176
ACKNOWLEDGEMENT After acknowledging the blessing of our Allah in helping me in my efforts, I would like to thank all of the other helping hands who were with me in the making this report a possibility. I would then like to thank my teacher Mrs. Fauzia Janjua who, inspite of her extremely busy schedule, gave me the opportunity to carry out this knowledge- full study. Thank you Madam. This study was carried out as a partial fulfillment of the MBA degree course at the NUST Institute of Management Sciences. Very special thanks to every one who participated in my study and gave me time and valuable information, which undoubtedly helped me in drawing a better analysis. As you go along the path to the completion of a project, you meet so many people that help and assist you in one way or the other but the sad part is that I forgot their names. But I thank them from the bottom of my heart none the less. I

SME Project

Embed Size (px)

Citation preview

Page 1: SME Project

ACKNOWLEDGEMENT

After acknowledging the blessing of our Allah in helping me in my efforts, I

would like to thank all of the other helping hands who were with me in the making

this report a possibility.

I would then like to thank my teacher Mrs. Fauzia Janjua who, inspite of her

extremely busy schedule, gave me the opportunity to carry out this knowledge-full

study. Thank you Madam.

This study was carried out as a partial fulfillment of the MBA degree course at the

NUST Institute of Management Sciences.

Very special thanks to every one who participated in my study and gave me time

and valuable information, which undoubtedly helped me in drawing a better

analysis.

As you go along the path to the completion of a project, you meet so many people

that help and assist you in one way or the other but the sad part is that I forgot

their names. But I thank them from the bottom of my heart none the less.

I

Page 2: SME Project

EXECUTIVE SUMMARY

In the growth and progress of any country, its small scale sector is of equal importance as

of other large scale sectors because a country cannot progress in its true sense unless its

small scale sectors progress. Be it a developed country like Japan and USA or a

developing country like Thailand and Pakistan, they form the backbone of the economy.

A dynamic and vibrant SME sector plays a key role in successful economic growth of the

countries.

The developmental role of SMEs has been highly recognized. They provide most of the

employment opportunities for the general public of the country and as a result, they

prosper in these conditions. SMEs allow a homogeneous geographic development

throughout the length and breadth of a country because of the fact that the development is

done at a micro level due to the initiative taken by the general public. This has a positive

effect on the GDP level and the employment conditions in the country.

The contribution of SMEs in GDP of Pakistan is mere 15 percent. Yet, they employ more

than 60 percent of non-agricultural workforce. So there is great room for improvement.

The Government of Pakistan, realizing the potential of SMEs has very rightly turned its

attention toward the uplift of this sector. The formation of SMEDA (Small and Medium

Enterprises Development Authority) and SME Bank are a step in right direction.

Furthermore, the State Bank of Pakistan has instructed all the commercial banks to

establish a SME counter in their premises. This will have a positive effect on the sector as

a whole.

II

Page 3: SME Project

TABLE OF CONTENTS

EXECUTIVE SUMMARY II

CHAPTER 1 INTRODUCTION 3

1.1 AN OVERVIEW OF PAKISTAN’S ECONOMY 31.2 SECTORAL OVERVIEW 51.2.1 AGRICULTURAL SECTOR 51.2.2 MINING AND QUARRYING 61.2.3 MANUFACTURING SECTOR 71.2.4 SERVICES SECTOR 81.3 SMALL AND MEDIUM ENTERPRISES 81.4 ROLE OF SMES IN ECONOMY 101.4.1 PROMOTING INDUSTRIALIZATION THROUGH SMES 101.4.2 COMPONENT OF INFORMAL ECONOMY 111.4.3 BURDEN SHARER OF PRESSURE ON LAND 111.4.4 FOREIGN EXCHANGE EARNINGS 121.4.5 CATERER OF LOW INCOME GROUPS 121.4.6 CARRIERS OF CULTURAL HERITAGE 121.5 SMES IN PAKISTAN 121.6 SMALL AND MEDIUM ENTERPRISE SECTOR OF PAKISTAN (IN BRIEF) 131.7 DEFINITION OF SMES IN PAKISTAN 141.7.1 SBP DEFINITION OF SME 151.7.2 SMEDA DEFINITION OF SMES 151.7.3 SME BANK DEFINITION OF SMES 161.7.4 SINDH INDUSTRIES DEPARTMENT DEFINITION OF SMES 161.7.5 FEDERAL BUREAU OF STATISTICS DEFINITION OF SMES 161.7.6 PUNJAB DIRECTORATE OF INDUSTRIES 161.7.7 PUNJAB SMALL INDUSTRIES CORPORATION DEFINITION OF SMES 161.8 SIGNIFICANCE OF SMES 171.9 ADVANTAGES OF SMES 181.10 PROBLEMS FACED BY SMES 191.11 RESEARCH OBJECTIVE 191.12 RATIONALE OF THE STUDY 201.13 SCOPE OF THE STUDY 211.14 METHODOLOGY 211.15 ORGANIZATION OF THE STUDY 22

CHAPTER 2 LITERATURE REVIEW 22

2.1 SMALL AND MEDIUM ENTERPRISES 222.2 DEFINITION OF SMES IN SOME ASIAN COUNTRIES 232.2.1 BANGLADESH 262.2.2 CHINA 272.2.3 INDIA 282.2.4 JAPAN 29

Page 4: SME Project

2.2.5 MALAYSIA 302.2.6 THAILAND 302.2.7 PAKISTAN: 312.2.8 PHILIPPINES 32

CHAPTER 3 FINDINGS 33

3.1 ORGANIZATIONS WORKING FOR UPLIFT OF SMES 333.1.1 SMALL AND MEDIUM ENTERPRISES DEVELOPMENT AUTHORITY 333.1.2 SME BANK LIMITED 513.1.3 PUNJAB SMALL INDUSTRIAL CORPORATION 553.1.4 SINDH SMALL INDUSTRIES CORPORATION 563.1.5 NWFP SMALL INDUSTRIES DEVELOPMENT BOARD 563.1.6 THE DIRECTORATE OF SMALL INDUSTRIES BALOCHISTAN 573.2 SME PRODUCTS OF DIFFERENT BANKS 583.2.1 UNION BANK 583.2.2 SME BANK 633.2.3 BANK ALFALAH 663.2.4 MYBANK 73

CHAPTER 4 ANALYSIS 77

4.1 EFFECTS OF WTO ON SME 774.2 PERFORMANCE OF SME BANK 784.2.1 FINANCIAL RATIOS 794.2.2 ADMINISTRATIVE COSTS 814.3 BASIC SITUATION OF SME AND THEIR SUPPORT STRUCTURES 824.3.1 CURRENT STATUS OF SME 824.3.2 ISSUES IN SME DEVELOPMENT 86

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 108

5.1 ESTABLISHING A COMMON DEFINITION OF SMES 1085.2 STREAMLINING THE FISCAL POLICY 1085.3 PROMOTION OF LINKAGE AMONG FIRMS 1095.4 EASY ACCESSIBILITY TO FINANCE 1105.5 STRENGTHENING THE HUMAN RESOURCE DEVELOPMENT OF SMES 1115.6 BOLSTER THE TECHNOLOGY TRANSFER AND R&D INITIATIVES 1125.7 EFFECTIVE ROLE OF GOVERNMENT INSTITUTIONS 1125.8 STREAMLINING PRIVATE SECTOR ORGANIZATIONS 113

BIBLIOGRAPHY 115

LIST OF TABLES 116

LIST OF ABBREVIATIONS 117

2

Page 5: SME Project

Chapter 1 INTRODUCTION

1.1 An Overview of Pakistan’s Economy

Pakistan is one of the key emerging markets of South Asia. With an estimated population

of over 160 million people, it is the 6th most populous state in the world. The land area of

Pakistan is 803,940 square kilometers, 25 percent of which is cultivated1.

Table 1: Pakistan Economy at a Glance

Population (2005 Estimates) 162,419,946GDP Per Capita $ 2567Population Growth Rate

2.4 percent annually2

Life Expectancy3 (2004 estimates)

Total

Male

Female

62.61 years

61.69 years

63.58 years

Infant Mortality3 (2004 estimates)

Total

Females

Males

74.43 deaths/1,000 live births 74 deaths/1,000 live births

74.84 deaths/1,000 live birthsLiteracy Rate (2003 estimates)

Total

Males

45.7 percent

59.8 percent

1 http://en.wikipedia.org/wiki/Pakistan2 www.statpak.gov.pk/depts/fbs/ publications/pocket_book2003/chapter05.pdf3 http://www.immigration-usa.com/wfb2004/pakistan/pakistan_people.html

3

Page 6: SME Project

Females 30.6 percent

Pakistan’s economy extended its impressive expansion for the third year in a row in

2004-05. Economic growth at 8.4 percent reached its highest level in two decades, the

fifth time in the country’s history that it exceeded 8 percent growth mark. This

momentum is underpinned by dynamism in industry, services and agriculture, and the

emergence of a new investment cycle supported by strong credit growth. Over the past

three years, the prerequisites for a sustained economic growth have gradually come into

place. Economic recovery has raised the perceived wealth of households and thus boosted

confidence, leading to higher consumption. The ensuing lifting of aggregate demand in

turn has spurred credit demand. With increased lending, it has stimulated more demand,

in turn feeding back into economic activity and thus, reflecting a broader virtuous circle.

This positive prospect for consumer demand backed by investment spending, if sustained,

will be a crucial support for the government’s major macroeconomic policy target for

2005-06.

Considering that Pakistan did not have much of a manufacturing base at the time of

independence, the development of the industrial sector, which now accounts for 14

percent of GDP in year 2003-04 has been impressive. Agriculture is now the smallest

sector in terms of employment generation and export earnings, contributing 9 percent of

the GDP. Services account for 45 percent of GDP. The country experienced a declining

growth rate from an annual average of 6 percent during the 1980s to 4.6 percent during

the 1990s. Pakistan’s exports are dominated by textiles and apparel as well as agricultural

products, despite the diversification efforts of the Government. Major imports include

crude oil and petroleum products, wheat, machinery, chemicals, fertilizers, cooking oil

and consumer products.

While Pakistan’s social welfare indicators have seen some improvements over the past

two decades, progress remains too slow. Population growth is at a high of 1.9 percent and

low levels of education and health constrain productivity throughout the economy. Life

expectancy for males is 64 years and 63.8 years for females.

4

Page 7: SME Project

Poverty in Pakistan is generally believed to be on the rise. 33 percent of the population is

living below the poverty line in the year 2003-04. Moreover 63 percent of them were at

the border line. The available data implies that roughly 1/3rd of the population is affected,

with poverty rising in urban areas too. Poor access to social services, inappropriate

economic policies and lack of good governance are cited as underlying reasons for this

development. Social inequalities in Pakistan find expression in an unequal land

distribution.

The Pakistan poverty reduction strategy proposes the distribution of about 3 million acres

of available land linked with infrastructure support. On poverty alleviation the

government is aiming for a comprehensive approach through preparation of a poverty

reduction strategy and with economic reforms that are expected to show results in the

medium term. Increases in pro-poor public expenditures address short term needs through

various programs for local community infrastructure, public works, micro-credit, food

support and provision for land and housing.

There are a number of dominant sectors in Pakistan where the presence of micro-credit

and the small enterprises can really give a boost to the economy. Through a proper

institutional support the unemployment figures cannot only be substantially reduced but

the growth of these sectors is further ensured.

1.2 Sectoral Overview

1.2.1 Agricultural Sector

On the back of unprecedented rise in

cotton crop and a near bumper wheat

crop on account of widespread and

timely winter rainfall as well as increase

in its support price, agriculture surpassed

it’s target of 4.0 percent for the year by a

wide margin, registering an impressive

5

Page 8: SME Project

growth of 7.5 percent in 2004-05. Some contribution to agricultural growth also came

from rice production, which grew by 2.7 percent.

Major crops, accounting for 37 percent of agricultural value added, grew by 17.3 percent

in 2004-05 as against a mere 1.9 percent last year. Besides mea suring from a low base,

value added in major crops registered a sharp pick up primarily on account of a 45.5

percent increase in cotton production (14.6 million bales as against 10.0 million bales of

last year) – a size of the crop never achieved in the country’s history. Wheat is another

major crop, grew by 8.2 percent (from 19.5 million tones to 21.1 million tones). Rice and

maize, the two major crops, registered a growth of 2.9 percent and 46.3 percent,

respectively and contributed handsomely to the rise in value addition of major crops. The

production of sugarcane, however, has registered a 15.2 percent decline thereby

contributing negatively to the rise in value added in major crops. It may be pointed out

that these five crops account for over 90 percent of value addition in major crops.

Minor crops, accounting for 12 percent of value added in overall agriculture, grew by 3.1

percent – a slight improvement over last year’s growth of 2.6 percent. Production of

pulses such as masoor, moong, and mash registered a sharp decline in the range of 7.7

percent to 25.6 percent. Vegetables such as potatoes and onions exhibited mixed

performance as the former registered a decline of 2.7 percent while the later posted a rise

of 25.4 percent. Chilies, being an important minor crop, registered a sharp rise of 34.7

percent during the year under review.

1.2.2 Mining and Quarrying

Pakistan is endowed with rich mineral resources. However, due to lack of proper

infrastructure, these mineral resources have not been utilized properly. The country has

substantial deposits of iron ore, coal, copper ore, crude oil, etc but these deposits have not

been taped properly, mostly due to nonexistence of enrichment plants. Efforts are being

made to change this scenario. The output of the mining and quarrying sector grew by 5.0

percent this year as against the rise of 3.8 percent last year. The principal minerals which

have shown positive growth are: baryte (16.6 percent), limestone (19.3 percent), natural

6

Page 9: SME Project

gas (19.3 percent), rock salt (2.88 percent), Sulfur (11.5 percent) and chromites (183.3

percent). While negative growth was exhibited by dolomite (22.2 percent), gypsum (52.9

percent), and magnetite (12.5 percent).

1.2.3 Manufacturing Sector

The large scale manufacturing, accounting for 69.5 percent of overall manufacturing and

12.7 percent of GDP, recorded an impressive and broad – based growth of 15.4 percent in

2004-05 as against 18.2 percent last year and against the target of 12.2 percent – the

second highest growth achieved in three decades. Two successive years of stellar growth

owe to a rare confluence of positive structural and cyclical factors. Rising levels of

income, availability of cheap credit and a general ‘feel good’ mood fueling the ongoing

boom in consumer spending helped sustain an impressive growth for two years in a row.

Additionally, manufacturers on the other hand are capitalizing on the ongoing rebound in

domestic demand by adding capacity. Industrial activity is also getting a boost from the

current pick up in external demand as exports continue to register a double – digit

growth.

The performance of large – scale manufacturing has been broad – based as most of the

major industries have registered high double – digit growth. For example, the production

of textile and apparel has registered a growth of 24.5 percent, production of chemical

group is up by 14.4 percent, petroleum group production is up by 11.8 percent,

engineering and electrical groups production are up by 11.3 percent and 54.9 percent,

respectively. Automobile production continues to maintain its strong growth momentum,

registering an increase of 30 percent. Production of cement, tractor, cooking oil, soap and

detergents, paint and varnishes (both in solid and liquid from) are up in the range of 15 to

60 percent. Consumer durables such as refrigerators, deep freezers, TV sets also show an

impressive growth, ranging between 6.0 to 60 percent.

Housing and construction has been identified as one of the major drivers of growth on

account of its immense forward and backward linkages. In order to promote activities in

this sector the government had announced various measures in the last two Federal

7

Page 10: SME Project

Budgets. This sector has responded positively to the incentives inspite of higher input

prices, such as iron and steel, cement etc. The construction sector is provisionally

estimated to grow by 6.2 percent in 2004-05 as against a decline of 6.9 percent last year.

Last year’s decline was mainly caused by a massive global increase in the prices of iron

and steel because of the China factor. Implicit deflator for construction increased by 28.2

percent last year, resulting in decline of 6.9 percent in value added of construction at

constant price of 1999-2000, despite the fact that this sector grew by 19.4 percent that

year.

1.2.4 Services Sector

This sector surpassed the growth target by a wide margin on account of robust growth in

telecom sector, stellar performance in banking and insurance, wholesale and retail trade.

Public administration and defense posted a marginal decline of 0.8 percent while

ownership of dwellings grew by 3.5 percent and social services sector maintained a

growth rate of 5.4 percent. On the whole, services sector has emerged as a buoyant sector

and astronomical growth in telecom sector as well as strong growth in banking and

finance, and wholesale and retail trade will continue to provide greater impetus to the

sector in the medium-term.

1.3 Small and Medium Enterprises

Small and medium enterprises (SMEs) are one of the principal driving forces in

economic development. They stimulate private ownership and entrepreneurial skills, they

are flexible and can adapt quickly to changing market demand and supply situations, they

generate employment, help diversify economic activity and make a significant

contribution to exports and trade.

Small and medium enterprises (SMEs) have played an important role in boosting up

economies of the developing countries and particularly in recent times the success of the

South East Asian countries is indebted to this very sector.

8

Page 11: SME Project

SMEs account for almost 90 percent of privately-owned businesses and bulk of

employment all over the globe. Experience has shown that neglect of this sector is bound

to keep that country below its potential growth level.

The SME sector covers all types of businesses, but it is the common profile of service

and manufacturing business concerns. Reason being the large-scale manufacturing sector

is unable to cater to all demands of goods and services and depends largely on sub-

contracting arrangements with smaller business units.

If viewed in global scenario, SMEs are found to generate 80 per cent of total industrial

employment, contributing 30 per cent to GDP and adding to export earnings to the extent

of 1/4th of total industrial sector contribution.

The globalization and trade liberalization, which is a favored move on the part of the

developed countries has increased the competition for SME sector in all the developing

countries, particularly in Asian countries, and is bound to further widen the gap between

rich and poor nations. Thus it is imperative for economic survival of Asian countries that

they review their national economic policies. They must boost up their economic

competitiveness, for which strength of the indigenous SME sector is one of the most

forceful parameters.

Though Japan has reached the most developed status, its SMEs continue to play a major

role in boosting export of products specially relating to computers, its parts and those

products which involve latest technology and are skill intensive.

China is rapidly emerging as a powerful nation. The SME sector with the full backing of

the government has been the main contributing factor for excellent performance of its

economy. Resultantly, China is in a very comfortable position to face the challenges of

globalization and in fact now poses as economic giant for developed countries. Thus the

experience of China in the SME sector is of immense interest for all developing countries

in relation to their fears regarding World Trade Organization (WTO) regime bringing

onslaught of innumerable economic disadvantages for them for quite a long time.

Developing countries are trying to replicate China, not only with regard to its policy

9

Page 12: SME Project

towards the SME sector but are also keen in forging actual business and trade links with

SMEs in China.

