Reforms that we need for the MSMEs in Bangladesh

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.

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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.

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Potential of Small and Medium Enterprises

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.

Views expressed in this article are the author's own.

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