that banks and financial institutions halt loan instalment collections, waive interest on loans, provide financial incentives to victims, offer low-cost loans with flexible terms and take steps to expand market opportunities.

The affected SMEs would face long-term financial difficulties if they are not provided with immediate support, it warned.

Anwar Hossain Chowdhury, managing director of the SME Foundation, said the SMEs have faced numerous challenges due to the political unrest starting from June this year followed by two rounds of flooding.

The foundation requested Bangladesh Bank to ask banks to refrain from imposing fines or extra interest on businesses in case of failure to repay loans in time.

Our Moulvibazar correspondent contributed to this report​

 

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Bridging MSME financing gaps with customised digital credit scoring

Micro, Small, and Medium Enterprises (MSMEs) are known as the lifeblood of the world economy. The presence of MSMEs in every economic channel develops forward and backward linkages for large businesses as well. According to World Bank data, SMEs contribute 40 per cent to the Gross Domestic Product

thefinancialexpress.com.bd

Bridging MSME financing gaps with customised digital credit scoring
Sanjoy Pal
Published :
Nov 12, 2024 21:35
Updated :
Nov 12, 2024 21:35

Micro, Small, and Medium Enterprises (MSMEs) are known as the lifeblood of the world economy. The presence of MSMEs in every economic channel develops forward and backward linkages for large businesses as well. According to World Bank data, SMEs contribute 40 per cent to the Gross Domestic Product (GDP) globally. In Bangladesh, MSMEs contribute 25 per cent to the GDP, whereas in comparable economies like Indonesia, Sri Lanka, Pakistan, and Vietnam, MSMEs contribute 40 per cent or more. The International Finance Corporation (IFC) has estimated that about 40 per cent of formal MSMEs in developing countries have unmet financing needs of $5.2 trillion each year. They also concluded that 70 per cent of MSMEs in emerging markets are not receiving adequate funding, with most of these concentrated in Asia and Sub-Saharan Africa. By addressing their unmet financing needs, banks and mobile financial services (MFS) can become effective market players to enhance MSMEs' contributions to emerging economies like Bangladesh.

Although medium enterprises within MSMEs are generally able to place themselves under the umbrella of the banking system, micro and small enterprises struggle significantly. For certain period, most MSME financiers preferred collateral-based financing over cash flow-based financing, believing that security would act as a safeguard for recovery in case of loan default. Financiers also tended to provide generic loan facilities to all types of customers. Market research on product diversity for MSMEs was minimal. However, MSME research has now extended its scope. It is known that many MSMEs, especially those in rural areas, prefer to transact their revenues in cash rather than through the banking system, which hinders their participation in the formal sector.

At the end of the day, although the profits they generate correspond to their income, the lack of prepared documentation prevents them from accessing external sources of financing, particularly from banks and non-bank financial institutions (NBFIs), which leaves the economy distant from the concept of financial inclusion. In the digital era, the financing needs of MSMEs can be met if accurate and reliable data is readily available. To ensure data availability and alignment with international best practices, Bangladesh Bank recently issued guidelines on the licensing, operation, and regulation of credit bureaus. Financiers can easily obtain the necessary data from licensed credit bureaus for credit assessments before making financing decisions.

MSME financing has improved due to the global implementation of credit scoring, which enables financiers to reduce the time required for financing decisions. According to CGAP research, the main disadvantage of traditional credit-scoring methods is that low-income individuals and informal businesses often lack financial data (such as transaction records, tax receipts, and bank statements), resulting in marginal users having marginalised credit scores. This type of credit profile is referred to as a "thin file." In contrast, inclusive credit-scoring models combine traditional financial transaction data with alternative data (such as e-commerce transactions, personal purchases, mobile wallet data, geolocation, bill payment histories, and social media usage), which can help reduce the financing gap. Credit-scoring systems minimise the high operational, financing, and monitoring costs of banks and financial institutions by using digital means. Data is the primary resource processed to assess the creditworthiness of borrowers through credit scoring.

Credit scoring can be an effective tool to streamline a financial institution's MSME financing process, especially with the influx of digital banking in Bangladesh. Broadly, MSMEs are segmented into three categories - manufacturing, service, and trade - each of which includes various sectors of the economy. The credit scoring components used to assess borrowers and their financing requirements should be customised based on business nature, model, and performance. For example, although both logistics businesses and restaurants fall under the service sector, their business models are entirely different. Therefore, the numerical weightage of credit-scoring components should differ for each. Additionally, while logistics businesses are capital-intensive, restaurant businesses are manpower-intensive. Investment in logistics is significant and vehicle-oriented, whereas investment in restaurants is relatively lower and primarily directed toward infrastructure development. As a result, the scoring weightage on gross profit margin and net profit margin should not be the same for both. Similarly, the parameters for account turnover, tied-up period, and debt-equity ratio will differ for each business. Credit scoring parameters for MSMEs must be business-specific and logically linked to the nature of the business.

It is now essential to refine the financing strategy. To eliminate frictions and distortions in credit assessment and reduce the financing gap, financial institutions should design customised credit-scoring methods for MSME assessment. Furthermore, a risk-minimisation-centric credit-scoring policy should be established by the central bank of Bangladesh, similar to the initiative for credit bureaus. With customised credit scoring for MSME customer analysis and financing assessment, bankers will be better equipped to access the unserved or underserved MSME market in Bangladesh.

The writer is a Banker and Financial Modeling & Valuation Analyst (FMVA®) certified from Corporate Finance Institute, Canada.​

 

[Saif]

Policies promoting new-generation micro and small enterprises for productive job creation​

Policies promoting new-generation micro and small enterprises for productive job creation

In Bangladesh, micro and small enterprises (MSEs) and cottage enterprises (CEs) which are mostly managed by own-account workers together provide a vast majority of employment for the country's enterprise sector. Latest available statistics of the Bangladesh Bureau of Statistics (BBS) show that CEs

thefinancialexpress.com.bd