RESEARCH MONOGRAPH 16ssadmin.bibm.org.bd/notice/02-07-19/Monograph 16.pdf · the banking sector was...

RESEARCH MONOGRAPH 16

SME Cluster Development: Implication for Banks

Dr. Shah Md. Ahsan Habib

Professor & Director (Training), BIBM

Md. Ashraful Alam

Deputy General Manager, Bangladesh Bank

Fahmida Chowdhury

Former Associate Professor, BIBM and

SVP & Principal, Research and Training Institute

Southeast Bank Limited

Md. Shahid Ullah

Assistant Professor, BIBM

Md. Zakir Hossain

Lecturer, BIBM

Rexona Yesmin

Lecturer, BIBM

BANGLADESH INSTITUTE OF BANK MANAGEMENT

Mirpur, Dhaka



Md. Ashraful Alam

Fahmida Chowdhury

Md. Shahid Ullah

Md. Zakir Hossain

Rexona Yesmin

Editor Dr. Toufic Ahmad Choudhury, Director General, BIBM

Dr. Prashanta Kumar Banerjee, Professor & Director (RD&C), BIBM

Support Team Md. Golam Kabir, Publications-cum-Public Relations Officer

Papon Tabassum, Research Officer

Md. Morshedur Rahman, Proof Reader

Graphics & Design Md. Awalad Hossain

Md. Nasir Uddin

Published: January, 2016

Published by Bangladesh Institute of Bank Management (BIBM)

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Copyright © BIBM 2016, All Rights Reserved No part of this report may be reproduced or utilized in any form or by any means, electronic

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ii Research Monograph 16

Foreword

s part of the ongoing dissemination of BIBM research outputs, the present research

monograph contains the findings of the research project titled “SME Cluster

Development: Implication for Banks”.

Small and Medium-sized Enterprises (SMEs) are extremely important for an economy

because of their formidable role in national economic development. The study finds that

different SME clusters of the country are in a nascent stage. For the development of clusters,

the study recommends for cluster mapping, formation of a coordination body, enactment of a

SME Cluster Development Strategy and coordination among universities, specialized

institutions, government agencies and entrepreneurs and banks.

It gives me immense pleasure to publish and distribute this research output to the

practitioners of the banks as well as to the academics and common readers. I hope this

monograph will be a useful guide especially for the bank employees working in the

concerned departments.

Dr. Toufic Ahmad Choudhury

Director General

A

Research Monograph 16 iii

Acknowledgement

e have completed the research project with the immense support from many

persons, especially from officers and executives of different banks.

We would extend our gratitude to Dr. Toufic Ahmad Choudhury, honorable Director

General, BIBM for his helpful advice, observations and thoughts to progress our research

work.

Also, we are truly indebted to Dr. Prashanta Kumar Banerjee, Professor & Director

(Research, Development & Consultancy), BIBM, his opinion and observation about the

report.

We are also very obliged to all of our faculty colleagues for their comments and positive

suggestions to carry out our research.

Our honest appreciation goes to our field assistants, who have facilitated us to get very

much useful information from the customers of various banks. The cooperation of

selected SME departments of banks are also appreciated.

Finally, we would like to thank all of those who extended their support in our teamwork.


Fahmida Chowdhury

Md. Shahid Ullah

Md. Zakir Hossain

Rexona Yesmin

Ashraful Alam

W

iv Research Monograph 16

RESEARCH MONOGRAPH 16

ME CLUSTER DEVELOPMENT:

IMPLICATION FOR BANKS

S

Contents

Abbreviations

Executive Summary

viii

x

1. Introduction 1

2. Concept and Literature Review of SME Cluster Development:

Policy, Strategy and Measurement

4

3. SME Cluster Development: Status, Performance and Level 17

4. Implications of SME Cluster Development for Bank Financing in

Bangladesh

38

5. Observations and Recommendations 46

References 48

Appendix 52

Tables

Table-1 SME Clusters Covered in the Study 4

Table-2 Status of SME and Cluster Financing by Banks (% of Disbursement

as upto June 2013)

41

Table-3 Status of SME and Cluster Financing by Banks (% Outstanding as of

end June 2013)

42

Figures

Figure-1 Cluster Status 12

Figure-2 Cluster Performance 13

Figure-3 Cluster Level 14

Figure-4 Disbursement and Outstanding SME Credit to the Clusters [% of Total

SME Credit]

40

Figure-5 Credit to the SME Clusters by Broad Bank Groups (upto end June 2013) 40

Figure-6 Sectoral Distribution of Credit to the SME Clusters (up to end June 2013) 40

Research Monograph 16 vii

Boxes

Box-1 Difficulties in Financing SME Clusters and Some Suggestions 42

Box-2 Cluster Financing by National Bank Limited 43

Box-3 Narsingdhi Jamdani Cluster Financing by BRAC Bank Limited 44

Box-4 Bogra Light Engineering Cluster Financing by The City Bank Limited 44

Box-5 Cluster Financing by UCBL 45

Box-6 Narsingdhi Textile Cluster Financing by BASIC Bank Limited 45

Box-7 Sustainable Cluster Finance in the Farming Sector by MTBL offers

Valuable Lesson for Cluster Financing

45

Abbreviations

ACCA Association of Chartered Certified Accountants

ADB Asian Development Bank

ASEAN Association of Southeast Asian Nation

BCSIR Bangladesh Council of Scientific and Industrial Research

BDBL Bangladesh Development Bank Limited

BDS Business Development Service

BDT Bangladesh Taka

BEIOA Bangladesh Engineering Industry Owners Association

BEPZA Bangladesh Export Processing Zone Authority

BIDS Bangladesh Institute of Development Studies

BITAC Bangladesh Industrial Technical Assistance Center

BSCIC Bangladesh Small and Cottage Industry Corporation

CDM Clean Development Mechanism

CEC Consumer Electronics Control

CSR Corporate Social Responsibility

DANIDA Danish International Development Agency

DBBL Dutch Bangla Bank Limited

EBL Eastern Bank Limited

EDI Electronic Data Interchange

EIA Environmental Impact Assessment

EPB Export Promotion Bureau

ERI Earthquake Research Institute/ Ecological Restoration Institute

ESCAP Economic and Social Commission for Asia and the Pacific

viii Research Monograph 16

EU European Union

GDP Gross Domestic Product

GOB Government of Bangladesh

ICT Information Communication Technology

IDA International Development Association

INSPIRED Integrated Support to Poverty and Inequality Reduction through Enterprise

Development IREDA Indian Renewable Energy Development Agency

JAICA Japan International Cooperation Agency

LDC Least Development Country

LEPBPC Light Engineering Product Business Promotion Council

LPG Liquefied Petroleum Gas

MDG Millennium Development Goal

MFI Micro Finance Institution

MSME Micro, Small and Medium-sized Enterprise

MTBL Mutual Trust Bank Limited

NBFI Non-Bank Financial Institution

NBL National Bank Limited

NGO Non Government Organization

NGP Nordic-German-Polish

OECD Organization for Economic Co-operation and Development

PCB Private Commercial Bank

R&D Research and Development

RBI Reserve Bank of India

SCITI Small and Cottage Industries Training Institute

SEZ Special Economic Zone

SME Small and Medium-sized Enterprise

SOCB State Owned Commercial Bank

UK United Kingdom

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Program

UNIDO United Nations Industrial Development Organization

USA United States of America

USD United States Dollar

VAT Value Added Tax

WTO World Trade Organization

Research Monograph 16 ix

http://www.worldbank.org/ida/

Executive Summary

Small and Medium-sized Enterprises (SMEs) are extremely important for an economy

because of their formidable role in national economic development by creating employment,

contributing to domestic and export earnings, reducing poverty, and spurring product

innovations. Especially, in the context of the manufacturing SMEs, it is claimed that in SME

clusters, geographic concentrations of interconnected companies, specialized suppliers,

service providers, firms in related industries, and associated institutions compete and

cooperate, and thus grow faster. Policy makers of many countries are taking interests on the

cluster based development because of the evidences that competitive advantage derives not

just from firm-based resources and capabilities, but also from resources and capabilities that

are located in the firm‟s geographically proximate business environment.

SMEs are getting growing emphasis to the policy makers of Bangladesh; however, clustering

SMEs as a strategy received very limited attention. Here, most of the SME clusters are

mainly concentrations of SMEs in a particular area. As in other countries, SMEs of

Bangladesh face a number of inherent challenges: inadequate access to finance; lack of

institutional support; insufficient skilled personnel; disproportionately high trade costs; lack

of access to technology; unfavorable business environment, etc.; and policy makers of the

country has been struggling to handle the challenges. Though, Bangladesh Bank has

undertaken some remarkable measures for ensuring greater access to finance of the SMEs of

the country, a lot to be achieved yet in regard to the demand side to obtain the expected

outcome. In spite of some remarkable instances in response the initiatives of Bangladesh

Bank; cluster approach has hardly been followed by banks to finance SMEs in different parts

of the country. There are evidences that cluster based financing to the small manufacturing

units could play remarkable roles in ensuring viability of the credit to the SME sectors. In

several instances, an extensive and innovative SME financing strategy by banks brought

visible outcome when the process was integrated with cluster development.

Bangladesh government has been active in promoting SMEs of Bangladesh. The Government

has declared its commitment to develop SME as one of the main pillars of economic growth

to achieve the goal of becoming a middle income country by 2021. A National Taskforce on

SME development was constituted in 2003 to draw up a realistic strategy for promoting rapid

growth and vigorous competitiveness among SMEs in Bangladesh in the interest of

accelerating the growth of the economy. The government has already initiated a few industry-

friendly policies and support through SME Foundation, Bangladesh Bank, EPB, BSCIC,

BITAC, BCSIR, BEPZA, SEZ authority. Some of the initiatives are also offering good

dividend.

x Research Monograph 16

Of the policy making bodies, role of Bangladesh Bank in promoting SME financing is

particularly visible. The central bank issued directives to both public and private commercial

banks regarding working capital loans, use of standardized documentation procedure and

time limits for credit sanctioning and loan disbursement. In recent time, Bangladesh Bank has

undertaken some remarkable measures to ensure greater access to bank finance by the SMEs.

For the first time in Bangladesh, an indicative target for SME loan disbursement has been set

from 2010 by the banks and financial institutions considering SME development as one of the

most important development agenda of the country. In response to the direction of the

Bangladesh Bank to promote SME women entrepreneurs, banks established separate

„Women Entrepreneurs‟ Dedicated Desks‟ with necessary and suitable manpower. Banks and

financial institutions were encouraged to receive group security/social security in the SME

financing by the central bank. BB also offered licenses to new branches specifically to

finance the priority sectors like SME and agriculture. These SME supportive systems are

directly relevant to all types of SMEs including clusters.

In response to the policy initiatives, some positive changes have taken place in the area of

bank financing to SME sectors of the country. According to the BB (2014) information, total

SME credits increased from around 20 percent to 27 percent of their total credit portfolio in

between 2009 and 2013. As of June end 2013, total outstanding amount of SME financing of

the banking sector was BDT 90,672 crore of which only around 2 percent (less than BDT

2,000 crore) exposure was with SME clusters. Most of SME clusters are located in the rural

areas, and due to the lower SME loan disbursement in the rural areas, the geographically

concentrated SME manufacturing units are getting lower proportion of loans from banks and

NBFIs. Available data indicates that a considerably low proportion of banks‟ SME credit

goes to the clusters. The survey finds that of the broad bank groups, performance of PCBs is

relatively better.

The dominant roles of PCBs to the geographically concentrated SMEs (called as cluster

financing) are visible. Of the total outstanding credit to the SME clusters, PCB‟s exposure

was three-fourth of the total. In terms of number, 77 percent SMEs of the clusters were

financed by PCBs as upto end 2013. Practically, other than a few exceptions, banks do not

make distinction between financing to the individual SME entrepreneurs and to the SMEs

within a cluster. Banks do not follow cluster approach to finance SMEs, as found in the

survey interviews. The available information indicates that very limited SME financing was

offered to the crucial SME clusters- light engineering and leather including footwear. As of

June 2013, 48 percent cluster financing goes to the RMG, and 24 percent to the rice mill

clusters. Of the total SME credit to the clusters, only 5 percent was disbursed to the light

engineering sector. In regard to the performance of individual banks in SME cluster

Research Monograph 16 xi

financing, the distribution is much skewed. According to the Bangladesh Bank (2014) data,

top five banks accounted for over 52 percent of total SME credit (outstanding); and top five

banks accounted for about 72 percent of the total SME credit to the clusters.

