Role of Bank Loans for Increasing the Productivity of Small and Medium Sized Enterprises (SMEs) in Bangladesh

In many countries, it is widely viewed that small- and medium-sized enterprises (SMEs) are very promising sector. They not only contribute to productivity but also create employment opportunities for the mass people. In spite of their significant role in output growth and generation of employment, they often face difficulties in bank finance for expanding their economic activities. For the sake of developing SMEs, Bangladesh Bank, the central bank, Bangladesh Bank initiated some special schemes to provide better formal financial services for them. However, on the ground of widespread belief that SMEs had been diverting loan into unproductive sectors, Bangladesh Bank (2016) adopted a comprehensive investigation to find causes of high growth of such loans and its economic impact through a field survey of 451 enterprises financed under banks and non-banking financial institutions (NBFIs) in 2012. For further analysis with a view to finding out the relationship between production and SME financing, we use a sub sample of 310 enterprises of that survey data for the period 2009–2011 and introducing a finance variable into the neoclassical production function, we estimate three production functions — for all SMEs, Manufacturing, and Business SMEs with panel data regression model. From the estimated equations, we find that financing in SMEs contributes positively to output basically sales of SMEs. The results suggest that output is very sensitive to bank financing to the SMEs in industrial sector than those in the business sector. For this reason, banks and NBFIs should prioritize to provide loans to the SMEs in the industrial sector which can contribute more productivity and thus economic growth. Aus. Aca. Acc & Fin. Rev Vol 5(2), Jul 2019, P 85-93