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Clusters are emerging as a crucial stabilising force and growth engine for the SME sector in Bangladesh, redefining how small businesses collaborate, compete, and grow.

As Bangladesh navigates its evolving economic landscape, cluster-based development offers a compelling framework to accelerate industrial decentralisation, enhance productivity, and foster inclusive growth, industry experts said.

With SMEs comprising over 90 per cent of industrial units, contributing around 30 per cent to GDP, and employing 85 per cent of the industrial workforce, the significance of their collective transformation cannot be overstated, they said.

However, these enterprises have long been constrained by poor access to finance, lack of technology, inadequate infrastructure, and fragmented policy support, they added.

According to the SME Foundation, a cluster is defined as a group of enterprises engaged in similar production or services, located within about a 5-kilometer area, and sharing common strengths, weaknesses, opportunities, and threats.

In practice, clustering allows SMEs to pool resources, reduce costs, share market intelligence, and tap into common infrastructure — advantages that are often out of reach for individual small businesses.

These benefits include shared testing facilities, logistical support, power and water connections, and access to skilled labour.

The global evidence, however, is encouraging.

In Vietnam, for instance, cluster development in textile and electronics sectors has helped local SMEs become part of global value chains. Italy’s industrial districts, particularly in fashion and footwear, demonstrate how clustering leads to sustained productivity and exports even in traditional sectors.

Bangladesh can draw valuable lessons from these success stories — but the implementation here is far from seamless.

Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, has emphasised the vital role of small and medium enterprises in Bangladesh’s economy, warning that without adequate support, many risk financial distress.

‘SMEs often support large industries through logistics and services. With proper nurturing, some can grow into large enterprises,’ he said.

He stressed that cluster-based development — focusing on region-specific industrial strengths — can boost efficiency and allow the government to design targeted policies, offer collective training, and improve market access.

Rather than forcing full formalisation, Mustafizur suggested selective integration. ‘They don’t all need to become formal industries. But a trade license, decent employment, and basic labour law compliance are essential.’

He added that banks should consider transaction histories instead of collateral when financing SMEs, many of which lack assets.

He called for a multi-stakeholder approach, involving the SME Foundation, government agencies, and industry associations. ‘Many SME owners come from remote areas and face  discrimination. Their challenges must be addressed inclusively.’

He also urged the SME Foundation to be more proactive. ‘Most SME operators are unaware of global market opportunities. Nationwide awareness campaigns are essential.’

The SME Foundation has so far identified 177 such clusters across 51 districts, involving approximately 70,000 enterprises that collectively employ nearly two million people.

These clusters span a wide range of sectors — from traditional handicrafts and agro-processing to garments, leather goods, electronics, and even emerging fields like healthcare diagnostics and educational services.

For example, the shoe clusters in Bhairab and Madarbari, the coconut coir cluster in Bagerhat, and

the handloom carpet cluster in Rangpur have thrived by leveraging these synergies.

A breakdown of the SME Foundation’s data shows that 38 clusters belong to the handicrafts and miscellaneous segment, followed by 34 in agro-processing/agri-business, 31 in light engineering and metalworking, and 22 in the garments and knitwear sector.

Beside more specialised areas — like fashion accessory, leather goods, handloom and specialised textiles — electronics, plastics, healthcare, and education are also represented.

Anwer Hussain Chowdhury, managing director of the SME Foundation, admitted that cluster-based SME development faces major challenges, particularly access to finance.

‘Many SMEs still can’t secure loans due to high interest rates and collateral requirements,’ he said.

Other issues include a shortage of skilled manpower, weak IT adoption, poor marketing, limited exports, and high VAT and tax burdens.

To address the issues, the foundation is offering targeted training and organising fairs. Anwer also called for rational tax policies suited to small enterprises.

He noted that the SME Foundation had identified 177 clusters in 2013 and is now remapping as the number has likely increased. A digital database is also being developed to improve planning and policymaking.

Recognising the potential of cluster-based growth, Bangladesh Bank introduced a Cluster Financing Policy in 2022, requiring financial institutions to allocate at least 12 per cent of their CMSME portfolio to clusters.

However, actual disbursement remains low — studies by SANEM and BIDS show cluster-based lending still accounts for only 5–6 per cent of SME credit.

Officials attribute this to the informal nature of many SMEs, lack of documentation, and banks’ perception of clusters as high-risk.

Most clusters also suffer from poor infrastructure — unreliable electricity, inadequate roads, weak internet, and waste management — alongside a shortage of skilled workers due to limited technical training facilities. The institutional support system remains fragmented.

Md Ali Zaman, president of the SME Owners Association, criticised the government for neglecting the sector.

‘Despite talk, there’s no real action,’ he said.

He blamed market dominance by large syndicates and a lack of intervention by the Competition Commission.

‘SMEs operate with minimal investment, often informally, and many owners don’t even realise they qualify as SMEs.’

‘SMEs fight daily to survive,’ he added. ‘Instead of incentives, they face obstacles of high taxes, red tape, and indifference.’

Experts noted that while agencies like the SME Foundation, BSCIC, and district chambers are active, the absence of a unified national strategy hampers cluster development.

Poor inter-agency coordination leads to duplicated efforts and inefficient resource use, with policy support often being reactive rather than strategic, they said.

Bangladesh could gain significantly from cluster-based SME development.

Heavy reliance on the RMG sector has limited industrial diversification and deepened regional disparities, they noted.

Experts said that cluster growth can drive inclusive development by creating jobs and innovation hubs in rural and semi-urban areas.

To make this model work, a coordinated national strategy is essential. This should include targeted infrastructure investments via PPPs, dedicated cluster zones within economic zones, simplified regulations, and financial incentives like credit guarantees and interest subsidies, they added.

They said that digital integration and online platforms can connect cluster actors, while comprehensive data on turnover, employment, and financing needs — disaggregated by sector — will allow for more targeted interventions.

With the right mix of strategy, investment, and institutional support, SMEs can become a pillar of sustainable and inclusive growth, they said.