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ADB to Help Foster Development of SME Sector in Bangladesh

MANILA, PHILIPPINES (21 December 2004) - The Asian Development Bank (ADB) will support efforts of the Government of Bangladesh to foster development of the country's small and medium enterprise (SME) sector, through an assistance package approved totaling US$50 million.

The SME Sector Development Program will help strengthen the policy environment for SMEs and improve their access to credit and support services, to enable the sector to attain its full potential for contributing to sustainable economic growth and poverty reduction.

It is generally recognized that the country's estimated 6 million SMEs and microenterprises - firms of less than 100 employees - have a significant role in generating growth and jobs.

Bangladesh's SME sector contributed up to 25% of Bangladesh's gross domestic product last year, about 40% of gross manufacturing output, 80% of industrial jobs, and around 25% of the total labor force in Bangladesh.

However, SMEs have not been able to fully develop due to various constraints, such as lack of medium to long-term credit; limited access to market opportunities, technology, expertise, and informationlack of suitable incentives; inefficient and limited outreach of government services; and weak capacity among SME entrepreneurs in managing functional areas of business.

"Given the critical role of the sector, a holistic approach to SME development is needed with targeted policy measures to facilitate access and address specific constraints," says Renato Limjoco, an ADB Lead Financial Sector Specialist.

The program complements the Bangladesh Government's agenda of developing the private sector as the engine of growth for the economy and donor interventions to develop the enabling environment for the private sector. It will also help facilitate the flow of private investments into the SME sector in parallel with ADB's interventions to promote good governance and development of the financial sector, particularly rural credit.

The program consists of four parts:

• A program loan of $15 million designed to establish a SME policy and development framework; establish institutional structure and mechanisms to support the sector; define government support to SMEs, including rationalizing incentive and tax structure for SME; and improve SME access to various services;
• A project loan of $30 million that will be used as a contribution to the Small Enterprise Fund (SEF) which provides loans to small enterprises, or the so-called "missing middle", that have graduated from microcredit programs but not large enough to fall within the scope of bank lending;
• A technical assistance (TA) loan of $5 million to provide technical advice and resources needed to build capacity and assist in program implementation; and
• A TA grant of $600,000 for assisting the Government in implementing and coordinating the program and for result monitoring. The Government will contribute $150,000 equivalent toward the TA cost.

As part of the program, a gender action plan has also been prepared to target women entrepreneurs and foster their participation in policy-making, training programs, and credit fund allocations.

The three loans come from ADB's concessional Asian Development Fund, with interest set at 1.0% per annum during the grace period and 1.5% per annum for the rest of the term.

The program loan has a 24-year term, including a grace period of eight years. The project loan and technical assistance loan both carry a 32-year term including grace period of eight years. The program loan closing date is expected to be end-2007.

The project loan will contribute to SEF whose fund size is $56.7 million. The Bangladesh Government is providing $16.7 million and the World Bank $10 million. The completion date of the project loan is expected in June 2010. The TA loan completion date is expected in December 2007.

For its part, the Bangladesh government will contribute US$3.46 million to the TA loan. It will also contribute $150,000 equivalent to the TA grant through the provision of counterpart staff, offices, transportation, and incidental expenses.

The executing agency for all loans and grants is the Ministry of Finance, Finance Division.

ADB is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 63 members - 45 from the region. In 2003, it approved loans and technical assistance amounting to US$6.1 billion and US$177 million, respectively.

More at adb.org/media

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