Bangladesh has more than 8 million small and medium enterprises. The sector makes up approximately 25% of the country's economy and combinedly generates 40% of the overall employment. Let that nugget of insight sink in, and then look at the challenges SMEs face in the country. It is a long list. We’ve written about the challenges of SMEs many times here and here. For context, SMEs struggle to access finance, hire skilled manpower, access training support, bureaucratic procedures, etc.
A 2013 study found that over 40% of SMEs lack access to formal credit. World Bank says the SME sector in Bangladesh has a financing gap of $2.8 billion. These challenges push SMEs to borrow from microfinance institutions and the informal sector at prohibitively high-interest rates.
It is complex problem without an easy solution. SMEvai, a Dhaka-based platform that has developed several services for SMEs, says the mix of solutions for the development of SMEs has key blocks missing such as opportunities and services for SMEs to equip themselves for growth and run their business more efficiently.
SMEvai has launched several products to add these missing pieces. I recently had an opportunity to speak with my friend and Founder and MD of SMEvai Technologies Mahadi Hasan Sagor to learn more about SMEvai, the challenges SMEs face in Bangladesh, how SMEvai plans to address many of these challenges with its suit of products, and much more. What follows is a lightly edited version of our conversion.
Ruhul Kader
What are the major challenges SMEs face in Bangladesh?
Mahadi Hasan Sagor
Most SMEs are not bankable. They can't access bank financing. As a result, they fail to scale. SMEs usually don't start with a ton of capital. When they finally aim to grow, they need this external finance. They usually can't/don't go for the equity financing that many startups go for. So they instead go for debt financing and high-interest loans.
There are three reasons SMEs can't access bank financing. First, a lack of awareness. Second, a lack of preparedness.
Before we get to the third, this second reason needs a little unpacking. Preparedness for financing involves several things including legal preparedness such as forming a proper entity and having the necessary licenses, which many of these SMEs lack.
Many SMEs operate without proper licenses. Now when they seek bank financing, banks hand them a long checklist and ask them to come back once they have all those things ready. By the time they organize all these documents, it takes them a long time which discourages them in this entire financing process.
The third problem that we have found is the technical know-how. Many of these SMEs lack a basic understanding of financial management. There is an absence of financial literacy.
For instance, they can't properly plan loan repayment. They mismanage loans. They take loans for one purpose and spend the money on something else which leads to loan repayment issues and other challenges. If these people had a little better skills in financial management, they could have overcome many of these challenges.
SMEs who have better financial management skills, do better. But a majority of SMEs remain small, one-man operations due to a lack of financial management understanding. Only a small percentage of SMEs can graduate to the next stage.
The other significant lacking that I see is in technology adoption which could lead to efficiency gains and other operational benefits.
We have seen excellent growth in the internet and overall tech penetration over the last three decades, but this has not yet led to visible tech adaptation among SMEs.
We don't see a lot of SMEs using tech to automate operations and run their businesses compared to our peer countries such as India, Thailand, and Vietnam where SMEs have embraced tech to a far greater degree.
Technology adoption can significantly improve operational efficiency, reduce the cost of operation and improve profitability.
Finally, many of these SMEs lack the skills to grow their businesses. Often an SME entrepreneur starts his enterprise with the skills they have. At times they lack the skills to take the business to the next level.
A lack of a support structure where these entrepreneurs can learn practical skills and get the support to take their businesses to the next level also makes this challenge prominent. There are some initiatives by INGOs and organizations like the SME Foundation, but these have proven insufficient.
These challenges are major bottlenecks in the growth of SMEs in Bangladesh.
SMEs are an important sector of our economy. The role SMEs play is well recognized. But they could have done much better had there been solutions to their challenges. Individual SMEs could have expanded their business, hired more people, and contribute more to the economy. We could have benefited greatly from the growth of SMEs.
This is where our initiative SMEvai comes in where we are working to empower SMEs with our tools and products.
Ruhul Kader
How does SMEvai address these problems?
Mahadi Sagor
Our vision at SMEvai is to empower SMEs by making them bankable. We’ve designed a set of products to address the challenges I discussed. Broadly speaking, SMEsvai is a web-based platform that provides services and solutions to SMEs.
One of our products is SME learning, which is an online learning platform targeted toward SMEs. We have created high-quality content for Bangladeshi SMEs focused on the challenges they face so that they can upskill themselves and use the skills to take their businesses to the next level.
We provide recorded content/courses, mostly in Bangla, made by people who have direct experience in running operations. We have courses across business functions such as hiring, leadership development, financial management, marketing basics, team management, etc.
Since these are recorded courses and priced reasonably, it is easy for us to reach a large number of people from across the country.
Anyone from anywhere in the country can access these educational materials using their hand-held devices. Our advantage is that our content is built for SME owners in Bangladesh.
The second challenge related to bankability is legal issues and reporting. Companies often are not registered and many companies lack proper financial management setup to ensure reporting. Our next two products address these challenges.