In most of South East Asian parts the SME sector has been neglected and discriminated

against in terms of government attention and access to credit, management, marketing

expertise and latest technology. This is particularly the case with Pakistan where although

economy is in transition but still large - scale sector continues to assume the major role in

economic development. In fact in transition economies private sector development must

have focus on SMEs to allow these enterprises to grow into medium and large scale

entities and take over the functions of state owned enterprises.

1.4 Role of SMEs in Economy

Due to fast developing modern technologies and production scales, the small and medium

enterprises have become very critical for economic growth. This sector is now very

important for those nations whose desire is to be prosperous as it is the starting point of

industrial development. Large Scale Enterprises (LSEs) of today were SMEs in the past

and SMEs of today would be LSEs of tomorrow. This rule holds good for all countries of

the world.

1.4.1 Promoting Industrialization through SMEs

The SMEs in the developing countries are both large and growing. Considering its

potential in generating employment opportunities; the government should promote the

SMEs by enhancing availability of formal credit, imparting education and training to

increase productivity and augment earnings of the informal workforce.

More emphasis should be placed on the development of working skills than on

entrepreneurship, priority should be given to the provision of basic education which

makes the acquisition of vocational training easier and also enhances the mobility and

flexibility of workers.

10

Page 13: SME Project

Governments all over the world including Pakistan have recognized the important role of

the informal sector in the economy. One of the major components of informal sector is

SMEs which is regarded as the breeding ground for new entrepreneurs and instruments of

employment promotion. There are various advantages of SMEs.

The experience around the world suggests that SMEs have played an important role in

industrialization of the country. For example, Japan’s industrialization in the 19 th century

and East Asian miracle of the 20th century are typical examples of the role the SMEs have

played on that part of the world.

1.4.2 Component of Informal Economy

The small and medium manufacturing sector is the most important component of

informal economy all over the world. It is comprised of heterogeneous types of activities

but its components can be found in all sectors of the economy.

However sectors like trade, transport and small enterprises tend to have by far the largest

share of informal sector owing to the limited absorption of workers in the large scale

manufacturing and corporate sectors and the fact that majority of workers seeking

employment are unskilled.

1.4.3 Burden Sharer of pressure on land

Undoubtedly, main segment of this population lives on agriculture, yet SMEs absorb

considerable surplus of rural labour. Many families in rural areas live on both sources and

supplement their income from employment in small industries. An innovative tendency in

Sialkot is noticed, that many exporting concerns have opened their manufacturing

concerns in the rural areas and as such a concrete barrier has been created in urbanization

trend. This model can be extended to other industries as well. This will expose our rural

population with an emerging industrial culture and bring them out of the stagnant values

and old mindset.

11

Page 14: SME Project

1.4.4 Foreign Exchange Earnings

SMEs are very important contributors of export earnings in Pakistan. At present, 26

percent of foreign exchange earnings is being contributed by this sector. For instance,

exports of surgical goods, leather goods, exports goods from Sialkot are worth $ 650

million and export of cutlery and knives from Wazirabad are $ 25 million. Another angle

to evaluate role of SMEs in foreign exchange earnings may be seen from the fact that our

large scale industry is mainly concentrated in the import substitution factor which is

heavily protected. SMEs not only earn foreign exchange but also exonomize on foreign

exchange by relying mainly on domestic machinery and inputs.

1.4.5 Caterer of low income groups

Realistically, purchasing power of major portion of population is very low and products

of SMEs are compatible to their needs. Cheap labour, indigenous raw material is the

reasons of low cost and thus low sale price of their goods. This suits Pakistan’s

population so long as they are in the existing income bracket.

1.4.6 Carriers of cultural heritage

The SMEs are source of preservation of local handicrafts being capable of such necessary

skills and styles of production as required in manufacturing of traditional handicrafts. For

example, artisans of Chiniot and Gujarat produce excellent woodworks and of Multan

produce very good table lamps and other handicrafts from camel leather and similarly

artisan of Hyderabad produces attractive glass bangles.

1.5 SMEs in Pakistan

The SME sector, especially in the sub-continent has mostly been neglected and

discriminated against in terms of government attention and access to credit, management,

marketing expertise and latest technology. This is particularly the case with Pakistan

where although economy is in transition but still large - scale sector continues to assume

the major role in economic development. In fact in transition economies private sector

12

Page 15: SME Project

development must have focus on SMEs to allow these enterprises to grow into medium

and large scale entities and take over the functions of state owned enterprises.

SMEs are considered as the engine of growth for developing countries like Pakistan. It is

vital that these enterprises are encouraged so as to enhance the economic growth and to

increase the economic activity in the country.

In Pakistan, SMEs' contribution to GDP is only 15 percent, yet they employ 60 per cent

of the industrial labour force. To some extent these small and medium size industrial

entities have contributed towards making fair distribution of national income and creating

employment opportunities by forging links between more organized sector in urban with

rural sector. In a way this ensures employment of rural population in industrial sector.

Furthermore, the growth of the country's exports of value added goods, achieved in recent

years is indebted to low cost and labour intensive products manufactured by SMEs.

Direct and indirect contribution of SMEs to total exports is almost 50 per cent.

1.6 Small and Medium Enterprise Sector of Pakistan (In Brief)

A majority of the SMEs operating in Pakistan are in the trade and services sector with a

contribution of 51 percent and 34 percent respectively with the manufacturing sector

having 15 percent of the SMEs. A breakup of this sector is shown below:

Breakup of SME Sector of Pakistan

Trade51%

Services34%

Manufacturing15%

13

Page 16: SME Project

Although no accurate data is yet available, it is estimated that there are approximately

around 3.8 million SMEs in Pakistan which constitute almost 90 percent of all

businesses, which: provide employment to over 80 percent of the labour force (since

artisans, workshops, household units, craft industries, vendors and agro-based businesses

that cluster around townships and population centres have a tremendous capacity to

provide employment).

The different categories of businesses based on the number of people employed are given

below:

Micro Scale Enterprises: Less than 10 people employedProductive Assets limit of Rs. 2 million

Small Scale: Between 10 to 35 people employedProductive Assets limit of Rs. 20 million

Medium Scale: Between 36 to 99 people employedProductive Assets limit of Rs. 40 million

1.7 Definition of SMEs in Pakistan

There are many different ways in which the informal sector is defined in Pakistan. In

some cases, it is defined as a unit which fufills the eight conditions listed below:

1. Employees not more than 10 people

2. Avoids social regulation

3. Does not operate at fixed hours

4. Employs workers from the household of the head of enterprises

5. Has an inherent nature or occupies temporary premises

6. Does not use electrical or mechanical energy

7. Does not use credit from formal institutions

8. Employs workers with fewer than six years of schooling

In many cases, an informal sector is also classified according to the complexity of

accounting systems.

14

Page 17: SME Project

1.7.1 SBP Definition of SME

SME (Small and Medium Enterprise) refers to an entity, ideally not a public limited

company, which does not employee more than 250 persons (if it is manufacturing

concern) and 50 persons (if it is trading / service concern) and also fulfills the following

criteria of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as relevant:

(a) A trading / service concern with total assets at cost excluding land and buildings up

to Rs 50 million.

(b) A manufacturing concern with total assets at cost excluding land and building up to

Rs 100 million.

(c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300

million as per latest financial statements. 4

1.7.2 SMEDA definition of SMEs

SMEDA defines micro, small and medium enterprises as:

1. Micro enterprises

a. Less than 10 people

b. Productive assets limit of Rs. 2 million

2. Small enterprises

a. Between 10-35 people

b. Productive assets limit of Rs. 20 million

3. Medium Enterprises

a. Between 36-99 people

b. Productive assets limit of Rs. 40 million

4 “Prudential Regulations for Small and Medium Enterprises Financing”, Banking Policy Department, State Bank of Pakistan. http://www.sbp.org.pk/publications/prudential/index.htm

15

Page 18: SME Project

1.7.3 SME Bank definition of SMEs

The SME Bank defines Small and Medium Enterprises as:

1. Small enterprises are those entities having a project cost of upto Rs. 20 million

2. Medium enterprises are those entities having a project cost of upto Rs. 100

million.

1.7.4 Sindh Industries Department Definition of SMEs

Entity engaged in handicrafts or manufacturing of consumer or producer goods with fixed

capital investment up to Rs.10 million including land & building.

1.7.5 Federal Bureau of Statistics Definition of SMEs

The Federal Bureau of Statistics defines Small Enterprises as entities having less than 10

employees. The FBS does not define Medium enterprises.

1.7.6 Punjab Directorate of Industries

The PDI defines a small unit as one with fixed assets worth Rs. 10 million of less,

excluding the cost of land. The Punjab Small Industries Corporation (PSDI) sets this limit

as Rs. 20 million. According to PDI, all enterprises with assets excluding land, valued

between Rs. 10 million and Rs. 100 million are medium scale units. PSDI defines

medium scale enterprises with assets excluding land valued between Rs. 20 million and

Rs. 100 million. All enterprises employing less than 10 persons are classified as cottage

industries while those employing over 10 persons are categorized as small or medium

sized enterprises.

1.7.7 Punjab Small Industries Corporation Definition of SMEs

The Punjab Small Industries Corporation (PSIC) defines medium enterprises as entities

which have a fixed investment upto Rs. 20 million excluding the cost of land and

building, It does not recognize small enterprises.

16

Page 19: SME Project

1.8 Significance of SMEs

SMEs are considered the engine of economic growth in both developed and developing

countries as they:

Provides low cost employment since the unit cost of persons employed is lower

for SMEs than for large sized units.

Assists in regional and local development since SMEs accelerate rural

industrialization by linking it with more organized urban sector.

Help achieve fair and equitable distribution of wealth by regional dispersion of

economic activities.

Contribute significantly to export revenues because of the low cost labour

intensive nature of its products.

Have a positive effect on the trade balance since SMEs generally use indigenous

raw materials, reducing dependence on imported machinery, raw material or labour.

Assist in fostering self-help and entrepreneurial culture by bringing together skills

and capital through various lending and skill enhancement schemes.

Impart the resilience to withstand economic upheavals and maintain a reasonable

growth rate since being indigenous is the key to sustainability and self-sufficiency.

Firms with sales less than $1 million spend 2x - 3x more on R&D per $ of sales

than the average. And result is SMEs’ producing 55 percent more innovations than

LSEs’.5

Converts the raw material within the country into semi-finished items and later

pass it on the LSEs that have capital, skill and equipment to process these into

finished goods.

Provide rural people an opportunity for income generation and personal growth

since they can work at home. This helps to achieve fair and equitable distribution of

wealth by creating nationwide non-discriminatory job opportunities.

Attracts direct foreign investment since multinationals and big conglomerates

have started to outsource from countries with strong SME sectors. The low labour

5 “Canadian Federation of Independent Business” Quoted in “Lecture on The Role of Entrepreneurial Small Business”. http://www.scar.utoronto.ca/~bovaird/c39/lec1.htm

17

Page 20: SME Project

cost makes production of semi finished goods very economical for large concerns

operating in international markets.

The SMEs act as engines through which the growth objectives of developing

countries can be achieved.

1.9 Advantages of SMEs

The advantages of SMEs in an economy, be it labour intensive or otherwise are manifold.

Therefore, the development of small and medium industries in any country has specific

effects on the balanced and dynamic growth of a country. It has a number of advantages

over large scale industries. Some of these are mentioned below:

It generates more jobs per unit of capital and is more capital efficient.

Similarly it is also strongly integrated into the domestic economy.

Small industries use a high percentage of local raw materials. Most of local

consumable products are produced by small scale industries. It taps the resources

at the grass root levels.

The promotion of Small and medium industries induces rapid growth of large

scale manufacturing in the long run.

SMEs not only create employment opportunity for the entrepreneurs, but also to

his/her family members and associates.

It also generates cheaper goods and services to the general population which

attempts to break the cycle of the ever increasing price hikes. The increased

employment and the goods/services produced has a positive effect on the GNP of

a country. This becomes a catalyst in breaking the poverty cycle.

The small businesses are remarkably flexible because they operate near the

customer, thus it has the ability to adapt according to the ever changing needs of

the customer.

18

Page 21: SME Project

1.10 Problems faced by SMEs

SME sector in Pakistan over the years have been facing many difficulties due to

negligence by Government of Pakistan. Out of many problems, cumbersome procedure

by Government agencies, taxation and other charges promoting lack of documentation or

incorrect documentation done by SME entrepreneurs, inconsistent government policies

discouraging entrepreneurs to develop long-term vision, lack of formal technical

education, non-internalization of new technologies, lack of basic infrastructure, finance,

marketing etc. and most important of all, these factors discouraged commercial banks to

extend financing to SME sector especially when specialized Government institutes such

as SBFC, RDFC etc. failed to be feasible.

Some of the other problems are described below:

Poor record keeping by SMEs, particularly the accounting information.

Lengthy and cumbersome application procedures, which discourage both SMEs

and Banks.

Poor operational performance.

Problems with packaging bankable loan requests by SMEs.

The limited knowledge of financing options for the SMEs.

Stringent collateral requirements and other banking regulations.

Low productivity of the SMEs and also the inability to improve quality over time.

Lack of skills in banks for identifying needs and structuring the delivery of

financial assistance to SMEs.

1.11 Research Objective

The objective of this research study is to assess the overall SME sector of Pakistan in an

attempt to identify the shortcomings and weaknesses of this sector. The performance of

various Government agencies like SMEDA etc will be analyzed. Particular emphasis will

be laid on the performance of SME Bank in particular and an in-depth analysis will be

carried out.

19

Page 22: SME Project

1.12 Rationale of the Study

The SME’s in Pakistan are facing a number of problems that’s why exports and

employment level is much below as compared to neighbor countries, hence the study

aims to:

1. To identify and analyze the problems faced by SMEs in Pakistan and recommend

their solutions.

2. To recommend measure of SMEDA, SME Bank and other interested groups.

The SME’s are by far the most important source of employment in the market economies,

and the most important source of output and GDP growth. SME play a critical role in

manufacturing sector by providing 80 percent of industrial employment, contributing 30

percent of GDP and generating one fourth of sectors export earnings6.

They are generally seen as labor intensive capital saving and capable of helping to create

most of the on billion new jobs, the world will need in the neat future. Their adoptability

and flexibility are considered desirable attributed in adjusting to a fast changing

technological landscape.

SMEs with growth-oriented management can adopt faster to change, create new products

faster and bring them to market more swiftly, while feeding the larger companies with

low cost, high value services.

SMEs in traditional areas of production fit the classical stereotype of small-scale

industry. Such enterprises do not exhibit economies of scale. In such enterprises, lack of

economies of scale, and the low-skilled labor-intensive aspects of their production and

management technologies, renders them an ideal vehicle for employment creation and

poverty alleviation. Such enterprises survive on direct production to the market, or

subcontracting with larger enterprises that produce goods for a larger market.

6 Economic Survey Of Pakistan, 1997-1998

20

Page 23: SME Project

In either case, they draw on labor in the vicinity of a specific market or firm location. In

the latter case, they rely on a flexible pool of unskilled worker who can flow between the

SME and traditional sector during various phases of the business cycles. Such enterprises

are expected to produce low rates of return on capital, and tend to be staffed and managed

by relatively unskilled workers and entrepreneurs.

1.13 Scope of the Study

This is a mammoth topic in itself. Hence the researcher will restrict itself and try to focus

on certain organizations like Small and Medium Enterprise Development Authority and

the SME Bank. The researcher will also try to analyze the role, Government is playing

for the uplift of the SME Sector.

1.14 Methodology

Information will be congregate for the research purposes from the following mediums:

Primary data

Libraries

Articles

Research material

Internet

Financial Magazines

Secondary data

Questionnaires

Interviews

Discussions

Visits

21

Page 24: SME Project

1.15 Organization of the Study

The research comprises of the following chapters:

Chapter 1: Introduction

Chapter 2: Literature Review

Chapter 3: Findings

Chapter 4: Analysis

Chapter 5: Conclusions and Recommendations

22

Page 25: SME Project

Chapter 2 LITERATURE REVIEW

Small and medium enterprises have been a subject of interest for the past many years.

The reality is that “small business” plays an important role in the economies of many

nations has also been recognized. Moreover, the ability of small and medium enterprises

(SMEs) to participate in international trade has also been the subject of interest to

researchers in recent years.

2.1 Small and medium enterprises

There is no single, uniformly acceptable definition of a small firm. Firms differ in their

levels of capitalization, sales and employment. Hence, definitions that employ measures

of size (number of employees, turnover, profitability, net worth etc) when applied to one

sector could lead to all firms being classified as small, while the same size definition

when applied to a different sector would lead to a different results. The first attempt to

overcome this definition problem was by Bolton Committee (1971) when they

formulated “economic” and “statistical” definition. Presented in the following table is a

summary of alternative definitions.

Table 2: Alternative Definitions of SMEs

World Bank since 1996 Firms with fixed assets (excluding land) less than US$ 250,000 in value is a small scale enterprise.

Grinde et al. (1989:9-10) Small scale enterprises are firms with less than or equal to 25 permenant members and with fixed assets (excluding land) worth upto US$ 50,000.

USAID in the 1990s Firms with less than 50 employees and atleast half the output is sold.

UNIDOs definition for Developing countries

Large Firms with 100+ workers.

Medium Firms with 20-99 workers

Small Firms with 5-19 workers

Page 26: SME Project

Micro Firms with less than 5 workersUNIDOs definition for Industrialized countries

Large Firms with 500+ workers

Medium Firms with 100-499 workers

Small Firms with < 9 workers

From the various definitions above, it can be said that there is no unique definition for a

Small and medium scale enterprise. In a study carried out by International Labor

Organization (ILO), more than 50 definitions were identified in 75 different countries,

with considerable ambiguity in the terminology used. The enormous variety of criteria

applied includes size of workforce or capital, form of management or ownership,

production techniques, volume of sales, client numbers, levels of energy consumption

etc.

2.2 Definition of SMEs in some Asian Countries

SMEs are key for economic development of any country, be it a developed or a

developing country because of the fact that they provide most of the employment

opportunities for the general public of the country and as a result, they prosper in these

conditions. SMEs have wide ranging definitions, varying from country to country. Some

employ net assets, some turnover and some the number of employees. The general

definitions of small, medium and large enterprises in non-Asian countries are given

below7:

7 International Finance Corporation - WB Group, Dated May 10, 2005)http:// www.ifc.org

23

Page 27: SME Project

Table 3: Definitions of SMEs in non-Asian countries

Country Number of Employees

Revenues Asset Base

United States < 500 < USD 5 MM  European Union 10 < X < 250 < USD 50MM < USD 34 MMCanada < 500

manufacturing < 50 services

< USD 4 MM  

Mexico 10 < X < 500    South Africa > 10-20

< 100-200> US$ 0.05 MM < USD 1 - 8 MM

> USD 0.07 MM < USD 0.3 – 3 MM

Pakistan < 250 manufacturing< 50 services

<USD 4 MM < USD 1.35 MM manufacturing<USD 0.7 MM services

Turkey 10 < X < 200    

Countries do not use the same definition for classifying their SME sector. Nor does

universal appear to be necessary. The definition in use depends on the purposes. These

definitions are required to serve and the policies, which govern the SME sector thus

defined. The three parameters can generally be applied by most countries, singly or in

combination are:

Capital investment in plant and machinery

Number of workers employed

Volume of production or turnover of business

Despite the lack of universal quantitative norms, the SMEs as a class are clearly

distinguishable in any country, developed or developing. The factors that set them apart

0-14 staff 15-49 staff > 200 staff

MICRO SMALL MEDIUM LARGE

50-199 staff

24

Page 28: SME Project

are essentially qualitative and comparative.

