Identification of Problems and Challenges Facing SMEs

SMEs in Bangladesh face significant problems in balancing, modernizing, replacement, and expansion (BMRE) due to credit crunch, poor technological know-how, inadequate supply of efficient labor forces, and insufficient fiscal and regulatory supports from the related government agencies.

While the Bangladeshi government has SME policies, the SME Foundation, SME Cells at the Ministry of Commerce (MOC), the SME Credit and Monitoring Department at Bangladesh Bank, and One Stop Services of Board of Investment (BOI) in place, these policies and institutions have so far proven insufficient in supporting the SME sector.

Several studies have found that high transaction costs, ineffective SME policies, and poor capabilities of SME entrepreneurs can be attributed to these constraints (Chowdhury, et al. 2013 and Khandaker, 2014). Khan (2004) has found some additional constraints to the growth of the SME sector in Bangladesh: (a) shortage of skills at all levels (facilitating institutions and entrepreneurs), (b) lack of industrial organization, (c) limited size of the market and its low growth rate, (d) lack of sound policy and constructive programs, and e) poor state of technology. Qudus and Rashid (2000) identified that entrepreneurs in the SME sector have to face myriad bureaucratic obstacles in their quest to start an SME. Begum (1993) has found that inadequate government efforts and poor fiscal and financial incentives have slowed the process of SME growth in Bangladesh. Finally, the lack of infrastructure facilities in Bangladesh represents another hurdle for SME growth in Bangladesh (McDowell, 1997).

Commitments of the Trade Bodies in curbing corruption

The project plan included exploration of the available key organizational documents from the largest business support organizations in the country. It was expected that these documents would provide the baseline data on the problems faced and required plan of actions on five key areas (democracy, governance, transparency, accountability, and corruption) at the national and subnational levels. These trade bodies’ documents would show, we assumed, how these issues are addressed and what specific plans have been adopted and implemented. These will help identifying the strengths and weaknesses of the current endeavours.

Between February 2021 to February 2022, we collected a total of 152 publications from ten national and regional trade organizations (Appendix 1). The national organizations were selected based on their overall influence. Unfortunately, we have found almost no significant commitments from any of the trade organizations towards combating corruption. For example, The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) is the largest trade organization representing the private sector, counting 106 Chambers of Commerce and Industry and 402 trade and industrial associations as members. However, FBCCI has not made a clear, public commitment to combatting corruption. Rather, according to FBCCI’s website, it plays “a pivotal role in consultative and advisory capacity, safeguarding the interest of the private sector,” and the President of FBCCI described the organization’s main task as “work[ing] with the government at the policy level” (Uddin, 2022). Accordingly, researchers have also raised concerns about FBCCI’s independence from the government (Mirdha, 2021).

In a similar vein, The Bangladesh Garment Manufacturers and Exporters Association (BGMEA), which has about 4500 members and” is one of the largest trade associations in the country,” has not pushed anticorruption as an organizational priority (“BGMEA | BGMEA at a Glance” 2020). Its available documents do not list any policies or initiatives aimed at combatting corruption or fostering transparency in the business sector or overall governance.

There are a few vague allusions to corruption in tax collection and the banking system, but, according to available documentation, BGMEA has not committed any significant resources to identify and address these issues. Most of the available documents and publications are instead focused on advocating tax reforms and increasing subsidies, among other similar issues.

The absence of any reference to the five key issues (democracy, governance, transparency, accountability, and corruption) in these documents implicitly validates the necessity for this project. Private sector stakeholders must convene to discuss these issues, share their perspectives, explore pathways for action, and create a platform to create an action plan and work with policymakers on solutions in the future. The regional FGDs and a national dialogue will help address the current situation and pave the way forward.

Business leaders and experts’ perspectives

Business leaders, academics, and experts on SMEs acknowledge the pervasive nature of corruption in the economic sector in Bangladesh. “There isn’t any sector that is not affected by corruption,” said one expert involved in tracking the incidence and nature of corruption in the public sector for more than two decades. A business leader pointed out that the SME sector’s share and pattern of corruption are largely similar to the overall state of corruption in society, particularly in the business and economic sectors.

One leader of a national body echoed the sentiment, saying, “Corruption is not only in the SME sector but is present as a barrier to all other sectors of the country,” and academics have described this phenomenon as “evident.” However, trade bodies and entrepreneurs have identified some particular aspects of the existing corrupt practices and their sources vis-à-vis the SME sector. They noted bribery as the principal means of corrupt practices while securing licenses and permits from government bodies. “You have to grease the wheels of bureaucracy at every stage,” said a trade body leader. Excessive bureaucratization of the process is cited as a tacit factor behind the expansive nature of corruption.