SME Hishab is an accounting software that allows SMEs to maintain their accounting. It is a SaaS solution that you can use as you need it.
Then we have the SME legal that helps SMEs to access legal services easily. SMEs can access all their legal services such as getting a trade license, company formation, getting different licenses, and so on. The service is easy to access. SMEs can order all these services online. We cover a wide range of services from trade licenses to company formation to various other licenses. We work with vetted vendors to provide these services to SMEs through our platform. It is more like a marketplace for SME business services.
Licensing can be a complex process sometimes. In many instances, SMEs struggle with finding the right vendor for these services. Our goal is to make access to this support easier, widely available, and transparent, and that too at an affordable cost. We are also creating awareness and literacy in these areas by creating blogs and content with experts. We regularly do live interviews and expert sessions to discuss various aspects of these legal issues. So we are giving people information, we provide consultancy, and we also provide services to people.
Our most important product is SME Hishab, an accounting software product for SMEs. SMEs mostly don't maintain accounting. Very few SMEs use software like Tally, Excel, etc to maintain their book. A majority of them keep accounts without much care. To automate accounting for SMEs, we have created a software-as-a-service accounting solution.
The product is designed for Bangladeshi SMEs, addresses the use cases of Bangladeshi users, and is priced affordably for Bangladeshi SMEs.
You can find several accounting software products in the market. Some of them offer limited free versions but almost all of them are international products designed for global users. Many of these products don't cater to the specific needs of our users. Since we made the SME Hishab for Bangladeshi SMEs. It is locally made for local entrepreneurs. You can't find any accounting software that accounts for VAT. Most of these other products have options for tax. But we provide options for VAT. There are many such subtle distinctions in our product.
We have made the software super easy to use. So we made it super simple. You just have to create your invoices in SME Hishab and it will automatically create other reports for you such as income statement, stock management report, and all other relevant reports.
We are doing two things here. First, when you go for loans or any financial relationship with banks, they ask you for your financial reports. When an SME business uses Hishab to manage their accounts, they can access all their reports here and can easily share them with the banks. It makes reporting simple. They can download all the reports in excel or PDF and send them to the banks.
We're also talking with banks to include metrics and criteria that banks look for when they give loans to SMEs. We have already partnered with a few banks and are in conversation with a few others where we are trying to build credit scoring type of models in the system so that banks can quickly assess and evaluate these SMEs from our system. Since our reporting system starts with invoices, it reduces the chances of manipulation and banks can trust our reports. If someone wants to give reports for two years, they have to maintain reports for two years in our system.
We plan to enter into partnership with banks where our users will be able to give banks access to their reports on our platform or we can give banks access to their reports with their permission. That's a future product. However, I think it will be easier for SMEs who use our Hishab software to access loans and bank financing regardless. So we are solving the problem of compliance and recording problem with SME Hishab software.
We have four solutions. I have discussed three -- SME learning, SME legal, and SME Hishab.
The last one is SME marketing where we offer affordable marketing solutions to SMEs in a manner where they can do it themselves instead of hiring an agency or an expert. For example, we're working in partnership with HTT Pool which is the Meta partner in Bangladesh so that SMEs can access Facebook ads and pay for it in Bangladeshi taka. We are also offering bulk SMS services to SMEs. We also offer email marketing, design, and other relevant services.
Many SMEs, particularly the ones from outside Dhaka, can't access many of these services. We want to make these services affordable and easily accessible for SMEs.
Ruhul Kader
Can you tell us about the background of the company? When did you come up with the idea and get started? And how did you put together initial resources? Also, please give us an overview of your operation.
Mahadi Sagor
We have been working on this product for about three years. However, we officially incorporated it last year. To that end, we are less than a year old in terms of the official age of the company.
We have built several iterations of the product. Before, we discarded several iterations. We ran a six months beta test for the current product, we launched the product after seeing a highly satisfactory response from people.
We have almost a thousand registered users on our Hishab software. Almost 60% of our current users are in the trading business and 40% are in the service business.
On our learning product, we have another 600 users who registered for at least one of our courses. There are likely to be some overlaps in users.
We rolled out the product quite recently. These numbers are basically from the last couple of months.
Ruhul Kader
You are still at a very early stage. I think you haven't started promoting the service yet. These numbers hopefully will grow as you start promoting the platform. However, what do your existing users tell you? Do they think these are essential/indispensable services for them?
Mahadi Sagor
Generally speaking, our SMEs are mostly interested in things that would give them immediate business. Culturally, they don't see accounting software as something they must have. They see it as good to have. To that end, we have quite an uphill battle ahead where we're having to invest in education, making people realize that maintaining your finance/accounts is incredibly important and making sure we’re growing users.
The good part is that many of the users who are using our product are doing so because they find it easy and beneficial to use. One common feedback we get from our users is that it is super easy to use and they are happy with the experience.