On the qualitative side are their internal management structures, decision making process,

financial practices, trading styles, attendant risks factors etc. Most SMEs are 1 person

shows or are run by 2-3 individuals, usually relatives, friends or business partners, who

take most of the decisions. There is no distinction between private and business assets

and subjective and personal factors play a large role in decision making. The personal

stakes SMEs have in their businesses are much higher than those of corporate executives

in their companies. This enhances the attendant risk and commits entrepreneurs more

strongly with a success of their ventures.

A comparative factors have to do with a way SMEs are situated vis a vis large enterprises

in the corporate sector. They are small and medium sized in comparison with the large

entities with which they share a given economic space. SMEs therefore in come in

varying sizes and SMEs in one country may well be larger than the “BIG” companies in

another. The interesting feature is that, not withstanding their absolute sizes, the problems

confronting SMEs appear to be similar to most countries – whether developing or

developed. It is these features, which set them apart as a distinct group and it is these

factors and not the quantitative definition which are common and have universal

applicability.

Need for Definition:

The countries with such definitions are also the countries that have seen a faster growth

of the SME sector. It appears the more precise the definition, the more effective has been

the transaction of policies intended to benefit the sector into actual results. In countries

where no definition exists, the enterprises feel they are in a disadvantageous position and

empathetic in their demand for such a definition. In some cases, the definition seems to

lend itself to differing interpretations, thus opening up the scene for disputes and

dissatisfaction.

Given below are SME definitions in use by some Asian Countries:

25

Page 29: SME Project

2.2.1 Bangladesh

The government’s industrial policy of 1991 defines “cottage” and “small”-enterprises.

While large scale enterprises are also defined, there is official classification for medium

sized enterprises. This can however be inferred. The Bangladeshi authorities use amount

of fixed investment including initial working capital but excluding the cost of land,

expenses on inland transportation, commissioning of machinery, and duties and taxes, as

a classifying criteria. For cottage and small scale businesses an informal definition based

on number of employees also exits.

A “small enterprise” is defined as an industrial undertaking engaged either in

manufacturing or in service activity and whose total fixed investment including initial

working capital but excluding the cost of land, expenses on inland transportation,

commissioning of machinery, and duties and taxes (does no exceed takka 30m). An

investment for “balancing modernization, replacement and expansion” (BMRE) would

not entail a change in category. However, the investment on BMRE should not be more

than the 50 percent of the total investment limit.

The term “cottage enterprise” is used for an industrial unit engaged in manufacturing or

servicing that is essentially run by family members, on a full time or part time basis, and

whose total investment does not exceed Takka 500,000.

Under the aforementioned policy, any enterprise whose fixed investment exceeds takka

30m is classified as a large scale enterprise. However, it is fairly common to consider

those with a fixed investment not exceeding Takka 100 million as a medium scale

enterprise.

Small units and cottage industries had originally been defined in terms of the number of

workers employed, though this definition is not in vogue. But still it provides readily

accepted criteria for purposes of comparison. According to this definition a small scale

unit is on with between 10 and 20 workers, if it uses mechanical power and between 20

and 150 workers if it does not. Along the same lines, a cottage industry is allowed upto

10 workers if it uses mechanical owe, and upto 20 workers if it does not.

26

Page 30: SME Project

2.2.2 China

Following the planned economic system over a relatively long period, China has

classified enterprises into large, medium and small enterprises based on production

capacity and size of fixed assets. Different criteria have been set in accordance with the

characteristics of different sectors, whereas there is no strict requirement regarding the

employment and sales volume of each enterprise. Those factors constitute the major

difference between China and western countries, at present China is still using the criteria

set by their State Economic and Trade Commission in 1998 to classify enterprises and

there are no clear and unified criteria for enterprises of other types.

Table 4: Sector-specific SME definitions in China

Industrial Sector :Small Enterprises 

300 - 2000 employees

30 -300 M Yuan in sales

40-400 M Yuan Asset size

Medium Enterprises  >2000 employees >300 M Yuan in sales >400 M Yuan Asset size

Construction :Small Enterprises 

600 - 3000 employees

30 -300 M Yuan in sales

40-400 M Yuan Asset size

Medium Enterprises  >3000 employees >300 M Yuan in sales >400 M Yuan Asset size

Wholesale :Small Enterprises 

100 - 200 employees30 -300 M Yuan in sales

 

Medium Enterprises  >200 employees >300 M Yuan in sales  

Retail :Small Enterprises 

100 - 500 employees10 -150 M Yuan in sales

 

Medium Enterprises  >500 employees >150 M Yuan in sales  

Transportation :Small and Medium Enterprises 

>500 employees >30 M Yuan in sales  

Posts :Small and Medium Enterprises 

>400 employees >30 M Yuan in sales  

Hotels and restaurants :Small and Medium Enterprises 

>400 employees >30 M Yuan in sales  

2.2.3 India

The definition used by the Indian authorities is based on the level of investment in plant,

27

Page 31: SME Project

machinery or other fixed assets whether held on an ownership, lease or hire purchase

basis. It seeks to keep in view the socio economic environment in India, where capital is

scarce and labor is abundant. However, a definition exist only for tiny and small units,

medium sized enterprises are not defined either technically or legally.

 Industrial undertaking in which the investment in fixed assets in plant and machinery,

excluding land and building, whether held on ownership terms or on lease or on hire

purchase, does not exceed Rs. 1 Crore.

An industrial undertaking which is engaged or is proposed to be engaged in the

manufacture or production of parts, components, sub-assemblies, tooling or

intermediates, or the rendering of services and undertaking supplies or proposes to supply

or renders not more than fifty percent of its production or services, as the case may be, to

one or more other industrial undertakings and whose investment in fixed assets in plant

and machinery, whether held on ownership terms or on lease or on hire purchase, does

not exceed rupees one crore.

 All Small Scale units wherein investment on plant and machinery (excluding land and

building) upto Rs. 25 lakhs are classified as tiny industries.

 All small scale units which exports more than 50 percent of their output is classified as

Export Oriented Units.

 Industrial related service/business enterprises with investment on plant and machinery

upto Rs. 10 lakhs excluding land and building is registered under Small Scale Service

Business Enterprises (SSSBE).

 Indonesia

According to Undang-Undang (Regulation) No 9 Tabun (year) 1995, small businesses

have a maximum net worth (excluding land and building) Rupiahs 200 million or

maximum sales of Rupiahs 1 billion, are owned by Indonesian citizens and are

independent i.e. not a subsidiary of, or owned by, or affiliated directly with, medium size

28

Page 32: SME Project

or big enterprises.

2.2.4 Japan

The Small and Medium Enterprise Basic Law (1999) of Japan qualifies small enterprises

as being enterprises with a regular workforce not in excess of 20 people (or five people

for enterprises that are principally engaged in commerce or the service industry).

Table 5: Definition of SMEs in Japan

A. Small and Medium Enterprises

Mining, manufacturing, transportation construction industries :   Employees

Invested Capital

<300 or

<300 million yen

Wholesalers :Employees

Invested Capital

<100 or

<100 million yen

Retailers, Services : Employees

Invested Capital

50 or

< 50 million yen

B. Small Scale Enterprises

Manufacturing and other Industries : Employees  <20

Commerce and Services :Employees <5

Based on most recent data obtained (2002), more than 99 percent businesses in Japan are

classified as SMEs and of the total work force, 81 percent are employed by this sector. At

the same time, 51 percent of shipped manufacturing goods are produced by SMEs; in the

wholesale industry, this figure is 62 percent, while in retail, it represents 73 percent8.

Percentages/Figures have not changed very much in the past thirty five years with the

enforcement of the Small and Medium Enterprise Basic Law. SMEs assume a very

important role in the Japanese economy, comprising 98.8 percent of total establishments

in Japan and contributing 77.6 percent to total employment in 1996. In terms of market

8 Japan Small and Medium Enterprise Corporation or JASMEC

29

Page 33: SME Project

share, the SMEs contributed 51.0 percent of total shipment value of the manufacturing

sector in 1996. In 1994, SMEs contribute 61.4 percent of the total amount of wholesale

and 76.8 percent of retail sales.

Japanese SMEs continue to perform well, demonstrating their unique flexibility and

creativity, even at time of recession experienced by the Japanese economy. The Law has

the following objectives:

Promoting the growth and development of SMEs, and

Enhancing the economic and social well-being of entrepreneurs and employees of

SMEs

2.2.5 Malaysia

The definition of SMEs in Malaysia is tied to Industrial Coordination Act of 1986. It

states that SMEe are those companies that employ less that 75 full time workers or with a

shareholders’ fund of less than M$ 2.5 m (US$ 1m) The small scale industries (SIs) refer

to manufacturing establishments employing between 5 and 50 workers or with

shareholder’s fund of up to M$ 500,000 (US$ 200,000). Medium Industries (MIs) are

those manufacturing establishment with a share holders fund of more than M$ 500,000

and up to M$ 2.5 million or employing 50-75 full-time staff.

2.2.6 Thailand

On September 11th 2002, the Ministry of Industry introduced the definition of Thai small

and medium-sized enterprise (SME). This definition is based on the number of salaried

workers, and fixed capitals. An enterprise is categorised as an SME since it has

employees less than 200 and fixed capital less than baht 200 million, excluding land and

properties (3). SMEs in Thailand are classified in three sections: production, service, and

trading (2).

Table 6: Definition of SMEs in Thailand

Type Small Medium

30

Page 34: SME Project

Employees Capital (million baht)

Employees Capital (million baht)

Production Not more than 50 Not more than 50 51-200 51-200Service Not more than 50 Not more than 50 51-200 51-200Wholesale Not more than 25 Not more than 50 26-50 51-100Retail Not more than 15 Not more than 50 16-30 31-60

In business practices, the definition of SMEs can be extended including number sharing

holdings by parent companies, enterprise structures and independence. The principle

criterion for SME is an enterprise’s independence. This characteristic indicates that not

more than 25 percent of SME capital should be owned by one large or many large

companies (1). At present, there are many multinational companies in the form of

franchise companies and joint-venture between Thai and overseas companies. Some of

these companies should not be classified as Thai SMEs. In this study, Thai SME

definitions are as follows:

1. Employee size is not more than 200.

2. Fixed capital is not more than 200 million baht.

3. Less than 25 percent owned by one or jointly several enterprise(s).

4. Less than 50 percent owned by foreigners.

2.2.7 Pakistan:

Different agencies define SMEs in their own way and there is no single nationally

accepted definition. The Punjab Directorate of Industries (PDI) defines a small unit as

one fixed assets worth Rupees 10 million of less, excluding the cost of land. The Punjab

Small Industries Corporation (PSDI) sets this limit as Rupees 10 million. According to

PDI, all enterprises with assests excluding land, valued between Rupess 10 million and

Rupees 100 million are medium scale units. PSDI defines medium scale units as

enterprises with assets excluding land valued between Rupess 20 million and Rupees 100

million. All enterprises employing less than 10 persons are categorized as small or

medium sized enterprises.

31

Page 35: SME Project

2.2.8 Philippines

In the Philippines, an SME is defined as any business activity or enterprise engaged in

industry, agri-business and/or services whether a single proprietorship, cooperative, a

partnership or a corporation with a value of total assets inclusive of those arising from

loans but exclusive of the land on which the office, plant and equipment of a particular

business entity are situated, coming under one of the following categories:

Micro (upto P 150,000)

Cottage (over P 150,000 to P 1.5 million)

32

Page 36: SME Project

Chapter 3 FINDINGS

3.1 Organizations working for uplift of SMEs

There are many different organizations working for the uplift of Small and Medium

Enterprises in the country. These organizations are mostly Government based.

3.1.1 Small and Medium Enterprises Development Authority

The Small and Medium Enterprises Development Authority (SMEDA) was established in

1998 under the Ministry of Industries and Production in order to foster the development

of SME in the economy and was expected to take a key role in this process. Its functions

include, inter alia, the facilitation on policy making and the provision of overall planning,

programming, research and evaluation of matters related to SME in Pakistan; monitoring

and evaluation; encouraging and facilitating development of SME and to protect their

interests. Its functions are:

1. Facilitation on policy making and provision of overall planning

2. Programming, research and evaluation of matters related to SMEs in Pakistan

3. Monitoring and evaluation; encouraging and facilitating the development of SME

and to protect their interests.

In the industrial development of a country, the importance of the SME sector cannot be

overemphasized because:

1. SMEs constitute nearly 90 percent of all enterprises in Pakistan.

2. They employ 80 percent of non-agriculture labour force

3. Their share in the annual GDP is approx. 40 percent.

Historically, the GoP has not distinguished between large and small enterprises in

industry or trade. Industrial and commerce policies have been uniform for all scales of

enterprises. As a consequence of which specific needs of Small and Medium Enterprises

could not be addresses. SMEDA is creating a SME focus within the Government for this

33

Page 37: SME Project

crucial sector of the economy which provides low cost employment opportunities and

helps the economy in two valuable ways:

Boosting exports

Poverty reduction

However, unlike large enterprises in the formal sector, a small and medium enterprise is

constrained by financial and other resources. This inherent characteristic of an SME

makes it imperative that there should be a mechanism through which it may get support

in different functions of business including technical upgradation, marketing, financial

and human resource training & development.

In Pakistan SMEDA is the flagship organization of Pakistan which is providing the

necessary services to help SMEs overcome the weaknesses that are endogenous to their

very nature. It is an autonomous body working under the umbrella of the Ministry of

Industries & Production and contributes towards the growth and development of SMEs in

Pakistan through:

1. The creation of a conducive and enabling regulatory environment.

2. Development of industrial clusters.

3. The provision of Business Development Services to SMEs in all areas of business

management

One of the first exercises SMEDA conducted was determining the definition of SMEs.

Local research showed that there were varying numbers of definitions in use by different

organizations. Thus SMEDA first of all developed a uniform definition of SMEs that

would be acceptable to all concerned.

In Pakistan, SMEDA has defined SMEs in terms of employment generated as well as

investment in productive assets. SMEDA’s definition of SMEs is primarily based on the

number of personnel employed in the enterprise. The secondary criteria for classification

of the SMEs, is the value of productive assets employed the enterprise. Adhering to a

clear mandate and a logical path to achieve quantitatively verifiable targets SMEDA:

34

Page 38: SME Project

1. Removes all regulatory retardants in the shortest possible time

2. Assist SMEs with…

a. Technical upgradation

b. Technical support, especially in export markets

c. Human resource development through training & organization structure

development.

3. Access to formal capital comprehensive analyses of international trends

4. National policies and other macroeconomic factors affecting SMEs in Pakistan for a

gradual progress towards the creation of favorable business environment for its

key clients – the SMEs of Pakistan.

5. At the same time, they also interact with the SMEs working in industrial sectors such

as agriculture, fisheries, textiles, handloom, weaving, transport, leather, marble &

granite, carpets and light engineering. This interaction takes place at the

individual as well as collective level to provide proactive and responsible

financial, technical, management and marketing services to the SMEs.

At the collective level, SMEDA addresses the problems and needs of SMEs in the form

of an industrial cluster – a concentration of largely homogenous enterprises within a

certain geographical area. SMEDA interacts with the stakeholders operating in such

clusters on a regular basis and collects fist hand information about their problems and

needs. During this interaction, the issues are prioritized and the important problems are

selected for detailed working through which the projects/ programs are identified.

SME support through cluster development program is provided on two fronts:

1. Regulations and policy level support.

2. Institutional & networking support.

At the institutional level, SMEDA provides support to SMEs

By creating networking amongst the concerned stakeholders.

35

Page 39: SME Project

By directly starting development projects in the clusters. Such projects may

include establishing a training institute, building a common facility centre,

building a model plant with state-of-the-art technology for SMEs to emulate

through reverse engineering. These projects also include upgrading technology in

a particular industrial sector and starting a program lending scheme for this

purpose in collaboration with the financial institutions.

3.1.1.1 Services Offered

As SMEDA offers following services for Small and Medium Entrepreneurs (SMEs):

Assistance in Raising Finance

Financial Advice

Project Identification

Business Plan Development

Technical Advice

Marketing Advice (Branding, Labelling, Packaging, Distribution Promotion etc)

Company Incorporation, Export Registration & Regulatory Advice

Sales Tax, Custom Duty, Excise Duty etc

Training & Development

Information Services (Library, Databases, Project briefs, Pre-feasibilities)

Business matchmaking

Adhering to a clear mandate and a logical path to achieve quantitatively verifiable targets,

SMEDA carries out comprehensive analyses of international trends, national policies and

other macroeconomic factors affecting SMEs in Pakistan for a gradual progress towards

the creation of a favourable business environment for its key clients - the SMEs of

Pakistan.

At the same time, we also interact with the SMEs working in industrial sectors such as

Agriculture, Fisheries, Textiles, Handloom Weaving, Transport, Leather, Marble &

Granite, Carpets and Light Engineering. 

36

Page 40: SME Project

This interaction takes place at the individual as well as collective level to provide

proactive and responsive financial, technical, management and marketing services to

SMEs.

At the collective level SMEDA addresses the problems and needs of SMEs in the form of

an industrial cluster - a concentration of largely homogenous enterprises within a certain

geographical area. 

SMEDA interacts with the stakeholders operating in such clusters on a regular basis and

collects first hand information about their problems and needs. During this interaction,

the issues are prioritized and the important problems are selected for detailed working

through which the projects/programs are identified.

SME support through cluster development program is provided on two fronts:

1. Regulations and policy level support

2. Institutional & networking support

In the policy level support, problems related to any Government department or

Government policy/regulation are studied and, if found valid, are advocated with the

concerned authorities. At the institutional level, SMEDA provides support to SMEs by

creating networking amongst the concerned stakeholders or by directly starting

development projects in the clusters. Such projects may include establishing a training

institute, building a common facility centre, building a model plant with state-of-the-art

technology for SMEs to emulate through reverse engineering. These projects also include

upgrading technology in a particular industrial sector and starting a program-lending

scheme for this purpose in collaboration with the financial institutions.

