COVID-19: Impact on Bangladesh’s SME Landscape

    LightCastle Analytics Wing
    LightCastle Analytics Wing

    SMEs [1] are the bloodline of Bangladesh’s economy creating employment for 7.8 million [2] people directly and providing livelihood for 31.2 million [3]

    SMEs contribute 25% to our GDP but have the potential to contribute more. In our peer economies – Vietnam, Srilanka and Cambodia, SME contribution to GDP is 40%, 52% & 58% respectively.

    The COVID-19 pandemic has affected all spheres of life and business, but the hardest punch hit the already vulnerable SMEs. The economic distress has added to existing problems such as lack of access to finance, poor market linkage, absence of skilled labour, and lack of export market.

    According to the Asian Development Bank, the SMEs in Bangladesh account for 70 to 80% of the non-agricultural sector employment. 40% of the manufacturing output is also by SMEs. Presently more than 6 million SMEs and micro-enterprises are operational in Bangladesh and they are constantly striving to upgrade the lives of many. (RRP Sector Assessment, ADB) [4]

    Hardest punch received by the SMEs as they are dependent on a short cash cycle which has been affected as a result of supply chain disruption and loss of sales

    To gauge the gravity of the crisis, LightCastle Partners and Sheba.xyz joined hands to conduct a study of the SME sector. Primary research spanning 230 respondents was conducted across all the eight divisions. Major industries include agriculture, poultry, dairy, fisheries, jute diversified product, retail store, food processing, & services (tailoring, electrical, laundry, mobile recharge & MFS shop).  From the research, some insightful responses are presented below:

    Source: LightCastle Partners and Sheba.xyz Primary Survey conducted on April 6-8, 2020 (n=230)
    • Half of the respondents had to completely halt their business operations
    • Zero output due to the unavailability of raw materials and lack of scope to sell their outputs.
    • 28% of the respondents have seen a drastic decrease in their revenue by over 50%
    • Cash reserves are running dry or with their debtors.
    • Services industry took a heavy hit as they are unable to provide their services and generate revenue.
    Source: LightCastle Partners Primary Survey conducted on April 6-8, 2020 (n=30)

    42% of enterprises have cut back their marketing expenditure while 23% have done the same in distribution. This implies businesses are taking initial cuts on these two fronts to save some funds. It is also worth mentioning that 32% of the enterprises operated on their own facility – hence did not incur any rental expenses.

    With respect to salary, 24% have cut down either to 0 or less than 10%. This indicates employees are already being laid off. This engenders concern as SMEs are one of the biggest employers in Bangladesh — they going down this route could end up with thousands of people becoming unemployed in a matter of months.

    Source: LightCastle Partners and Sheba.xyz Primary Survey conducted on April 6-8, 2020 (n=230)

    Due to the current lockdown, the enterprises not related to emergency food and medicine are suffering immensely. SMEs related to services and production of generic items such as jute, handicrafts, light engineering among others have been hit the hardest as they are unable to maintain liquidity and operational activities. According to the survey, 68% SMEs reported that they will have to permanently shut down their business if the lockdown persists for more than 4 months.

    Source: LightCastle Partners and Sheba.xyz Primary Survey conducted on April 6-8, 2020 (n=230)
    • About half of the SMEs (46%) will lay off more than 50% of their staff in a bid to cut costs
    • In other contexts too we see that at an aggregate 31% of the
      enterprises will go for some sort of layoff (1-50% of staff) to
      minimize costs and keep their businesses afloat
    • On a positive note, we also see that 23% of enterprises will
      not go for any type of layoff — indicating these enterprises
      have enough cash reserves to tackle rainy days

    Government of Bangladesh’s response to the crisis compared to other economies

    Source: Bangladesh Bank, Media Room Circulars & IMF,Policy Responses to Covid-19; Retrieved on 24 April, 2020

    Before delving deeper into the current state of Bangladesh, let’s take a look at what our neighbouring countries are doing. India has unveiled a $34 billion aid stimulus package, the primary focus has been to back workers in the informal sectors who have experienced a steep decline in income or have lost jobs. Malaysia has pledged a $2.31 billion aid package for small businesses including startups. Indonesia cleared an aid package worth $8.7 billion, providing for a range of fiscal and non-fiscal incentives in addition to a special stimulus for startups and small and medium-sized (SMEs) businesses. Thailand unveiled an aid stimulus package worth $15.4 billion that will be used for helping SMEs, especially tourism-related businesses; allowances worth $305 million is already approved.

    In a ramped-up effort with stimulus packages, Bangladesh has allocated a total of Tk 93 thousand crores (USD 10.9 BN) as a stimulus package to revamp the economy. As part of this, small businesses in rural areas will get subsidized loans of Tk 3,000 crore under the Tk 20,000 crore stimulus package announced by the government to support SMEs. Moreover, on April 12, a new stimulus package was unveiled worth Tk 5,000 crore to provide financial assistance to small and medium farmers in rural areas for boosting agricultural production facing the fallout of COVID-19. To this end, agro loans were reduced to 4% from the previous 5% interest rate.

    To further help the daily wage earners, GoB has allocated Tk 760 crore (Tk 2,000 in cash to each of about 40 lakh families whose breadwinners have lost jobs because of lockdown), for day labourers, rickshaw or van-pullers, mechanics, construction workers, newspaper hawkers, hotel workers.

    Concessional loan, government support and digital transformation will help SMEs’ survival

    “Prevention is better than cure” — is a quote familiar to most of us. To date, there is no cure for COVID-19 and the only way left for us is prevention. The lockdown is mandatory for our survival — with the current healthcare infrastructure it will be painstakingly difficult for us to fight and win against this virus at a mass scale level.

