PROBLEMS & PROSPECTS
OF SMALL BUSINESS
IN
BANGLADESH
Methodology
The methods that are used to prepare the report are mentioned as follows:
Collecting data from primary and secondary sources (website, annual report, raw data)
Analyzing the factor related to Problems and Prospects of Small Business in Bangladesh
Identifying some suggestions for this sector
Profile of an entrepreneur
Objective
Our objective is to –
• Give an overview of small business in Bangladesh
• Describe the problems and prospects in this sector
• Provide information regarding supportive institution
• Recommending on the overall scenarios of small business in Bangladesh
Executive Summary
Small business is that part of business which is organized and managed by the owner or his or her family. Small business is a crucial part of the total business scenario of any country. Especially it plays a vital role in case of the economic development of a less developed or under developed country. Areas that small business covers are- manufacturing, wholesaling, retailing, service and so on. An interesting point to be considered is that the growth and development of medium and large industries is mostly dependent on small business. Today, small business is providing strong contribution the national economy. Features that have made small business separate from other business forms are – large contribution of owner, source of finance, size and capital of the firm, size of investment, less legal restrictions and so on. Like other countries small business is in a firm position in our country. As the unemployment in our country is high, so small business may play an essential role in reducing the rate of unemployment. Some government and non government organizations are assisting in the expansion of small business in our country. But unfortunately, small business is facing some unexpected problems. These problems include – lack of required knowledge and managerial skill of the owner, lack of adequate capital, inventory mismanagement, negligence of the inhabitants towards small business, unable to compete with large firms, lack of proper counseling and other forms of assistances and so on. As small business is having a crucial impact on the economic developed of our country , so government as well as non government institutions must come forward with comprehensive program to remove all the inconveniences. Because small business has gained a major portion of our country by contributing to personalized flexibility, creativity, specialization and performance.
SMALL BUSINESS
A small business is a business that is independently owned and operated, with a small number of employees and relatively low volume of sales. Small business is defined as those engaged in manufacturing or processing or service activities whose total fixed investment is limited to BDT 30 million (US$ 0.75 million), while cottage industries are those engaged in manufacturing or servicing and generally run by family members with a total investment limited to Tk. 0.5 million (US$ 12,500) only. The legal definition of “small” often varies by country and industry, but is generally under 100 employees in the United States and under 50 employees in the European Union. In comparison, the definition of mid-sized business by the number of employees is generally under 500 in the U.S. and 250 for the European Union. In Australia, a small business is defined as 1-19 employees and a medium business as 20-200 employees. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships.
In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition. These criteria are followed by the European Union, for instance (headcount, turnover and balance sheet totals). Small businesses are usually not dominant in their field of operation.
Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing etc.
The smallest businesses, often located in private homes, are called micro businesses (term used by international organizations such as the World Bank and the International Finance Corporation). The term “mom and pop business” is a common colloquial expression for a single-family operated business with few (or no) employees other than the owners.
Features of small business
Small business has some special characteristics. These characteristics have made small businesses different from other firms of businesses. The features of small businesses are as follows-
In case of small businesses, owners pay the most vital role as he\she performs all the vital responsibilities .s\he is the one who takes all the initiatives to start the business’s\he bears all the risk. The business is operated & managed by his or her\by the owner
It is easy to run the small business compared to large corporations. And there . is little or no delegation of authority. And the communication process is verbal.
Another important feature is that, there is no separate entity. Business & owner is uniform in this case.
In case of small business, employers are hired internally. Most of the employees are from the family & only few are hired.
Another important concern is financing .Small business is basically financed by the owner. Limited funds are borrowed. It has no access in share market.
As, the employees are mostly from the owner’s family & the number of the employees are few, so there remains a close relationship among owner & employees.
There is little scope of innovation. And also few scope for specialist services.
Small businesses are housed in small establishment. So infrastructural cost is low.
Small businesses are run by the owner. So control is easy.
In case of small business, it is easy to ensure security; compared to large corporations.
Small business is run by limited capital. So, size of investment is comparatively low.
Small business has limited market share. That is sales volume is small.
Another important concern is, use of technology. Modern equipments are not used to a large extent in case of small business.
The alone mentioned features have made small business different.
