Asia Small and Medium-Sized Enterprise Monitor 2021

Volume I—Country and Regional Reviews

,

• Publisher: Asian Development Bank
• Year: 2021
• Print ISBN: 9789292691745
• eBook ISBN: 9789292691752
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

The Asia Small and Medium-Sized Enterprise Monitor provides data and analysis as a resource for evidence-based policy design. This year's edition focuses on South Asia. This first volume reviews micro, small, and medium-sized enterprises (MSMEs) at the country and regional levels. It covers Bangladesh, India, Nepal, Pakistan, and Sri Lanka, and examines MSME development, access to finance, and policies and regulations. It notes that revitalizing MSMEs by channeling more growth capital to them will be key to a resilient economic recovery from the pandemic. It highlights opportunities in formalizing MSMEs and connecting them to international markets, expanding digital skills, fostering technology-based start-ups, and supporting youth and women entrepreneurs.

Country Review

Bangladesh

Overview

The economy decelerated to 3.5% growth in fiscal year (FY) 2020 (ended 30 June 2020) from 8.2% in FY2019. Nonetheless, it showed resiliency despite the adverse effects of the coronavirus disease (COVID-19) pandemic. Supported by large government stimulus packages to curb the pandemic’s impact, the economy quickly shifted to recovery in 2021 with estimated growth of 5.5% in FY2021, although still below its pre-pandemic level. Bangladesh was in nationwide lockdown during March–May 2020, relatively soon after the pandemic started, causing many enterprises to shut down and forcing revenue losses and unemployment. Businesses could reopen after the first lockdown, but the government imposed lockdowns again in July–August 2021 due to the Delta coronavirus variant. The uncertainty surrounding the pandemic remains the main downside risk for short-term economic growth.

Micro, small, and medium-sized enterprises (MSMEs), including cottage industries, are critical to economic growth, covering 99.97% of all enterprises—they absorb around 86% of the labor force. Cottage and small enterprises generate around 16% of manufacturing gross value added, still small but growing. They remain the group most hurt by the pandemic but have shown strong resilience nonetheless. Strengthening MSMEs is key to further boosting the national economy.

Access to finance underpins the growth of MSMEs. With the central bank setting lending targets, commercial bank credit to MSMEs has been steadily rising at a compound annual growth rate (CAGR) of 13.0% from 2010 to 2020, benefitting 0.8 million MSME borrowers by end-2020. As over 80% of MSME credit is for urban establishments, credit to borrowers in rural areas should be strengthened. There are several refinancing schemes for MSMEs to help women and small entrepreneurs continue to access financing.

The nonbank finance industry is an important substitute for bank credit to MSMEs. The growth of lending by central bank-regulated nonbank finance institutions (NBFIs) has been decelerating with increased concentration on manufacturing and rising nonperforming loan (NPL) ratios since 2018. Meanwhile, the microfinance market has grown steadily. The Palli Karma-Sahayak Foundation (PKSF), a wholesale lending institution, offers microenterprise loans in rural and poor areas through partner organizations, increasing sharply since 2018, helping satisfy financing demand from rural MSMEs. The two stock exchanges created a specialized equity market for small and medium-sized enterprises (SMEs) in 2019 with concessional listing requirements.

The SME Policy 2019 is the national framework for MSME development, raising their target contribution to gross domestic product (GDP) to 32% by 2024. The government launched a long-term national development strategy “Perspective Plan of Bangladesh 2021–2041” in 2020 to implement its core national development framework—Vision 2041. It promotes inclusive growth by enhancing MSME dynamism and access to finance. The central bank launched a National Financial Inclusion Strategy for 2020–2024, paying special attention to digitization.

The government sees MSMEs as pivotal for sustainable growth. Thus, MSME development strategies have been formulated to comprehensively cover both financial and nonfinancial agendas with time-bound goals and action plans. Well-organized intragovernmental coordination will be key to successfully implement the strategies. Given the social constraints brought on by the pandemic, MSME digitalization continues to be a policy priority, as well as formalizing informal businesses, opening international markets to MSMEs, and developing youth and women entrepreneurships. From a long-term perspective, more attention should be given to allowing greater capital market access to MSMEs for their growth capital.

1. COVID-19 Impact on MSMEs

The country’s high growth momentum was stunted by the COVID-19 pandemic in 2020. The government acted quickly to contain the pandemic, implementing a nationwide lockdown from 26 March to 30 May 2020.¹⁸ It significantly reduced all business activities, including those of MSMEs.