Up to now, SMEDA has been involved in cluster development projects in the areas of

boat modification in Marine fishery sector, credit for auto vendors, carpet Weaving,

Marble & Granite, Dates & apples Processing, wooden furniture, leather garments,

ceramic kilns, cotton ginning, and glass bangles cluster. Some of the important cluster

development projects undertaken by SMEDA are:

37

Page 41: SME Project

Textile/Apparel

Ginning Technology Up-Gradation

Program Lending For Power Looms

Computer Aided Design Centre (common facility centre-Sialkot)

Designing Institute for Garments (Peshawar)

Accessories Sector Study

Development of Handloom Cluster Horticulture/Fruits and Vegetables

Establishment of Cool-Chain Agriculture Export Processing Zone

Fruit Processing Facility (NWFP in Collaboration with EPB)

Assistance to Set up Horticulture Export Board

Revitalisation of Sunflo cit-Russ for Citrus cluster development.

Apple Treatment Plant in Balochistan (co-ordination with EPB)

Fisheries

Program Lending Boat/Engine Modification, Gwadar District

Establishment Of Shrimp Farms

Fish Processing Facility In Gwadar (Feasibility Study)

Granite & Marble

Export Warehouse Marble (Azakhel NWFP)

Establishment of Model Quarry and Training Institute Marble

Joint Ventures and Technology Transfer Arrangements (NWFP)

Gems

Five New Gem Mines To Be operationalized (NWFP)

Lapidaries Program Lending (NWFP)

Glass & Ceramics

Ceramics Kiln Up-Gradation: Common Facility Centre, Gujrat

38

Page 42: SME Project

Sanitary Ware & Pottery Sector Kiln Up-Gradation

Bangles Kiln Up-Gradation (Hyderabad)

Agriculture

Agri-Mall - One Stop Shop for Agriculture Inputs

Support Services for Agricultural Credit (SSAC)

Establishment of 3 Private Sector Warehousing & Trade Promotion facilities in

Afghanistan

The third area of SMEDA’s functioning is the provision of Business Development

Services to SMEs. For this purpose they have Helpdesks in all four of their regional

offices where any SME in need of SMEDA’s services can simply walk in and obtain over

the counter products such as Project briefs, Pre-feasibility studies and Regulatory

procedures, along with advice on specific problems. SMEDA helpdesk services include:

Assistance in raising finance.

Financial advice.

Project identification.

Business plan development.

Technical advice (marketing advice etc.)

Company Incorporation, Export Registration, & Regulatory Advice.

Sales Tax, Custom Duty, Excise Duty, etc.

Electronic Commerce Support.

Business Matchmaking.

Accounting & Bookkeeping Services.

Information Services (library, databases, project briefs, Pre-feasibility studies,

business guidebooks).

As a part of its Business Development Services, SMEDA also provides human resource

training services by conducting extensive training need analysis of different SME

clusters. SMEDA has so far conducted more than 230 training courses and workshops

focusing on developing sector specific skills.

39

Page 43: SME Project

SMEDA, envisions to become a model of public-private partnership for better facilitation

of the small & medium enterprises in Pakistan through the creation of a more equitable,

transparent and conducive regulatory environment for the businessmen. 

SMEDA believes in synthesizing home-grown solutions to the problems of SMEs, based

on global information and local wisdom achieved through cross-country analysis,

experience of indigenous entrepreneurs and constraints of the government.

3.1.1.2 Economic Importance

Apparently the government of Pakistan has got convinced that without appropriate

initiatives on her part this sector cannot be expected to play its due role in the

advancement of industrialization of the country.

Reportedly the Asian Development Bank and some other international agencies are

prepared to offer meaningful help to pave the way for SME of Pakistan to come out of its

hole.

The history of SMEs of other Asian countries has shown that small scale units cannot

compete with the large size companies for reasons of meager resources i.e. technology,

finance, skills, management. Even when confined to work as subcontractors they have to

undercut each other to secure access to business opportunities, compromising thereby

their viability abinitio.

Other Asian economics have learnt from the Japanese success, followed suit and

registered significant improvement in their industries which are predominantly small and

medium enterprises. Pakistan is presently on the look out for remedial measures for its

SME sector. A summary of the state of affairs in some of the Asian SME is presented

hereunder:

40

Page 44: SME Project

3.1.1.3 Projects undertaken by SMEDA:

3.1.1.3.1 SME Policy Development:

Promotion of Small and Medium Enterprises (SMEs) entails enhancement of the

competitiveness of the economy and generation of additional employment. A thriving

Small and Medium Enterprise (SME) sector has long been recognized as one of the key

characteristics of any prosperous and growing economy.

Pakistan is an economy comprising mainly of SMEs. The significance of their role is

clearly indicated by various statistics. According to more recent estimates there are

approximately 3.2 million business enterprises in Pakistan. Enterprises employing up to

99 persons constitute over 95 percent of all private enterprises in the industrial sector and

employ nearly 78 percent of the non-agriculture labour force. They contribute over 30

percent to the GDP, Rs.140 billion to exports, and account 25 percent of exports of

manufactured goods besides sharing 35 percent in manufacturing value added.

However, there has been concern that in Pakistan the SME sector has not been able to

realize its full potential. The SMEs continue to suffer from a number of weaknesses,

which hamper their ability to take full advantage of the opening of economy and the

increasingly accessible world markets. The areas of constraints are normally identified as

labor, taxation, trade capacity, and finance and credit availability.

It is understood that despite previous efforts the SME sector has not received due priority

on account of segregated efforts and non-consolidation of programs to achieve well

targeted results. In order to move forward, we need to develop a common vision for

SMEs to be the real engine of growth. Our vision also needs to be achievable so we may

find motivation in implementing phase.

Implementing change requires the formulation of a Policy for SME development and

assigning specific responsibilities for its implementation and continuous improvement.

The Government of Pakistan has thus constituted the SME Task Force which is to define

the basic elements of our SME policy.

41

Page 45: SME Project

As there are many cross-cutting issues to be addressed, the SME Task Force is composed

of diverse sectors and levels of Government and includes major stakeholders of the

private sector, and SME in particular. Where the SME Task Force deems it necessary or

useful, it may invite specific organizations or individuals to assist its work. It may also

co-opt further members. In order to enable the SME Task Force to work effectively,

working Committees were setup to carry out technical analyses and deliberate the

findings. The Working Committees after due deliberation, finalized their

recommendations.

The broader objectives to be achieved by this policy exercise are; across the board

recognition for SMEs as a sector requiring separate policy & regulatory space, define

SMEs that qualify for support, propose counterbalancing measures to eliminate

disadvantage of size, remove unnecessary regulatory burden, institute SME support

mechanism in both public & private sectors, improve support delivery mechanisms and

establish policy evaluation and review systems.

In order to achieve the above, wide scale consultation with the Provinces is being

undertaken to elicit views of the ultimate beneficiaries, i.e. SMEs. The participation of

stakeholders has been therefore, the cornerstone of the policy development process.

3.1.1.3.2 Industry Support Program

SMEDA and JICA (Japan International Cooperation Agency) have initiated an Industry

Support Program in Pakistan. These two organizations are working together to provide

technical assistance to various industrial sectors through Japanese Senior Experts.

Textiles being the most vital sector of our economy and in order to provide support to our

industry with the modern techniques, methodology and effective management systems,

and to cope up with the challenge of post WTO regime, JICA has placed five textile

experts as Senior Volunteers (SVs) at SMEDA The tenure of each of the SVs is for two

years.

42

Page 46: SME Project

These SVs are presently working for technical support to Textile Industry in Pakistan. An

Industry Support Cell (ISC) has also been established at SMEDA for its internal capacity

building and to continue this program after the departure of JICA SVs. This cell is

comprises of textile professionals and interpreters at Lahore and Karachi. These

professionals are working closely with the SVs.

All the Senior Volunteers are based at SMEDA Lahore with travel to other cities of

country as per needs of the program.

With more than 35 years of experience, coupled with pertinent education in respective

fields, these experts transfer their knowledge, expertise and methodology to the local

industry on truly voluntary basis. As a part of the program, Japanese expert(s) are

attached with individual industrial unit(s) for a certain time period.  

In the process of technical guidance, the selected units are evaluated thoroughly by the

experts and comprehensive advice and guidance is given on improving the levels of

productivity, efficiency, quality, cost controls and effective management techniques

(based on the needs of each individual unit). Normally, a time period of five to eight

working days is allocated to each individual unit for technical assistance and then after a

certain time the same unit is again re-visited to evaluate the changes that take place in

light of the guide lines provided earlier.

Since the inception of this program in March 2004, a total of 94 factories in different

sectors of textile industry (including 16 Spinning, 21 Weaving, 22 Knitting and 35

Garment factories) have received the direct benefit of this program in all over the

country.

Through a feedback mechanism, it has been observed that industry is feeling a significant

impact in following areas:

Improvement in productivity

Optimal capacity utilization

43

Page 47: SME Project

Introducing efficient management techniques

Cost controls

Skill up-gradation at middle management level

Introducing concept of on-the- job-training

Minimizing rejections

Awareness of International Quality Standards

Cultural change by introducing concept of “Continuous Improvement”

It is estimated that around 200 industrial units will get a direct benefit from the program

during the two years stay of SVs in Pakistan. After the departure of these SVs, the

Industry Support Cell at SMEDA with Pakistani professionals will continue to provide

these services to industry.  It is anticipated that the program will lead to improvement of

textile industry at various steps of the value chain.  These improvements will lead to

higher productivity of Pakistani manpower and better product quality for enhancing

exports for the textile sector.

In order to share the benefits of the expertise and knowledge of the Japanese Experts, the

relevant industrial units are invited to be the part of this program as model unit(s). Upon

request, the relevant expert would spend a defined time at the factory and will guide

about the improvements that can take place based on the specific needs of unit.

 The concerned trade associations would also be requested to select their members who

are relatively small to medium scale in size, genuinely interested in up-grading their level

of operations through the Japanese experts and are ready to put-in the required time,

effort and investment for moving on to a higher level of business operations. 

3.1.1.3.3 Industrial Information Network

44

Page 48: SME Project

The Industrial Information Network (IIN) (http://www.iin.com.pk) is the first Pakistani

B2B and information portal designed specifically to cater the trade information needs of

businesses for various industrial sectors in Pakistan. The project is initially focused on

facilitation of Textile and Leather sectors with more sectors to be added later.

Pakistani businesses face a severe challenge in international market competitiveness due

to lack of IT & eCommerce infrastructure. “Survival of the fittest” is what is going to rule

the world and Pakistani businesses will be able to achieve the level of fitness for survival

only if concrete measures are taken immediately by automating their value chains &

financial systems, accessing real time market information, enabling online buyer seller

interactive exchanges, etc.

One of the primary objectives of IIN is to promote the use of B2B e-commerce within the

country and utilize information technology to link businesses with international buyers,

suppliers, trade facilitation bodies and the Government institutions. Access to the other

businesses will enable Pakistani businesses finding and exploring international markets,

access to the new technologies and information for work flow enhancements. Getting

connected with trade facilitation bodies and government institutions will open new doors

for acquiring required business information from multiple sources while communicating

their problems directly to the Government to assist the Government better understand the

regulatory & policy needs.

In addition, international outreach and provision of updated international business

information and trends is also one of the major objectives of IIN. IIN offers a unique

online platform to maintain eShops to present their products round the clock to the

interested buyers. In addition to trade facilitation area, IIN offers comprehensive sector

specific information as well as information on financing, government rules & regulations,

business startup procedures, and import & export procedures etc. IIN also offers e-

learning opportunities to executives with focus on business management tips & tricks.

In short, IIN is designed to become a one-stop-shop for businesses for all their

Information and eCommerce needs. Ministry of Information Technology & Telecom

45

Page 49: SME Project

(MoITT), Small and Medium Enterprise Development Authority (SMEDA) and UNIDO

have already laid down the cornerstone of IT infrastructure & the framework creating a

conducive environment for eCommerce applications to be launched. IIN will act as a

catalyst to trigger a ripple effect and usher paradigm shift in the way businesses are

currently operated in Pakistan.

3.1.1.3.4 Common Facility Centers

In May 2002, the Asian Development Bank (ADB) signed a consulting agreement with

M/s. GFA of Germany to design the SME Sector Development Program (SDP) for

Government of Pakistan. The consultant firm was to comprehensively review SME

related issues and design well-sequenced priority measures to be implemented under an

ADB supported SDP.

Based on the findings of the Consultants, the Government of Pakistan (GoP) has signed

an agreement with the Asian Development Bank (ADB) for initiating an SME Sector

Development Program. As part of this Program the ADB has extended the following

loans to the GoP

US$ 18million Project Loan

US$ 152 million Program Loan

As part of the terms and conditions of the Program Loan, the GoP is to extend a grant of

US$ 12 million to SMEDA for supporting its Cluster Development Program. These funds

will be utilized for establishment of Common Facility Centers (CFCs) in major SME

clusters throughout Pakistan over a period of 5 years. Typically these Centers (expected

to be around 50) provide a common pool of machinery, testing/inspection or technology

related services for the collective up-gradation of SMEs. The SMEs will use these

facilities for improving quality and for value addition in their products or processes. The

specialized services and technology offered through such an arrangement will be those

which do not justify investments by a single enterprise.

46

Page 50: SME Project

It has been proposed to set-up the CFCs as non-profit joint ventures in collaboration with

various SME associations or other suitable representative bodies who will be responsible

for their operation and maintenance. SMEDA, through this grant, will provide machinery

and know-how, whereas the local partners will provide space and manpower for the CFC.

The CFC Scheme will be open to all SME sectors, whether manufacturing or services,

where the establishment of a CFC can contribute in at least one of the following ways

Value addition into a product or process

New (export) market development

Enable compliance with international standards or statutes

3.1.1.3.5 Cluster Development

Given the large number of existing SME clusters, most of which are widely

acknowledged to be performing below their full potential, a cluster development program

has been recognized as being ideally suited to Pakistan, and would complement the

activities being carried out by agencies such as SMEDA, Export Promotion Bureau

(EPB) and the National Productivity Organization (NPO).

A project was initiated in mid-2001 covering five pilot clusters:

1. Leather and leather products in Korangi, Karachi

2. Gems and Jewellery in Saddar, Karachi

3. Ready-made garments in Lahore

4. Fans in Gujrat

5. Cutlery in Wazirabad.

All of these clusters have been selected by the Pakistani counterparts for their potential to

increase significantly their export revenues, in some cases from an already high base.

47

Page 51: SME Project

This project has hitherto been funded largely from two separate trenches of UNIDO seed

money, released respectively in 2001 and 2003, amounting to a total of US$ 235,000. 

This relatively modest outlay, supplemented by contributions in kind from various

Pakistani counterparts in the public and private sectors, has enabled significant successes

to be achieved:

A full complement of CDAs trained for the five pilot clusters in a training course

held in India in connection with the UNIDO cluster development  program in that

country.

Comprehensive diagnostic studies carried out in each of the pilot clusters and

corresponding action plans for follow-up sub-projects drafted, some of which

have begun to be implemented.

A national focal point established; coordinated ongoing activities; popularizing

the cluster development concept and UNIDO methodology among public and

private-sector decision-makers in Pakistan.

Project Objectives:

The project will seek to support a variety of trade capacity building measures for

enhancing the production and export capacity of the SMEs in these clusters, many of

which are existing or potential exporters. These include:

Efforts to benefit from common opportunities and overcome common weaknesses

by taking advantage of external economies (e.g. specialized suppliers of raw

materials, components and machinery; sector specific skills etc.)

Promoting the emergence of specialized technical, managerial and financial

services

Creating a favorable ground for the development of inter-firm cooperation

Supporting increased cooperation among public and private local institutions to

promote local production, innovation and collective learning.

48

Page 52: SME Project

Project Structure and Implementation Strategy:

The project is expected to have a total duration of 3-5 Years and will have three principal

components:

The formalization of the status of the existing project staff and the recruitment of

new staff as required.  This represents an essential housekeeping measure to

ensure the sustainability of the project in the selected clusters

The establishment of a training program for CDAs

Project Outputs:

The activities to promote trust-building and networking among cluster actors are intended

to help them develop a common vision for the cluster, achieve increased (external)

economies of scale and enhance their competitive advantage.  In the particular case of the

selected clusters, since they are comprise industries with a strong export potential, this

trust building will initially be channeled towards helping the cluster actors to formulate

and promote a common brand or logo.  In addition, these activities will facilitate joint

actions on both the supply and demand sides, such as the development of raw materials

and marketing consortia for the ultimate up-gradation of all tiers of these clusters.  The

entrepreneurs will also be helped to understand more fully the opportunities and

challenges facing their industry, and the measures they can take jointly for their common

advantage.

Lastly, and based on the trust-building and networking activities described above, the

project will seek to enhance the institutional capacities of the clusters.  A significant role

in this context will be played by the various industry institutes that have already been

established in the clusters by various public and private-sector agencies, but which are

still operating at a very low level of effectiveness.  Emphasis will be placed on

strengthening these institutes and promoting and improved alignment of the services

provided by them (e.g. with regard to vocational, management and marketing training)

49

Page 53: SME Project

with the existing and potential requirements of their respective clusters.  Efforts will also

be made, with the support of international experts where necessary, to enhance the R&D

potential of these institutes.  Wherever possible and appropriate, activities related to the

up-gradation of these institutes will be linked to parallel activities related to an EU-

funded project for trade-related technical assistance in order to derive highest possible

degree of synergy between UNIDO’s various activities in Pakistan.

Current Status:

The awareness-creation role of the project has been particularly important, and achieved

considerable successes. In 2003 the Government of Pakistan announced its decision to

adopt SME cluster development as a principal element of its trade policy, EPB declared

its willingness to provide substantial sums to use UNIDO’s services for the development

of export-oriented SME clusters throughout Pakistan; led to the formulation of the

following phased approach for EPB’s support to the UNIDO cluster development

program in Pakistan:   

The EPB has contributed US$ 211,000 in cash towards the implementation of the

follow-up sub-projects in the five pilot clusters. First trenches of US$ 70,000 have

already been transferred to UNIDO for implementation. UNIDO has also added

USD 50,000 as co-funding to the implementation phase of the program.

The EPB will make a further contribution for the new clusters; program may

subsequently be expanded

In addition, the Government of the Punjab has also adopted the UNIDO cluster

development approach for seven SME clusters in the province in collaboration with

Punjab Small Industries Corporation (PSIC) and SMEDA, with UNIDO’s support;

allocated an amount more than US$ 200,000 for preliminary stages of project in 2004-

2005.

The EU mission to Pakistan has expressed an interest in funding the development of two

additional clusters beyond the ones covered in the current project and those proposed in

the other projects under discussion with the EPB and the Government of the Punjab.

