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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
SME Cluster Development: Implication for Banks
Dr. Shah Md. Ahsan Habib
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
or mechanical, including photocopying, recording or by any information storage and
retrieval system, without the permission of the publisher
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.
Dr. Shah Md. Ahsan Habib
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
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
SME Cluster Development: Implication for Banks
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.
Research Monograph 16 3
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
4 Research Monograph 16
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).
Research Monograph 16 5
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)
6 Research Monograph 16
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).
Research Monograph 16 7
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
8 Research Monograph 16
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
Research Monograph 16 9
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).
10 Research Monograph 16
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.
Research Monograph 16 11
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)
12 Research Monograph 16
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
Research Monograph 16 13
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
14 Research Monograph 16
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).
Research Monograph 16 15
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
16 Research Monograph 16
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.
Research Monograph 16 17
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
18 Research Monograph 16
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).
Research Monograph 16 19
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
Competitive Environment
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
Access to Key Factors
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
20 Research Monograph 16
Supporting Organizations
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
Research Monograph 16 21
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
Growth and Development
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.
22 Research Monograph 16
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
Competitive Environment
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
Distance of Competitors Competitors are locally concentrated
Area/ Locality 8 thanas - Sutrapur, Wari, Gandaria, Lalbug,
Islampur, Chakbazar, Kotwali, Bongshal
Access to Key Factors
Research Organizations/
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
Quality and Arrangement of
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
Research Monograph 16 23
Supporting Organizations
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
Quality of Local Life Style
(Overall)
Lot of scope to improve local living standard
Cluster Performance
Collaboration and Network
Sharing of Orders Yes; mostly in the form of subcontracting
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
24 Research Monograph 16
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
Growth and Development
Recognition and Branding No branding. Locally recognized market as a
whole for a number of production sectors
Changes in No. of Firms Increasing
Changes in Output and Business Increasing
Changes in Employment and
Income
Increasing
National and Global Market
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‟.
Research Monograph 16 25
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
Competitive Environment
Number of Firms Total 600 manufacturing firms including 419
firms in BSCIC Industrial area
Business and Product Development
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
Distance of Competitors Competitors are locally concentrated
Area/ Locality Sarulia, Rupganj, Damra
Access to Key Factors
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
Quality and Arrangement of
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
26 Research Monograph 16
Supporting Organizations
Research Organizations/
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
Regulators and Other Business
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
Quality of Local Life Style
(Overall)
Notable contribution in local life; status is getting
better
Cluster Performance
Collaboration and Network
Sharing of Orders Yes; mostly in the form of subcontracting
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
Linkage with Local Business and
Other Organization
As it is labor-intensive and all the labors stay in
the locality, other forms of business also flourish
Research Monograph 16 27
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
Growth and Development
Recognition and Branding Itself is a brand and recognized market as a whole
Changes in No. of Firms Increasing
Changes in Output and Business Increasing
Changes in Employment and
Income
Increasing
National and Global Market
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
Level of the Cluster
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‟.
28 Research Monograph 16
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
Competitive Environment
Number of Firms Total 1,100 manufacturers
Business and Product Development
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
Access to Key Factors
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
Quality and Arrangement of
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
Research Monograph 16 29
Supporting Organizations
Research Organizations/
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.
Community Support (Local) Available
Business Climate
Relative Cost of Production Relatively 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
Quality of Local Life Style
(Overall)
Improving
Cluster Performance
Collaboration and Network
Sharing of Orders Yes; mostly in the form of subcontracting
Sharing of Infrastructure No
Activities of Associations In a limited scale
Group Guarantee in Borrowing Not found
Sharing of Human Resources No formal and permanent arrangement, but
occasionally it happens
Horizontal and Vertical Linkages Yes
Linkage with Local Business and
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
30 Research Monograph 16
Growth and Development
Recognition and Branding No branding. But recognized locally as a whole
Changes in No. of Firms Increasing
Changes in Output and
Business
Increasing
Changes in Employment and
Income
Increasing
National and Global Market
Access
Access to national market
Dynamism
Using New Technology No evidence
R&D Spending No
Innovative Product
Development
Mostly buyer specific
Level of the Cluster
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
Competitive Environment
Number of Firms Total 5,000 manufacturers
Business and Product
Development Capabilities
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
Distance of Competitors Competitors are locally concentrated
Area/ Locality Local level competition is severe
Supply of Raw Material Easy, finished leather is collected from tanneries in Dhaka
Research Monograph 16 31
Access to Key Factors
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
Supporting Organizations
Research Organizations/
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
Community Support (Local) Available
Business Climate
Relative Cost of Production Relatively low
Regulators and Other Business
Rules/ Barriers
Lack of land space, environmental risk, load
shedding, marketing barrier
Quality of Local Life Style
(Overall)
Improved
Cluster Performance
Collaboration and Network
Sharing of Orders Yes; mostly in the form of subcontracting
Sharing of Infrastructure No
Activities of Associations In a limited scale
Group Guarantee in Borrowing No
Sharing of Human Resources No formal and permanent arrangement
Horizontal and Vertical Linkages Yes
Linkage with Local Business and
Other Organization
Available, they are suppliers of renowned brand
like Apex, Bata, etc.
