Unlocking the potential of CMSMEs in Bangladesh

Despite impressive economic growth of more than six per cent per annum in the past decade, policymakers and businesses in Bangladesh continue to ponder why the country continues to rank low in productivity and innovation indices

Feature | 11 October 2023
Bangladesh: Unlocking the potential of cottage, micro, small and medium enterprises

By Gunjan Dallakoti, SME Development Specialist, ILO in Bangladesh

©ILO/Muntasir Mamun
Despite impressive economic growth of more than six percent per annum in the past decade, policymakers and businesses in Bangladesh continue to ponder why the country continues to rank low in productivity and innovation indices. The dominance of cottage, micro, small, and medium enterprises (CMSMEs) in the country's economy, providing employment to an estimated 87% of the active labour force and accounting for nearly a quarter (25%) of the GDP says a lot about the productivity. May be this could be explained by the fact that about 80% of the CMSMEs operate informally with a severe ‘decent work deficit’ - a measure of the gap between the reality of the jobs and work conditions people find themselves in, and their hopes for a better life.

As the country prepares to graduate from the Least Development Country (LDC) category, the Government of Bangladesh is undertaking several reforms in the economy with implications for CMSMEs. The abolishment of financial and non-financial incentives for exporting firms for example, will directly impact the performance of export oriented CMSMEs and their supply chains. The increasing compliance requirements for global businesses like human rights due diligence may put additional pressure on CMSMEs aiming to penetrate export markets and become part of global supply chains.

On the other hand, the large Bangladesh market and an expanding middle class are attracting international players into the domestic market. Ongoing import tariff rationalization may immediately open CMSMEs to intense competition from foreign suppliers in the local market.  This new development together with the continuing challenges of accessing finance and innovative technologies, and navigating the regulatory environment necessitate comprehensive policy and programming support for the CMSMEs.   

In a recent policy dialogue organized by the Small and Medium Enterprise (SME) Foundation of Bangladesh and the ILO, participants called for support to CMSMEs to address the twin challenges of productivity and competitiveness. Productivity could be improved through policy support, regulatory reform, appropriate and adequate institutional set up, technology transfer and human capability development.

There was consensus that export oriented CMSMEs could improve their competitiveness by adopting international best practices and compliance to labour standards on business and human rights, responsible business conduct, and environmental, social and governance (ESG) guidelines to increase their share of both domestic and international markets. They however need capacity building to understand and comply with the standards and requirements.

Access to finance remains a key challenge particularly for the cottage and micro-enterprises. Recommendations included looking beyond the traditional low-cost financing to diversifying financial products and services to include equity financing, blended financing, venture financing and so on. Financial institutions will require technical support to develop such products and enabling policies to support their roll-out. There is need to work with business associations to raise awareness on innovative financing products to create effective demand and promote their utilization among CMSMEs. Financial risks in the sector could be mitigated by expanding wholesale credit facilities, like one provided by the SME Foundation, and development of a credit rating system for the sector.

Bangladesh should also consider developing an online one-stop service portal for CMSMEs to provide information on registration, regulation, and formalization of these enterprises. Existing models in the Asia-Pacific region go further to include services like business and entrepreneurship training, technology transfer, market linkages, and business-to-business networking. Such a portal requires authoritative institutional arrangements built through inter-ministerial coordination and extensive promotion for effective uptake.

With its normative mandate of promoting full and productive employment and decent jobs for all, the ILO has time-tested resources and expertise to support the policies and programmes for CMSME development. The ILO’s tripartite declaration on principles concerning multinational enterprises and social policies, its recommendations on job creation in small and medium enterprises, and on transition from informal to formal economy offer comprehensive guidelines for the government, employers’ and workers’ organisations to shape up an enabling business environment for CMSMEs.  

As Bangladesh aspires to become a middle-income country by 2026, the country should strive to sustain its journey towards prosperity by unlocking the potential of CMSMEs. Transforming CMSMEs from their current form of low productivity, low value addition and their subsistence-orientation, into dynamic, profitable engines of economic growth and source of decent work would be critical for the country's smooth and irreversible LDC graduation, and its eventual transition to a developed country by 2041 as enshrined in the country's Vision 2041.This will require comprehensive and coordinated policies and programmes supported by the government, the private sector, the UN, and civil society organizations.  ILO Bangladesh stands ready to collaborate with the relevant organizations in this journey.

This article was first published in The Financial Express of Bangladesh on October 8, 2023.