Declining SME sales weaken the economic foundation

When Bangladesh Bank increases interest rates on bank borrowing to combat persistently high inflation, the impact is felt by small and medium business owners like Paritosh Kumar Malo from Faridpur and Md Oli Ullah from Chuadanga. Already struggling with declining sales due to rising inflation over the past three years, both entrepreneurs have been forced to put their expansion plans on hold, as they rely on bank loans to grow their businesses. As a last resort to stay afloat, they have begun cutting their workforce.

However, even desperate measures have their limits. If macroeconomic pressures do not ease soon, these small businesses—contributing 32% of the country's GDP and employing 85% of the industrial workforce—face potential closure.

According to the Small and Medium Enterprise (SME) Foundation, Bangladesh has approximately 7.9 million SMEs, which serve as the backbone of the economy. However, most are currently struggling under the weight of inflation and broader economic challenges.

The SME crisis has been exacerbated by a slowdown in government spending on development projects following last year’s political transition through a mass uprising. This has further tightened cash flow for businesses like Malo’s RK Metal in Faridpur, a workshop specializing in farming machinery that once employed 25 workers.

Malo used to rely on government projects for steady orders, but with work stalled for the past six months, no new contracts have come in. His situation worsened after supplying Tk 20 lakh worth of equipment to a USAID-funded project, with payment now uncertain following foreign aid cuts by the new US administration.

Just six to eight months ago, his factory generated Tk 30 lakh in revenue, but that has now plummeted to Tk 3 lakh. Out of this, he must allocate Tk 80,000 per month to repay bank loans. Demand for small agricultural machines—once his primary revenue stream—has dropped by nearly 70%.

Dealers are hesitant to place orders, while farmers struggle to afford new equipment. “If they don’t have money, how will they buy it?” he asked.

Unable to sustain his entire workforce, Malo had no choice but to lay off 15 employees. “Letting them go was heartbreaking. They have families to support,” he said.

Shrinking Capital, Looming Layoffs

Md Oli Ullah, owner of Janata Engineering in Chuadanga, also manufactures agricultural machinery such as corn threshers and mustard oil extraction machines. Like Malo, he has seen demand plunge as farmers and small entrepreneurs delay purchases.

With over 100 workers under his employment, Ullah now faces the prospect of layoffs.

“I took a Tk 5 crore loan from Agrani Bank in 2020 when the interest rate was 9%. Now it has surged to 17%, significantly increasing my quarterly repayments,” he said.

As his capital dwindles, Ullah fears he will have to downsize after Eid just to keep his business running. Despite his best efforts to sustain operations, he worries that without economic relief, businesses like his may be forced to shut down.

Bangladesh Bank’s loan disbursement data underscores these financial struggles. In the July-September quarter of FY 2024-25, loan disbursement to small enterprises declined by 16.05% year-on-year, compared to a modest 1.89% increase during the same period in FY24.

Meanwhile, the cost of financing for SMEs surged to 12.12% in December 2024, up from just 6.17% in June 2023, placing additional strain on businesses.

Struggles Beyond Bank Loans

Unlike Malo and Ullah, Rubina Akter Munni, owner of Design By Rubina, does not rely on bank loans. She runs a leather goods business, producing travel bags and jackets.

Yet, even without loan repayments, she faces financial hardships. Over the past three months, online, corporate, and export orders have dwindled.

“Consumers are probably cutting back on luxury spending,” she observed.

Previously, she received export orders from expatriates and local leather exporters. Now, even they are delaying payments due to their own business downturns.

With revenues sharply declining, she struggles to pay her 71 employees. “This crisis isn’t just about me—it’s affecting many small entrepreneurs,” she said.

Some businesses have already postponed orders, and while Munni is relieved not to have bank loans, keeping daily operations running is becoming increasingly difficult.

A Silver Lining in Jute

Amid the economic downturn, Ajit Kumar Das, owner of Creative Jute Textile in Narsingdi, has managed to sustain his business thanks to the consistent demand for eco-friendly jute bags—Bangladesh’s renowned “golden fibre.”

While many SMEs struggle, his company supplies various shops in tourist areas, with some of his products indirectly exported abroad.

"Basic Bank has financially supported me, and even private banks are willing to provide loans. As long as I maintain quality and appealing designs, demand remains strong,” Das said.

His company, employing over 100 workers, is one of the few thriving SMEs in the current economic climate.

Calls for Relief Measures

M Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, pointed to the Purchasing Managers’ Index (PMI), which indicates a downturn in the SME sector.

He identified three major challenges: high production costs due to inflation, disruptions in raw material imports caused by the US dollar crisis, and weakening consumer demand as the cost of living rises.

Anwar Hossain Chowdhury, managing director of the SME Foundation, acknowledged these struggles, emphasizing that SMEs operate with limited capital, making them particularly vulnerable.

The foundation has urged Bangladesh Bank to introduce a three-month loan deferment for SMEs.

“We are also working on fostering collaboration among stakeholders through fairs and conferences,” he said.

“Our goal is to improve access to bank loans by bridging the gap between the banking sector, corporates, and entrepreneurs, ensuring SMEs can continue to grow.”