The government’s preference for particular enterprises in the public procurement process represents another major example of corruption. In a similar vein, many SMEs struggle to secure loans from banks.

allocate loans to the SMEs,” said one leader of a trade body. Another survey respondent opined that many large enterprises use their influence and connections to what meager loan funds are allocated for SMEs.

The collusion between SMEs and various other actors is an important element of these prevalent corrupt practices. One of the experts interviewed for the project noted that banks collude with businesses to fabricate the businesses’ compliance requirements. According to another respondent, such collusion also occurs in public contracting. The latter is considered as a coping mechanism against corruption, and a way to “remain competitive.” Several respondents stated that corruption, especially bribery of officials and government agencies, occurs partly due to a lack of internal discipline within some SMEs. By “internal discipline,” respondents meant the lack of good internal governance among smaller firms.

Many participants suggested that the presence of corrupt practices in both the demand side and supply side creates a cycle of corruption. A leader of a regional trade body said, “If we pay bribes to get ahead in the competition in some ways, we create a demand for the bribes within the system itself.”

Respondents cited this “mindset” that the public implicitly accepts corruption as the most important factor for the continuing prevalence of corruption throughout the economy, and particularly in the SME sector. Citizens consider corruption as” inseparable” from the economic system and practices, experts and business leaders opined. This tendency mutes backlash against corrupt practices and encourages their use. One trade body leader felt that a lack of moral education has contributed to this culture of acceptance.

On the institutional side, lack of accountability in the public sector and impunity for perpetrator, have been cited as major factors in the continuation of corrupt practices. Experts have emphasized that acts of corruption are often overlooked due to the political affiliations of perpetrators. One expert with significant experience in leading an anti-corruption organization identified broken promises on behalf of political leaders and a lack of clear commitments to corruption-prevention measures as additional important reasons. This person underscored that, “Laws are not sufficient. Instead, participation of citizens and members of the civil society is important for creating a corruption-free environment.” The absence of effective punitive measures against corruption serves only to encourage an environment where participants view corruption as imperative to success. In this regard, the dysfunction and severe weaknesses of the institutions meant to combat corruption act as crucial factors in their prevalence.

These weaknesses include the lack of resources and expertise of the relevant institutions. “There is a variety of reasons for corruption,” a head of a national body argued, while a leader of a different national trade body suggested that monetary benefit alone is not sufficient to explain the proliferation of corruption.

Corruption also persists in the Bangladeshi economy due to, as one informant noted, the difficulty of linking crimes to their perpetrators. While few of the informants felt that the proclivity for cash transactions in Bangladesh enables corruption, a shift in society towards cashless transactions, conducted through proper banking channels, would significantly hinder the capacity for actors to continue corrupt practices.

Most of the informants could not cite any private sector anti-corruption initiatives. However, one respondent indicated that some organizations have interest in such programs but lack the organizational framework to implement them. With that said, several organizations have conducted important anticorruption and transparency initiatives in Bangladesh. For example, Transparency International Bangladesh (TIB) has long fought to raise awareness of corruption and governance issues. Research on corruption by the Centre for Policy Dialogue (CPD) has also contributed to bringing attention to these topics. However, many respondents expressed a sense of resignation, suggesting that civil society members can do little to root out corruption, as fundamental flaws in governance exacerbate such issues. “If the government does not come forward first and address the challenges, things are less likely to change,”, stated a leader of a regional trade body. The leader added, “Unfortunately, we don’t see the government coming forward and working with the collaboration of civil society in our country.” However, a respondent with an attachment to a political party said that civil society itself has become politicized, implying that partisan affiliations hinder such initiatives. As for the government initiatives targeting the SME sector, our observation of their absence was validated by the trade body leaders and experts.

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However, all of them referred to the overarching efforts of the government, particularly the Anti- Corruption Commission (ACC), but they also mentioned that the ACC’s success is limited at best. ”There are government initiatives. But I am not satisfied with their implementations,” said one respondent, and another leader of an SME-support foundation underscored the same deficiency. “It would be better if it [ACC] worked more efficiently,” insisted a leader of a regional trade body. Lastly, an academic mentioned, “The ACC regularly evaluates and monitors this [SME] sector, but there is no court of law to implement corruption laws.”

