[🇧🇩] Cottage Industry in Bangladesh

[Saif]

Reforms that we need for the MSMEs in Bangladesh

To increase value per MSMEs, we also need to build capacity of the MSME associations.

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Reforms that we need for the MSMEs in Bangladesh

Due to the low entry barrier and the informality of the MSMEs, success of one MSME draws in multitude of similar enterprises. This leads to a price war that eventually proves to be detrimental to all. SOURCE: FREEPIK

Micro, Small and Medium Enterprises (MSMEs) create self-employment, apprenticeship and jobs for the unskilled population. They help solve economic problems faced by the youth, women and marginalised communities, while providing innovative merchandise and services and making products and services more accessible and affordable. During the Covid lockdown, we saw a new wave of MSMEs flourish through online sales. A large number of women ran such enterprises through various platforms, such as Facebook. But the recent years have been tough. The diminishing purchasing power of the consumers is hurting the MSMEs. Global value chains are in shambles and prices of imports have increased. The exchange rate devaluation has not helped the matter either—it is now 30 percent more expensive to advertise products on Facebook. The MSMEs cannot increase prices in proportion to the costs as that would result in a loss of sales in a country like Bangladesh, where inflationary pressure is high. Given their low switching costs, a large number of MSMEs are leaving the market. This has created a vicious loop of underperformance and informality.

I believe the solution to this problem lies in policies that foster value creation by the MSMEs and expansion of the market base and reduction in price competition. The consumer is always seeking the highest value for the price paid. In a market with two MSMEs, if both MSMEs offer the same product, the consumers will buy from the one that sells it for a lower price. If one producer offers, say, ketchup made with organic tomatoes, while the other sells regular ketchup, the first one gains from the premium market while the second one gains from the price-sensitive market. This is beneficial for all parties involved. Similarly, if one MSME produces home-baked bread and another sells diabetic bread, both gain as they serve different values. However, in Bangladesh, MSMEs thrive in the price-sensitive market rather than in the value-focused one. Due to the low entry barrier and the informality of the MSMEs, success of one MSME draws in multitude of similar enterprises. This leads to a price war that eventually proves to be detrimental to all.

The economic significance of value creation will be clearer if we compare the data on MSMEs per thousand people and the value of MSMEs for different countries. There are 79 lakh SMEs in the country, according to the Planning Division. As per IFC's SME Finance Forum's 2019 database, Bangladesh has 50 MSMEs per thousand people. India has 48 per thousand, Pakistan 18, UK 40, and China 17. The number of MSMEs does not drop with affluency of a country. Luxemburg has 54 MSMEs per thousand, Sweden has 32 and Japan 43. This raises the question: how does Luxemburg, a country of over 6,75,000 people (according to Worldometer), have so many MSMEs? The answer lies in the value created by the MSMEs in Luxemburg. The definition of MSME is largely the same across countries by the number of employees but differs in terms of assets or revenue per enterprise. According to a policy paper of Bangladesh Bank, an enterprise is small if it has no more than 50 employees and if its fixed asset other than land and building is within the range of Tk 50,000 to Tk 1.5 crore. In contrast, in Luxemburg, which follows the European Union (EU) definition of SMEs, an enterprise is small if it employs less than 50 people and its annual turnover or balance sheet total is 10 million euros or Tk 130.30 crore. A small enterprise in Luxemburg is almost 86 times more valuable than a small enterprise in Bangladesh.

Our policymakers rarely get into this discussion of value creation. We are more interested in the number of MSMEs, and the number of jobs created by the MSMEs, as our formal sectors fail to create the large number of jobs that we require to employ our youth.