One of the reasons we have found many of our SMEs don't use accounting software is that it requires them to hire an additional person to manage their accounting, a cost they don't want to incur.
We have created Hishab in a manner where you don't need to hire anyone to maintain it for you. You can maintain it yourself. If salespeople create their invoices in the system, you don't need to do anything to prepare any other reports. The entire thing happens automatically.
We have worked hard to keep the product simple. This is one of the reasons people are using it, for now. The users we have now are using it for the benefit they get from the product.
Ruhul Kader
As you said, your core product is SME Hishab. I think your idea is that once people start using Hishab, they will also start using other products that you offer such as learning, marketing, legal, etc. Sort of an ecosystem approach. How big is the market? How much do SMEs now spend on the services that you offer?
Mahadi Sagor
There are more than 8 million SMEs in Bangladesh. Only 0.7% of these are large businesses. The rest 99% are small businesses. So that's kind of the market for us.
The existing market size the way put in terms of current spending on these services might not be that big. But we see an upward trend and the potential is huge.
The current state is that most SMEs don't use any accounting software. So for most of these businesses, the cost of accounting and similar solutions is small. To that end, our task is twofold, we have to develop the market while also building the company.
Ruhul Kader
How big is your company now in terms of team and operation? Also, you have raised a pre-seed investment, have you raised any more investments?
Mahadi Sagor
We've not raised any additional investment after pre-seed. We have plans to raise money but we first want to better these numbers significantly before we go for raising investment.
We are a team of seven people now. Our main team is in business development and tech. We get excellent tech support from our investor, so that also covers a lot of our tech requirements.
Ruhul Kader
There are a couple of players in this space trying to digitize SMEs in Bangladesh. How do you see the competitive landscape in the space? How is your product unique from other competing products? What sustainable moat do you have?
Mahadi Sagor
Many of these services are trying to digitize brick-and-mortar SMEs. A few of them are specifically targeting mom-and-pop shops. Honestly speaking, there is no solution for the market we are trying to serve. There are some global solutions in this space but no local players as yet.
One potential challenge may come if many of the players who are operating in the vertical decide to launch something.
But we have our advantages. We’re a first-mover in the vertical. The second aspect is that we are building accounting software for non-accountants. Our product is designed differently. I think we’ve hit the bull's eye with it.
So our goal is to double down on this differentiation as we move ahead. Once the market matures, there will be more competition, but at the same time, we will mature as well.
Most of the SaaS accounting software products are global and designed for people who understand at least basic accounting. Our approach however is completely different. We don't ask you to create a journal or do any of the accounting things. You don't need to do any debit/credit things. The start is with invoice creation. This accounting software is for non-accountant professionals. This will keep us ahead of the competition and will allow us to create a strong market position in the near future by the time competition comes into the market.
We're also building partnerships across segments including banks and communities that work with SMEs. We're not building a mere product. We're building a solution that will empower SMEs in the long run and prepare them for formal channel financing. It comes with a set of products including learning and legal. It's not just an accounting software.
Ruhul Kader
What are the plans for the future?
Mahadi Sagor
The immediate goal is to grow our paid users to 5000 within the next year or so. In five years, we want to empower 100,000 SMEs who'll be using our platform.
We want to build partnerships with organizations across sectors including Government, the development sector, and communities that work with SMEs.
We have built some good partnerships and want to expand that as we move ahead. We're also getting attention from INGOs and development organizations who work with SMEs. These partnerships should help in brand building and customer acquisitions.
We're also regularly improving the product. We're looking into challenges users from different industries face when it comes to maintaining accounting and building those industry-specific features.
The other aspect is access to finance. We plan to enable access to finance for SMEs through our platform in the coming years. Once that happens I think it'll dramatically improve our relevance to SMEs as well.
We're also building plugins and other tools for the product. We've created one for WordPress and we plan to do a similar thing for Shopify and other areas.
Ruhul Kader
What are the challenges for the company?
Mahadi Sagor
One challenge is that there is a lack of awareness among SMEs regarding the need of maintaining their accounts and all that. We're having to develop the market while growing the business. People think that it is a “good to have” thing and not necessary.
There are infrastructural challenges. We offer a web-based solution. In many instances, SMEs want a solution that can be used without the internet and on desktops, etc. There are some challenges there. Although the product is super simple, people still have a negative idea when it comes to using tech solutions, particularly users we deal with. So we have to spend quite a bit of time educating people.
Ruhul Kader
These are some interesting points. This is a big market but people still think in the sector that having accounting software is a luxury. So you have work cut out for you. But it is a big market if you can pull it off. What are some of the lessons you've learned?
Mahadi Sagor
At Geeky Social, we have worked with a ton of SMB businesses. We saw that one of their struggles is with managing finances. So the idea comes from a personal experience with SMEs and how they run their businesses. They genuinely struggle in these areas.
We see that SMEvai is a product that can have a huge impact. That's where our motivation for doing this comes from. This is a product made for Bangladeshi businesses.
