Despite the unprecedented COVID-19 shock, Bangladesh is moving forward with a 5.2% GDP growth in FY19-20 while SMEs contribute 25% to the GDP. As Bangladesh speeds its way towards the status of a middle-income country, it must strengthen this crucial sector in the economy. An effective way to accomplish this task is to adopt a cluster-based approach.
While SMEs have been playing a pivotal role in moving Bangladesh forward, the core problem for SMEs to sustain has always remained lack of access to finance. Cluster-based development intervention can simplify SME financing, intensive monitoring and government facilitation as well as can ensure maximum utilization of limited resources.
In Bangladesh, there are about 8.1 million micro, small, medium enterprises with around 2.3 million of them operating in urban areas and nearly 5.8 million locating in rural areas. Among the total active enterprises, 32.2% operate in Dhaka followed by the second largest city of Chattogram with 17.1%. The percentages confirm that most enterprises are concentrated in Dhaka and Chattogram; however, the majority of enterprises are located in rural areas playing a significant role in rural development.
The geographic proximity of SME clusters in Bangladesh has remained long overlooked by the policymakers until recently. According to the SME Foundation’s (SMEF) definition, “Cluster is a concentration of 50 or above enterprises producing similar products or services and is situated within an adjoining geographical location of 3-5 kilometers radius and having common strengths, weaknesses, opportunities and threats.
SMEF has identified 177 SME clusters in 51 districts with approximately 69,902 enterprises employing around 1,937,809 workforces. However, cluster development in Bangladesh has only advanced to the identification of the cluster, the very first phase of the process. This article attempts to map the existing and potential SME clusters in the upazilas of Dhaka district.
Dhaka Metropolitan Area (DMP)
In Dhaka Metropolitan Area, there are multiple light engineering clusters primarily located in old Dhaka. Manufacturers of plastic goods, PVC pipe, plastic containers and other synthetics are clustered in Chawk Bazar, Lalbagh, Islampur and Tejgaon areas.
There are around 500 metalworking shops in Sutrapur and 280 electronics & electrical goods producers in Jatrabari. Rubber goods, bi-cycle and pad cabs are manufactured in Bongshal while machine tools, light fittings, transport accessories, tin containers, tin cookeries, furnaces, distribution boxes, welding machinery, compressors etc. are produced in Nawabpur.
Shyampur has multiple clusters of re-rolling mills, casting units, foundries, manufacturing of hardware materials, door bolts, hinges, agricultural and dredging pumps. Besides, the household materials cluster is functioning in Tipu Sultan Road and the RMG spares cluster in Mirpur and Sadarghat.
The renowned Mirpur Benarasi Palli is the largest cottage-based handloom industry in Dhaka. Furthermore, cluster development can be initiated for the custom-made shoe market in Pallabi, Mirpur. The 40-year-old Nilkhet Book Market with over 1700 shops is a significant location for both new and second-hand books, education materials, printing and publication and stationaries. Cluster development policies can strengthen their ecosystem and upgrade their business models.
Due to the relocation of tanneries in the Savar Leather Industrial Park, the area is concentrated with around 600 SMEs offering peripheral services to the sector. Apart from that, Savar is primarily focused on livestock and manufacturing industries; however, two new lesser-known industries have been making their presence; flower farming and metal jewelry.
A cluster of villages in Birulia union has grown into a hotspot for rose farming particularly for land suitability making flower farming the most popular form of business in the area. Around 35,000 people are engaged in rose cultivation and the numbers are on increase due to the growing demand for the flower in the domestic market.
In Bhakurta union, about 10,000 people earn their livelihood by making metal jewelry. What started as an attempt to save the tradition of their ancestors, has now spread to adjacent villages of Keraniganj Upazila. The cottage jewelry industry makes ornaments worth BDT 15 million in a year and can meet the local demand for jewelry.
The cottage pottery industry in Savar has lost its prominence over the years due to a lack of government facilitation. The local demand may have been replaced with other options but pottery goods hold huge demand abroad for its artistic effects. The potential for garments backward linkage industries, hardware business, beauty parlor, the business of agro-products, agricultural equipment and electric tools, and river transport also require to be assessed to be eligible for SME finances.