How do we get out of this vicious cycle? The answer is: by directing the MSMEs to enter untapped niches and by incentivising value creation. The Palli Karma-Shahayak Foundation's (PKSF) Sustainable Enterprise Project (SEP) has shown how mixing microcredit with technical assistance, skills development and market creation activities can help rural MSMEs to target strong niches through value added products. We need to emulate this at the national level. PKSF's Partner Organisations (POs) or the Micro-Finance Institutions (MFIs) have been capacitated to support the MSMEs. The SME Foundation needs to partner with financial institutions and business associations along with business development service providers to map out the range of niche markets that remain untapped for the MSMEs and provide soft loans together with skills for product development, quality assurance and market promotion support. PKSF itself can work as a special purpose vehicle to scale this project through the MFIs. We need to reduce cost of doing business for the MSMEs to incentivise formalisation. Cost of business can reduce if we give access to preferential rates on facility rents, technology, services, machineries and equipment. The immediate return from legalisation should be much higher than the cost of it.

In addition to these, information on markets, logistics suppliers, business development service providers, financial service providers need to be widely available. SME Foundation's works on cluster mapping should be revisited to identify natural clusters with fully integrated vertical and horizontal linkage activities and specialised clusters with just one type of entities in the value chain. The prospect of cluster and value chain financing for Bangladesh has already been mapped and presented for the national SME policy in Bangladesh. However, these proposals are yet to be made operational.

To increase value per MSMEs, we also need to build capacity of the MSME associations. Bangladesh Furniture Industries' Owner's Association (BAFIOA) is a testimony of how the associations can champion growth of an entire sector. By building associations, we should be able to unlock potential for export. But the foundation must be set by expanding the local market base. By strategically targeting value creation, we will be able to unleash the true power of growth of our MSMEs.

Md Rubaiyath Sarwar is managing director at Innovision Consulting.​

 

[Saif]

Cottage industries on the wane as production falls

Smaller and medium industries in Bangladesh are becoming weaker as their production has steadily been down over the years, painting a grim picture of employment generation, according to officials. The manufacturing growth in cottage, micro, small and medium enterprises (CMSMEs) had been lower in f

thefinancialexpress.com.bd

Cottage industries on the wane as production falls
Call for formalising CMSMEs for economic growth
FHM HUAMAYN KABIR
Published :
Nov 24, 2024 00:46
Updated :
Nov 24, 2024 00:46

Smaller and medium industries in Bangladesh are becoming weaker as their production has steadily been down over the years, painting a grim picture of employment generation, according to officials.

The manufacturing growth in cottage, micro, small and medium enterprises (CMSMEs) had been lower in fiscal year (FY) 2023-24 than in previous years, official data showed on Saturday.

An estimated 85-per cent employment of the country is created in the informal sector, which mostly deals with CMSMEs.

Economists say lower growth in CMSMEs means slim employment generation as these industries are the country's top generator of jobs.

Since CMSMEs are the backup industry for larger ones, their production fall will ultimately affect manufacturing at bigger industries, they add.

The Bangladesh Labour Force Survey-2022 shows an estimated 60-million people, who constitute 84.9 per cent of the total working population here, are engaged with the informal employment.

According to a recent disclosure by the Bangladesh Bureau of Statistics (BBS), the year-on-year industrial production growth rate in micro, small and medium enterprises (MSMEs) lowered to only 5.07 per cent in FY24.

The rate was lower than that in the previous two consecutive fiscals of FY22 and FY23.

According to the MSMEs industrial production index, the FY22 growth was 15.39 per cent and that in FY23 was 9.03 per cent, according to the National Accounts Statistics-2024 report.

Under MSMEs, the production of machinery and equipment has dropped drastically as it marked 45.55-per cent negative growth in FY24.

Machinery and equipment output maintained positive growth in FY22 and FY23.

The production of wood-made goods and corks, printing and reproduction of recorded media, chemicals and chemical products; pharmaceutical products and preparations, computer, electronic and optical products, and transport equipment posted negative growth in FY24.

Based on the production index, the growth rate in the cottage industry also lowered in the same fiscal.

The BBS data showed that the year-on-year production at the cottage industrial has been lowered to 6.7 per cent in the last FY2024.