32 Research Monograph 16
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
Growth and Development
Recognition and Branding No branding. But locally recognized market as a
whole, Suppliers of Reputed band like Apex and Bata.
Changes in No. of Firms Increasing
Changes in Output and
Business
Increasing
Changes in Employment and
Income
Increasing
National and Global Market
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
Level of the Cluster
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.
Research Monograph 16 33
Cluster Status
Competitive Environment
Number of Firms Total 500 manufacturing firms, Auto 100, Husking
400
Business and Product
Development Capabilities
No evidence
Distance of Customers Customers are basically located in Dhaka,
Chittagong, Faridpur, etc.
Distance of Competitors Competitors are locally concentrated
Area/ Locality Competitions are amongst the mills in Dinajpur
district and in adjacent areas; face competition
from Indian rice
Access to Key Factors
Qualified and Skilled Personnel About 60% unskilled and 40% skilled
Cost of Labor Relatively low
Local Sourcing of Personnel 80% local
Access to Finance/ Capital Satisfactory, banks are ready to finance appropriate
customers
Quality and Arrangement of
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
Supporting Organizations
Research Organizations/
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
International Agency No
BB and Other Banks Bangladesh Bank, Janata Bank, Agrani Bank,
National Bank, Pubali Bank, etc.
NGO/ MFI/ Multipurpose Not visible
Community Support (Local) Available
34 Research Monograph 16
Business Climate
Relative Cost of Production High than the imported rice from India
Regulators and Other Business
Rules/ Barriers
Threat of imported rice; problem in marketing and
selling
Quality of Local Life Style
(Overall)
Good
Cluster Performance
Collaboration and Network
Sharing of Orders No evidence
Sharing of Infrastructure No evidence
Activities of Associations In a limited scale
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
Linkage with Local Business and
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
Growth and Development
Recognition and Branding They have their own branding
Changes in No. of Firms Auto Increasing but husking decreasing
Changes in Output and
Business
Decreasing
Changes in Employment and
Income
Increasing
National and Global Market
Access
Mostly national but potential of export
Dynamism
Using New Technology Yes (Auto rice milling)
R&D Spending Not at all
Innovative Product
Development
No mentionable evidence was found
Research Monograph 16 35
Level of the Cluster
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
Competitive Environment
Number of Firms Total 400 firms, most of which are family based
Business and Product
Development Capabilities
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
Distance of Competitors Competitors are locally concentrated
Area/ Locality Mostly, in the local level
Access to Key Factors
Qualified and Skilled Personnel Mostly Skilled
Cost of Labor Relatively low
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
Quality and Arrangement of
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
36 Research Monograph 16
Supporting Organizations
Research Organizations/
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
International Agency No
BB and Other Banks Bangladesh Bank, BDBL, Janata Bank, etc.
NGO/ MFI/ Multipurpose Not visible
Community Support (Local) Available
Business Climate
Relative Cost of Production Cost of production is lower because of involvement
of family members
Regulators and Other Business
Rules/ Barriers
Not Visible
Quality of Local Life Style
(Overall)
Moderate. So, lot of scope to improve local living
standard
Cluster Performance
Collaboration and Network
Sharing of Orders Yes; mostly in the form of subcontracting
Sharing of Technology/
Infrastructure
Generally, absent
Activities of Associations In a limited scale
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
Research Monograph 16 37
Growth and Development
Recognition and Branding No branding
Changes in No. of Firms Increasing
Changes in Output and Business Increasing
Changes in Employment and Income Increasing
National and Global Market Access Mostly local and national
Dynamism
Using New Technology No
R&D Spending Not at all
Innovative Product
Development
Limited, but they can make Satranji as per byers‟
specification
Level of the Cluster
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
38 Research Monograph 16
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.
Research Monograph 16 39
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)
Source: Bangladesh Bank
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
40 Research Monograph 16
Figure 6: Sectoral Distribution of Credit to the SME Clusters (up to end June 2013)
Source: Bangladesh Bank
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]
Top 5 Banks as Per Total
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
Source: Bangladesh Bank
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
Research Monograph 16 41
Table 3: Status of SME and Cluster Financing by Banks
(% Outstanding as of End June 2013)
Top 5 Banks as Per Total
SME Financing as % of Total SME
Credit by All Banks [Outstanding]
Top 5 Banks as Per Total
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
Source: Bangladesh Bank
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.
42 Research Monograph 16
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
Research Monograph 16 43
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
44 Research Monograph 16
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
Research Monograph 16 45
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.
46 Research Monograph 16
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
Research Monograph 16 47
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.
52 Research Monograph 16
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
Research Monograph 16 53