Small and Medium Enterprises’ Financing by the Commercial Banks in Bangladesh: An Evaluation

Abstract

Small and Medium Enterprises (SMEs) are of growing importance for all national economies worldwide. SMEs all over the world have been playing a vital role in promoting economic development, improving structure facilities, reducing hunger and poverty, making potential contribution to the overall industry, generating employment, achieving millennium development goals, eradicating gender inequality and increasing women empowerment. Nowadays, it is broadly admitted that SMEs have been playing an elementary role with regard to thorough industrialization by means of entrepreneurship development. Industrialization’s connection to poverty mitigation is by means of – exaggerating the economic growth rate of the country, ennobling of the efficiency of the labor in employment, delivering job opportunity to the unemployed. As a result, SME in Bangladesh adopt numerous strategies to raise themselves and the economy of the country. This sector requires lower energy supply, lower infrastructure facilities and imposes less environmental risk. They contribute towards better utilization of local resources and skills that might otherwise remain unutilized. One of the most pressing troubles of SMEs to make sure their survival and development is accessibility to external finance. The research is empirical in nature. Quantitative approach has been drawn on to find out contribution to GDP, financing gap in Bangladesh. Research reasoning approach of the research is deductive. Since it is quantitative in nature, statistical and mathematical techniques form an integral part of the positivist research paradigm. The primary data in this study have been collected through questionnaire responses from 366 SMEs, 50 from credit officers of sample banks, 40 from academicians and 37 from accounting experts. Secondary data are obtained from the audited annual reports of the sample private commercial banks in Bangladesh. In addition, the relevant secondary data also have been collected from different sources like Bangladesh Bank, Bangladesh Bureau of Statistics, Ministry of Industries, SME foundation, MIDAS, Bangladesh Economic review, Bangladesh Economic Survey, Bangladesh Bank Bulletin, Statistical Year books, Economic Advisor’s Wing, Ministry of Finance and from other SME related organizations. The data were analyzed using the following methods: descriptive analysis, regression analysis, chi-square tests, t-tests, ANOVA tests, correlation tests and analysis of variance and then used to address the hypothesis and to meet the objectives of the study. The objectives of the research are to determine the contribution of SMEs to GDP and enhance the understanding of the attendant factors that facilitate or impair SMEs’ accessibility to bank finance from a demand side perspective as well as supply side perspective as per Pecking Order Theory, Information Asymmetry theory, Trade off Theory and Agency Theory. To achieve the plan, the researcher selects SMEs in Bangladesh as the population as representatives of the demand side. The research findings confirm that different sectors of SMEs such as crops and horticulture sector, animal farming sector, forest and related sector, finishing sector, hotel and restaurants sector, transport sector, real estate sector, auricular sector have significant contribution to GDP in different years in Bangladesh. It was also found that manufacturing sector, construction sector, wholesale and retail trade sector, industry sector, service and other sectors have significant contribution to GDP in different years. The findings have also identified that service sector and trade sector have significant contribution to GDP through employment generation. The findings also confirm that there are some significant influences of the internal finance, collateral and profitability on accessibility to bank loan. It was found also that one of the most important reasons for most owners or managers failing to obtain finance from the commercial banks were lack of collateral and incomplete financial statement prepared by the firm (financial information). The firm’s features (sector, size and age of the firm) have also significant influence on accessibility to bank credit from demand side. From the supply side, the rate of interest, relative financial information opacity of SMEs and reliable collateral have significant influence on accessibility to bank loan. Our finding also corroborates the fact that the financial performance variables, such as net profit before tax, net profit after tax, interest income, non-interest income, loans and advances, total investments, total assets, shareholders’ equity, return on assets and return on equity of the sample banks have influence on SMEs’ financing except those of Eastern Bank Ltd.