The home-based industry expanded at a 7.67-per cent rate in FY22 and 9.96 per cent in FY23, reveals the BBS data.

Although machinery and equipment manufacturing has got a good leap over the last few years in the cottage industry, gadgets like computer, electronic and optical items, coke and refined petroleum products, rubber and plastic goods maintained negative growth.

Dr Zahid Hussain, a former World Bank economist, told the FE that a gradual decline in demands has affected the production of CMSMEs domestically.

"Inflation is higher. The month-on-month real wage has been declining in the last couple of years. Thus, the purchasing power of people has fallen. So, the demand for CMSME products has dropped."

Since the demand has dropped over the years, production at smaller and medium industries has ultimately declined, said Dr Hossain.

He urged the government to supply seamless power and gas, formalise smaller manufacturing sectors and subsectors, ensure internal and external markets, and cut the inflationary pressure with intent to boost production at CMSMEs.

As the highest number of jobs is created by CMSMEs in Bangladesh, their lower growth might affect the employment, according to Policy Exchange Bangladesh chairman Dr Masrur Reaz.

"If the trend continues, Bangladesh's employment will shrink further and people will fall behind the poverty line," he told the FE.

As these sectors are the backup industry for large manufacturers, their recovery is needed, continued the economist.

Cottage, micro and small industries should be brought under the formal sector for their survival and also for the growth of the national economy, he cited.

"Most of the cottage, micro and small industries in Bangladesh are set up on an informal basis. They should be brought under the formal system in a bid to upgrade their capacity to create decent employment," Mr Reaz said.​

 

[Saif]

Most SMEs cite tax structure as main barrier

Around 57 percent of surveyed small and medium enterprises (SMEs) cited the existing tax structure as the main obstacle to doing business in compliance with the law, according to a report by the SME Foundation.

www.thedailystar.net

Most SMEs cite tax structure as main barrier

Around 57 percent of surveyed small and medium enterprises (SMEs) cited the existing tax structure as the main obstacle to doing business in compliance with the law, according to a report by the SME Foundation.

The trade licence renewal process was the next biggest barrier, being identified by 54 percent of entrepreneurs, it said.
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Other leading concerns were regarding the cost of trade licences, singled out by 51 percent of respondents, and the complexity of laws and regulations, pointed out by 44 percent.

Melita Mehjabeen, a professor of the Institute of Business Administration (IBA) at the University of Dhaka, conducted and led the research.

She presented the findings at a seminar yesterday.

The seminar, styled "Informal SMEs in Bangladesh: Formalization Challenges and Way Forward", was organised by the SME Foundation and German development agency Friedrich-Ebert-Stiftung (FES), Bangladesh at Parjatan Bhaban in the capital yesterday.

Sadia Noor Khan, an associate professor of the Department of Banking and Insurance at the University of Dhaka, was the co-researcher.

The study surveyed 304 entrepreneurs across Dhaka, Chattogram, Sylhet, Khulna and Rajshahi.

Mehjabeen said more than 74 percent of small and medium entrepreneurs want to do business in line with government rules and regulations.

However, there is a need to simplify the rules. Introducing one-stop services, collateral-free loans and increasing the benefits of doing business in compliance with the law are also necessary, she said.

To do business in accordance with the law, seven certificates are needed from different government departments in India, Mehjabeen said.

But permission from around 34 departments is required in Bangladesh, she added.

As most SMEs are informal, they remain outside the tax net.

So, Mehjabeen suggested the government prepare a comprehensive strategy paper to bring these organisations under existing structures, formalise them step by step and provide monetary and non-monetary incentives to entrepreneurs.

SMEs accounted for almost 25 percent of Bangladesh's gross domestic product in 2018, according to a Planning Division report.

SMEs account for about 90 percent of businesses and more than 50 percent of employment around the globe, according to a 2022 World Bank report.

The contribution of SMEs in the formal sector is up to 40 percent of the GDP in emerging economies, it added.​