50

Page 54: SME Project

Italian donors have also approved Euros 1.4 millions, to be deployed jointly with

SMEDA, would give the resources to move forward with the cluster development

program in Pakistan on a broad front. It is expected to allocate a proportion for UNIDO's

SME cluster development activities in Pakistan.  In particular, it will also enable UNIDO

to participate more effectively in the cluster development project embarked upon by

SMEDA and PSIC.

3.1.2 SME Bank Limited

3.1.2.1 Introduction9

On 1st January 2002, Pakistan’s financial sector witnessed the advent of a Bank that was

long missing from the country’s economic front the premiere Bank for SME’s (Small &

Medium Enterprises) It is playing a strategic role in advancing the economic growth

through market research, product development and lending while providing state-of-the-

art services to SMEs through out Pakistan.

As part of the financial sector restructuring, the SME Bank has been established through

an amalgamation of SBFC (Small Business Finance Corporation) and RDFC (Regional

Development Finance Corporation). This Bank aims to fulfill

1. Financing needs of small and medium enterprises

2. Guidance to fresh and existing entrepreneurs

In the past, institutions like SBFC have lacked in performance and efficient client

handling. When the present management was put in place in SBFC in February 2000, the

institution was a sad case of inefficient management. Non-performing loans, exorbitant

expenditures, lack of credit appraisal skills, overstaffing and lack of institutional integrity

were some of the major issues affecting the organization’s productivity and ability to

function. Since then, a great deal of effort has been undertaken for turning around the

institution and putting it on the right track. These efforts are guided by a focused mission

statement and vision. The new SME Bank, therefore, inherits only the best practices.

9 http://www.smebank.org/financial percent20products.htm

51

Page 55: SME Project

All entrepreneurs who have a proposal with potential can gain access to loans by SME

Bank. It provides loans for acquiring raw materials and adding value for products that are

export oriented. The requirements for obtaining a loan are a viable business plan,

adequate debt equity rates and securities.

3.1.2.2 Products & Services:

3.1.2.2.1 Financial Products

Any commercially viable business proposal merits SME Bank’s support. It is Bank’s

effort to assist and support enterprises that use indigenous raw material, add value and are

export oriented. Such enterprises are vital to our economy since these are labor intensive

and thus create employment opportunities.  

SME Bank is reaching out to small and medium entrepreneurs through:

1. Working Capital & Medium-Long term financing

2. Program Lending (Hunarmand Pakistani Schemes)

3. Leasing through its subsidiary 

Bank’s three main requirements are:

1. A viable business plan

2. Adequate debt equity rates

3. Acceptable securities

Facilities:

All entrepreneurs having proposal with potential can gain access to loans by SME Bank.

It provides loans for acquiring raw materials and adding value for products that are export

oriented. The requirements for obtaining a loan are a viable business plan, adequate debt

equity rates and securities. It is reaching out to small and medium entrepreneurs through:

52

Page 56: SME Project

Working Capital & Medium-Long term financing

Program Lending (Hunarmand Pakistani Schemes)

Leasing through its subsidiary 

Customized Services

Bank generally adopts a Program Lending approach for its financing activities.

According to this approach, specific sectors with large SME presence have been

identified and specific lending schemes have been designed targeting these sectors. It is

expected that a larger number of SMEs can be reached through such schemes.

Schemes for the following sectors have been developed:

1. Marine Fisheries

2. Date Processing

3. Information Technology

4. CNG Kits

5. Gems & Jewelry

6. Carpets Manufacturing

7. Beacon house Informatics

8. Beacon house School Systems

9. Women Entrepreneurs

10. Motorcycle Rickshaws

53

Page 57: SME Project

Enterprises, which are commercially viable and meet SME Bank's eligibility criteria but

do not have a Program Lending Scheme available, are processed individually. The

lending criteria and credit analysis for such proposals varies on a case-to-case basis.

Customized financing products for the following are also available: 

1. Power Looms Up Gradation

2. Beaconhouse School Systems

3. Carpet Manufacturers

4. Gems & Jewellery

5. OEM (Original Equipment Manufacturers) – Autoparts

3.1.2.2.2 General Lending Criteria

Financing Limit

SME Bank can provide financing within the range of Pak Rs.50,000.- to Pak Rs.

30 Million

Loan provided by the Bank will not exceed 60 percent of the forced sale value of

collateral

Project’s/Borrower’s Eligibility

The borrower should have a commercially viable business plan

Adequate Debt Equity ratio

Collateral / Security

Acceptable forms of security are mortgage of property/house/building

Hypothecation of stocks/machinery/equipment

54

Page 58: SME Project

Personal guarantees

Repayments

Upto 7 years, as determined by the nature of the project and its cash flows

Normally in equal monthly installments

Documents Required

Business Plan

Attested copy of NIC

Property documents

Accounts

Bank statement

3.1.3 Punjab Small Industrial Corporation

In order to facilitate the expansion of the cottage industry in the province, the Punjab

Small Industrial Corporation (PSIC) was established. PSIC has set up 13 small industrial

estates in the province where 4026 industrial plots of different sizes with complete

infrastructure facilities and production facility worth Rs. 2 billion per annum have been

developed for setting up of small industrial units which have provided jobs to over 26000

people. There is enough potential for expansion of value addition upto Rs. 8 billion and

job opportunities for 60,000 people. PSIC has further plan to develop 13 industrial estates

in every district.

The industrial estates in Taxila and Kasur are under active consideration while initial

work has been accomplished for industrial estates at Gujarat and Sialkot. Inspite of

financial constraints, the Corporation continued its two credit schemes of rural

industrialization program and self employment scheme for the small entrepreneurs. PSIC

55

Page 59: SME Project

has disbursed an amount of Rs. 17603 lacs to 6319 small entrepreneurs in the province of

Punjab while against recoverable loans, it has recovered Rs. 13.6 million.

The Corporation is also running

Technical specific centres / dehi mazdoor training centres

Ready-made garment training centres

Hosiery knitting training centres

Embroidery training centres

PSIC has also established 14 Technology Specific Service centres in the field of

Light engineering

Metal products

Leather garments

Ceramics and pottery

Sports goods

Wood working,

Cutlery

Surgical instruments and

Agricultural implements.

3.1.4 Sindh Small Industries Corporation

The main function of SSIC is planning, preparation and implementation of development

schemes pertaining to small industries in the province of Sindh. The Corporation has

established 17 small industrial estates in almost all district headquarters of Sindh with

1983 developed industrial plots with required infrastructure facility. The SSIC has

extended loaning facilities to strategic small investors under Self Employment Schemes

since 1992 for purchase of locally manufactured machinery upto one million and setting

up of small industry. The SSIC has sanctioned 258 applications for 1998-99 and

disbursed loans worth Rs. 96 million to 179 small industrial units under this scheme.

SSIC has established 51 training centres of traditional crafts where training has been

56

Page 60: SME Project

imparted to 1917 students in various trades. The Corporation is also running 64 Technical

Training Centres where training has been imparted to 1625 pupils. The training is

imparted in both traditional and non-traditional fields like carpet weaving, radio / TV

repair, electric wiring, wood working, gas welding and ready made garments etc. The

Handicrafts Design Centre and Institute of Handicrafts are carrying research in traditional

trades and latest modern designs to improve the quality and value of the handicrafts.

SSIC is striving hard to provide export outlets to small industry alongwith marketing

facility through five handicraft shops and the Directorate of Exports is established for this

very purpose.

3.1.5 NWFP Small Industries Development Board

NWFP Small Industries Development Board (SIDB) was established in 1972 with main

objectives of promotion and preservation of traditional crafts, skill upgradation and run

training program, provision of industrial infrastructure in industrial estates and extend'

financial help, to small entrepreneurs. The SIDB has established nine small industrial

estates throughout the province with all basic amenities which contain: 1620 factory

plots, out of which 1222 are already allotted. The Board has provided financial assistance

of 187 million, on nominal interest, to 420 prospective entrepreneurs for the

establishment of micro-enterprises in the province under Boards subsidized credit scheme

and self employment which generated employment for 5743 persons. The Board has

established (our regional offices at D.I.Khan, Peshhawar, Abbotabad and Mingora (Swat)

to facilitate 'small investors. The Board has closed 10 carpet training centres and

handicraft development centers after seeking desired results, while 5 carpet training

centers and 4 handicraft development textile centers are operative where 1936 pupils are

being trained. Under its women development program, six embroidery, and knitting

training centers are established for imparting training, to women. The Board has

established Arts and Crafts, Galleries at Peshawar and Islamabad which are generating

enough revenue and promoting traditional handicrafts.

57

Page 61: SME Project

3.1.6 The Directorate of Small Industries Balochistan

The Provincial Directorate of Small, Industries, Balochistan, is serving the cause, of

promotion of small industries in the province by imparting vocational training to boys

and girls and running a number of handicraft centers. Besides head office in Quetta, four

zonal offices at Kalat, Sibi and Loralai are facilitating the prospective small entrepreneurs

of the province. The Directorate is also running four handicraft development / training

centers, 28 carpet centers and three sales & display' depots for providing external

exposure to local handicraft. In technical training centers a large number of persons arc

obtaining technical, know-how in several trades such as carpets, handicraft development,

dari making etc. The total sanctioned strength of trainees in the centers is 1470 against

which 803 trainees are on roll. The Directorate lagged behind its other counterparts in

other provinces in many fields. It has only established one industrial estate in Quetta with

all necessary industrial infrastructures. The poor performance is due' to financial and

institutional constraints. No allocation has been made in public sector development

program (PSDP) for last three years.

3.2 SME Products of Different Banks

3.2.1 Union Bank

Union Bank is one of the many banks which has a reputable management, commands

extraordinary respect & recognition in the market, has a vast network of financial

partners across the globe. It also understands your needs and has efficient solutions to

offer to the problems.

Union Bank has handpicked a group of highly trained and professional individuals to

form an exclusive Small & Medium Enterprises (SME) Group for personalized service to

companies which have diverse needs. SME Group strives to apply a unique blend of

finance, industry and technological expertise to keep pace with dynamic markets and

translating insights into solutions that meet your diverse financial needs.

58

Page 62: SME Project

For a more focused approach to the unique needs of different markets &/or geographical

areas, SME Group has four Regional Heads who oversee customers in their region. The

different products that they offer are described below:

3.2.1.1 Agri Deal

Agri Deal is a Running Finance Facility for the dealers of agricultural inputs, i.e.

fertilizers, seeds and pesticides. It extends a credit line up to Rs 20 million.

Its features include

Payment of Mark up on utilized amount only.

Markup calculated on daily product basis and payable on monthly basis.

Agri Deal not only provides funds to purchase fertilizers, seeds and pesticides, but

also provides Letter of Guarantees (LG) on highly competitive terms and

conditions. Now you can use the facility of LG without paying bank commission.

Make free online transactions and get pay orders/demand drafts made.

With the Union Bank online connectivity, you can access your account from more

than 50 branches from all across Pakistan.

With the availability of surplus capital, you can easily avail business opportunities

and expand your business as much as you want.

Business expansion and growth becomes a reality not a dream.

Book fertilizers, seeds and pesticides from the companies and get a better profit

margin by availing cash and volume discounts.

With the comfort of availability of capital, you can easily enjoy various schemes

offered by the companies.

Hassle free simplified documentation.

3.2.1.2 Business Power

.Business Power, a 'Running Finance Facility' offered against property to businessmen

and self-employed professionals provides a flexible source of funds to businesspersons to

meet day to day working capital requirements and capitalize on profitable opportunities.

59

Page 63: SME Project

It can extend a credit line from Rs. 1 million to Rs. 20 million. It is a stand-alone, one of

its kind product where the only collateral required is property.

The credit line offered ranges from Rs. 1 million to Rs. 20 million depending on the

market value of the property. Residential property is assessed on the market value and up

to a maximum of 70 percent of its value can be released as the financing line.

Everyone can avail this powerful facility if the applicant is :

A resident Pakistani living in Karachi, Lahore, Islamabad, Rawalpindi, Peshawar,

Gujranwala, Gujarat, Sialkot, Faisalabad or Multan.

Between 25-60 years old.

Running your present business for the last 3 years.

Earning a net monthly income of at least Rs. 36,000.

Willing to provide your own or co-borrower's residential property as a security.

3.2.1.3 Cash Today

Cash today is a Bill Discounting Facility for the suppliers of goods and services to large

and multinational companies and the best is part no Mortgage, no Pledge is required.

Features

Payment of Mark up on utilized amount only.

Markup calculated on daily product basis and payable on monthly basis.

Make free online transactions and get pay orders/demand drafts made up to a

certain limit.

Pay cash to procure raw material and reduce the cost of production thus making

more profits.

Fulfill business requirements through own sources.

Book bigger orders earn more profits

Business expansion and growth becomes a reality not a dream.

Eligibility Criteria

60

Page 64: SME Project

Pakistani Citizens.

Authorized Vendors of Multinational (MNCs) and Large Scale Entities (LSEs).

Minimum annual sale of Rs. 1.5 million to MNCs and LSEs

Age is between 22 and 65 years.

Having a Performance Certificate of at least last three years form the MNCs or

LSEs.

3.2.1.4 Elektro Finance

It is a unique Running Financing Facility for the dealers of electrical and electronic home

appliances. This product helps them avail cash and bulk purchase benefits without

increasing pressure on their current cash flow; rather it will provide them with a financial

muscle to further expand their business horizons. Union Bank’s Elektro Finance is an

easy way to success for the authorized dealers of electronics & electrical appliances.

Union Bank’s Elektro Finance will instantly extend them a credit line up to Rs. 10

million by just following simplified eligibility criteria without burdening them with

laborious paperwork.

Its features include:

Payment of Mark up on utilized amount only.

Markup calculated on daily product basis and payable on monthly basis.

Hassle free simplified documentation

Collateral Free Pledge based facility.

Facility to avail cash free limit of 30 percent against every Purchase Order.

Free Warehousing facility.

Union Bank pays for the Insurance.

With the availability of surplus capital, you can easily avail business opportunities.

3.2.1.5 Rang hi Rang

As a dying and printing operator in the textile industry, businessmen often have short

term capital requirements. Every businessman is in search of golden opportunities, and

61

Page 65: SME Project

when they come their way, they try to avail them, but can not because of shortage of

funds.

To cater to the short term needs, informal sources of lending are available but at very

high mark up rates, and thus the opportunities are not viable any more. Union Bank

brings a Running Finance Facility which is made according to your requirements and at

very competitive rates.

Its features include:

Payment of Mark up on utilized amount only.

Markup calculated on daily product basis and payable on monthly basis.

Rang hi Rang not only provides funds to purchase raw materials, but also provides

Letter of Guarantees (LG) on highly competitive terms and conditions. Now you

can use the facility of LG without paying bank commission.

Make free online transactions and get pay orders/demand drafts made up-to a certain

limit.

With the Union Bank online connectivity, you can access your account for more than

50 branches from all across Pakistan.

By using Rang hi Rang, get the raw material on cash and maximize profits by

availing cash discounts

With the availability of surplus capital, you can easily avail business opportunities.

Business expansion and growth becomes a reality not a dream.

Hassle Free simplified documentation.

3.2.1.6 Tana Bana

Union Bank’s Tana Bana is an exclusive credit line for textile fabric weavers to procure

cotton yarn. Through this facility fabric weavers can obtain a Running Finance Facility

ranging up to Rs. 7 million by mortgaging their residential, commercial or industrial

property.

Its features include

62

Page 66: SME Project

Payment of Mark up on utilized amount only.

Markup calculated on daily product basis and payable on monthly basis.

Tana Bana not only provides funds to purchase raw materials, but also provides Letter

of Guarantees (LG) on highly competitive terms and conditions.

By using Tana Bana, get the raw material on cash and maximize profits by availing

cash discounts.

3.2.2 SME Bank

SME Bank Limited is a public limited company incorporated in Pakistan on October 30,

2001 by merging Small Business Finance Corporation (SBFC) and Regional

Development Finance Corporation (RDFC). The bank has an exclusive mandate to

provide financial services to the hitherto neglected SME sector. The bank is operating

through 35 branches with its network in SME concentrated areas e.g. Sialkot,

Gujranwala, Multan, Sukkur, Hyderabad, Mirpur, D.I.Khan, Gilgit, etc. It is a

Development Financial Institution (DFI).

In May 2005, SME bank launched Commercial Banking Operations at its Islamabad

Branch. Banking at SME Bank is based on one of the leading Banking Software available

in Pakistan. Banking Operations also started at Lahore and Karachi Branch followed by

Peshawar, Quetta, Sialkot, Gujranwala and Faislalabad Branch.

SME Bank provides financial assistance from Rs.50,000 upto an amount of Rs.30

Million. It is mandatory for the borrower to meet the debt: equity ratio of at least 60:40,

which represents that at least 40 percent of the project’s/enterprise’s financing should

come from the borrower in the form of equity. Up to 60 percent would be financed by

SME Bank.

The bank finances all projects/enterprises that are commercially viable and meet the

Bank’s lending criteria. The bank ensures that financing is used for productive activities.

BSS (Business Support Services) are provided in the areas of marketing, accounting,

product design and development, etc. They facilitate better pricing and selling strategies,

63

Page 67: SME Project

stronger marketing channels and assist in business start-ups and expansions. Services are

also available to assist SMEs to develop and write bankable business plans. SME Bank

also provides Business Support Services in the areas of Management, Product innovation

and development, Quality control, Acquisition of new technology, Product positioning,

Marketing, and Development of bankable business proposals. SME Bank extends two

financial assistance packages:

3.2.2.1 Program Lending Scheme:

Under the Program Lending Scheme, a specific sector with a large SME presence is

identified whereby a lending scheme is designed according to the sector requirements.

The repayment period is determined by the nature of project and linked to its cash flow.

By doing so, the bank expects to reach a large number of SMEs. The Program Lending

Schemes for Cutlery, Women Entrepreneurs, Doctor/Dentist Clinic, CNG Stations,

Surgical Instruments, and Fan industry have been developed and launched. Whereas,

schemes for Date Processing, Gems & Jewellery, Marine Fisheries, Transport, and Wood

Furniture Manufacturing are under development.

The bank adjusts repayment of loans according to the turnover of the business while

assessing the cash generation abilities of the business. Therefore, financing under the

program-lending scheme though generic in nature, can have customized terms and

conditions which are suitable to the clients.

3.2.2.2 Project Lending Scheme:

The Project Lending Scheme caters to those enterprises, which are commercially viable

and are able to meet the banks’ other eligibility criteria but do not fall under the Program

Lending schemes. Such borrowers are assessed separately on a case-to-case basis. Any

profitable running business can qualify for bank s financing. The eligible applicant

should have at least 2 years of relevant experience for applying to the program-lending

scheme.