Stages of Small Business Development
Any precise quantitative estimate of the importance of small business in Bangladesh economy is precluded by non-availability of comprehensive statistical information about these industries at the national level. Latest BSCIC estimates suggest that there are currently 55,916 small industries and 511,612 cottage industries excluding handlooms under the section of small business. Including handlooms, the number of cottage units shoots up to 600,000 units indicating numerical abundance of small and cottage industries (SCIs) in Bangladesh. The most recent private sector survey estimates the contribution of the micro, small, and medium enterprises (MSMEs) is 20-25% of GDP. Regardless of the correct magnitude, SBs undoubtedly play a very important role in the economy of Bangladesh in terms of output, employment, and private sector activities. Together, the various categories of SBs are reported to contribute between 23% of total civilian employment. However, serious controversies surround their relative contribution to Bangladesh’s industrial output due to paucity of reliable information and different methods used to estimate the magnitude. The most commonly quoted figure by different sources (ADB, World Bank, Planning Commission and BIDS) relating to value added contributions of the SBs is seen to vary between 45-50% of the total manufacturing value added. Some specialized financial institutions are working actively in Bangladesh to provide SME facilities:
· Bangladesh Small & Cottage Industries Corporation (BSCIC)
- Bangladesh Industrial Technical Assistance Center (BITAC)
- Bangladesh Council for Scientific & Industrial Research (BCSIR)
- BASIC Bank
· NASCIB
· MIDAS
· CARITAS
· Commercial Banks (BRAC Bank, AB Bank, Dhaka Bank)
Prospects of Small Business in Bangladesh
Small business in Bangladesh has a significant prospect in respect of social, economical & cultural perspective. In previous & current year, we observe the owner of the small business; get auspicious result from conducting this business. Here we identify some reasons for the prospects of small business in Bangladesh.
Supporting Industry:
Small business work as a supporting industry for the large business unit. Large business develops products, select market and produce large scale of products which are distributed to the ultimate consumers by small business. To distribute large scale product small businesses like distributors, wholesale business, retail business etc. are developed over time.
Easy formation:
Easy start up & less rules ®ulation also help the growth of small business unit in Bangladesh. As we know to start up a business like small business the formal procedure is very easy compared to other country in world.
Cultural product demand:
Culture specifies norms and customs of a society. Bangladesh has a established culture and different cultural event. Bangladeshi people with their norms and in different cultural events use cultural products. This demand may be fulfilled more efficiently by small business rather than large business. For example, we use Punjabi and Shari in cultural events like Pohela Baishak, Pohela Falgun etc.
Unemployment effect:
A large number of unemployed people are playing a crucial role in establishing small business. In rural area seasonal unemployed people support the small business a lot. Current global recession also help a large number of skilled people who loss their jobs will contribute in small business with their skilled labor.
Skilled worker:
For starting small business expensive training program is not necessary. It also does not require modern technology. Workers can gather experience from their family members.
Women participation:
Women participation in outside work environment is still limited in our country because of social conservativeness. So women can easily engage in small business activities. As a result they can play a greater role for the development of their family as well as our country.
Local demand:
Local demand mainly created according to local culture, people’s idea modes and norms. Specific local demand can not be fulfilled by large industry. By fulfilling local demand small business can earn more profit
Location:
For establishing small business it is not so much important for managing area as large location. Most of the small businesses are established by the combination of family members. It is not necessary to buy or rent extra land for establishing small business.
Loan facility:
Different financial institutions provide financial support for the development of small business. Now a day’s different N.G.O’s also play a greater role for providing support to the small business.
Institutional Support in Small Business Unit
Bangladesh Small & Cottage Industries Corporation (BSCIC)
BSCIC is a promotional organization. It fosters the promotion and extension of Small and Cottage Industries (SCI) in the private sector in Bangladesh. Its H.Q. is in Dhaka having 4 Regional offices and 64 District offices. It is a Government statutory body.
Its Objectives are:
- To accelerate the growth of SCI and raise its productivity.
- To create employment opportunity, develop and provide marketing facilities and linkage industries.
- To arrange HRD facilities.
BSCIC Provides
- Pre investment counseling
- In plant advisory services
- Post investment extension services
- Developed Industrial plots for investors
BSCIC Supplies
- Technical information
- Designs and prototypes
- Industrial profiles
- Market information
BSCIC Assists in:
- Financing of SCI through DFIs & NCBs
- Selection of right type of machinery
- Adopting and adapting appropriate technology
- Studying investment feasibility
- Establishing sub- contracting linkages.