The shipbuilding industry has stayed vibrant in Keraniganj for the last 57 years. According to the Bangladesh Dockyard and Shipyard Owners Association (BDSOA), about 80 new ships are built annually and 400 to 500 ships are repaired at the 27 dockyards in the area. Bangladesh Bank has also recognized the industry to provide SME credit facilities.
Moreover, Keraniganj is home to more than 4000 RMG factories with more than 5,000 shops and 250 malls engaging around 0.2 million people are employed in the factories and shops of Keraniganj. Covering an area of more than one kilometer between Agarnagar and Kaliganj, the apparel hub meets around 80 percent of the local demand for denim and woven items. In addition, beaconing hopes of the industrial revolution in the country, Zinjira has evolved as a noteworthy location for the electronics and light engineering sector.
Dhamrai is the primary center for the metal casting and brassware industry, which is currently in the doldrums. Local demands for these artisans have gradually dwindled due to stiff competition from inexpensive machine-made aluminum and plastic products. The cottage pottery industry in Dhamrai illustrates a similar scenario. However, the market has huge export potential that can be capitalized through government initiatives and sufficient training programs. Alongside these, Bangladesh Bank has identified some potential sectors for SME credit including rice mills, marketing of agro-products, poultry, dairy farm and manufacturing of water transport.
Historically, Dohar is popular for its yarn and handloom industry. Bangladesh Handloom Board has also documented Dohar and Keraniganj as important locations for lungi production. Fulfilling the local demand, Bangladesh earns around BDT 1,220 crore annually by exporting about two crore pieces of lungi in 25 countries. Apart from that, the shipbuilding industry, training institutes for non-resident wage earners, fishery and hardware business were identified as potential sectors for SME credit by Bangladesh Bank.
To draw investors and promote the SMEs in Nawabganj the government has approved to establish a new economic zone (EZ) in the respective area. Most of the SMEs in this Upazila are chemical, plastic and light engineering industries. It has been proposed that special benefits will be provided for these sectors. Corrugated iron sheets and construction materials, fishery, yarn and handloom industry are promising sectors for SME credit.
Key Concerns of Non-clustered SMEs
SMEs in Bangladesh stumble upon a myriad of problems while access to finance tops the list. According to a report from the Bangladesh Institute of Development Studies, clustered industries in Bangladesh are more capital intensive and have greater access to SME loans in comparison to non-clustered SMEs. As a result, non-clustered SMEs have to rely on external sources for monetary aid. Moreover, it is easier to monitor SME financing in clustered SMEs.
Technology adoption is also faster in clustered SMEs rather than the non-clustered ones Individual SMEs often lack financial records for which banks struggle to verify the legitimacy of the business. Lack of a strong networking system, most of the SMEs fail to establish a linkage with larger industries.
During the lockdown, lack of technology integration in SMEs such as digital financial services, disbursement of SME loans has been a tough task to fulfill. Consequently, a large number of SMEs found themselves in a severe cash crisis while some had to shut their operations.
Cluster Development for Sustainable SMEs
The SME Policy 2019 has highlighted multiple cluster development policies; however, the execution of these policies have barely advanced. According to the SME Policy 2019, cluster industries should have witnessed infrastructure development, the establishment of incubation centers and common facility centers, training programs for potential entrepreneurs in clusters by June 2020. Owing to the pandemic, the progress further slowed down. With the economy recovering, the implementation of these policies should be highly prioritized.
SME clusters should be introduced to digitized documentation and loan applications. Digitization of the supply chain will strengthen their business models enabling linkage with larger industries. Moreover, FinTech and Digital Financial Services should be used to streamline SME financing. Bringing them under the umbrella of formal financial services will drive financial inclusion in the country.
Bangladesh Bank has recently introduced a credit guarantee system to aid SMEs but its effectiveness again depends on the execution of existing policies. Needless to say, industry-specific training programs can play a pivotal role to improve the skills of the workforce and produce high-value services. To cope with LDC graduation in the near future, it needs to be ensured that SMEs in Bangladesh have sustainability. A strong focus on cluster development is thus of extreme urgency.
Ishrat Jahan Holy, Content Writer and Silvia Rozario, Senior Business Consultant at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]
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