The paper comes up with the following recommendations. For effective intervention, a

cluster mapping for identification of potential cluster with their current status, performance

and level is the pre-condition. To perform the job, exiting government agencies may play due

role with the support of specialists, or government may even think of establishing a separate

authority. A coordination body is also needed with the participation of different stakeholders

for formulating support strategies. Besides, there are huge potentials of developing clusters in

SME sectors like light engineering, leather, plastic, etc. For ensuring expected output from

clusters, a generic „SME Cluster Development Strategy‟ must also identify „Product Specific

Strategies‟. Likewise, to enlarge the product basket and diversify export items, we are in need

to spend on product research and new product development. Linking universities, specialized

institutions may help doing the job. The sponsorship arrangement of research and

development for supporting cluster is the need of the time. In addition, to support cluster

financing, involvement of additional costs of banks (at the initial stage) could be

considered or counted as their CSR activities. This might be an encouraging factor for

banks to undertake cluster promotion and financing. Finally, the ongoing efforts of

Bangladesh Bank (BB) is promoting green banking is a remarkable initiative. BB‟s initiatives

have made notable changes in the environmentally responsible banking activities by the time.

Sustainable and environmental cluster financing might receive incentive as part of promoting

green banking initiative of Bangladesh Bank.

xii Research Monograph 16


1. Introduction

Small and Medium-sized enterprises (SMEs) are extremely important1 for an economy

because of their formidable role in national economic development by creating

employment, contributing to domestic and export earnings, reducing poverty, and

spurring product innovations. Considering the importance2, policy makers in almost all

economies have been undertaking strategies to promote SME sectors most of which are

industry focused. Especially, in the context of the manufacturing SMEs, it is claimed that

in SME clusters geographic concentrations of interconnected companies, specialized

suppliers, service providers, firms in related industries, and associated institutions

compete and cooperate, and thus grow faster. There are evidences that the networking

behavior of firms and healthy competition in a cluster are strategically critical to promote

growth of the group (Beck 2006). Policy makers of many countries are taking interests on

the cluster based development because of the evidences that competitive advantage

derives not just from firm-based resources and capabilities, but also from resources and

capabilities that are located in the firm‟s geographically proximate business environment.

The industrial cluster, as an international form of the industrial layout, also integrate into

global supply chains, share the industrial division of economic globalization and form

competitive industry, further enhancing the international competitiveness. Geographical

proximity can produce significant positive effects on new firm formation, productivity,

innovation, profitability and growth. However, simply having a number of similar SME

units together or creation of an SME cluster is not the sufficient condition to obtain

positive outcome, rather upgrading and innovation are crucial determinants. In many

instances, there are physical proximities of a good number of SMEs but, the basic goals

of having a cluster i.e. networks, linkages, competition or cooperation are completely

missing. To obtain benefits, it is crucial for the policy makers and other stakeholders to

intervene effectively. For identifying strategies by the policy makers and stakeholders,

1About 95 percent of enterprises across the world are SMEs, accounting for 60-70% of private sector

employment. In developing economies, SMEs are strongly linked to employment, poverty reduction, women's

economic empowerment and income distribution; and SMEs are integral to private sector development,

particularly in LDCs; and an essential component of inclusive, sustainable development (WTO 2014) 2Over 99% of the world‟s businesses are micro or small and medium-sized enterprises (ACCA 2014).

Research Monograph 16 1

it is crucial to understand the current state of the clusters, performances, and levels.

However, identifying some generic indicators to understand the current status,

performances, and levels is a challenge itself. Because, though cluster concepts are

gaining footings in economic development circles, there is no agreement on the necessary

and sufficient conditions for cluster development.

As a strategy, SME clustering is relatively a new phenomenon, however, there are cluster

success-stories that show important positive effects which can be obtained when cluster

concepts and strategies are implemented correctly. In several instances, SME clusters

have helped stimulating competence development by promoting output and creating

supply chain and impacted positively in the region by creating positive job effect.

Especially, SME cluster offered remarkable benefits to the small manufacturing units

both in developed and developing countries. Clustering is beneficial for SMEs, especially

smaller manufacturers, because it facilitates connections with the external economy

including suppliers, workers, trade parties, and financial institutions (ADB 2012). In these

success stories, smooth financing has played a remarkable role. Practically, inadequate

financing has been considered as a critical bottleneck in the development of SMEs of all

types. The SMEs face financing difficulties mainly because of the problems of

asymmetric information, inadequate assets, absence of markets, etc. In several instances,

it was proven that SME clusters were useful in handling the asymmetric information and

other related problems effectively and made differences in ensuring efficiency in SME

financing. It is also recognized that the financial institutions and banks have a critical role

to play to develop SME clusters because small amount of finance to SMEs in a cluster

can smoothen the processes and linkages.

SMEs are getting growing emphasis to the policy makers of Bangladesh; however,

clustering SMEs as a strategy received very limited attention. In the context of

Bangladesh, most of SME clusters (as identified in the study of SME Foundation) are

mainly concentrations of SMEs in a particular area. As in other countries, SMEs of

Bangladesh face a number of inherent challenges: inadequate access to finance; lack of

institutional support; insufficient skilled personnel; disproportionately high trade costs;

lack of access to technology; unfavorable business environment, etc.; and policy makers

of the country has been struggling to handle the challenges. Though, Bangladesh Bank

has undertaken some remarkable measures for ensuring greater access to finance of the

SMEs of the country, a lot to be achieved yet in regard to the demand side to obtain the

expected outcome. In the country, banks have traditionally been reluctant to lend to SMEs

and have failed to provide sufficient support for potentially dynamic clusters in which

2 Research Monograph 16

SMEs are critical actors. In spite of some remarkable instances in response the initiatives

of Bangladesh Bank; cluster approach has hardly been followed by banks to finance

SMEs in different parts of the country. There are evidences that cluster based financing to

the small manufacturing units could play remarkable roles in ensuring viability of the

credit to the SME sectors. In several instances, an extensive and innovative SME

financing strategy by banks brought visible outcome when the process was integrated

with cluster development.

On the above background, the study attempts to analyze the development of SME clusters

in Bangladesh, and examine its implications for bank financing to the SMEs of the

country. The specific objectives of the study are: One, to identify the conceptual, policy

issues, and measurement of SME cluster development; two, to assess the current status of

SME cluster development in Bangladesh; and three, to examine the implication of SME

cluster development in the country for banks‟ financing to the SME sectors.

The study is based on both primary and secondary data. Published journals and some

local publications were important data source on the development of SME clusters in

different developed and developing countries and in Bangladesh. A few sets of

questionnaires were developed to gather information on selected clusters (considering

only the geographic concentration of SMEs); and to interview SME heads of banks3 and

representatives of other stakeholders (Bangladesh Bank, SME Foundation, Small and

Cottage Industries Training Institute (SCITI), Bangladesh Small and Cottage Industry

Corporation (BSCIC), SME Cell of the Ministry of Industry). Seven cases on clusters

were prepared on the status, performance, and level based on the information collected

through personal visits of the research team to the selected locations. Associations of all

the selected clusters and a few entrepreneurs from each cluster were consulted to gather

relevant data. Six cases of SME cluster financing of banks were also gathered to

understand the existing nature of SME cluster financing in the country. Following clusters

were selected from different region based on the study of SME Foundation on cluster

mapping:

3Sonali Bank Limited; Janata Bank Limited; Rupali Bank Limited; Bangladesh Development Bank Limited;

Bangladesh Krishi Bank; Rajshahi Krishi Unnayan Bank; Bangladesh Commerce Bank Limited; Bank Asia

Limited; Pubali Bank Limited; Uttara Bank Limited; Mercantile Bank Limited; United Commercial Bank

Limited; IFIC Bank Limited; BRAC Bank Limited; The City Bank Limited; BASIC Bank Limited; Farmers

Bank Limited; Meghna Bank Limited; Islami Bank Bangladesh Limited; Al-Arafah Islami Bank Limited; Bank

Alfalah Limited; Woori Bank; Commercial Bank of Ceylon PLC; State Bank of India; National Bank of

Pakistan.


Table 1: SME Clusters Covered in the Study

Name of Cluster Division/Location Total No. of Clusters Percentage

Rice Mill Phulhat, Dinajpur 34 19.2

Handicrafts Jamalpur Sadar 38 21.5

Light Engineering Old Dhaka 31 17.5

Jamdani Cluster Sarulia, Narayanganj 38 21.5

Satarangi Nishbetgonj, Rangpur 10 5.6

Shoe Cluster Bhourab, Kishorgonj 13 7.3

Plastic Lalbagh, Dhaka 3 1.7

The study covered a limited number of clusters. The development status, performance,

and levels of selected clusters were determined based on the opinions of the associations

and some entrepreneurs. Findings on banks‟ role and implications were determined based

on the interviews with the SME heads of banks, and other stakeholders.

The report is organized into five sections. Introductory section deals with the background,

objectives and methodological issues. Section-2 is about conceptual issues and literature

review. SME cluster development and role of stakeholders are examined in section-3.

Section-4 is about implications of SME cluster development for the efficiency of bank

financing to the SMEs of the country. The study offers a few recommendations and

concluding remarks in section-5.

2. Concept and Literature Review of SME Cluster Development: Policy, Strategy

and Measurement

The impact of the cluster concept accelerated with the adoption of „cluster theory‟ within

public policy beginning in the early 1990s when the notion was embraced by practitioners

in the public, private, and academic sectors as a tool for promoting national and regional

competitiveness, innovation, and growth (OECD 2002). Evidence of well performing

SME clusters has been reported in several literatures of early 1990s (Pyke et al. 1990;

Sengenberger et al. 1990; UNCTAD 1994; among others), however, there are differences

in the definitional aspects, approaches, strategies in the context of a number of developed

and developing countries. Although an enormous literature on clusters has appeared in the

past two decades, knowledge of clusters is still highly fragmented, and inconclusive on

several key points.

Definitions and Rationale for Developing Clusters

„Geographical concentrations‟ and „interconnections‟ were the key areas of focus in

almost all definitions of cluster. According to Cortright (2006), there is no such fixed and


single definition of cluster and it is necessary to modify one‟s definition depending on the

purpose. In UNDP‟s (2005) definition, clusters are geographic concentrations of

interconnected companies engaged in similar or highly related economic activities

(UNIDO 2005). Porter (1998) has defined cluster as a geographic concentration of

mutually interconnected companies, specialized suppliers, service providers, companies

working in the same fields that compete but also cooperate. ERIA (2014) termed clusters

as regionally or locally networked set of economic agents (firms and institutions) that

connect all critical economic agents necessary to drive learning, innovation and

competitiveness.

Though there are differences of opinions, a number of commonly accepted characteristics

of clusters have emerged: similar firms are linked through traded and untraded

relationships with each other, sell in the same or interlinked markets; interlinked firms are

geographically proximate; clusters encompass a mix of public and private organizations,

such as research institutions, suppliers, and providers of business services, which offer

specialized skills and infrastructure of value to the cluster. Attachment with local

economic activities and development has been found to be crucial for performing clusters

(UNCTAD 1994). The meaning of „geographic proximity‟ is a contested issue in cluster

research and policy, and opinions vary as to whether proximate means within „driving

distance‟, a city, a province/ state, or even a nation4. Sippitt (2013) noted that SME

clusters are not only about geography, and proximity of cluster businesses to a number of

support networks, and is no longer a pre-requisite for cluster concept. Modern ways of

communication, particularly structured by the Internet, have made communication much

easier, but nothing beats face-to-face interaction (ERIA 2014). However, linkage and

cooperation among firms are crucial. Evidence shows that in spite of the potential benefits

for the enterprises, inter-firm cooperation and the other features of successful clusters do

not always emerge spontaneously. In many performing clusters in developed countries,

inter-firm networking primarily emerged spontaneously as the result of the peculiar

historical and social environment surrounding the SMEs. Spontaneous networking has

also been observed in some developing countries but it appears to be relatively

uncommon. Even less common is the spontaneous emergence of other features of

successful clusters such as institutions promoting collective learning and innovation

(Ceglie and Marco 1999).