64

Page 68: SME Project

The aforementioned financial products are by nature term finances, repayable over a

maximum period of seven years. The mark up rate is 16 percent to 18 percent for both the

schemes. The financing limit ranges from Rs. 50, 000 to Rs. 30 million and can not

exceed 60 percent of project value and normally stands below 50 percent. The bank

however, demands for traditional collateral and security including mortgage of land,

building or house and hypothecation of stocks and equipment. Personal guarantees of

persons and Trade Bodies or Corporate guarantees that have the capacity to repay the

loan amount are acceptable for loans up to Rs.100, 000.

3.2.2.3 Women Entrepreneurs Program

This program is in place to facilitate women entrepreneurs in their business and product-

line expansion, roll-outs and franchising. The financing limit given in this scheme is

between Rs.50, 000 and Rs.300, 000. The mark-up rate is also flexible and ranges from

12-16 percent per annum.

Some other benefits include:

Repayment Period: Tenure of 1-3 years with no grace period. Payments in

monthly and/or quarterly installments

Debt/Equity Ratio: 50:50

Security/Collateral: 2 personal guarantees acceptable to SME Bank

Hypothecation of assets/machinery/stocks

Sector Preference: Women Entrepreneurs involved in the following line of

business are particularly encouraged;

o Personal care and grooming (salons, parlors, beauty clinics

o Fitness (gyms, Swimming pools, aerobic centers)

o Eateries (restaurants, fast food, bakeries, ice-cream parlors

o Vocational institutes (stitching, cooking, painting, designing, arts and

crafts)

o Clothing (cloth shops, boutiques, embroidery work)

o Educational & Teaching institutes

65

Page 69: SME Project

o Other unique and feasible projects that are commercially viable

Must be a graduate or vocationally qualified

Age bracket of 25-55 years

Should have business premises (either owned or rented)

Should have an established product line

Track record of 2-3 years in the same field of business

3.2.2.4 Hunarmand Pakistani Schemes:

Small-scale activities are being financed by the SME bank under the “Hunarmand

Pakistani Schemes”, like Auto parts, Doctor’s & Dentist’s Set-up, Auto looms, Fan

Industry, Beacon house Informatics, Fisheries, Beacon house School, Furniture

Manufacturing, Carpet Sector, Gems & Jewellery, CNG Kits, Hand-loom Weavers, CNG

Pumps, Qingqi Motor –Rickshaw, Cutlery, Surgical Instruments, and Women

Entrepreneurs.

The “Hunarmand Pakistani” scheme has attracted a lot of attention. The scope of

industries under the “Hunarmand Scheme” as well as credit facilities will be broadened to

provide further opportunities for self-employment.

3.2.3 Bank Alfalah

With the objective of diversifying the Bank’s risk, enhancing the customer base and

contributing towards the economic development of the country and being encouraged by

the successful launching of a number of Finance propositions which have been well

received in the market, BAFL has launched diversified products to cater the needs of

small and medium businesses. This will greatly help stimulating no only the economic

activity but will also generate employment in the country. One of the products is “Alfalah

Karobar Finance” which is discussed below:

66

Page 70: SME Project

3.2.3.1 Alfalah Karobar Finance

The finance under this scheme is provided on a running finance basis. The purpose of

facility is to finance procurement of raw material, finished goods and other working

capital requirements.

The target customers for AKF are small and medium business enterprises. The facility

can be allowed in the name of the firm/companies and as well as in the name of

individuals who are proprietors and partners in these enterprises. The office of the Head

of SME Division assists the credit and marketing officers at the branches by providing

them lists of customers to whom they can make marketing calls.

Types of Finances

The AKF includes two different types of SME financing these include the:

i. Current Finance: Current finance (CF) is basically meant for financing the working

capital requirement which includes the day to day operating finances. Here the loan is

granted for a time period of one year. Which can be rescheduled by setting the amount

with the bank for two days that is the customer is required to adjust the complete amount

disbursed to him/her to the bank at the completion of the year for two days and can then

re-borrow the amount for the next year. Unlike the loan extended in the case of CF is not

returned in installments but on the end period basis. Under the CF the loan is disbursed in

the account of the customer and as soon as he draws money the interest begins to be

charged till the money drawn from his account is re-deposited in the same account. This

enables the customer to use the loan for as long as he requires within the one year time

frame and return as soon as he/she has the money. This flexibility is provided in view of

the customer comfort. For example if the customer is posses a large number of

receivables and needs money till the receivables are cleared then it is best for him/her to

opt for the CF since as soon as the receivables are earned the borrower would re submit

the amount such that no more interest is charged on the borrowings for the complete

period.

67

Page 71: SME Project

ii. Term Finance: Term Finance (TF) is aimed at capital financing that may include

some sort of project or purchase of machinery NPV of which would take a time period of

more than a year. Under this type of financing the loan is repaid in installments of six

months. This is again to the ease of the customer since in is obvious that such sort of

finances cannot generate earnings in a very short period so the customer is given the

facility of repaying in installments such that as he/she make earnings out of the new

project conducted he/she may pay it.

Accessibility

Bank Alfalah Limited has highly enhanced the accessibility of its services through its

network which is spread through out the country. It has various branches in all the main

cities of Pakistan, covering Lahore, Karachi, Islamabad, Faisalabad, Quetta Peshawar etc.

it also has some branches in some smaller cities for various remote areas to access the

credit facilities. These include Attock, Mandibahauddin, Bhurewala, Chakwal etc. It is

noticeable that although it operates number of branches but their network distribution is

not uniform. The province of Punjab and Sindh (Karachi), being their main areas of

concentration. As per the objectives of the bank which is to provide easy access of

finances to the undeveloped sectors and areas of the country, on the contrary we know

that Punjab being a developed province already possess a very easy access of the finances

here it is important for the banks to focus on such areas where there is lack of financing

facilities these would include the remote areas of Balochistan and NWFP.

Eligibility Criteria for Applicants:

The criteria for the prospective borrower identified by the branches is that the property

should be owed by the Pakistani(s) national, in that case only the citizens of Pakistan are

able to access the credit. Moreover the Enterprise should be operating the existing

business at least for the last 3 years. (Facility will be provided on the assessment of the

running business). Newly established enterprises that have not yet started their operations

or have recently started their operations do not fall in the criteria of accessing the credit;

68

Page 72: SME Project

this makes it difficult for an individual or a group of individuals to establish a new

business. Hence it can be concluded that the bank is not engaged in promoting the

establishment of new businesses but it is only working to provide finances to the already

established business hence promoting growth of the enterprises. Another factor that adds

to the accessibility of the finances by the bank is that their credit is secured by the

collateral according to which the owners of the enterprise should be willing to provide

their urban residential/commercial property as security which makes it further difficult

for a business to access finances. Also the enterprise should not have any over due

liability from any bank in Pakistan. Among other constraints it is required that the

enterprises should be a member of the relevant trade body / professional association.

Similarly a defaulter (including that of Credit Card) or a legally incapacitated person

cannot have access to the finances. This restricts such an individual form obtaining credit

even when he fulfills other criteria and is despair need of credit.

On the other hand the bank has also has a soft corner in its policies according to which

the Facility can also be allowed in the name of individuals who are proprietors, partners

and directors of their firms/companies provided these firms/companies meet the above

mentioned criteria.

Security

The bank has engaged in a very secure mode of credit offering which aids in enhancing

the sustainability of the product. The main idea behind securing the principal is restricting

to the laid down procedures and the collateral. The credit facilities will be fully secured

by an equitable or registered mortgage of residential / commercial urban property which

are acceptable to our designated legal advisor and the personal guarantee of mortgagor(s)

and all the owners of SME. In case of limited companies, guarantees of all directors other

than the nominee directors shall be obtained. Further securing the collateral requires the

compliance to the following requirements as a result improving the sustainability of the

banks SME department.

69

Page 73: SME Project

It is important that the geographical location of the area where the confirmation of the

title to its respective property is uncomplicated and the property is transferred safely and

the procedure takes places with the required steps. The bank safeguards its interest by

making sure that all written evidences are articulate and hold transparency. This is further

done by analyzing all involved parties to make sure they have sound reputation and there

is no involvement in any fraudulent case of any kind. Absence of any kind of restriction

on transfer of title or mortgage on the property is necessary for banks interest. It is also

important that the property is free from all encumbrances

The primary risks in finance against property are concentrated in the title of property,

valuation, creation of enforceable mortgage and erratic price fluctuation in the residential/

commercial market. In order to control and manage the risks following stipulations but

not confined to the same should be considered:

Property is not in the name of minor. In case of joint owners, none of them are

minor(s) or any other person with no legal recourse

There is no default in payment to government authorities of taxes payable in respect

of the property

Evacuee property and property on agricultural land shall not be accepted

Property on un-demarcated land should not be considered

Property if mortgaged on the basis of Power of Attorney should not be accepted

except with the approval of the Central Credit Committee

Original title documents with lamination covering should not be accepted, except

with the prior approval of Central Credit Committee

Any other significant factors

Period of finance

The facility shall be I initially valid for a period of one year. One month before the expiry

of the credit line, the repayment record and utilization of the credit facility shall be

reviewed and if found satisfactory, the facility shall be renewed for further period. This

70

Page 74: SME Project

makes it easy for the bank to reduce any major default and hence access the credibility of

the borrower.

Risk limits

The aggregate exposure on the SME sector shall not exceed the following limits specified

in the Prudential Regulations:

Table 7: Aggregate exposure limits for AKF and ARF

Percentage of classified SMEs advances to total portfolio of SME advances

Maximum limit of exposure

Below 5 percent No limit

Below 10 percent 3 times of the equity

Below 15 percent 2 times of the equity

Up to and above 15 percent Up to the equity

As required by the Prudential Regulations, the maximum exposure on a single SME shall

not exceed Rs.75 million. In addition, the total facilities (including leased assets) availed

by a single SME from all the financial institutions shall not exceed Rs.150 million

provided that the facilities excluding leased assets shall not exceed Rs.100 million.

The minimum amount of finance to a borrower under the AKF shall be Rs.500, 000 and

maximum limit up to Rupees 10 million. This reduces the degree of damage in case there

is default since the loan amount is less.

Amount of eligible finance

71

Page 75: SME Project

Amount calculated by the Credit and Marketing Officers considering the projected cash

flows over the period of financing as determined by the income verification agencies.

However, in case financial statements are not available or can not be prepared by the

income verification agencies, the finance is limited to three times the annual income

estimation as per the borrower’s last Tax Assessment Order. Moreover 70 percent of the

assessed market value of the property to be mortgaged as security against the facility.

This ensures the mitigation of risk as a result with the reduced amount of exposure to risk

the sustainability of AKF is enhanced.

Cost Effectiveness

The interest rate is related to the KIBOR rate under this relation two types of interests are

charged these include the following.

KIBOR + 3 percent up to a loan of 1 million

KIBOR + 2 percent for those above 1 million

Since the KIBOR is very unstable therefore the interest charged on the loan is quarterly

revised. Currently the rising KIBOR rate has added to the increased cost of lending.

The other costs include the cost of

Insurance: This cost is not fixed and its rate is dependent on the insurance company.

For example if the business is of foam then there is a high risk of fire which can

destroy all the stock so the insurance company would be initially very reluctant

and if it did offer the insurance policy it would be very costly.

Credit Line Proposal charge (CLP): This includes fees charged to the customer for

completing his documents and setting up his case to be forwarded to the relevant

department for approval. The CLP for a business which has the property as

collateral the charges are Rs. 2500 and for those secured by the liquid security the

charges are Rs. 700.

Similarly the bank also incurs a CIB fee which is Rs 100 for loan with liquid

securities as collateral and Rs. 200 for loans with a business property as collateral.

72

Page 76: SME Project

As for the ease of the customer and in order to reduce the cost of loan these

charges are bore by the bank itself.

Legal opinion is charged from the customer, which costs Rs.1000, and the cost of

legal documents depends on the cost of stamp paper which is further dependent

on the amount mortgaged.

The percentage of the mortgage is variable depending on the customer credibility.

According to which if a customer is highly credible then it may be possible under

the flexible rule which empowers the relationship officer only mortgage 10

percent of the property, on the other hand under high levels of risk the customer

may be asked to mortgage 100 percent of his/her property.

3.2.4 Mybank

In order to facilitate the small Shopkeepers/Traders who cover a large segment of retail

shops spread all over the country and also to augment the Government policy of poverty

alleviation, the Bank has launched a credit scheme.

3.2.4.1 Easy Credit Scheme for Small Shopkeepers and Traders

It is available in all the four provinces including Azad Kashmir through the network of 50

Branches. The financing is from Rs. 10,000 to Rs. 100,000 without any collateral

security. The maximum financing is from Rs. 100,000 to Rs. 1,000,000.

The bank has a "Easy Credit Commercial" scheme. Any Businessman or a Small Trader,

can easily apply for a loan of Rs.100,000 against two personal guarantees. The features of

this scheme are low markup Rate, quick approval and easy documentation

73

Page 77: SME Project

Chapter 4 ANALYSIS

4.1 Effects of WTO on SME

Most of the businesses in Pakistan, especially in the textile sector are worried that they

will be at a disadvantage if WTO is introduced in Pakistan. They do not realize that it is

not just about the textile sector alone, there is a lot more to do than that. What most

people don’t realize in Pakistan is that the buyers are going to dictate their own terms on

the compliance issues and matters relating to labour, employment etc. For instance, it is

going to be the buyers who’d determine how many toilets a factory needs to have for its

workforce. SMEs were going to suffer directly because of the tariff and non-tariff walls

that the importing countries are seeking to build in the post WTO era (to protect their

own commercial interests). SMEs could never fulfill the compliance requirements of their

buyers for being very costly. “If a company is making five products, it will be required to

obtain as many echo labels for them, causing it Rs. 2.5 million annually”. The US

security concerns required proper security arrangements both at the factory premises as

well as at the time of loading and unloading of consignments for that country. The costs

are too big for the SMEs to bear. It is due to lack of awareness and smaller size of the

businesses. Even if somebody wants to do something in this respect, he cannot because of

the very high costs involved. Most of the difficulties would be faced by the textile sector

that contributed more that 65 percent of the country’s total exports. Other sectors, like

automobiles, would not feel much impact of the walls being erected by the buyers

because they were not much into exports. The farmers would have to improve the quality

of the products as well as its packaging if they want to compete in the international

markets.

What are the implications of this back loading and how far our textile industry is geared

to face the open competition environment after WTO is imposed. Some facts are

indicated here to facilitate serious analysis issues involved.

Page 78: SME Project

1. Historically, the country’s textile sector has enjoyed high protection and for

longer periods than necessary. In the absence of genuine competition, the quality

improvement and value addition were seldom accorded a serious consideration.

The industry flourished primarily at the cost of consumers of captive domestic

markets.

2. The restrictive regimes indirectly protect inefficient and weak producers by

assuring market share in the importing countries. Pakistan’s quota management

policies were also not used as an instrument of value addition. The cardinal

principals are these policies has been the linkage of quota entitlement of the

exporters with quantities shipped irrespective of the quality of product. In order

not to lost quota entitlement, the manufacturers / exporters generally accorded

priority to quantity rather than quality. The quota manipulation by the vested

interests also encouraged rent seeking tendency in the industry.

3. Cotton yarn and fabrics have the largest manufacturing base. During the last few

years, the segments of knitwear, bed linen, towels and selected items of ready

made garments have shown an appreciable rising trend in exports. However

Pakistan’s textile sector is relatively weak in synthetic fiber products, women

garments and fancy apparels. The impact of full integration is likely to hit these

segments hard. Also no adjustment period is available to the industry and the

sudden switch from restricted to free environment would certainly add to the

adjustment difficulties of un-prepared units. Pakistan must take stock of the

emerging situation and devise appropriate strategy to minimize negative effects

on our exports of this switch-over from protected to open market environment.

4.2 Performance of SME Bank

The SME Bank was launched in year 2001 to support and develop SME sector in

Pakistan by providing the necessary financial assistance and business support services on

a sustainable basis and to enable the SME sector to contribute to economic development

through value addition and exports; promote entrepreneurship; and create employment

opportunities.

78

Page 79: SME Project

Undergoing a restructuring program has brought about a turnaround in the financial

position of the bank. Profit after tax for the year 2004 is almost 14 times higher as

compared to the year 2003. SME Bank, as a DFI, declared an after tax profit of Rs. 486

million for 2004 as compared to Rs. 59 million in 2003 which also resulted in an

improved credit rating. Based on the latest credit rating issued by JCR-VIS Credit Rating

Company Limited, credit rating of the SME Bank was BBB in the long term, with a

“stable” outlook from previous BB+, and A2 in the short term, which has been upgraded

from A3. JCR-VIS Credit Rating Company has upgraded medium to long term and short

term rating of SME Leasing Limited from BBB to BBB+ and from A-3 to A-2

respectively.

The paid up capital of the bank has been increased to Rs.1.1 Billion. The bank has paid

Rs. 3.393 Billion to SBP against its liability and adjusted another Rs.3.3 Billion

receivable from it. The remaining liability is to be liquidated by 2006. The bank has also

successfully implemented a voluntary staff separation scheme as part of the restructuring,

under which about 700 employees have been voluntarily severed. A branch

rationalization program has also been implemented resulting in substantial savings

annually. This bank has been in profit since its inception has taken these steps to prepare

for privatization by the end of June 2006.

To optimize the organization's operations, the Recovery Operations Division has

outsourced the part of recovery operation of the areas where no bank's branch exist. It is

expected that this decision will reduce the Recovery operations cost considerably.

4.2.1 Financial Ratios

Table8: ROA and ROE of SME Bank

2003 2004ROA

ROE

5.897

84.72

6.46

37.67

79

Page 80: SME Project

4.2.1.1 Return on Assets10

Return on assets measures a company’s earnings in relation to all of the resources it had

at its disposal the shareholders’ capital plus short and long-term borrowed funds. Thus, it

is the most stringent and excessive test of return to shareholders.

The ROA in the case of SME Bank was the favourable for both the years. An ROA of

6.46 percent of year 2004 is considered satisfactory; this shows that the company (bank)

is efficiently utilizing its available resources. This happened due to a considerable

decrease in the amount of asset-base.

ROA

5.6

5.8

6

6.2

6.4

6.6

2003 2004

ROA

4.2.1.2 Return on Equity11

One of the most important profitability metrics is return on equity. Return on equity

reveals how much profit a company earned in comparison to the total amount of

shareholder equity found on the balance sheet. Shareholder equity is a creation of

accounting that represents the assets created by the retained earnings of the business and

the paid-in capital of the owners. Upon analysis it is revealed that the ROE decreased in

2004 to 37.67 percent from 84.72 percent in 2003. But this is due to the fact that major

restructuring was being done in the bank.