BSCIC Organizes
- Technical and management skill development training
- Fairs and exhibitions
- Buyer-seller meet
Bangladesh Industrial Technical Assistance Center (BITAC)
Bangladesh Industrial Technical Assistance Center (BITAC) was set up by government as an autonomous body under the Ministry of Industries.
Its mandate is to:
(a) Train industrial personnel to upgrade their skills;
(b) Render technical advice to industries;
(c) Disseminate modern know-how and improved techniques among industrial personnel;
(d) Manufacture and supply spare parts, tools and machines; and
(e) Develop equipments tools and processes. BITAC has since its birth played an important but limited role by facilitating transfer of technology to the industrial sector of the country besides developing human resources through its skill development training programs. However, it has suffered from chronic paucity of funds necessary for conducting training and modernization. This venerable organization with years of experience and goodwill should be reenergized and enabled to play its due role in the national economy.
Bangladesh Council for Scientific & Industrial Research (BCSIR)
Bangladesh Council for Scientific & Industrial Research (BCSIR) has also remained an underutilized organization in spite of its potential. Particularly, its regional establishments in Chittagong and Rajshahi should have been fully used to undertake research in locally available materials, which can be used as inputs by the SMEs. The agency’s research in the area of Soya foods and Spirulina for example has attracted attention of the public but there has been no sustained effort by BCSIR to remain in the public view. Years of neglect and fund starvation have stifled the growth of BCSIR. To the best of our information it has no useful linkage with the SME sector. Ways need to be explored to find mutually beneficial cooperation between the two.
Other Institutions
Over the years a number of semi government and private sector institutions have become active in the SME area. Some of these like the BASIC Bank, and just named
BCSIR are in the public sector. But more importantly NASCIB, MIDAS, CARITAS, Kumudini, Banglacraft to name a few are some of the organizations, who have appeared in the private sector and are contributing to promotion and development of the SMEs particularly those in the traditional sector. However, more SMEs should be encouraged and assisted to form their own associations and build-up links with the national bodies. The major non-government private sector support agencies in the field of finance include a large number of non-government microfinance organizations (NGOs).
Their work among the landless & asset less poor through infusion of microfinance has activated millions of miniscule SMEs across the country.
Special Incentives for SB in Bangladesh
Tax consideration:
Tax considerations specially tax holiday and income tax benefits for small business encourages potential entrepreneur to establish a small business. For small business govt. provide tax holiday for 5-10 years and entrepreneur’s income are also tax free. Tax holiday facilities will be available for five or seven years depending on location of the industrial enterprise. Tax holiday facilities will be provided in accordance with the existing laws. The period of such tax holiday will be calculated from the month of commencement of commercial production. Tax holiday certificate will be issued by NBR for the total tax holiday period within ninety day of submission of application.
Flexible rules & regulations:
Flexible in rules & regulation also assist the growth of small business in Bangladesh. For this flexibility small business unit may quickly start up their operation.Special incentives will be provided to encourage non-resident Bangladeshi (NRSs) for investment. In case of their investment in Bangladesh, they will enjoy facilities similar to those given to the foreign investors.
Consultancy support:
Banks and N.G.O’s provide financial support as well as counseling facilities. They monitor the performance of the small business. If their performance is not satisfactory financial institutions provide logistic support in that case..
Reviewing performance:
In order to eliminate any unfair competition, rationalization will be undertaken keeping in view the interests of the entrepreneurs as well as consumers. Bangladesh Tariff commission will regularly review such cases and recommend necessary measures.
Constraints of SB in Bangladesh
Quality and Standards:
Bangladesh has failed to ensure the quality of products and services to consumers not only in the domestic market but also in international markets. There is no national quality policy and adequate support systems that provide assistance to all enterprises to understand the principles of quality and to develop quality consciousness in business behavior. Currently, the Bangladesh Standards and Testing Institution (BSTI) formulates national standards of industrial, food, and chemical products. However, the most important problem is that BSTI lacks credibility.