4The benchmarking of 143 cluster organizations in seven European countries in the context of the Nordic-

German-Polish (NGP) Excellence project has shown that typically 75 to 95 per cent of the cluster participants

are located within a distance of 150 kilometers from the cluster management organization, which can be

considered as the “node” of the cluster (Sippitt 2013).


Growth impact of SME clusters is well recognized in the relevant literature. Porter (1990)

in his book „Competitive Advantage of Nations‟ expresses an assumption that commonly

interconnected fields concentrated geographically in a restricted area are a driving force

for national, regional and local growth. According to Choe et al. (2011), clusters were

developed by rival firms and suppliers that were collocating and collaborating on their

ways to reduce their external transaction costs, to innovate, to develop new business

opportunities and markets to create competitive advantage and thus contribute to growth.

Pavelkova (2006) mentioned that clusters allowed firms to stimulate economic growth

through increasing their competitiveness and performance of businesses; stimulate

innovation through efficient use of research and development; promote new businesses by

attracting foreign investments and increasing exports as well as employment opportunities

in the region. Agreeing with this concept of cluster, the US President Barack Obama also

emphasized the significance of a cluster strategy as a necessity to maintain dynamic

interaction process between large and small companies, universities, and financial

institutions, and also considered the cluster policy as a vital factor for enhancing the

future US national economic competitiveness (as noted in Lenchuk and Vlaskin 2010).

Cluster helps creating supply chain and international linkages. There is no doubt that

cluster may not always perform. Reasons for such under-performance include

endogenous factors such as introspection, lack of trust, resistance to innovation and the

weakness of collaborative institutions (UNIDO 2005). It must also be acknowledged that

there can be negative effects of clustering, including congestion, inflated costs, and the

risk of over specialization making a region susceptible to shocks in a particular industry

(Devis et al. 2006).

Stakeholders’ Support for Cluster Development

The rationale for government involvement in innovation is usually explained in terms of

market failure and system failure (OECD 1999). In this perspective, cluster policies aim

to produce public goods that the market cannot provide – networks, coordination, local

services, and strategic development of links in the local value chain (Martin and Sunley

2003). More recently however, the rationale for government intervention in innovation

has been conceptualized in terms of system failure5 (Woolthuis et al. 2005). The cluster

approach i.e. a complex arrangement through the mixture of markets, firms, alliances,

associations, public-private organizations, and public organizations could offer a very

good solution (De Langen 2003).

5System failure refers to deficiencies in the rules or infrastructure that underpin interactive behavior, and in the

actors that interact with other actors in the innovation system. The four major kinds of system failures are

infrastructure failure, institutional failure, network failure, and capability failure (Woolthuis et al. 2005)


There are essentially two components to cluster development: cluster creation and cluster

upgrading (UNIDO 2005). Following creation, there must be successful upgrading

strategy, and promotion of clustering effect. Governments can create or strengthen the

institutions to promote clustering effects. They can also screen particular clusters, and

identify and resolve problems. Given the problems of information asymmetries between

government and firms, intermediary organizations such as chambers of commerce,

training institutions and R&D labs often help resolve collective action problems.

Stakeholder coordination (e.g., through industry, government, consumer and labor

coordination councils) often helps secure and expand social capital (ERIA 2014).

Many governments, institutions and NGOs remain committed to support SME clusters,

on the grounds that if these problems are overcome, clusters are likely to make a stronger

contribution to employment and poverty reduction than isolated SMEs. As a result,

hundreds of clusters in some developing countries have been supported by national and

regional government, by international agencies and NGOs. Policy makers and economists

in many countries, both at the national and the regional level, believe that supporting and

creating clusters is the major way to be competitive and to win in the globalization race.

According to Solvell et al. (2003), the cluster initiative can be said as an organized effort

that focus on the acceleration of growth and competitiveness of a cluster in the region

through the participation of cluster companies, government, and/or research community

(Andersen et al. 2006). UNIDO (2006) pointed out that although clusters are usually

identified as geographical concentrations of businesses irrespective of their degree of

actual cooperation; they gain their strength and distinctive advantages from a supportive

network of nearby institutions, such as trade associations, research units, universities and

NGOs, which facilitate information exchange, joint working and alliance building.

However, access to support services is severely hampered for SMEs in developing

countries due to lack of action plan for the provision of support services, poor services of

Business Development Service centers (BDS), lack of legal framework for and

underutilization of modern technology (UNIDO 2010). Promotion of technology and

technology transfer are particularly crucial for developing countries. Policy emphasis

should target the development of technology infrastructure to offer SMEs strong

connectivity and coordination for effective networking with other firms, supporting

organizations and government bodies (ERIA 2014).


Cluster Development Approach and Benefits from Performing Clusters

Securing a comprehensive policy package, demanding regulatory standards and a network

of supportive institutions might help extending a SME cluster beyond the tight

geographical focus (Porter 2000). For optimum outcome, A demand-led approach to

insertion into global value chains is crucial (Humphrey and Schmitz 2002, 1995).

The scope of activities should be holistic, should involve a broad range of related firms,

not just those that imitate each other and compete solely on price (Altenburg and

Eckhardt 2006). In response to external challenges, there should be collective action

(UNIDO 2005). There could be „tremendous heterogeneity‟ however, upgrading efforts

are expected to change cluster dynamics, benefiting certain sorts of firm (depending on

levels of education, size, openness to innovation, etc.) as suggested by Giuliani et al.

(2005) and Rabelotti (2004). Recently, researchers have hypothesized that corporate

responsibility could be an additional factor helping to stimulate existing or even unite

new clusters (AccountAbility 2003). A recent collection of essays makes frequent

reference to the impacts of labour and environmental standards to clusters, (Giuliani et al.

2005). Both corporate responsibility and cluster development as a strategy have emerged

as new perspectives for understanding and promoting business success and positive

impacts on society (UNIDO 2006).

Because of a number of success stories, the cluster development approach has been

recognized as a tool for strengthening the SME sector in many countries. Clustering

enables SMEs to link and integrate with regional and global value chains and fosters

greater synergy between providers of BDS (ESCAP 2009). An effective Business

Development Service (BDS) provision, based on changing market demands, could also

lead to the development of local capacities and eventually promoting the development of

SME clusters. In order to promote SMEs‟ linkages with large enterprises and their

integration into regional and global value chains, SME clusters should be assisted further

through buyer-seller forums, which may be organized by either the Government or

business associations (or SME clusters themselves). Buyer-seller forums can provide

valuable opportunities for business matching and networking among SMEs, regional and

international buyers. The forums can also facilitate the development of market

intelligence systems by collecting market information to determine the most penetrable

and profitable domestic/ export markets, which is an important tool for SME clusters

development.

From corporate responsibility perspective, SME clusters could offer invaluable outcome.

Working collaboratively within a cluster, businesses are able to take advantage of market


opportunities that they could not achieve alone by addressing issues such as local capacity

and infrastructure, regulation, and national reputation. Cluster approaches can reduce the

cost of barrier and risk, and adapt international tools and standards for local contexts

making it more attractive for individual business to take on responsible business practices

and increasing uptake. Clusters offer a useful and cost-effective entry point for agencies

seeking to encourage responsible business practice by large numbers of SMEs.

Responsibility pressures provide an external challenge which catalyzes collective action,

dialogue, trust and capacity building within clusters, and with other linked organizations

and sectors (UNIDO 2006).

Clusters positively influence the real income levels in the regions and have important

implications for the regional development polices as well as forenhancing the core

competences of the enterprises (Saha et al. 2012). According to Baptista and Swann

(1998) as well as Bergeron (1998), companies within industrial clusters or regions are

more likely to innovate than other companies, as the chances of boosting the

technological knowledge are higher (Saha et al. 2014). Researchers claim that the

companies, which are within the cluster, are more progressive as they have better

conditions for being competitive, and associating with clusters, enterprises can enhance

their productivity due to skilled manpower and adequate information (Pavelkova 2006).

The study added, cooperation within a cluster, enterprises can increase their accessibility,

power and voice in order to make investment in the specialized infrastructure; new born

enterprises can get the benefit of entering into a global market, what enables them to

study the marketing strategy.

UNIDO (2010) pointed out three potential outcomes from performing SME clusters:

collective efficiency gains; spatial proximity effects; and pro-poor potential. In theory,

firms working together in a cluster should be better able to respond to the challenges of

global trade than isolated SMEs, gaining economies of scale and scope. The true benefits

can be achieved through linking SMEs with their larger corporate counterparts in

knowledge-transfer and capacity-building partnerships that develop responsible, cost

effective solutions to create a ripple effect. Clusters offer support in the form of proximity

to raw materials, customized business development services, abundant clients attracted by

the cluster tradition, a skilled local labour force, and vibrant competition among

entrepreneurs, which spurs innovation and increases efficiency (UNIDO 2005). Hence,

recently a new trend has been observed that the enterprises have a propensity to join

cluster to integrate and motivate the human resources (Ecotech 2004). A recent article

pursued to offer an overview of research on economic clusters and regional growth,

followed on how the cluster concept in India (Kerala) highlighted the importance of HRM


and cluster activities provided by the clusters that act as a tool for improving human

resources to strengthen the competitive advantage as well as to facilitate the regional

economic development (Saha et al. 2014).

There are a number of instances of carefully designed set of public incentives that has

stimulated the establishment of approximately SME networks with significant results in

terms of increased SME profitability and sales. These supportive initiatives include

develop a nation-wide strategic plan for the development of SME Clusters with necessary

infrastructure; enhance the institutional and managerial capacities of SME Clusters

through implementing a proper legislative and regulatory framework; conduct national

cluster mapping exercises to identify key players; create capacity building programs to

strengthen national and local state chamber of commerce and industry offices; develop

industrial-sector-based production and export strategies in cooperation with key

stakeholders; promote linkages between local SMEs and large enterprises through buyer-

seller forums; implement national initiatives on export promotion for SME clusters;

establishment of cluster development cells at the national level under the respective

departments of industry (UN ESCAP 2014). Business Development Services (BDS)6 and

value chain development have become important SME support instruments in developing

countries during the last decade (UBS 2014).

Countries such as the Germany, US, India, Italy, Chile, Hong Kong, Colombia, South

Korea and Sri Lanka have been able to establish globally competitive industrial clusters

in textiles, software and computing, agricultural and seafood processing and financial

services (Ramsawak 2012). In the context of different global economies the approach and

status of SME clusters are not very similar, and thus their importance and benefits

appeared to be different. In Germany, central part of innovation policy and enterprise

policy were vital as a way of creating strong clusters and attracting co-location of large

firms and finance providers. In France, clusters resulting from local initiatives are active

in most sectors. Generally, clusters are seen as a way of boosting competitiveness in the

French economy which helps to develop growth and jobs in key markets, such as IT,

bio-technology and automotive. They accelerate innovation efforts and improve the

attractiveness of France for business. Clusters are well integrated but aren‟t region-led as

they are in larger countries, owing to the geographical size of the UK. In USA, clusters

can be found around large cities, with many trying to mimic the Silicon Valley model. In

6BDS is not only a term circumscribing business development services, but a concept promoting the idea that

the services should not be free, and that, if quality levels are adequate, markets for BDS would eventually

develop. The approach is often applied to assist SME producers finding new markets and diversifying their

production, providing them with a safer basis of planning the growth of their business (UBS 2014).


China, though clusters are important, they differ from the way in which the western world

understands them. In recent time, China has introduced a specialist division within local

government. In India, the Ministry of Micro, Small and Medium Enterprises runs

programs to address common issues such as improvement of technology, skills, market

access and access to finance and provides support by setting up facility centers and help

groups and by providing access to banks and credit agencies. Clusters are important in

India as they are seen as a way of developing skills collectively and demonstrating the

country‟s competitiveness internationally. There has been increasing focus on technology

development, modernization and energy and environmental conservation, in recent years.