10 ROA = Net Operating Income/ Average Total Assets

11 ROE = Net Operating Income/ Average Total Equity

80

Page 81: SME Project

ROE

0

20

40

60

80

100

2003 2004

ROE

4.2.2 Administrative Costs

The SME Bank significantly improved its performance during the period, which is

depicted in the decrease in the administrative costs as a percentage of annual average

total assets. This was attributed to the restructuring effort pursued by the bank, due to

which the assets as well as administrative expenses both decreased. However, the

administrative costs as a percentage of annual average loan portfolios for SME Bank

increased during the same period, which was attributed to a decrease in the SME lending

in 2004. The loans for the SME sector disbursed by the SME Bank decreased from Rs.

1,094 million in 2003 to Rs. 1,059 million in 2004. This was mainly attributed to the low

lending and higher recovery rates.

Table 9: Administrative Costs

Administrative and operating costs as a percentage of

2003 2004

Annual average total assets

Annual average loan portfolio

5.3634.12

5.17

39.99

81

Page 82: SME Project

4.3 Basic Situation of SME and Their Support Structures

4.3.1 Current Status of SME

It is fair to say that our economy is an economy of SME. The significant role of SME is

clearly indicated by research and statistics. Enterprises employing up to 99 persons

constitute about 90 percent12 of all private enterprises in the industrial sector and SME

employ some 78 percent of non-agriculture labour force13. They contribute over 30

percent to GDP, PKR 140 billion to exports, and 25 percent of manufacturing export

earnings besides sharing 35 percent in manufacturing value added.14

Stability of policy is a necessary condition for achieving and sustaining high levels of

economic development. The stability in the economy can be ensured by a desirable mix

of various other policies.

In Pakistan, policies in the past have given a general perspective, direction and defining

broad parameters of activity within the macroeconomic framework. However, efforts

have remained limited focusing on the large enterprises, neglecting SME which are at the

heart of our economy. For example, institutions established to facilitate business activity,

like Board of Investment (BOI), Export Promotion Bureau (EPB), Central Board of

Revenue (CBR), to name a few, have been concentrating their efforts on large scale

industry. The adverse influences of legal environment affect all economic agents. The

evidence suggests small firms are discriminated against relatively large firms15. And

while large enterprises and established holding structures possess the necessary economic

and human resource potential to cope with and overcome these difficulties, SME, due to

their size and the resulting peculiarities, are far less capable of adjusting and carrying on

successful business16. While spared direct statutory or administrative discrimination,

12 Pakistan Country Assistance Strategy, World Bank Report, Annex II, Page 313 Census of Establishments-199814 Economic Survey of Pakistan 2002-03

15 SME policy Note, the World Bank; ILO SMEDA Study 2001 on MSME, LUMS study on SME constraints

16 LUMS in its study on “Barriers to SME Growth in Pakistan: An Analysis of Constraints” compared the growth rates of Large vs. Small scale manufacturing and established that during 1970s both were growing at a comparable rate of over 4 percent whereas in 1990s during the period of economic downturn small scale manufacturing growth dropped to 2.6 percent against large scale manufacturing growth rate of 3.6 percent.

82

Page 83: SME Project

SME remain subject to unequal treatment, which distorts the competitive environment for

business. The economic significance of this bias is apparent. Such an environment does

not cater well to innovative activities which come from newly founded, small firms, and

the new job creation potential of the economy is thus constrained while the informal

sector tends to grow17.

Our SMEs suffer from a variety of weaknesses which have constrained their ability to

adjust to the economic liberalization measures introduced by the Government of Pakistan

and to take full advantage of rapidly expanding markets of the world. But SME

importance and contribution in the economic activity suggests that there is a significant

potential to enhance their growth through appropriate regulations and promotion.

More recently, the importance of SME has been realized, with the Government’s efforts

focusing on the hitherto neglected informal sector. The reason behind the increased stress

on the SME sector is that SME promote entrepreneurial culture, create a wider base for

employment generation and are a primary vehicle for poverty eradication.

4.3.1.1 Government Socio-economic Strategies and SME

SME are a distinct pillar of the economy that needs to be given due attention. It requires

specific policy and regulatory space to turn SME into an effective tool for driving the

economy and increasingly contribute to economic growth and employment.

The Government of Pakistan has developed a number of strategies for socio-economic

development.

Poverty Reduction Strategy Paper (PRSP)18

Micro Finance Sector Development Program

17 Non-Linear Model to estimate underground economy in Pakistan, SBP Research Department

18 Under PRSP government is following a five point strategy which includes 1) Macroeconomic stability and Fast growth 2) Investment in Human Resources 3) Government’s involvement in particular sectors (including SME) 4) Expansion in social security system and 5) Good Governance.

83

Page 84: SME Project

SME Sector Development Program

Education Sector Reforms 2001-05

Reform of financial sector

Reforms in Tax Administration

While SME are being mentioned in some of these important socioeconomic strategies

and policy documents, including even very specific measures for their promotion, these

measures are not sufficiently specified and prioritized for us to be able to speak of any

coherent SME policy or approach. The SME Sector Development Program seeks to

improve this situation by inviting all concerned stakeholders to draft Pakistan's future

SME policy. Although SME policy is a sector-specific policy, it should be noted that the

task of formulation is not a simple exercise. SME are a cornerstone of our economy.

Many changes in existing legislation may have direct or indirect effects on SME, e.g. in

labor law, financial law, export regulations, banking system regulations, tax regulation

etc. SME promotion therefore comes close to a cross-cutting issue. Furthermore, the

environment for SME is constantly changing, in particular with an increased exposure to

world markets due to the opening up of the economy. Therefore, SME policy within a

socioeconomic development strategy cannot be a one-off exercise. Only a process of

regular review linked with predictable behavior by all stakeholders will ensure successful

outcomes in the long run.

4.3.1.2 Coordination and Institutional Support

The role of government as a facilitator of business and its interaction with business

support institutions is imperative for the establishment of a mutually beneficial

relationship for the growth of the sector. SME promotion is an important issue for many

government departments and central offices. For example, the Ministry of Labor plays an

important role in shaping the labor market policy of the state. Similarly, in order to gather

information on the health of the SME population the role of Federal Bureau of Statistics,

the Ministry of Finance, and planning division is pivotal. Other ministries and divisions

such as Ministry of Finance, Ministry of Commerce, Planning Division, Ministry of

Food, Agriculture and Live Stock, Ministry of Environment, Ministry of Local

84

Page 85: SME Project

Government and Rural Development, and the Ministry of Science & Technology also

influence the situation of our SME. Provincial and local governments also take their share

in responsibility.

However, there is an existing lack of coordination and regular information exchange

mechanism among institutions which constrains their collective ability to deliver in the

SME development process. As a result of the Governments more recent efforts, two

institutions Small and Medium Enterprise Development Authority (SMEDA) and SME

Bank were created.

The responsibility for facilitating SME policy development now lies with SMEDA which

is attached to the Ministry of Industry and Production (MoIP). SMEDA is responsible for

creation and coordination of Government policy for the SME sector. Parliament,

naturally, is responsible for monitoring policy and its implementation. One of the major

reasons for the lack of coordination is that SMEDA has not been provided with a formal

mechanism to initiate, coordinate, monitor, and evaluate initiatives undertaken for SME

development which fall outside of its own scope of activities. Therefore, cross-

departmental and stakeholder consultations, resulting in the preparation of our national

SME policy are our key to success.

Regular information exchange mechanism and networking needs to be developed

amongst our public and private sector institutions. There is a strong need to devise such

an information exchange mechanism and redefine the role of institutions, specifying their

functions in order to avoid duplication of efforts and allowing the best-possible usage of

resources.

Under the SME Sector Development Program it is expected that SMEDA

i. prepares Government documents on policy regarding SME

ii. drafts relevant laws and regulations

To form a collective view of all stakeholders, the SME Task Force has been established

at the MoIP. SMEDA will serve as the secretariat. A network of institutions stimulating

85

Page 86: SME Project

the growth of SME is being proposed. The institutions in this network cover all

stakeholders involved in SME promotion: Regional Development Agencies, Business

Support Centers, Chambers of Commerce, as well as other organizations which are

established as an initiative of local communities, etc.

4.3.2 Issues in SME Development

4.3.2.1 Different definitions hurting SMEs sector 19

Seven government institutions directly linked with the development and working of small

and medium enterprises maintains different definitions for SMEs. These versions not

only vary in weight age and size but also on assets of these enterprises.

As a result of variation in definitions which are normally used for attaining qualifications

and approval of facilities from an institutions most of the SMEs die out much before

gaining strength to survive. The situation does not reflect so well on the government that

has lately been emphasizing the role that SMEs can play in generating employment and

expediting the growth in the country.

It is an accepted fact that SMEs' ratio of bank loans default is the lowest and they

generate more employment as compared to capital intensive large-scale units. When

SMEs operate in clusters they transform into vendors and provide support to larger

industrial units. But unfortunately, all the seven government institutions are giving

different definitions with regard to their weightage to assets, number of workers and

investment.

Even Small and Medium Enterprise Development Authority (SMEDA) and SME Bank -

institutions directly involved in the development and promotion of SMEs perceive them

differently.

The SMEDA's definition for small enterprises: "10-35 employees or productive assets of

Rs2 to Rs20 million. And for medium enterprises it says that 36 to 99 employees or

productive assets of Rs20 to Rs40 million should be the criterion for an enterprise to 19 ”Different definitions hurting SMEs sector “ By Parvaiz Ishfaq Rana

86

Page 87: SME Project

qualify."

Against this the SME Bank which has been given a task to arrange finances for the

SMEs defines as: "A SME should have assets of Rs20 million and for medium size unit

total assets of Rs100 million. The bank does not consider the number of employees in the

SMEs.

Yet another flabbergasting definition is of the Sindh and Punjab industries departments.

Though both the departments have fixed the capital investment up to Rs10 million but the

Sindh Industries Department has included the cost of land and building in this amount.

The Punjab Industries Department, however excluded the cost of land from the fixed

capital investment of Rs10 million. Furthermore, they have not given separate definition

for small and medium enterprises.

The Punjab Small Industries Corporation while giving a combined definition for the

small and medium enterprises has fixed investment up to Rs20 million excluding land

and building cost.

The Federal Bureau of Statistics also gave combined definition for the SMEs and says

"an enterprise with less than 10 employees qualifies as an SME." However, the State

Bank of Pakistan (SBP) under SME Prudential Regulation come up with better and more

pragmatic qualifying definition for the SMEs.

According to SBP: "an entity, ideally not being a public limited company, which does not

employee more than 250 persons (manufacturing) and 50 persons (trade/services) and

also fulfils one of the following criteria: i) A trade services concern with total assets at

cost excluding land and building up to Rs100 million. ii) A manufacturing concern with

total assets at cost excluding land and building up to Rs100 million.

The other qualifying definition for an SME has been fixed by the SBP is that any concern

(trade, services or manufacturing) with net sales not exceeding Rs300 million as per latest

financial statements.

For all practical purposes after the SBP announcement of SME Prudential Regulations

the best should have been that all other institutions involved in the SME development and

87

Page 88: SME Project

promotion should have also changed their definition accordingly to create uniformity.

But instead all these institutions continue to define SMEs differently creating chaotic

conditions for the SMEs. For the sector to realize its potential it is absolutely necessary

that such distortions are removed and all bodies dealing with the sector are encouraged to

adopt one unified criterion to identify SMEs to start with.

4.3.2.2 Short and Medium-Term Issues

This section reflects issues where we feel we may achieve strong impacts in the short and

medium-term, i.e. until 2011. They should therefore become major topics of our

deliberation and shape the formulation of our SME policy.

4.3.2.2.1 Business Environment

The large size of the SME sector limits the ability of Government and business support

institutions to achieve complete coverage by support programs. This is a fundamental

reality in most countries of the world and it is why policy framework and regulatory

measures are of tremendous importance when SME promotion is concerned. It is agreed

that much more can be achieved only by appropriate policy tools and regulations than

with support programs. Likewise, SME development is hampered more by inappropriate

regulations than compensated by means of appropriate support programs. Most of the

developed nations therefore have mechanisms in place to revert the biases against small

firms. For instance, the United Kingdom introduced the “Think Small First” initiative

which requires all Government organizations to assess the impact of their actions on

small business prior to implementation. Furthermore, participation of small business in

government procurement is being facilitated as a matter of routine. The result of such

policies is that (unfortunate) surprises to small firms are less frequent. It is made sure that

businesses potentially affected are consulted and informed of any forthcoming policy

shifts so as to avoid negative impacts. They are also allowed an adequate grace period for

the adjustment of economic activity and there is no retroactivity of new regulations.

Besides this, special attention is paid to minimizing the room for bureaucratic discretion

while developing policy rules or procedures.

88

Page 89: SME Project

All such mechanisms are missing in present policy or legal environment in Pakistan. The

absence of a specialized, uniform legal framework for the development of SME hampers

SME operations20.

20 To this point, the Ten Year Perspective Development Plan 2001-2011 notes that there is a large range of zoning and other regulations imposed by the federal, provincial and local governments and public sector utilities which affect the functioning of SME hence, legislation similar to the US Small Business Regulatory Enforcement Act of 1996, which includes Regional Small Business Ombudsmen, would be considered to ensure the fair and efficient functioning of SME. Whatever the mechanism to enforce it, a “level playing field” is one of the cardinal conditions for SME development.

89

Page 90: SME Project

4.3.2.2.2 Relationship between Government and SME

The relationship between Government and SME seems to be fundamentally flawed. In

many cases this extends also to other large organizations and their interaction with

smaller clients as SME. Our compulsion of centralized control stems from the fear of the

regulator to be misled by the opportunistic profit-seeking entrepreneur. And our

administration practice is characterized by rent-seeking bureaucrats who, given the low

level of their pay, take advantage of the semi-literate entrepreneur. Of course, we all

know there are also many dedicated and honest professionals on both sides. But the fact

of the matter remains that there are severe attitude problems in the relationship between

the two sides. The only way to break this discouraging situation is to face the problem

squarely and seek solutions in a positive spirit and entertain systematic dialogue between

the two sides.

The present divide is, among others, reflected in a language gap. Part of the concern for

local business people is the inadequate business facilitation process in the local language

which includes laws, regulations and business support material available in the English

language only.

As a starting point, we propose to consider the increased usage of Urdu in our written

documentation, in our official deliberations and communications. This Issues Paper will

be translated to Urdu and circulated so as to enable a debate with all of Pakistan's

interested SME. Eventually, we should expect the SME policy we are going to develop to

be published in Urdu as well, and to regularly report about the achievements under this

policy in Urdu to the policy's clients, our nation's SME.

A second point is how we may increase the share of SME participating in the provision of

goods and services to the public sector, as it is common practice in many countries. A

typical SME in Pakistan caters to the domestic private sector. It is noted that fewer than 4

percent21 are supplying to the government sector. Some of the issues are related to tough

21 World Bank SME policy Note 2001, the results of SMEDA-World Bank Investment Climate Survey 2003 also conforms to the findings.

Page 91: SME Project

bargaining price (36 percent) and supplies on credit (34 percent) and other are related to

absence of rules on how to the public sector should increase its procurement from SME.

Further points may possibly emerge from the dialogue.

4.3.2.2.3 Taxation issues

High tax rates are one of the major reasons for firms to drift into the informal economy.

This holds for countries all over the world, including developed countries. These effects

are compounded by high compliance costs for small firms to deal with tax laws and other

forms of government regulation. This is a specific size-related disadvantage compared to

large scale firms which have not only the necessary accountants, but frequently also in-

house tax and legal advisors. Compliance costs have monetary implications (such as

paying tax advisor fees or salary payments to personnel dealing with tax issues), time

cost implications (in the form of time spent by a taxpayer to handle tax issues), and

physiological cost (in terms of anxiety, stress, and apprehensions related to possible

mistakes or a possible audit by the tax authorities).

Firms in Pakistan's SME sector, encounter an increasingly complex legal, tax and

administrative environment, both in starting up and developing their business. According

to research, 67 percent of enterprises termed tax regulations as most problematic, 56

percent22 of businesses report a crunch of taxes, while 28 percent of businesses felt that

taxes in the country are too high.

From SME point of view, the present tax structure and administration generally distort

incentives and discriminate against small firms who are harassed by the tax authorities.

Smaller firms found tax related issues more restrictive than larger firms, 69 percent of

firms, whose size of assets was less than Rs.1 million faced the greatest of tax related

22 The 56 percent figure is an addition of the three tax related responses: High taxes 28 percent, High Sales tax16 percent and high Income Tax Rate 12 percent

Page 92: SME Project

problems. Many small firms claim it is not possible for them to maintain books23 as per

law or hire a professional due to cost constraints.

The prevailing system is non-standardized and offers excessive discretion to the tax

authorities. There is no consolidation or rationale in current provincial or local tax

structure either. Hence, there has been a constant confrontation between tax authorities

and the business communities resulting in very slow expansion in tax base24. Two sectors;

retailers and small to medium sized manufacturers have already propounded the idea of

fixed taxation as remedy to this continuous ailment. Cognizant of the change required to

cater to the SME sector in its policies, there have been reforms in the advance stage of

implementation of Pakistan’s tax regime. But these reforms are focused on tax

administration and management, instead of addressing the aspects that directly affect

SME. No incentives are being offered to SME to enter the formal economy.25 There has

been no consideration as such for reviewing tax law from an ordinary SME or even micro

enterprise perspective.

4.3.2.2.4 Labor issues

Likewise, the intensity of regulations is the second most important reason for firms to

drift into the informal economy all over the world. Labor Laws and regulations in

23 In Japan, after the war in 1949, old taxation system was replaced by new system to resolve the problem of incomplete bookkeeping and fear of over-taxation of SME. The new system allowed certain tax merits if a tax return is made with a “certain formula of quick bookkeeping.” This system resulted in not only the improvement of financial accounting but also the strengthening of financing systems for SME.

24 There are 1.05 million active tax filers in Pakistan. In 1999-2000 the number of salaried taxpayers was 440,000 and those filed under old self-assessment scheme were 275,000. Lowering tax rates may well lead to substantial expansion of the tax base in compensation and be neutral for government income. However, without more profound improvements in the relationship between Government and enterprises, hopes should not be raised high for tax rate changes to bring immediate tax base expansion.

25 A taskforce on the reform of tax administration, chaired by Mr. Shahid Hussain, was constituted by the government, which gave detailed recommendations in its report published in May 2001. Based on this document and comments from the IMF and the World Bank a restructuring plan was drawn up by CBR. This restructuring plan is now being made operational with World Bank support.

Page 93: SME Project

Pakistan26 are considered to be one of the most complicated areas with which any

business enterprise deals.

The present set of labor laws was the result of checkered initiative of various

governments to create a healthy business environment for labor. Consequently,

enterprises have to deal with fifty six (56) labor laws with some of them being industry

specific. The existing plethora of labor laws has made compliance impossible for the

enterprises due to their inherent inconsistencies. Numerous labor inspections under these

laws are yet another impediment that retards the growth of SME.