The BRAC Institute of Governance and Development (BIGD), in collaboration with Monash University, conducted a survey to assess the impact of the lockdown on MSMEs before, during, and after the restrictions. The survey interviewed 1,960 MSMEs in July 2020, the majority of which were in light engineering. The initial findings showed sales income dropped sharply—by 76% compared with pre-COVID-19 levels (Figure 3.1). Operating costs fell by 52%, but exceeded sales income by 1.6 times. The result was that profits fell by 96%. After the lockdown was lifted, businesses started reopening, with sales income increasing by 89% and costs up by 15%. This generated a 179% profit increase compared with the lockdown period. However, profitability of the survey respondents remained below pre-lockdown levels.

Figure 3.1: Change in MSME Revenue and Employment (January–May 2019, 2020)

MSME = micro, small and medium-sized enterprise.

Notes: Sales value is the value of goods and services sold in the past month. Operating cost is the total cost of business in the past month. Survey respondents from 1,960 micro and small firms (including light engineering) through interviews. Survey was conducted on 14–23 July 2020.

Source: Recomposed from survey data on BRAC Institute of Governance and Development. 2020. The Impact of COVID-19 Pandemic on Small and Medium Enterprises in Bangladesh. December.

By sector, services that require physical contact, such as clothing/tailoring shops and beauty parlors, were hardest hit by low sales during the lockdown due to the difficulty in keeping social distancing and low demand for non-essential services. Interestingly, firms holding more capital (Tk2,246,000 [$26,485]) had a smaller drop in sales (25.4% below pre-COVID-19 levels) than firms with less funds (Tk235,000 [$2,771], 48.6%).¹⁹

The critical challenges for MSMEs during the lockdown was low demand of non-essential products and services (reduced orders), running out of funds (difficulty in paying salaries and maintaining business operations), and no sales/income (due to the shutdown of operations) (BIGD survey). The majority of those surveyed faced a shortage of raw materials, but they responded by raising prices, looking for new procurement channels, and delaying delivery of goods. Despite financial assistance to MSMEs from government stimulus, MSME access to finance remained limited, especially in services. The BIGD survey found the main reason was that many were unaware government assistance was available.

Another survey by the BRAC Bank was conducted by phone in November–December 2020 with 6,030 responses. The survey results showed around 20%–30% had their businesses open, but that 40%–70% had been closed during the lockdown. Once the lockdown was lifted, businesses quickly moved to reopen, with 99% operating on 3 December 2020. Sales dropped by about half during the lockdown (54% in April and 47% in May 2020) compared with pre-pandemic levels. By sector, hardest hit were textiles and accessories (16% in May 2020), auto parts/machineries (16%), steel and sheets (16%), and leather and footwear (21%). After the lockdown, sales recovered gradually, to 73% by November–December 2020. The survey said 60% of SME respondents reduced costs, while 20% considered new bank loans to revive their business. Less than 7% considered digitizing their business to e-commerce platforms.

The National Association of Small and Cottage Industries of Bangladesh (NASCIB) focused on women entrepreneurs to assess the pandemic effects.²⁰ The survey interviewed 55 women entrepreneurs by phone. After the government announced the lockdown in March 2020, 64% of their businesses remained closed for 5 months, 33% had no sales or orders. Another 60% reported a 75% decrease in sales. Some 40% had no income while another 42% reported income fell by 75%. Due to the disruptions, 16% could not pay salaries, while about 80% paid partially. Thus, 71% reported their employees faced financial problems. Women entrepreneurs relied heavily on informal financial sources (71% borrowed from friends) to run or reopen their business during the pandemic. Only 4% of respondents obtained bank loans.

A series of COVID-19 impact studies also suggest the lockdown seriously limited MSMEs’ business activities, immediately reducing incomes and profits, especially for smaller firms engaged in personal-contact-based services. Again, among the challenges were no or little demand for their products and services and a lack of funds to maintain or reopen their businesses. Women-owned firms were more seriously affected in sales, income, and funding. Some reports mentioned low awareness of government MSME assistance programs. Thus the government needs to dissemina...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Contents
• Tables, Figures, and Boxes
• Foreword
• Acknowledgments
• Data Contributors
• Abbreviations
• Rationale and Methodology
• Highlights
• Regional Review: South Asia
• Country Reviews
• Appendix: Regional Data Tables
• Footnotes
• Back Cover