Clusters are a growing trend in South Africa and are seen as a way of building

competitive advantage and drawing upon expertise collectively. The business cluster

environment is very new to Nigeria and has been driven mainly by manufacturing and

trade associations, rather than government-run programs (ACCA 2014).

Measuring Cluster Development: Status, Performance and Level

There is a need for systematic understanding of the factors that contribute to the creation

and development of clusters and their inter-relationships over time, to improve economic

and social development policy. The key challenge is thus to develop a framework and

indicators that characterize the structural and functional features of innovation clusters,

capturing linkages among firms and other innovation system actors, such as research and

development institutions or educational institutions within some geographically bounded

area, and measuring the progress of the cluster over time (Davis et al. 2006).

Based on the available literature, a framework may be illustrated (based mainly on Davis

et al. 2006; UNIDO 2005; and Anderson et al. 2004) in the form of three interrelated

segments: Cluster Status (Figure-1); Cluster Performance (Figure-2); and Cluster Level

(Figure-3); Cluster status offers some prerequisite that can ensure possibility of better

performance. Based on the performance criteria, the development level of the cluster

may be identified. Current Status consists of four constructs that measure the competitive

environment, access to some key factors, presence of supporting organization, and a

sound business climate.

The performance of an SME cluster heavily depends upon current status. In order to

identifying performance, it is crucial to find whether the cluster is performing in terms of

contribution in collaboration and network; significance in local, regional and national

economy; growth and development; and bringing dynamism. Not all indicators are

equally important to the conditions or performance of a cluster.


Figure 1: Cluster Status

CLUSTER STATUS

Competitive Environment

Number of Firms

Business and Product Development capabilities

Distance of Customers

Distance of Competitors

Access to Key Factors

Qualified and Skilled Personnel

Local Sourcing of Personnel

Access to Finance/ Capital

Quality and Arrangement of Transportation

Access to Raw Materials

Access to Utility

Supporting Organizations

Research Organizations/ Outsoursing

National Level Association

Government Agency

BD and Other Banks

Community Support (Local)

Business Climate

Relative Cost of Production

Regulators and Other Business Rules/ Barriers

Quality of Local Life Style (Overall)


Figure 2: Cluster Performance

CLUSTER PERFORMANCE

Colleraboration and Network

Sharing of Orders

Sharing of Infrastructure

Activities of Associations

Group Guarante in Borrowing

Sharing of Human Resources

Network, Linkages Horizontal and Vertical

Linkage with Local Business and Other Organization

Significate

National

Local

Economic

Social

Growth and Development

Recognition and Branding

Changes in No. of Firms

Changes in Output and Business

Changes in Employment and Income

National and Global Market Access

Dynamisium

Using New Technology

R&D Spending

Innovative Product


Figure 3: Cluster Level

It is important to identify the level of SME clusters for right policy intervention. Certain

Performance indicators of SME cluster indicates the level: Latent or Immature Cluster;

Developing or Growing Cluster; Established or Mature Cluster; and Transformational

Cluster. The levels are crucial to identify right and effective intervention.

A Latent or Immature cluster indicates a number of SMEs that begin to cooperate around

a core activity and realize common opportunities through their linkages. This is

characterized by low critical mass, low identity, low linkages, low level of growth and

dynamism. In a Developing or Growing cluster, a new set of actors in the same or related

activities emerged or are attracted to the region, and new linkages are developed. The

cluster started receiving importance to the local and regional economy. Formal or

informal institutes for collaboration appeared by offering common promotional activities

and other supports that already started pushing the growth and output of the SMEs. In

case of Established or Mature cluster, a certain critical mass is reached, and relations

outside of the cluster are strengthened. The types of clusters are characterized by high

identity, high linkages, high innovation, high growth and competition, established

importance at regional and national level. In order to survive, the cluster must avoid

stagnation and decay. Transformational clusters change with their markets, technologies,

and processes. Transformation may be through changes in the products and methods, or

into new clusters focused on other activities.

Low

Performer

Latent or

Immature Cluster

High Growth Developing Cluster

Consistent Growth Established or

Mature Cluster

Sustainable Growth &

Consistent Performer

Transformational


Relevance of SME Clusters for Efficient Bank Financing

Effective external financing for SMEs are particularly difficult, and one crucial reason is

that the market environment of SMEs is dispersed, which lack adequate asset and the

scale of capability is weak (Berger and Udell 2002). Moreover, they lack relevant

information and knowledge of management and operation so that banks and other

financial institutions find difficult to provide high quality financial services to SMEs.

According to a ADB (2012) study, industrial cluster helps to solve the difficulty of bank

financing of SMEs by several ways: cluster increases the symmetry of information i.e., a

bank is familiar with the situation of local enterprises, as a result, it increases the

opportunity of getting the loan; clusters help to conquer the moral hazard ; cluster helps

reducing the cost for banks i.e. banks may benefit a lot from economics of scale through

the loan to many enterprises within industrial cluster; clusters help reducing credit risk of

banks. Moreover, the credit risk within industrial cluster is mostly reflected on the risk of

industry which can be anticipated in some degree by the direction of industry and overall

growth situation. It is believed that a single SME in non-clusters is unable to reduce

information asymmetry, while the information overflow, human relation network and

other external effects caused by clusters characteristics weaken the information

asymmetry between banks and enterprises. Financial institutions may be unwilling to

finance small borrowers on an individual basis due to the high cost of frequent small

credit provision, but they may be willing to provide loans for a cluster that assembles

small borrowers at a reduced cost. A mechanism to channel funds smoothly to individual

SMEs through a proper credit screening system is necessary to implement cluster

financing (ADB 2012).

Inter person relationship brings benefits to businesses‟ bank financing and inter firm

relationship also plays a vital role in this process i.e. the higher the level of inter-firm

relationship, the higher the level of corporate bank financing performance. Inter-person7

relationship can help companies to get support and resources in the clusters like guarantee

(Hoang and Antoncic 2003). Hoan and Antoncic (2003) puts forward the observation that

industrial cluster can help to solve the difficulty of bank financing of SMEs, the basic

reason is that there is easy to form good report mechanism and credit cluster effect in the

industrial cluster.

7Inter-person relationship can be seen as a resources platform for managers, including financial, information,

advice and emotional support and so forth (Evan and Leighton 1989).


Considering the benefits of SME clusters, banks have followed cluster approach in

several instances both in developed and developing countries. According to UNIDO

(2006), cluster based approach in lending is intended to provide a full-service approach to

cater to the diverse needs of the SME sector which may be achieved through extending

banking services to recognized SME clusters. A cluster based approach may be more

beneficial in dealing with well-defined and recognized groups; availability of appropriate

information for risk assessment; monitoring by the lending institutions; and reduction in

costs (UNIDO 2006)

As the banking sector dominates the financial system in most developing and Asian

countries, how to enhance banks‟ lending efficiency to SMEs is a core issue in the context

of financial inclusion. The policy framework to improve SMEs‟ bankability should

address the key areas: proper financial and legal infrastructure for SMEs; innovative

financing instruments that facilitate SMEs‟ access to banks; and sustainable schemes for

mitigating SME credit risks; Moreover, due to information asymmetry, excessive

collateral and guarantee requirements have often been imposed on SME borrowers in

these countries. SME clusters could be useful in handling the issue effectively especially

in case small manufacturing SMEs (ADB 2012). Policy makers especially some central

banks have been playing notable roles by offering policy support for promoting cluster

approach in financing. For example, in 2004, Reserve Bank of India (RBI) has instructed

commercial banks to adopt a cluster-based approach for financing SMEs. In a statement,

the RBI has noted that a cluster-based approach to lending may be more beneficial in

dealing with well-defined and recognized groups; availability of appropriate information

for risk assessment and monitoring by the lending institutions. Moreover, India has

experimented carbon financing for energy efficiency in SME clusters. There was a

successful pilot in India involving local trade association or Chamber of Commerce and

the Indian Renewable Energy Development Agency (IREDA) to explore options for

financing energy efficiency equipment by pooling the cluster's demand by using a carbon

financing mechanism, and then to disseminate this model to other nearby clusters

(RBI 2004). The role of banks and financial institutions has been specifically in focused

in SME cluster development approach of India. As noted in the Ganguly Committee

recommendations (an expert committee on SME development), corporate-linked SME

cluster models need to be actively promoted by banks and FIs (RBI Web)8.

8http://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=394


3. SME Cluster Development: Status, Performance and Level

The role of SMEs is recognized in the context of Bangladesh. SMEs are the „employment

generating machine‟ that contributes to higher economic growth, narrowing the gap of

income inequality. It is evident that the number of SMEs in the country is growing over

time. As observed in the Bangladesh Bureau of Statistics (BBS) Survey (2013), the

number of nonfarm economic units in the country in 2013 was approximately 7.95

million against 3.71 million and 2.17 million recorded in 2001/03 and 1986, respectively.

Recent growth in nonfarm activities has been more in rural areas compared to urban

areas. The evidence on size distribution of the nonfarm economic units shows that nearly

97% of all nonfarm economic units in 2013 had less than 10 workers. The number of

manufacturing units stood at 869 thousand in 2013 against 490 thousand recorded in the

2001/03 census indicating a yearly compound growth rate of 5.3 percent (Bakht and

Bashar 2015). From the point of view of cluster development, small manufacturing units

are particularly relevant.

Constraints of SMEs of the country have appeared in several studies. Bakht and Bashar

(2015) identified these constraints again in their recent publication in the context of the

SMEs of Bangladesh: lack of freehold land; deficient infrastructure and utility services;

deficient legal and regulatory framework; inadequate access to finance; deficient

entrepreneurial, managerial and technical skills, insufficient business support services.

Discussion with head of SMEs of banks and representative of other stakeholders also

came up with similar constraints of SMEs of the country. Deficient physical infrastructure

and utility services have been identified as one of the major impediments to SME

development in Bangladesh. It is widely acknowledged that greater investment and/or

better performance from existing infrastructure facilities and utility services would have

high returns in terms of reduced costs of doing business. A recent survey of 120

manufacturing SMEs (INSPIRED SME Survey 2013) revealed that 86.8 percent of the

respondents considered electricity to be the main problem. Public institutions mandated to

provide business support services are usually ill-equipped and ill-staffed and the

programs they implement are not found very useful by the business community. Product

development, technological improvements, market promotions, and quality controls are

the especially deficient areas of business support measures. The other major area of

deficiency is the lack of reliable and up to date information on the sector. There is urgent

need for putting in place a centralized reliable system of business statistics, as observed in

the opinion survey.


Bangladesh government has been active in promoting SMEs of Bangladesh. The

Government has declared its commitment to develop SME as one of the main pillars of

economic growth to achieve the goal of becoming a middle income country by 2021. A

National Taskforce on SME Development was constituted in 2003 to draw up a realistic

strategy for promoting rapid growth and vigorous competitiveness among SMEs in

Bangladesh in the interest of accelerating the growth of the economy. In formulating the

industrial policy of the country, the Ministry of Industry has been offering due emphasis

on the development of the SME in the country. Ministry has formulated a document on

policy strategies for SME development in 2005. A SME cell within in the Industry

Ministry is working with the objective of providing to the SMEs the necessary

promotional support to accentuate and sustain SME activities. The government has

already initiated a few industry-friendly policies and support through SME Foundation,

Bangladesh Bank, EPB, BSCIC, BITAC, BCSIR, BEPZA, SEZ authority. Some of the

initiatives are also offering good dividend. Very recently, BIDS (Bakht and Bashar, 2015)

conducted a study to assess the current situation of SMEs in Bangladesh economy and

evaluate the means to integrate the SMEs as a dynamic sector in the economy by

overcoming the existing constraints and by articulating proper strategy for facilitating the

development of the SME sectors in manufacturing to contribute effectively to the

objective of growth and equity in the upcoming 7th Five Year Plan. In a recent meeting of

Executive Committee of National Council for Industrial Development (ECNCID), it was

decided to set up a total of 100 SME industrial clusters across the country and to bring

clusters under SME loan assistance. This is expected to be placed in the „National

Industrial Policy, 2015‟ which is at the formative stage.

