The SME Missing Middle Problem in Developing Countries and its Link to Lack of Financing: The Case of Bangladesh

Abstract

There is an increasing attention in the development literature on the issue of the Small and Medium Enterprises (SMEs) “missing middle” - a distinctive distribution of small and medium enterprises in developing countries as well as certain characteristics unique to this distribution. In this distribution the number of SMEs is found to be “low” relative to other enterprise sizes. A number of reasons are cited for the existence of this missing middle. They include: restricted access to Financing & Financial Infrastructure; Government Regulations & Taxes; Access to Electricity (particularly Energy); Economic & Political Uncertainty; and Lack of Workforce Skills & Informal Competition. The objective of this paper is to analyse whether there is a SME “missing middle” in Bangladesh and if so, are financial constraints a crucial factor for this. The paper also analysed the impact of various non – financial constraints on SMEs in Bangladesh. The paper is based on existing literature and available quantitative data and surveys from various international and local institutions and researchers. The paper finds that there is indeed a SME “missing middle” in Bangladesh in terms of their number and their contribution to GDP and employment relative to similar contributions by the SMEs in the emerging and the developed economies. The paper concludes that the major causes for the SME “missing middle” in Bangladesh are a continuing lack of access to financing (even though there have been signs of improvement in this area) and infrastructural problems particularly access to power. The analysis also shows that SMEs in Bangladesh have diversified significantly overtime, going beyond what would be expected in a proto-industrialization process, and venturing into industrial sectors unrelated to the agricultural sector. The paper concludes that even though various pro- SME growth initiatives are underway, there is still room for improvement particularly in the provision of financing and in the adaptation of new and innovative ways of doing business.