Executive summary In this paper, an attempt is made to delineate the deficiencies of the existing financial system in Bangladesh to cater to financing needs of SMEs or new potential entrepreneurs and a proposal has been given to develop the venture capital industry to meet financing and non-financing needs of SMEs. SMEs play a vital role within Bangladesh’s economy in terms of creation of industrial outputs and generation of employment. Even though they play a significant role they face problems in securing investment or manage finance to develop their ideas or to expand their existing business. It is not possible for Bangladesh to accelerate economic growth without catering to the financing needs of SMEs, Thus, the paper proposes the development of the venture capital industry as an additional financial intermediary to Cater to financing and non-financing needs of SMEs. The paper discusses available sources of finance for SMEs and the Constraints of these sources. There are basically three sources from which SMEs may receive finance. These are banks, non-government organizations (NGOs) and the capital market. Then, we discuss the advantages that venture capitalists have over banks in catering to the funding needs of SMEs. It is argued that venture capitalists perform the role of ‘active investors’ by way of offering both financial and non-financial commitment to the investee company, which is essential in a market characterized by a high level of uncertainties. Also, it is argued that venture capitalists can reduce the transaction costs associated with monitoring as they launch the extensive process of ‘initial due diligence’ and practice the ‘participative management’ approach. Bangladesh has a large number of SME entrepreneurs. It is argued that policy makers should focus on how venture capitalists might receive finance that would in turn reduce moral hazard