The activities of a number of stakeholders are crucial for the SME development of the

country which is also relevant for cluster development. For example, Bangladesh Small

and Cottage Industries Corporation (BSCIC) is an important stakeholder in regard to the

SME promotion which is a subsidiary organization under the Ministry of Industry. The

main responsibilities of BSCIC include development of industrial estate, imparting

entrepreneurship skill development training, promoting sub-contracting, and running

credit program. The Small and Cottage Industries Training Institute (SCITI) was set up in

1985 under BSCIC to support SME entrepreneurs and their employees in the

development of their entrepreneurial and managerial skill. BSCIC basically follows

region approach to promote SMEs. Though the activities of BSCIC have been beneficial

for the clusters, the strategy does not match with the cluster approach. To promote SME

financing in the country, Bangladesh Bank has already introduced several schemes and


programs. Refinance schemes funded by Bangladesh Bank, IDA and Asian Development

Bank (ADB) has been facilitated for the development of SME Sectors. A department

namely „SME and Special Programs Department‟ is working in the central bank for

policy formulation, facilitating fund, monitoring and development of SME

entrepreneurship. BB in its credit policy document required banks to develop cluster

development policy to adopt cluster approach in financing. According to the BB‟s stand

on cluster development, banks/financial institutions are required to inform BB after

adopting cluster development policy to flourish SME sector which could be formulated in

co-operation with other banks, financial institutions and NGOs. The objectives of these

policies would be to strengthen the existing cluster, development of new clusters in

special sector, development and expansion of sustainable and competitive technology,

skill development of entrepreneurs, development of marketing channels, reduce credit

risk and enhance overall product development. Till date, the responses of the banks are

not encouraging till date, as observed in the survey interviews.

To promote SMEs of the country, the SME Foundation was created under the Ministry of

Industries as an apex institution for implementation of SME policy strategies adopted by

the Bangladesh Government. SME Foundation is also responsible for policy advocacy

and intervention for the growth of SMEs; facilitating financial supports for SMEs,

providing skill development and capacity building training; facilitating adaptation with

appropriate technologies and access to ICT; and providing business support services. In a

survey in 2013, SME Foundation (2013) has identified 177 clusters across the country

where the highest concentration of clusters is found in Dhaka division (38%) followed by

18 percent in Rajshahi division. The SME cluster mapping project comes in line with the

existing SME Policy9 to identify the small industries under 11 booster sectors10 outlined

in the policy. Practically, a very generic definition11 has been followed to identify the

clusters. Seven of these clusters (geographically concentrated manufacturing units) in the

areas of handicrafts, light engineering, plastic, handmade carpet (Satarnaji), agro-

processing (rice mill), and leather (footwear), were identified to gather information for

assessing their status, performance and levels (Cases 1-7) 9Ministry of Industries (2005) Policy Strategies for Small and Medium Enterprises development in Bangladesh,

Dhaka. 10

The booster sectors include agro-processing and related business, light engineering, knitwear and readymade

garments, fashion rich wear, personal effects and consumer's goods, leather and leather goods, healthcare and

diagnosis, plastics and other synthetics, electronics and electrical, software development, and pharmaceutical/

cosmetics/ toiletries (SME Foundation 2013). 11

A cluster is a concentration of enterprises producing is similar products or services and is situated within an

adjoining geographical location having common strengths, weaknesses, opportunities and threats (SME

Foundation).


Case 1: Handicraft Cluster, Jamalpur Sadar

About 22 years ago, JAICA and DANIDA came to Jamalpur to work with a local

NGO. Local entrepreneurs presented their handicraft as gifts to the foreign delegates.

They worked and made handicrafts using old cloths. However, after few years,

Japanese came there and they were pleased to see the handicrafts. Consequently, they

purchased the handicrafts from local entrepreneurs. Therefore, craftsmen realized that

there is a demand of these products. Later on, BRAC had offered training to four

women who started to work on hand made crafts. Subsequently, those women

provided training to other women. As a result, people learned how to make handicrafts

and they became entrepreneurs. At this moment over 150 firms are operating in the

proximate area, and they started selling their products to Dhaka and other divisional

cities.

Cluster Status


Number of Firms Total 150 firms, most of which are family based

Business and Product

Development Capabilities

The firms have potential for devising new products

to meet and create demand

Distance of Customers Customers are from both in proximate area as well

as other parts of the country. However, some

products are exported to foreign markets including

EU, USA, Canada, Australia (not by the producers)

Distance of Competitors Competitors are locally concentrated

Area/ Locality District head quarter and surrounding


Qualified and Skilled Personnel Both skilled and semi-skilled personnel are

available

Cost of Labor Reasonably low

Local Sourcing of Personnel Local labor is used

Access to Finance/ Capital Some firms have access to bank credit in a limited

scale. However, majority of the firms have either

no access or access to informal sectors

Quality and Arrangement of

Transportation

Available but limited in use

Access to Raw Materials Available in the local market

Access to Utility As they are mostly family based, utilities are

available

Land/ Accommodation Mostly located in the houses and thus saving house

rent



Research Organizations/

Outsourcing

No such formal initiatives is evident

National Level Association No national level association is connected or

supportive; however, they have their own

association

Government Agency No support from government agency

International Agency No support from any inetrnational agency at this

moment

BB and Other Banks Bangladesh Bank, National Bank Ltd., Dutch-

Bangla Bank Ltd., BRAC Bank Ltd., Uttara Bank

Ltd., Sonali Bank Ltd., etc.

NGO/MFI/Multipurpose NGO/ MFI are offering credit with higher interest

rates

Community Support (Local) Community people own the industry

Business Climate

Relative Cost of Production Cost of production is lower because of

involvement of family members

Regulators and Other Business

Rules/ Barriers

The most obvious impediment is lack of formal

and established brands and marketing

channels/supply chain of the manufacturers

Quality of Local Life Style

(Overall)

The standard of living of the entrepreneurs has

improved. They send their children to schools,

colleges, and universities. They are now more

aware about their lives

Cluster Performance

Collaboration and Network

Sharing of Orders Yes; mostly in the form of subcontracting

Sharing of Technology/

Infrastructure

Absent

Activities of Associations Their association is active in getting bank credit,

promoting savings, literacy of the entrepreneurs and

protecting mutual interest

Group Guarantee in Borrowing Yes, members of the association offer group

guarantee in getting credit from banks and NGO/

MFIs

Sharing of Human Resources No noticeable events

Horizontal and Vertical

Linkages

Absence of vibrant vertical linkages and networks

Linkage with Local Business

and Other Organizations

As it is labor-intensive and all the labors stay in the

locality, other forms of business also flourish


Significance

National Does not fall in the priority sectors in the export policy

Local Offers employment, income , empowerment and better living standard to

the local people

Economic Employment, income, export, government revenue through VAT

Social women empowerment, gender-equality and better living standard for the

local people


Recognition and Branding No branding across the country. Some firms have

potentials

Changes in No. of Firms Increasing

Changes in Output and Business Increasing

Changes in Employment and

Income

Increasing

National and Global Market

Access

Locally sold, not exported by the producers; belived

to be accessed

Dynamism

Using New Technology Use traditional technique

R&D Spending No

Innovative Product Development Mostly not by the manufacturers; but by the

branded sellers like Aarong

The Cluster Level

Based on the gathered information, it can be concluded that the cluster lacks a number

of required characteristics. The activities of local level association is encouraging,

however, firms still cooperate in a limited scale. There are very limited evidences of

supply chain at the national level. Bangladesh Bank and National Bank Ltd. have

played notable roles in promoting the cluster. A lot may be done in the area of

collaboration, and dynamism to push the firm to the „Developing level‟. At this

moment the cluster remained at the latent or immature level.


Case 2: Light Engineering, Old Dhaka

The Light Engineering cluster of the old Dhaka spreads around eight thanas of the

district, namely Sutrapur, Wari, Gandaria, Lalbug, Islampur, Chawkbazar, Kotwali,

Bongshal. This cluster concentrated on capital machineries, bicycles, construction

equipments, spare parts for the automobile, and other industries, factories and mills.

Around 500 manufacturing units are working in the area.

Cluster Status


Number of Firms Total 4000 factories/ workshops where about

500 firms are active

Business and Product Development

Capabilities

The factories are capable of mainly imitating

others‟ product (reverse engineering)

Distance of Customers Customers are from both proximate area as well

as other parts of the county. However, some

initiatives for selling products in foreign markets

are under consideration


Area/ Locality 8 thanas - Sutrapur, Wari, Gandaria, Lalbug,

Islampur, Chakbazar, Kotwali, Bongshal



Outsourcing Qualified and Skilled

Personnel

Lacks skilled personnel to ensure quality

products

Cost of Labor Relatively low

Local Sourcing of Personnel Mostly local, however, a few experts from

abroad also work

Access to Finance/ Capital Not satisfactory; Mostly from informal sectors

for small firms, however, big firms have access

to bank credit


Transportation

Available

Access to Raw Materials Generally not locally available; Key raw

materials are collected from ship breaking

industry; local suppliers are available

Access to Utility Not adequate

Land/ Accommodation Insufficient space for expansion



National Level Association Bangladesh Engineering Industry Owners‟

Association (BEIOA)

Light Engineering Product Business Promotion

Council (LEPBPC)

Government Agency Limited supports from SME Foundation,

Ministry of Industries

International Agency Limited support by ADB, Bangladesh

INSPIRED

BB and Other Banks Bangladesh Bank, IDLC Finance, BRAC Bank,

Southeast Bank, Trust Bank, Dutch Bangla

Bank, One Bank, Eastern Bank, Agrani Bank

NGO/ MFI/ Multipurpose NGO/ MFIs are dominant players among the

small firms

Community Support (Local) Available

Business Climate

Relative Cost of Production Low

Regulators and other Business

Rules/ Barriers

Inadequate knowledge on VAT, tax applicable for

a number of small firms; declared it as a thrust

sector but no visible actionable plan yet


(Overall)

Lot of scope to improve local living standard

Cluster Performance



Sharing of Infrastructure/

Technology

Generally absent

Activities of Associations In a limited scale

Group Guarantee in Borrowing Not for bank financing, but peer guarantee exists in

some cases

Sharing of Human Resources No formal and permanent arrangement, but

occasionally it happens

Horizontal and Vertical Linkages Yes (at national level)

Linkage with Local Business and

Other Organization

The growth and development of other forms of

business also depends on this sector/cluster


Significance

National Part of the priority sector of the country. Significantly important for the

national industrialization as well as farming using modern technology.

The products of the sector support other sectors by producing agricultural

machinery and spares; automobiles, railway and marine transport spares;

blades, battery and carbon rods; bread, biscuit and food processing

machinery; construction, building machinery and maintenance services;

gas distribution, LPG cylinder and fire extinguishers; general machinery

and spares; hardware, kitchen and bathroom fittings; metal products and

steel furniture; moulds and dies, foundry and casting; paper, pulp, sugar,

cement, plastics, rubber, and paint machinery; pharmaceutical machinery

and spares; printing and packaging machinery and spares textile and jute

machinery and spares, etc.

Local Significantly associated with the development of income and employment

of local population

Economic Economic importance is high. This cluster acts as prime producer of

locally manufactured machineries, spare parts and servicing industry

Social Contribute in improving income of local people; cause environmental

hazard


Recognition and Branding No branding. Locally recognized market as a

whole for a number of production sectors




Income

Increasing


Access

Strong national access and potential of access to

global market

Dynamism

Using New Technology In a limited scale

R&D Spending No Instance

Innovative Product Development Mostly reverse engineering

Level of the Cluster

Based on the collected information, it can be said that the cluster has huge potential.

There are evidences of the activities of local and national level associations; however,

firms still cooperate in a limited scale. Adequate support to develop it as a cluster is

missing. There are strong evidences of supply chain at the national level; and a few are

in the process of obtaining orders for big brands. Bangladesh Bank and some

commercial banks have been supporting the group of firms in the form of encouraging

and offering finance. A push can easily transform the cluster to the „Developing level‟.