Inquiry about whether these trade bodies and the organizations had developed internal mechanisms to identify and curb corruption yielded no results, revealing an absence of focus on one of the most pervasive problems in the country and within the SME sector. One of the leaders of a regional trade body said, “The chamber does not deal with corruption. The chamber deals with the problems of traders. We work as a bridge between the government and businesses to solve those [corruption] problems.” However, many of these leaders have insisted on having a “zerotolerance” policy towards corruption and conducting periodic discussions about the issue within their respective organizations. Many claimed to have information centers, but those centers receive very few complaints from their clients and constituents regarding corruption.

The importance of the private sector’s leadership in combatting corruption has prompted different responses from the key informants. A significant number of respondents doubted the necessity of private sector leadership in reducing corruption, and even those who touted its importance added that such leadership is meaningless without government support. One leader of a regional trade body said, “We as private sector stakeholders are trying to combat corruption in our own way, but if the government does not step up and ensure accountability, then nothing can be done.” Key informants offered several reasons for why private sector efforts without government leadership cannot curb corruption, including the assumptions that the government exerts control over trade body leaders and that business leaders would not risk profits by criticizing the government.

Most of the interviewed trade body leaders acknowledged that no private sector organization with the purpose of combatting or raising awareness about corruption in the SME sector currently exists. More than one trade body leader said that these umbrella organizations are neither intended nor equipped to address the corruption issue. The association that we have, or the organizations that I was in, are not really structured in that way,” said one person. Another leader went further, saying that anti-corruption “is not likely to be done in an organized way” by a trade body. The volunteer nature of the leadership was cited as a reason. However, one anti-corruption activist feels that national trade bodies need to take leadership roles in the efforts to curb corruption, stating, – “Various trade bodies related to the SMEs should be promoting business integrity and internal code of conduct.” Another regional body’s chief suggested a combined effort by both the government and the public sector.

However, there is widespread discontent among business leaders and experts regarding the effectiveness of existing laws and reporting systems for corruption, particularly their poor enforcement. “There are good laws, but they are not implemented,”, said one leader of the country’s largest trade body. Academics and other business leaders expressed very similar views. One said,” It seems that those who are in charge of implementation are not bothered. They are either reluctant or don’t understand the urgency to implement [these laws].” An anticorruption activist further explained, “The existing legal framework is not entirely ideal, but it is sufficient to control corruption. There are two significant lacking in the legal framework. One is the need for reforms in some legal areas. Several new policies implemented have weakened the ACC.

Secondly, what framework we have is not being implemented properly. The parliament’s role is to keep the government accountable to the people. However, the committees created by the parliament to supervise these areas aren’t fulfilling their roles due to fundamental problems in the structure of our democracy.”

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There are good laws,

but they are not

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implemented

The respondents also expressed a sense of frustration regarding the slow judicial process. The lack of awareness about and implementation of the Whistle-blower Act 2011, a law that guarantees legal protection to persons, including journalists, who disclose information for the public interest, has been cited as an enabler to corruption. Several respondents also cited the ineffectiveness of the existing corruption reporting system as a critical weakness. For example, one business leader labelled the current system as “ineffective” and urged the creation of a new one. Another trade body leader lamented the lack of knowledge about the reporting process amongst the citizenry.

With that said, even if the ic understood the reporting system, respondents expressed doubt that relevant authorities would actually listen to those complaints, with one even noting that fear of retribution prevents people from coming forward. In addition to greater transparency in corruption reporting, respondents viewed empowering an independent ACC as a way to encourage more people to report the corruption they witness. In order to build stronger anti-corruption measures, the interviewees suggested several important next steps that trade bodies should take. For example, simplifying licensing procedures represents one critical step, as many argued bureaucratic roadblocks create create opportunities for corruption to flourish. In addition, respondents insisted that meaningful anticorruption action will also require legal reforms. On this point, however, they did not provide concrete, actionable steps beyond working with the government on new legal frameworks and lobbying for affected industries. “[The trade bodies] need to facilitate the creation of sectoral and sub sectoral code of ethic or code of conduct and must ensure that there is accountability [in adhering] to these codes,” suggested one respondent. However, as one person noted, large trade bodies are not led by SME entrepreneurs and the organizations themselves do not focus their activities on SMEs. Therefore, SME entrepreneurs cannot rely on trade bodies to respond to their need for anti-corruption action.