    Keeping this into consideration, what should be the way forward for the government? We propose some concrete recommendations.

    Source: LightCastle Partners and Sheba.xyz Primary Survey conducted on April 6-8, 2020 (n=230)

    Concessional financing: From the current international practices as well from our study we observed that 70% of the respondents asked for soft loans/working capital loans to survive the crisis. Banks and financial institutions may sanction up to BDT 25 lacs to women entrepreneurs against the personal guarantee. Entrepreneurs’ credit limit may be ranged from BDT 50,000 to BDT 50 lacs.

    However, current stimulus packages that are applicable through banks depend on existing relationships with SMEs which many of the smaller players won’t have. That means they might not be able to avail these concessional loans. Moreover, the banking sector is going through a liquidity crisis with many of them having stretched NPLs (Non-Performing Loans); hence they might not be able to fully disburse the stimulus. Furthermore, they would be more willing to fund their existing clients rather than SMEs which require the most. Here again, we need a more ecosystem-centric approach, where MFIs whose current portfolio consists of 37% SME loan [5] and has a wider reach, can come into play.

    Tax reductions and grants: The government should be reducing the tax rate and offering grants to businesses in hard-hit sectors in an effort to help reduce costs and boost the bottom line. Moreover, specifically for SMEs, VAT exemption on revenue and expenses for current and next fiscal year, exemption [or deferral] of withholding tax payments can be a timely initiative. By lower/exempting tax and providing grants, the impact of plunging aggregate demand as a result of the recession could be minimized.

    Digital Transformation: Within the scope of the government’s financial assistance, the SMEs should try to digitize their business operations to the best of their ability. Since the lockdown is forcing people to stay inside homes, it is imperative that businesses switch to online channels. Linking up with mobile wallets, MFS (Mobile Financial Service), DFS (Digital Financial Service), and Digital Supply Chain Management will help towards achieving medium-term solutions to tackle the extent of the crisis.

    • Digital Financial Services: Cashless transactions could transform the way SMEs conduct business. It widens the possibilities of reaching customers across the country. Mobile financial services like bKash, Rocket, UCash, Nagad opened new doors in transferring, transacting and storing money digitally instead of cash. Mobile Application & Web-based financial services of banks provide faster and secured transactions with little or no human intervention. It solves the limitations of MFS as online-based banking services have greater transaction limits suitable for SMEs trading in large volumes. Nexus Pay (Dutch Bangla Bank), EBL Skybanking, BRAC Bank Mobile are a few of the leading mobile-based Digital Banking applications.
    • Digital Supply Chain Management: Supply chains having web-enabled capabilities render enterprises the ability to source and sell on digital platforms. This not only increases the potential market by folds but also ensures a seamless transaction and traceability from the factory to the consumers’ doorstep.
    • Digital Credit: Traditionally, large banks that have had controlled capital investments in Bangladesh. Most financial institutions have been reluctant to lend beyond large corporates. One prevalent reason is assessing the creditworthiness of SMEs has been seen by banks as more difficult and expensive. Apart from providing a platform to SMEs for selling their products/services — Sheba.xyz & Shopup also provide digital credit to SMEs and smaller enterprises, which are underserved by traditional banks. They are also leveraging digital platforms to expedite credit assessments.

    In the short term, e-commerce giants like Chaldal, Daraz, Pickaboo have been experiencing tremendous growth due to the lockdown; sometimes to an extent that leaves them unable to fulfil demand because of a supply shortage. Therefore, this brings great opportunities for rural SMEs; those who will be able to adapt will survive.

    SMEs create livelihoods and if they fail we will go into deeper economic shock with more and more people coming below the poverty line. Hence we all need to work together to support and uplift the sector. On the off chance that there is one thing that COVID-19 has shown unmistakably is that interest in digitization is not a luxury. Innovation is not only to survive this crisis but it is to create a sustainable business, which will be resilient and evolving in the ‘new normal’.

    Authors: Omar Farhan Khan, Business Consultant; Asif Newaz, Business Analyst; LightCastle Partners. For any queries, you can reach us at [email protected] and [email protected]

    The LightCastle team has been analyzing the macro and industry level picture and possible impacts wrought about by the Covid-19 crisis. Over the following days, we’ll be covering the major sectors shedding light on the possible short and long term ramifications of the global pandemic. Read all the articles in the series.

    Acknowledgment

    This study would not have been possible without our collaborating partner Sheba.xyz. Special thanks to the wonderful people from Sheba.xyz, Adnan Halim Imtiaz, CEO; Md. Samiul Kabir, Chief Strategy Officer; & Md. Abdur Rahman Tanmoy, AVP, Head of Micro Small Medium Enterprise (MSME).  Thanks to our colleagues from LightCastle Partners, Bijon Islam, CEO; & Silvia Rozario, Business Consultant. Sheba.xyz and LightCastle have come together to develop COV19 SME Impact and Way forward series.

    References

    • 1. Definitions of small and medium enterprises (SME) as per the National Industrial Policy Order 2010
    • 2. SME Foundation
    • 3. Household Income and Expenditure Survey (HIES) 2016, Bangladesh Bureau of Statistics (BBS)
    • 4. RRP Sector Assessment (Summary): Finance (Small And Medium-sized Enterprise Finance And Leasing), Second SME Development Project, ADB
    • 5. MRA Annual Report 2016-2017
    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.