Case 3: Jamdani Cluster, Sarulia, Narayanganj

A cluster comprising approximately 600 Jamdani saree manufacturing units including

419 in BSCIC industrial area has been identified at Sarulia, Narayanganj district. There

are around 4000 workers in this cluster where about 80 percent are male and 20

percent female. These Jamdani saree manufacturing units are established over the

years through government support. This cluster is growing because of increasing

demand for the products.

Cluster Status


Number of Firms Total 600 manufacturing firms including 419

firms in BSCIC Industrial area


Capabilities

It is a traditional product and design; some of

recent designs are imitated from India

Distance of Customers Customers are from both proximate areas as

well as other parts of the country. However,

some products are sold in the foreign markets

including India


Area/ Locality Sarulia, Rupganj, Damra


Qualified and Skilled Personnel Lacks skilled personnel to ensure quality products

Cost of Labor Relatively low and affordable

Local Sourcing of Personnel Earlier was mostly local. Now proportion of local

labor is rather declining

Access to Finance/ Capital Not satisfactory; Mostly from NGO, MFI, other

informal sources. However, big local firms have

access to bank credit


Transportation

Available

Access to Raw Materials Key raw materials are silk, thread and

color/chemicals; silk is imported from India and

China whereas thread and chemicals are collected

from local market

Access to Utility Mostly available; some problems during load

shedding

Land/ Accommodation Mostly located in the houses




Outsourcing

No such formal initiatives are evident

National Level Association No forms of association is found

Government Agency BSCIC is supporting; instances of supports by the

SME Foundation

International Agency Not evident

BB and Other Banks Bangladesh Bank, BRAC Bank, Mutual Trust

Bank, Sonali Bank, Agrani Bank, Janata Bank, etc.

NGO/ MFI/ Multipurpose Dominant role of NGO/ MFI other than bank. Few

banks including MTBL have whole selling

arrangement with MFIs

Community Support (Local) Community people are supportive and proud of the

industry

Business Climate

Relative Cost of Production High compared with products of power loom. In

case of costly items, up to 90 % cost of production

is labor cost


Rules/ Barriers

The most obvious impediment is lack of formal and

established brands and marketing channels of the

manufacturers; syndication by some big firms

refrain others in accessing to formal reputed outlets


(Overall)

Notable contribution in local life; status is getting

better

Cluster Performance



Sharing of Infrastructure No.

Activities of Associations No association exist

Group Guarantee in Borrowing Not for bank financing, but for financing from

NGO/ MFI

Sharing of Human Resources No formal arrangement

Horizontal and Vertical Linkages Yes, Linkage between local & national traders

with the manufacturers


Other Organization

As it is labor-intensive and all the labors stay in

the locality, other forms of business also flourish


Significance

National It is fostering heritage of the then Muslin of Mughal regime; part of the

priority sector of the country

Local Offers employment, income, empowerment and better living standard to

the local people

Economic Important source of employment, income, export, government revenue

Social Contribute in women empowerment, gender-equality and better living

standard for the local people


Recognition and Branding Itself is a brand and recognized market as a whole




Income

Increasing


Access

Mostly national; limited global market access

(through intermediaries)

Dynamism

Using New Technology Only designs are replicated

R&D Spending Not at all

Innovative Product Development Mostly not by the manufacturers; but by the

braded sellers like Aarong


Based on the gathered information, it can be concluded that the cluster has remarkable

potential and it needs support to convert it into a sound cluster. Activities of local level

association are extremely limited and very limited collaboration among firms. There

are strong evidences of supply chain at the national level; exports are generally made

through intermediary. BSCIC, Bangladesh Bank and some commercial banks have

been supporting in the form of encouraging and offering finance. A push can easily

transform the cluster to the „Developing level‟.


Case 4: Plastic Cluster, Posta

Posta is located at Lalbagh in old Dhaka, which is popular for manufacturing plastic

items. About 1100 entrepreneurs are operating in Posta. These units use plastic and

various colors as raw materials for their production. Most of the raw materials required

are locally available. Besides, ancillary services are available in the area like lathe,

workshop, dice maker, etc. The outputs of the cluster are sold locally and nationally.

The total amount of turnover of the cluster stood at around BDT 180 million.

Cluster Status


Number of Firms Total 1,100 manufacturers


capabilities

They are capable of developing new products

and manufacturing according to buyers'

specifications

Distance of Customers They have established trader (buyer) in Chalk

Bazar which is very near to Chalk Bazar

Distance of Competitors Customers are largely located in Posta, Chalk

Bazar and the surroundings

Area/ Locality Lalbagh in old Dhaka; competition among firms

within the locality


Qualified and Skilled Personnel Lacks skilled personnel to ensure quality

products

Cost of Labor Low and affordable cost

Local Sourcing of Personnel Mostly local

Access to Finance/ Capital Not satisfactory; Mostly from informal sectors

like NGOs


Transportation

Available

Access to Raw Materials Available; Key raw materials are collected from

Kamrangir Char which is very close to it

Access to Utility Generally available; problems during load

shedding

Land Insufficient space for expansion

Supply of Raw Material Very Easy, Kamrangir Char that supplies most

of the raw materials is very close to this cluster




Outsourcing

No evidence

National Level Association No evidence

Government Agency Limited government support

International Agency No support from any international agency at this

moment

BB and Other Banks Bangladesh Bank, Sonali Bank, Janata Bank,

BRAC Bank, Eastern Bank, Prime Bank, The

City Bank, Uttara Bank, etc.


Business Climate

Relative Cost of Production Relatively Low


Rules/ Barriers

Inadequate knowledge on VAT, tax applicable for

a number of small firms; declared it as a thrust

sector but no visible actionable plan yet


(Overall)

Improving

Cluster Performance



Sharing of Infrastructure No


Group Guarantee in Borrowing Not found

Sharing of Human Resources No formal and permanent arrangement, but

occasionally it happens

Horizontal and Vertical Linkages Yes


Other Organization

Available

Significance

National Significant contribution to total national production of plastic goods

Local Contribute in generating employment, and income

Economic Save environment by collecting and recycling rubbish plastic, Import

substitute.

Social Increased life standard, Awareness, Literacy, Financial Management;

caused environmental hazard



Recognition and Branding No branding. But recognized locally as a whole


Changes in Output and

Business

Increasing


Income

Increasing


Access

Access to national market

Dynamism

Using New Technology No evidence

R&D Spending No

Innovative Product

Development

Mostly buyer specific


Based on the collected information, it can be concluded that the cluster has potential.

Activities of local level association are limited and very limited collaboration among

firms. Adequate support to develop as a cluster is missing. Products are generally

locally sold. Bangladesh Bank and some commercial banks have been supporting in

the form of encouraging and offering finance. A push can help the immature cluster

into a „Developing‟ one.

Case 5: Leather (Footwear Producing) Cluster, Bhoirab, Kishoreganj

A footwear producing cluster is located at Bhoirab in Kishorgonj that produces

different types of shoes. This cluster started operation in 1989. There are about 5000

manufacturing units in this cluster. About 25000 people work in those units of which

100 percent are male.

Cluster Status


Number of Firms Total 5,000 manufacturers



Capable of developing new products and specialize in

making shoes as per buyers' specifications

Distance of Customers Customers are located mostly in Dhaka. Besides they sell

to traders in Sylhet. Local level sales are also evident


Area/ Locality Local level competition is severe

Supply of Raw Material Easy, finished leather is collected from tanneries in Dhaka



Qualified and Skilled

Personnel

Most of the personnel lack skill to ensure quality products

Cost of Labor Low

Local Sourcing of

Personnel

Mostly local

Access to Finance/

Capital

Not satisfactory; PCBs, SOCBS and from informal sectors

like NGOs

Quality and Arrangement

of Transportation

Available by road transport; easy communication by train

but train does not carry shoes; they are trying to negotiate

it

Access to Raw Materials Available; Easy, Key raw materials are collected from

Tanneries

Access to Utility Available

Land Insufficient space for expansion



Outsourcing

No evidence is found

National Level Association Shoe Industry Owners' Association

Government Agency Not visible

International Agency No

BB and Other Banks Bangladesh Bank, BRAC Bank, Eastern Bank,

Prime Bank, The City Bank, Sonali Bank, Uttara

Bank, Mutual Trust Bank, One Bank, etc.

NGO/ MFI/ Multipurpose Dominant players


Business Climate

Relative Cost of Production Relatively low


Rules/ Barriers

Lack of land space, environmental risk, load

shedding, marketing barrier


(Overall)

Improved

Cluster Performance



Sharing of Infrastructure No


Group Guarantee in Borrowing No

Sharing of Human Resources No formal and permanent arrangement

Horizontal and Vertical Linkages Yes


Other Organization

Available, they are suppliers of renowned brand

like Apex, Bata, etc.


Significance

National They are the dominant manufacturers of locally produced shoes

Local Employment, became a business hub, etc.

Economic High value addition, local raw materials, import substitute, export,

contribution to GDP

Social Increased life standard, awareness, inclination to education, bondage

among neighbours became very strong


Recognition and Branding No branding. But locally recognized market as a

whole, Suppliers of Reputed band like Apex and Bata.



Business

Increasing


Income

Increasing


Access

Mostly national but exported to global market through

intermediaries

Dynamism

Using New Technology Limited

R&D Spending No evidence

Innovative Product

Development

Buyer specific and imitation


Based on the collected information, it can be concluded that the cluster has remarkable

potential and it needs support to convert it into a sound cluster. Activities of local level

association are extremely limited and very limited collaboration among firms.

Adequate support to develop as a cluster is missing. There are strong evidences of

supply chain at the national level; exports are made through intermediary. Bangladesh

Bank and some commercial banks have been supporting in the form of encouraging

and offering finance. A push can help the cluster to reach to the „Developing level‟.

Case 6: Rice Milling Cluster, Phulhat, Dinajpur

In Phulhat BSCIC area of Dinajpur Sadar, a rice milling cluster has been identified.

The total number of operating units is 500. These mills use paddy as key raw material

to produce rice. The raw materials are mostly procured locally. Total amount of annual

turnover stood at around BDT 300 million.


Cluster Status


Number of Firms Total 500 manufacturing firms, Auto 100, Husking

400



No evidence

Distance of Customers Customers are basically located in Dhaka,

Chittagong, Faridpur, etc.


Area/ Locality Competitions are amongst the mills in Dinajpur

district and in adjacent areas; face competition

from Indian rice


Qualified and Skilled Personnel About 60% unskilled and 40% skilled


Local Sourcing of Personnel 80% local

Access to Finance/ Capital Satisfactory, banks are ready to finance appropriate

customers


Transportation

Available

Access to Raw Materials Available, mostly collected from local sources and

from adjacent district like Noagoan, Bogra,

ChapaiNababgonj

Access to Utility Available, face difficulty during load shading

Land/ Accommodation Available, huge scope for expansion



Outsourcing

No such formal initiatives are evident

National Level Association Dinajpur Zilla Rice Mill Owners‟ Association but

evidence of limited activity

Government Agency No such instances are evident


BB and Other Banks Bangladesh Bank, Janata Bank, Agrani Bank,

National Bank, Pubali Bank, etc.

NGO/ MFI/ Multipurpose Not visible



Business Climate

Relative Cost of Production High than the imported rice from India


Rules/ Barriers

Threat of imported rice; problem in marketing and

selling


(Overall)

Good

Cluster Performance


Sharing of Orders No evidence

Sharing of Infrastructure No evidence


Group Guarantee in Borrowing No

Sharing of Human Resources No such arrangement is evident

Linkages Horizontal and Vertical Yes, Linkage between local & national traders with

the manufacturers


Other Organization

Available, some reputed brand like PRAN, ACI,

etc. give orders to them

Significance

National Meets huge amount of demand for Rice in the country

Local Offers employment, income

Economic employment, income, export, support agriculture, ensures economic

growth

Social Better living standard for the local people and offers small businesses to

local people like trading


Recognition and Branding They have their own branding

Changes in No. of Firms Auto Increasing but husking decreasing


Business

Decreasing


Income

Increasing


Access

Mostly national but potential of export

Dynamism

Using New Technology Yes (Auto rice milling)


Innovative Product

Development

No mentionable evidence was found



Based on the gathered information, it can be concluded that the cluster has potential

but currently most of the traditional mills are facing difficulties. Activities of local

level association are limited and very limited collaboration among firms. Adequate

support to develop as a cluster is missing. Products are generally locally sold. Some

commercial banks have been supporting in the form of encouraging and offering

finance. A push can save the cluster.