Marketing:
SBs in Bangladesh, especially the small enterprises, do not have enough marketingcapability and network. An overwhelming majority of small firms do not have resources to be invested in marketing. Advertisement is an important determinant ofdemand but SBs in Bangladesh in most cases are not in a position to use this as amarketing tool. Export-oriented SBs have very little marketing activities and mostof them try to survive by linking up with multinational buyers or setting upsubcontracting relationships with them.
Investment and Working Capital:
One of the most important problems affecting supply is the access to finance. SBsneed finance to enable them undertake productive investment in order to expand theirbusiness, to introduce new products, and to market them. Various survey and microstudies in Bangladesh have identified access to finance as the main problem facingthe SBs
Shortage of Skilled Workers:
Although Bangladesh is a labor abundant country, shortage of skilled workforce isperceived to be a major constraint for manufacturing production. This problem isparticularly acute for medium scale export oriented enterprises. Manufacturing goodsnow overwhelmingly dominate Bangladesh’s export basket, but a significantproportion of it comprises very low domestic value addition because of limitedbackward linkage in the RMG sector, which will require skilled manpower.Therefore, supply capacity is preconditioned by availability of skilled workers.
Lack of entrepreneurship and management skills:
Most owner-managers and entrepreneurs often lack wider managerial skills thathinder their long-term success. Strategic planning, medium to long-term vision,marketing, commitment to quality, knowledge of quality systems, communicating inforeign languages, cash-flow management, information technology are a few critical elements of management required to meet challenges of the market economy, especially in the international market environment. In such a complex setting since it is not possible for an individual to muster all of these qualities, firms make division ofLabor.
Physical Infrastructure:
The state of physical infrastructure is weak in Bangladesh. It is evidenced that incountries with poor infrastructure, business must devote more resources to such tasksas acquiring information, procuring inputs, and getting their products to market.There are two dimensions of poor infrastructure – oneis the unavailability of a certain service or utility (such as telephone, water,electricity, roads and highways, etc.) and the other is the unreliability of the servicesprovided. In Bangladesh there are problems on both fronts and together underminesthe competitiveness of SBs.
Transport costs:
In some recent survey finds that transport to be a biggerproblem in Bangladesh than in some comparator countries. Three factors interact toaccentuate this problem. First, the recent research works on economic geography andinternational trade suggest that unfavorable geographical locations (e.g. distance)increase the costs of both export and import trade relative to countries with morefavorable geographical characteristics.
Geographical Disadvantage:
Geographically Bangladesh is away from more lucrative market of world like USA, Europe. The geographical disadvantage of being farther away from its North American and EUmarkets compared to many other competitors. Inefficient and corrupt ports and inland transportation increase the cost of production substantially.
Trade Policy and Incentives:
Bangladesh’s trade policy underwent a radical change particularly in the decade ofthe 1990s. Liberalization of industrial and trade regimes along with globalization are likely to have had significant effects on Bangladesh’s SBs
Lack of information:
Lack of informationis a major constraint to market development of Bangladesh’sSBs. Trade information is more than ever an element of competitiveness duemainly to three reasons:
(i) Assessing market trends and characteristics,
(ii) Understanding the market and new market access conditions, and
(iii) Identifying new market opportunities and potential trading partners. The Internet has introduced a new way of doing business especially in the field of commercial operations – selling and buying, advertisement, servicing and training.
Suggestions
Here we are giving some suggestions that may be helpful to improve the Small Business sector in Bangladesh. As capital is the major problem for Small Business development in Bangladesh special emphasis should be put here. Commercial banks should finance Small Business by giving them loan in low interest and for long term.
Role of N.G.O.s: NGOs are very active in this sector. There activity should be spending all over the country.
Assistance of Government: Government should make definite plan to boost up this sector. Youth development department should be more activate. Their fund needs to be increased and rules should be more flexible.
Ministry for Small Business: Special ministry can be made to coordinate all this.
Subsidy: Government can give some subsidies to boost up this sector.
Flexibility in Case of Tax: Taxation rules should be more flexible for Small Business.
Availability of Raw Material: It should be assured that the Small Business firms will get sufficient raw materials in lower cost.
Removal of Political &Social Inconsistency: Political and social instability should be maintained. Terrorism must be sustained and keep under control.
Availability of other Facilities: It must be assured that the Small Business firms will get public utility service connection without any delay and bribe.
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