Case 7: Satranji (Carpet) Cluster, Rangpur

A cluster of carpets and doormats is found at Nishbetgonj, Rangpur. The raw materials

used for these items are coconut fibers, threads and colors which are mostly procured

locally. Around 1,150 workers are employed in this cluster. The total annual turnover

of the cluster is about Tk. 0.04 million. Outputs are sold throughout the country.

Cluster Status


Number of Firms Total 400 firms, most of which are family based



The firms have potential for devising new products

Distance of Customers Customers are from both in proximate area as well

as other parts of the country


Area/ Locality Mostly, in the local level


Qualified and Skilled Personnel Mostly Skilled


Local Sourcing of Personnel Mostly local

Access to Finance/ Capital Some firms have access to bank credit in a limited

scale. However, BSCIC in collaboration with Janata

Bank arranges credit facilities


Transportation

Available

Access to Raw Materials Generally, not available locally but collected from

Bogra

Access to Utility As they are mostly family based, utilities are

available

Land/ Accommodation Mostly located in the houses




Outsourcing

No such formal initiative is evident

National Level Association They do not have their own association but Dinajpur

Chamber of Commerce and Industry is active in a

limited scale

Government Agency No support from government but BSCIC provides

lot of support to them


BB and Other Banks Bangladesh Bank, BDBL, Janata Bank, etc.

NGO/ MFI/ Multipurpose Not visible


Business Climate

Relative Cost of Production Cost of production is lower because of involvement

of family members


Rules/ Barriers

Not Visible


(Overall)

Moderate. So, lot of scope to improve local living

standard

Cluster Performance



Sharing of Technology/

Infrastructure

Generally, absent


Group Guarantee in Borrowing Absent

Sharing of Human Resources No noticeable events

Linkages Horizontal and

Vertical

Yes, Linkage between local & national traders with

the manufacturers

Linkage with Local Business

and Other Organizations

Present

Significance

National Contributing towards upholding national heritage

Local Offers employment, income, empowerment and better living standard to

the local people

Economic Employment, generation of income, government revenue through VAT

Social Women empowerment, gender-equality and better living standard for the

local people



Recognition and Branding No branding



Changes in Employment and Income Increasing

National and Global Market Access Mostly local and national

Dynamism

Using New Technology No


Innovative Product

Development

Limited, but they can make Satranji as per byers‟

specification


Based on the collected information, it can be concluded that the cluster has potential. It

needs support to convert it into a sound cluster. Activities of local level association are

not visible and very limited collaboration among firms. There are strong evidences of

supply chain at the national level. BSCIC, Bangladesh Bank and some commercial

banks have been supporting the cluster in the form of encouragement and finance.

A push can easily help the cluster to reach the „Developing level‟.

4. Implications of SME Cluster Development for Bank Financing in Bangladesh

Among the many compelling reasons why SMEs fail to realize their full potential in

Bangladesh, inadequate access to finance is prominent and most commonly cited. With

limited capital base of their own and limited access to institutional financing, most SMEs

rely on inefficient financing service from informal sources. The INSPIRED SME Survey

(2013) reveals that 68.6 percent of small enterprises and 44.7 percent of medium

enterprises identified access to finance as a major constraint.

In the past, government has attempted to provide small and medium enterprises with

access to finance through targeted lending. There was a government directive that 5 per

cent of Bank's loan portfolio be set-aside for small and medium enterprise financing.

A separate bank, namely, the Bank for Small Industries and Commerce (BASIC) was set

up in 1988 with the objective of financing the small and medium enterprises. Of the other

support bodies, BSCIC offers loans to individual entrepreneurs up to BDT 5 lac for doing

businesses. Besides, they have collaborations with Bangladesh Bank and have access to

the central SME fund amounting to Tk. 100 crore which they disburse to entrepreneurs

with the help of banks. SME Foundation has linkage with different banks to finance


SMEs. They allow pre-finance to banks in order to disburse collateral free loans to

entrepreneurs with reduced rate of interest which is around 9 percent. In offering direct

and indirect credit supports, BSCIC and SME Foundation do not make distinction

between SME clusters and financing to individual entrepreneurs.

Of the policy making bodies, role of Bangladesh Bank in promoting SME financing is

particularly visible. The central bank issued directives to both public and private

commercial banks regarding working capital loans, use of standardized documentation

procedure and time limits for credit sanctioning and loan disbursement. In recent time,

Bangladesh Bank has undertaken some remarkable measures to ensure greater access to

bank finance by the SMEs. For the first time in Bangladesh, an indicative target for SME

loan disbursement has been set from 2010 by the banks and financial institutions

considering SME development as one of the most important development agenda of the

country. In response to the direction of the Bangladesh Bank to promote SME women

entrepreneurs, banks established separate „Women Entrepreneurs‟ Dedicated Desks‟ with

necessary and suitable manpower. Banks and financial institutions were encouraged to

receive group security/ social security in the SME financing by the central bank. BB also

offered licenses to new branches specifically to finance the priority sectors like SME and

agriculture. These SME supportive systems are directly relevant to all types of SMEs

including clusters.

In response to the policy initiatives, some positive changes have taken place in the area of

bank financing to SME sectors of the country. According to the BB (2014) information,

total SME credits increased from around 20 percent to 27 percent of their total credit

portfolio in between 2009 and 2013. As of June end 2013, total outstanding amount of

SME financing of the banking sector was BDT 90,672 crore of which only around 2

percent (less than BDT 2,000 crore) exposure was with SME clusters (geographically

concentrated SME units). Most of SME clusters are located in the rural areas, and due to

the lower SME loan disbursement in the rural areas, the geographically concentrated

SME manufacturing units are getting lower proportion of loans from banks and NBFIs.

Available data (Figure-4) indicates that a considerably low proportion of banks‟ SME

credit goes to the clusters. Of the broad bank groups, performance of PCBs is relatively

better.


Figure 4: Disbursement and Outstanding SME Credit to the Clusters

[% of Total SME Credit]

Source: Bangladesh Bank

The dominant roles of PCBs to the geographically concentrated SMEs (called as cluster

financing) are visible in Figure-5. Of the total outstanding credit to the SME clusters,

PCB‟s exposure was three-fourth of the total. In terms of number, 77 percent SMEs of the

clusters were financed by PCBs as upto end 2013. Practically, other than a few

exceptions, banks do not make distinction between financing to the individual SME

entrepreneurs and to the SMEs within a cluster. Banks do not follow cluster approach to

finance SMEs, as found in the survey interviews.

The available information indicates that very limited SME financing was offered to the

crucial SME clusters- light engineering and leather including footwear (Figure-6). As of

June 2013, 48 percent cluster financing goes to the RMG, and 24 percent to the rice mill

clusters. Of the total SME credit to the clusters, only 5 percent was disbursed to the light

engineering sector.

Figure 5: Credit to the SME Clusters by Broad Bank Groups (upto end June 2013)


15.12

5.36

21.86

8.2 0

5

10

15

20

25

All Banks SOCBs PCBs IslamiBanks

Cluster Disbursement as a % of total SME Disbursement

2.2

0.82

3.35

1.27 0

1

2

3

4

All Banks SOCBs PCBs IslamiBanks

Cluster Outstanding as a % of total SME Outstanding

9%

75%

16%

Outstanding Credit

SOCBs

PCBs

Islami Banks

9%

77%

14%

Number of Firms

SOCBs

PCBs


Figure 6: Sectoral Distribution of Credit to the SME Clusters (up to end June 2013)


In regard to the performance of individual banks in SME cluster financing (both in terms

of credit disbursement and credit outstanding), the distribution is much skewed.

According to the Bangladesh Bank (2014) data, top five banks accounted for over 52

percent of total SME credit (outstanding); and top five banks accounted for about 72

percent of the total SME credit to the clusters (Table-2). In regard to credit outstanding,

top five banks collectively have over 53 percent of the total credit exposures of banks to

SME clusters (Table-3).

Table 2: Status of SME and Cluster Financing by Banks

(% of Disbursement as upto June 2013)

Top 5 Banks as Per Total

SME Financing as % of Total SME

Credit by All Banks [Disbursement]


SME Cluster Financing as % of Total SME

Cluster Credit by All Banks [Disbursement]

Islami Bank Bangladesh Ltd. 30.05 United Commercial Bank Ltd. 38.02

The City Bank Ltd. 6.70 Islami Bank Bangladesh Ltd. 17.11

EXIM Bank Ltd. 5.78 The City Bank Ltd. 6.07

AB Bank Ltd. 5.36 AB Bank Ltd. 5.98

Uttara Bank Ltd. 4.80 Jamuna Bank Ltd. 4.14


12% 5%

24%

6%

2%

48%

0% 3%

Disbursement

Handloom & Hosseary

Light Eng.

Rice Mill

Stone crashing

Fish processing & Dry Fish

RMG

ZamdaneeSharee & Joree

Others

21%

9%

25%

5% 3%

18%

0% 19%

Outstanding

Handloom & Hosseary

Light Eng.

Rice Mill

Stone crashing

Fish processing & Dry Fish

RMG

ZamdaneeSharee & Joree

Others


Table 3: Status of SME and Cluster Financing by Banks

(% Outstanding as of End June 2013)


SME Financing as % of Total SME

Credit by All Banks [Outstanding]


SME Cluster Financing as % of Total SME

Cluster Credit by All Banks [Outstanding]

BASICBank Ltd. 8.07 United Commercial Bank Ltd. 20.71

Janata Bank Ltd. 6.76 IBBL 12.06

United Commercial Bank Ltd. 6.74 Jamuna Bank Ltd. 6.93

Agrani Bank Ltd. 6.38 Janata Bank Ltd. 6.16

EXIM Bank Ltd. 6.26 The Premier Bank Ltd. 6.16


In connection with lending behavior of banks (as revealed in the interviews), there are

limited instances of using alternatives to real estate based lending in the SME financing

by banks in the country. Group guarantee and peer pressure, successfully used in the case

of micro-finance, are not very common for SMEs. Use of assets other than land and

building, such as fixture, equipment, vehicles, etc. as collateral is also a fairly standard

practice in institutional finance but is of less use in the case of SMEs as these enterprises

usually possess few such non-land assets. Banks face common difficulty in SME lending,

because of the informal nature of many SME transactions and high cost of small loan

administration. Instances of group security or social security are extremely limited. As

opined by the heads of SMEs of different banks, banks generally do not make any

distinction between SME cluster financing and SME financing to an independent SME;

however, they identified difficulties in offering SME cluster financing and pointed

following recommendations (Box-1).

Box 1: Difficulties in Financing SME Clusters and Some Suggestions

Difficulties: Difficulty in gathering people to form group; Lack of knowledge on

cluster financing in branch level; Lack of interest of the management ; Entrepreneurs

are not found to be interested to form group to obtain lending; Difficulty in recovery;

Absence of Financial literacy; Lack of knowledge in preparation of project planning;

Cost of fund is high for the SMEs can hardly afford high cost loans; Non-availability

of Trade License; Difficulty in getting guarantees and collaterals; Political unrest and

other external difficulties; Non-availability of bankable customers; No-branch network

or local set up; Lack of market information and access.


Suggestions: Offering related knowledge support to the entrepreneurs; Training

support to the supporting bankers; Developing strong monitoring cell to monitor the

activities of cluster; Rewarding successful cases; Capacity building of banks;

Arranging collateral free loans; Refinancing specially targeting clusters; Supportive

organization; Right identification of clusters; Formation of supply and value chain.

Source: Based on the interviews of Heads of SMEs and Representative of other stakeholders

Following six mini cases (Box-2 to Box-7) can be useful in understanding the existing

cluster financing practices by banks in the country and to draw lessons from the

experiences.

Box 2: Cluster Financing by National Bank Limited

National Bank Limited opened a branch in Jamalpur and has been offering financing

support to a good number of women who are involved in handicraft business. Initially,

they were suffering from financial constraints, some of them used to borrow very poor

amount from different NGO‟s with high interest rates and the borrowers became

exhausted to pay their borrowed money. With a view to help them, National Bank

Limited, Jamalpur branch came up to their doors and started financing the women

Entrepreneurs in the year 2009. They started this special program after having

inspiration from the Bangladesh Bank and with the initiative of the then top

management of the bank. Till November, 2013 the bank disbursed SME loans under

the Bangladesh Bank Refinance Scheme amounting to Tk. 7.70 Crore among 539

female and Tk. 69.50 Lac among 7 male entrepreneurs. As a whole, the bank financed

a total volume of BDT 8.39 Crore among 546 entrepreneurs and till November, 2013

the recovery achievement was 99.68%. In this regard, it may be noted here that around

21,000 to 25,000 people are involved in this handicraft business. For the very poor

women, the bank started group financing under group guarantee system where

minimum and maximum amount of loan for a single borrower was BDT 10,000 and

BDT 50 lac, respectively. The interest rate varies from 9-10 percent. Local community

and administrative support has been playing crucial role in the development of this

cluster.

Source: Based on the information from National Bank Limited


Box 3: Narsingdhi Jamdani Cluster Financing by BRAC Bank Limited

In terms of performance, the Jamdani saree manufacturing cluster in Sarulia,

Narayanganj financed by the BRAC Bank Limited is doing better as claimed by the

bank. These Jamdani saree manufacturing units were established over the years with

government support (BSCIC). This cluster is growing because of increasing demand of

the products and is having good utility support. The bank started financing this cluster

in 2005 to about 30 firms and disbursed about BDT 120 million initially whereas the

present number of borrowers is about 200 and amount outstanding is about BDT 1,400

million. As per the Product Program Guideline (PPG), the bank sanctions maximum

BDT 1.50 million and 5.0 million in the form of secured and unsecured loan. Both

term loan as well as working capital finance is provided by the bank. The bank

performs its financing activities having a SME unit office and with the help of some

corresponding banks in that locality. A unique feature of the financing in the cluster is

that about 50% of the borrowers have life policy equal to the loan amount with the

Pragati Life Insurance Company Limited as a safety for the borrower as well as the

bank. The recovery rate from the cluster is above 98 percent.

Source: Based on information from BRAC Bank Limited

Box 4: Bogra Light Engineering Cluster Financing by The City Bank Limited

City Bank launches the first cluster product for the light engineering and foundry

sector in Bogra in 2011. This is the first formal launching of City cluster product in

Bogra targeting light engineering and foundry sector. The bank started financing this

cluster with 6 firms and disbursed about BDT 4.0 million initially, and at present the

number of borrowers remains same (6) and amount outstanding is about BDT 1.7

million. As per the PPG, the bank sanctions maximum BDT 1.00 million and 2.00

million in the form of secured and unsecured loan. Only term loan has been provided

by the bank. The bank does not take any group guarantee and the recovery rate from

the cluster is about 50 percent.

Source: Based on the information from The City Bank Limited


Box 5: Cluster Financing by UCBL

Narsingdhi district is popular for textile and weaving industry cluster as identified by

SME foundation. United Commercial Bank Limited (UCBL) financed up to BDT 400

crore in the cluster. The bank started its banking activity in this area from 2012. UCBL

has also undertaken different initiatives for developing and maintaining SME cluster

development. They educated the people who are doing textile business with different

business knowledge and introduce them with the modern business process. The bank

also offered different training initiatives related to business expansion, product

marketing and network building. In this area, bank‟s loan amount ranges from

BDT 5 lac to BDT 10 crore depending on the capacity of the borrower. Recovery rate

is very high having NPL of around 1%. Bank gives finance to the people involved in

every phase in the production process. Loan amount is mostly covered by collateral,

and in case of a few large businesses corporate guarantees are accepted.

Source: Based on the information from UCBL

Box 6: Narsingdhi Textile Cluster Financing by BASIC Bank Limited

Narsingdhi Textile Clusteris one of the successful clusters financed by the BASIC

Bank limited as claimed by the bank. The bank started financing this cluster in 2004 to

15 Textile Mills and disbursed about BDT 150 million initially whereas the present

number of borrowers is thirty-eight (38) and amount outstanding is about BDT 405

million. As per the PPG, the bank sanctions maximum amount of BDT 50 million in

the form of both term and working capital financing. The bank offers secured credit

only. The bank does not take any group guarantee and the recovery rate from the

cluster is about 100 percent.

Source: Based on the information of BASIC Bank Limited

Box 7: Sustainable Cluster Finance in the Farming Sector by MTBL offers Valuable

Lesson for Cluster Financing

The farmers of a village in Panchagor, a northern district in Bangladesh have been

benefited tremendously by the cluster approach. The village is a very remote area

where electricity has not reached yet. In late 2009, green energy changed the picture of

the village. In group lending approach, farmers got loan for crops, pump for irrigation

and drainage. A private commercial bank, Mutual Trust Bank Limited (MTBL), helped


to form this cluster. First of all, bank organized the farmers and conducted feasibility

study in order to know the potentials of production. Then, farmers were asked to form

a cooperative which usually consists of 30-35 farmers. This cooperative then gets a

legal entity by registering with the appropriate authority. After forming cooperative,

they can apply for bank loan. In this case, bank offered Tk. 30 lac for irrigation pump

which is owned by cooperative and this is a common platform where members get

irrigation facility. For this loan, cooperative gives guarantee to the bank. Bank also

helped in procuring pump by contracting suppliers and ensured service facility

including installation of pumps. As these pumps are operated by solar, banks made

arrangement to install solar panel. Banks also made expenditure to prepare water

distribution system. Apart from this, bank took care of back-up facility which is diesel

operated in order to smooth flow of water. The bank offered loans for ten years in the

project.

Source: Based on MTBL information

5. Observations and Recommendations

The report identified several observations based on the primary and secondary

information, and interviews/ discussions with SME heads of banks, and representatives of

major stakeholders of SMEs of the country. The study puts forward a few generic

recommendations with the identified observations.

One, SME cluster approach received inadequate attention of policy makers till date.

A generic SME strategy would not work for sustainable cluster development. The

identification of clusters based on geographical proximity of SMEs of all sectors is only a

primary job. The country requires an in-depth analysis of the relevant information on

small manufacturing clusters of the country. This would be true background for

undertaking effective cluster development strategies in different regions of Bangladesh.

As per the draft Industrial Policy, Government is in favor of creating cluster villages for

running industrial enterprises in special economic zones for a number of industries. For

effective intervention, a cluster mapping for identification of potential cluster with their

current status, performance and levels is the pre condition. To perform the job, exiting

government agencies may play due role with the support of specialists, or government

may even think of establishing a separate authority. A coordination body is also needed

with the participation of different stakeholders for formulating support strategies.


Two, Most of the SME clusters of the country are immature clusters as observed in the

study. The clusters are generally featured by low level of cooperation and sharing; lack of

linkages; absence of the use of modern technology; absence of supply chain; absence of

the involvement of universities and research organizations; and absence of expenditures

on research and development. In most clusters, middlemen are taking advantages of the

products from the markets. Extensive support to these clusters can bring notable change.

Cluster may help changing the situation in creating true value chain and reaching the

national and global markets. The cost of transportation communication is very low in the

cluster net, which makes enterprises incline to look for cooperative partner within the net.

The study found huge potentials of developing clusters in SME sectors like light

engineering, leather, plastic, etc. It is not generic SME strategy, but SME cluster

development strategy that can offer a big push to these geographically concentrated small

manufacturing units.

Three, Product research and development has been a critical area to address for SME

cluster development; and thus SME clusters should be supported by universities with

specialist expertise and research institutes. Absence of the practices makes a cluster

stagnant. Practically, product baskets of SMEs are extremely small in terms of local

production or export items. To enlarge the product basket and diversify export items we

are in need to spend on product research and new product development. Linking

universities, specialized institutions may help doing the job. The sponsorship arrangement

of R&D for supporting cluster is the need of the time.

Four, Involvement of additional cost discourages banks in undertaking SME financing.

Bangladesh Bank has significantly expanded its CSR activities in recent years, with

pledging financial support to a number of projects. Besides, Bangladesh Bank has been

encouraging and offering incentives to banks and financial institutions to undertake CSR

activities to attain sustainable development. To support cluster financing, involvement of

banks‟ additional costs (not the financing part) could be considered or counted as their

CSR activities. This may be an encouraging factor for banks to undertake cluster

promotion and financing.

Five, The development of collaborative and sustainable clusters may be a way to

stimulate innovations, manage resources efficiently, and can help environmental and

social challenges. A few instances to the far sector are really encouraging in this

connection. Involvement of additional cost and efforts on the part of the banks cannot be

ignored in this connection. These initiatives of banks should get special treatment and


support. The ongoing efforts of Bangladesh Bank is promoting green banking is a

remarkable initiative. BB‟s initiatives have made notable changes in the banking activities

by the time. Sustainable and environmental cluster financing might receive incentive as

part of promoting green banking initiative by Bangladesh Bank.

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Appendix

Discussion Summary on National Seminar on “SME Cluster Development:

Implication for Banks”

Bangladesh Institute of Bank Management (BIBM) conducted a national seminar on

“SME Cluster Development: Implication for Banks” on March 14, 2015. Mr. Md. Abul

Quasem, Chairman, Executive committee of BIBM and Deputy Governor, Bangladesh

Bank was present in the seminar as the chief guest. Dr. Momtaz Uddin Ahmed, Professor,

Department of Economics, University of Dhaka; Mr. Md. Mehmood Husain, President &

Managing Director, Bank Asia Ltd. and Dr. Engr. Syed Md. Ihsanul Karim, Managing

Director, Small & Medium Enterprise Foundation were present in the seminar as

designated Discussants. Dr. Toufic Ahmad Choudhury, Director General, BIBM Chaired

the occasion. A total number of 200 participants including executives, high officials of

different banks, academicians, media representatives, faculty members and students of

BIBM participated in the seminar.

The summery of the comments of expert discussants and participants were as follows:

Dr. Momtaz Uddin Ahmed, Professor, Department of Economics, University of

Dhaka

Dr. Momtaz termed the paper as a very comprehensive and excellent research work. SME

clusters in Bangladesh are basically geographic conglomerations using local raw

materials, indigeneous skills and local markets. The so-called clusters are developed

spontaneously and require further policy support to convert into cluster in real sense. In

order to develop clusters, we need to ensure common service, collective activities like

sourcing and marketing, creation of value chain, connectivity with local, national and

international actors. Referring to the findings of the paper, he opined that it is not

surprising that only 2% of total bank credit was disbursed amongst the clusters. As

reasons he mentioned that banks generally follow traditional collateral based lending and

are not dedicated to financing SME clusters. He also stressed on venture capital

financing to support SME clusters. Dr. Momtaz disagreed with the recommendation of

the paper about tagging CSR of banks with SME cluster financing.


Mr. Md. Mehmood Husain, President & Managing Director, Bank Asia Ltd.

Mr. Mehmood termed the paper as a very good one, and appreciated the initiative of

BIBM in this connection. Due to lack of first-hand industry knowledge, banks heavily

depend on NGO/MFI-based wholesale lending, which is very expensive. There should

have separate and independent establishments to ensure support services for the clusters.

More training and counseling should be provided to bank employees so that they can

follow cluster-based lending approach.

Dr. Engr. Syed Md. Ihsanul Karim, Managing Director, Small & Medium

Enterprise Foundation

Dr. Ihsan appreciated BIBM initiative. He noted, we need integrated collaboration among

researchers, entrepreneurs, banks, and policy makers. To facilite this, a common facility

centre (CFC) can be established. There are some ignorance about the VAT and Tax

system among the entrepreneurs as well as tax officials.

Some Key Points Highlighted by the Participants

Lack of access to market is the key challenge to the development of clusters in

Bangladesh

To ensure one stop service, cluster administrator is needed

There is no cluster financing policy; Bangladesh bank should formulate cluster based

financing policy

Utilizing indian experience, special purpose vehicle (SPV) can be established to

promote clusters in Bangladesh


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