The labor market dynamics have changed considerably over the years, a higher degree of

adaptability and flexibility along with labor market security, including protection against

arbitrary loss of employment, reductions in income and unhealthy work practices are

essential requirements of new environment. Besides, the condition for compliance of

international labor standards under the global economic system is another issue.

Taking into account the need of labor market and employers, the Ministry of Labor and

Manpower introduced an employment security regime. The new labor policy initiatives is

aimed at creating a favorable environment for facilitating industrial promotion and

revival along with legislative and structural changes to bring in a environment devoid of

restrictive labor practices, but protecting the rights and interests of the workers.

It was proposed that existing labor legislation be simplified and rationalized into six basic

laws. In addition, for promoting bilateralism among government employer and

employees, government established a forum Workers Employers Bilateral Council of

Pakistan (WEBCOP). The government is also working on the development of Labor

Inspection Policy under the SME Sector Development Program to reduce the interface of

government officials with businesses without compromising on the unhealthy work

26 A committee on Reforms in Regulatory Legal and Policy Environment was established in the Ministry of Industries & Production in 2000 with the purpose to coordinate, review, identify issues of concern and formulate recommendations on various laws effecting businesses. Some of their efforts have resulted in the consolidation of labour laws as announced in the Labour Policy 2002 and proposed amendments in the Factories Act 1934, Drug Act 1976, Boiler Act 1923, and Explosives Act 1884, and as such reviewed 101 commercial and labor laws that effect industrial sector.

93

Page 94: SME Project

practices. The only issue highlighted thus far through direct interaction with SME is that

of co-ordination. The business and labor community at large has been supporting the

reforms.

4.3.2.2.5 Delivery of assistance and access to resources

Competitive advantage is determined by the productivity with which a country, region or

cluster uses its human, capital and natural resources. Pakistan’s international

competitiveness markedly declined over past few years.27 Part of the blame is shared by

lower productivity of the workers. The evidence reveals that median labor productivity,

as measured by annual value added per worker, is 25 percent lower in Pakistan than in

India and 35 percent lower than in China28.

Trade liberalization at the global and regional levels and the new information and

communication technologies have entwined to create rich opportunities as well as

formidable challenges to all interdependent countries and enterprises. Competition has

become increasingly fierce among the global and regional economies and enterprises.

The structure of markets and their demand29 is increasingly complex.

Despite operating locally, Pakistan's SME need to be increasingly aware of the world

market. They cannot escape it even in their local economy. To meet this challenge, there

is growing need for information on global technology trends, rules and compliance cost

including facilitation services regarding global issues.

An integrated program for improving competitiveness, promoting trade, and developing

workforce can help.30 Training, research and development, labor productivity

27 World Bank, Development Policy Review 2002 reveals that the annual manufactured exports of Pakistan are barely 12 percent of those of Malaysia, 18 percent of Thailand’s, and less than a third of Philippines— countries whose combined manufacturing exports were less than Pakistan’s in the mid-1960s

28 Investment Climate Survey of Pakistan-2003

29 Consumer preferences and market standards have become more sophisticated and exacting. Competitive advantage is now determined by several non-price parameters such as quality, health and safety, social equity in employment and production and ecological compatibility of products and processes.

30 The Ministry of Science & Technology is preparing a National Quality Policy & Plan and another initiative of the government is working on the development of National Productivity Policy.

94

Page 95: SME Project

enhancement, technology transfer and up-gradation and support to business startups

through business incubation and various other business support services, including

finance, are issues that need to be addressed separately by the SME policy.

What is important is that access to resources and services necessary to compete in this

global environment are being provided to SME because their size poses an effective limit

on their capacity to assess world market conditions and tap appropriate resources. Old

policy tools of protection now require replacement with promotional and facilitation

functions. The roles of business development services, hence, become imperative.

The capacity to deliver such services by the public or private sector led institutions is a

major topic for debate but also relates to the specifics of the service in question.

However, market-driven support programs are a cornerstone in any SME support system

which strives for sustainability. This also maximizes the potential for cooperation with

private sector organizations and minimizes the distortions in the market economy. Yet the

structures for such a system still need to be mutually agreed and implemented in

Pakistan. Below we flag the important issues.

4.3.2.2.6 Finance

Access to equity and formal debt financing has repeatedly been identified as a recurring

constraint to SME growth and development. Commercial banks apply conservative

policies in lending to SME. More, importantly the existing structure of financial sector

was developed to serve medium to large enterprises which are organized as a formal

business. Most banks prefer to hold risk free-income generating assets and lending to

SME is unattractive due to a range of objective and subjective factors. These include high

transaction costs, inability to do away with tangible collateral requirement, no linkage of

financial products with sector needs and the inability to structure/offer and manage risk-

prone SME specific medium to long term financing options.

It has been observed that 57 percent of new investment for Small and Medium

Enterprises and 67 percent of working capital finance come from internal finance or

95

Page 96: SME Project

retained earnings; only about 7 percent of funds for investment or working capital come

from banks or other financial institutions. Even suppliers’ credit rivals the contribution of

the banks as a source of working capital (4.5 percent).31 Another survey 32concludes that

SME are indeed being rationed out of the credit market, rather than merely exhibiting a

lower demand for credit.33

However, financing SME is one of the key prerequisites for the future development of the

national economy and the achievement of economic growth. The Government of Pakistan

had originally responded to the growing needs of the sector by introducing a Self

Employment Scheme through Small Business Finance Corporation of Pakistan (SBFC) in

1992. SBFC continued to grant loans to small businesses and disbursed 12 billion by June

1998, catering to the needs of 157,162 unemployed persons. Other schemes for SME

development or employment generation included the Youth Investment Promotion

Society, Provincial Small Industries, Prime Minister’s Self Employment Scheme, and

Yellow Cab Scheme. But all of these efforts lacked coherence across institutions, and, in

the absence of any national policy, resulted in disjointed efforts and even corruption.

Previous efforts have therefore had rather limited results and were highly inefficient

because the financial sector accumulated a huge portfolio of non-recoverable loans under

these schemes. The SME Bank will need to undergo restructuring for next three years.

Furthermore, severe damage has been done because the financial sector has developed

disinterest for any such initiatives in future, and we need to basically start from scratch.

The banking industry in general is also not venturing into the areas where new processes

and procedures with a view to improve SME’s access to credit are required. It is likely

that market-led mechanisms will take some time to improve the access of smaller firms to

31 SMEDA – World Bank Investment Climate Assessment survey was conducted between May and November 2002 by SMEDA in collaboration with the World Bank covering a random selection of 965 mainly manufacturing businesses (90 percent being SME), drawn from 12 largest cities of Pakistan. To date it represents the most comprehensive data set.

32 Faisal Bari, Ali Cheema, & Ehsan-ul-Haque; Barriers to SME Growth in Pakistan: An Analysis of Constraints, June 2003.

33 This finding is corroborated by the World Bank (2001) survey, which finds that over 50 percent of their sample SME who had ever approached a bank reported difficulties in obtaining credit. SMEDA-ILO Study 2001 also reports a similar finding.

96

Page 97: SME Project

formal credit. In particular, outreach shall remain to be a problem for the due to the

limited presence especially in the rural SME market.

The Government is seeking to facilitate the participation of commercial banks in SME

lending by training with the assistance of the ADB. The sooner commercial banks obtain

the know-how how to successfully engage in cash-flow based lending to small

enterprises, the better.

Finally, new prudential regulations increase the likelihood of viability and sustainability

in the financial sector. However, the broad definition of SME also bear a risk of upward

filtering of the loan portfolio towards the higher-end medium enterprises unless targeted

programs for micro and small enterprises exist. The creation of SME credit endowment

fund may be one way of mitigating this effect.

4.3.2.2.7 Human Resource Development

One of the major challenges that SME have to face is the emergence of the knowledge-

based economy. People must continue to innovate, change and upgrade. There is a need

to nurture the entrepreneurial spirit and skill development for adopting innovative

technologies. The low-literacy level of our population poses an immense challenge to our

competitiveness. Yet, it is a fact of life which we will not overcome in the short run. It is

therefore absolutely imperative that we seek intelligent short and medium-term solutions

to bridge the literacy gap.

One aspect of the Government's strategy is to strengthen non-formal skills and

entrepreneurship development, to better prepare workers for employment and to improve

the population's general capacity for self-employment. But are there any other ways by

which we may enhance the skills of our workforce in such a way that we need not despair

when facing external competition?

The Government has established a number of institutions that impart training and skill

development. These institutions, Pakistan Institute of Management Sciences (PIMS),

Technical Training and Vocational Authority (TEVTA), Provincial Vocational Training

97

Page 98: SME Project

Councils, Government Universities and various other support institutions have, however,

remained rather passive regarding the shaping of human resource development for SME.

A frequent complaint is the mismatch of the output of our human resource development

institutions with the demand of SME. There are also only limited training options for

middle management. Low skills of work force, inadequate vocational training facilities

yet remain outside the scope of the reform agenda. Are there any mechanisms by which

we may achieve effective consultation between the supply and the demand side of our

vocational training system so as to attain a maximum benefit for our economy?

Entrepreneurship does not breed in a vacuum. For a healthy, growing business

environment, it is necessary to foster entrepreneurial culture in Pakistan which goes

beyond the inclination to trade in goods. This can be boosted by entrepreneurial skill

development programs.

4.3.2.2.8 Technology Transfer and Up-gradation

Developing SME based on local skills/resources has now been rightly recognized as a

means of promoting economic growth and a very effective tool for providing productive

employment in any country.

But up to date technology also plays a vital role in the vertical integration of firms,

moving them up the economic ladder in terms of firm productivity enhancement. In our

country, growth oriented exporting firms still have problems sourcing quality inputs due

to the lack of a network of reliable suppliers. This adds to their transaction costs.

Likewise, the SME are not large enough to furnish sufficient demand to be an incentive

for a big high quality input supplier.

The Government in its efforts to facilitate technological transfer for indigenous SME

initiated a program with the United Nations Development Program (UNDP) to promote

Technical Cooperation among Developing Countries (TCDC)34. The scope of Phase I

34 A few countries (mainly China, Singapore, Indonesia, Sri Lanka) also shared their experiences and expertise with Pakistan.

98

Page 99: SME Project

remained narrow and focused on capacity building of various public sector organizations

through training programs. The intended final beneficiary, SME, has not yet been able to

benefit from the program. In its other efforts, the Government used to offer cash grants35

for ISO certification to those enterprises that chose to be growth-oriented

internationalized SME. The Government also set up a National Productivity Organization

as a resource centre and a research institute to enhance industrial and labour productivity

in Pakistan. Similarly other organizations like Pakistan Council for Scientific Industrial

Research (PCSIR), Pakistan Industrial Technical Assistance Centre (PITAC), Ministry of

Science and Technology (MOST) etc. established to facilitate industrial growth still need

to adopt an active approach to provide their services to SME in a effective manner. Major

technology up-gradation obstacles include:

Inability to acquire sophisticated testing equipment and R&D facilities. (SME see

it as a financial problem.)

Lack of skills/ experience to operate high-tech machinery

Insufficient information on technological co-operation opportunities

lack information on target market quality requirements and lack of knowledge on

how to achieve these quality levels

Absence of appropriate metrology and testing equipment and related

infrastructure as common facility centers

4.3.2.2.9 Market and Industry Information

Access to market and industry information is one of the keys to develop successful

business strategies. Frequently, business and trade associations are able to provide their

members with such services. By associating with like institutions in foreign countries,

they are also able to establish links and obtain information on foreign markets. Over half

of our SME (54 percent)36 belong to a business or industry association. Their perceived

role is limited to lobbing and negotiation with the government. Yet very few SME (12

35 Discontinued since June 2003

36 World Bank SME policy Note 2001

99

Page 100: SME Project

percent) perceive their associations to be a source of information on new developments in

their fields of business operation. How to increase the service provision by all types of

stakeholders will become a fundamental issue when SME support programs will be

looking for delivery channels.

4.3.2.2.10 Monitoring Developments

Harmonizing enterprise size categories

Pakistan has no across-the-board legal definition of SME. This makes it extremely

difficult to monitor the development of our SME economy and to establish benchmarks

against other countries in order to devise areas of intervention and support. Various

government departments and public-sector agencies have adopted their own definitions.

There are, of course, various reasons for them to define SME, and there may even be

discussion on just how a strict and reasonable size standard could be defined. A number

of current definitions are based on capital standards since this influences patterns of fund

raising in the formal and informal financial market by SME.

Many stakeholders consider enterprises with 100 or more employees as large, and

enterprises with less than 5 workers as micro. Yet our statistical system classifies

enterprises with more than 10 employees as large, and the State Bank of Pakistan

considers those with more than 250 employees as large.

The reference to international practice also suggests differentiation among industrial,

whole sale, retail37 and services related enterprises. This view also gets credence from

various studies on the issue for Pakistan38. Again, this consideration is only visible in the

SBP definition and missing in all others.

37 The Census for Establishments 1988 reveals that retail constitute 42.5 percent of total non-agriculture establishments and employs 20 percent of the labour force.

38 The survey of SME for ADB study on SME Constraints reports observed differences for retails sector. It suggests that the sector is dominated by micro enterprises and there has been considerable organizational, management and technological differences between enterprises employing 10-49 workers and those employing 50 or more workers.

100

Page 101: SME Project

There are also rationales beyond the particular organizational motivations for defining

specific size classes, and it will therefore be useful for all stakeholders to review

definitions on technical grounds.

For a national policy, it is extremely important to have a harmonized definition for as it is

important for the government to focus assistance as reasonably as possible for maximum

efficiency. It is also imperative to adopt a definition to foster the coherence of vision in

SME policy development and for the better implementation of related support programs

across institutions.

Measuring our success

Public resources are as scarce as private sector resources, and we need to ensure that they

are being used in the most efficient way so as to be able to create and maintain

sustainable support structures for SME which are able to perform in the long run. At the

same time, we, of course, seek a maximum effectiveness of our support programs39.

As things stand, we have no mechanism in place for measuring our success. In fact, we

do not even have any criteria established by which we are able to determine our success

as a nation in fostering SME development. And we are not able to correctly state what the

Government is spending on SME support annually.

Our present "system" of support is incoherent. While division of labor with diverse

stakeholders is a necessary condition for obtaining a maximum reach, it is also a perfect

ground for duplication of activities and wastage of resources. There is no current

overview of activities, and we are compelled to commission specific research if we seek

information on the diverse contributions by the various stakeholders. What is at stake is

that we forego the benefits of learning from one another in order to continuously improve

our support structures to meet the needs of the target group, SME.

SME as a Medium-Term Channel for Other Objectives

39 Reminder: "Efficiency" measures inputs vs. outputs whereas "effectiveness" measures outputs vs. objectives. Programs may be very effective and at the same time inefficient. The goal must be to seek both effectiveness and efficiency at the same time.

101

Page 102: SME Project

It is common practice in many countries to make use of the SME in order to further

specific development objectives as, for example, sustainable or equitable development.

After all, SME constitute the overwhelming part of the economy. Currently, we are not

making sufficient use of this channel for promoting the development of our country. Two

issues which also relate to our competitiveness are flagged in the sections below.

Gender Development

Each of the two genders of any society constitutes roughly half of the population, and

Pakistan is no exception. People of both genders embody not only labor force, but also

knowledge and creativity which may be mobilized to achieve economic ends. Discarding

either of the genders, therefore, implies foregoing the potential benefits which arise from

mobilizing the respective human resources for development.

Pakistani women have been engaged in production process for ages. Their participation

in economic activities in the modern society has also progressed beyond agriculture into

the local market economy. Women are increasingly migrating to urban areas for

employment in a range of cottage industries, such as carpet weaving, textiles and

handicrafts. In search for wage employment, women are moving into small business and

self-employment ventures thereby creating many formal and informal opportunities for

work. Women entrepreneurship in the formalized sense, however, remains a new

concept. Our current strategies also tend to focus on increasing women's participation in

the labor force.

The business environment for women in Pakistan reflects a complex interplay of many

factors made up of social, cultural, traditional and religious elements. These have taken

shape over many centuries; are anchored in the patriarchal system and are clearly

manifested in the lower status of women. The form of constitutional structures, policy

documents, regulatory arrangements and institutional mechanisms is contemporary rather

than traditional, so it is cosmetically impartial.

Yet, the gender bias is rigid and deep-rooted as it draws legitimacy from the perpetuation

of a traditional mind-set, established rituals and a firm belief system. It has conclusively

102

Page 103: SME Project

been shown that women business owners encounter more obstacles, and face more risks,

financially, socially- economically, culturally and legally than male business owners face.

The Government of Pakistan is well aware of the potential of women in our society and

the contribution that they can make towards economic development. Women are

continuously being encouraged to enter the business stream of our country and are being

provided incentives. However, there still is a strong dearth of focused initiatives that need

to be taken by existing business facilitation institutions.

Environmental Issues

Environmental issues are most frequently a result of the interaction between human

activities of production and the environment. Under fierce competitive pressure in the

market economy or as part of a coping strategy when faced with difficulties to cover

basic needs, enterprises and individuals are creating environmental issues. While

certainly one of the economic root causes for environmental damages are externalities40

which require appropriate government intervention, it is frequently overlooked that there

are many economic gains which may be achieved from producing in an environmentally

friendly manner. Reducing material waste can be one way of reducing input cost. Saving

resources such as water and energy does not only generate benefits at the national level

but may translate into competitiveness and thus economic gain at the enterprise level.

There is also a direct link between the effectiveness of technology transfer and the

stabilization of global climate change and natural resources depletion. Major constraints41

to effectiveness lie in the high transaction costs associated with the development of

capacities and capabilities to manage and generate technological change. Developing

country enterprises thus tend to ineffectively exploit available technology options, as well

as to inefficiently utilize the transferred technologies.

40 Upstream producer may affect the viability of a downstream producer without any economic transactions occurring between them. There is not internalization of cost at source, and the market cannot self regulate. Government must step in.

41 According to the World Bank’s survey for SME Policy Note 2001, a vast number of small entrepreneurs are highly interested (42 percent) or moderately interested (40 percent) in acquiring new technology. It further elaborates that SME learn their skills from own family (40 percent), working for another employer (35 percent), and educational institutions (25 percent). On sources of technical know-how it reveals Books and journals (30 percent), other companies working in the same field (23 percent), internet (13 percent), and only 4 percent from formal institutes as a source of acquiring technical know-how.

103

Page 104: SME Project

Many OECD countries make use of channels of SME promotion in order to achieve

improvements for the environment. For example, special credit lines may be provided in

order to encourage the adoption of environmentally friendly technologies. Specific

training courses are being offered to SME on waste reduction. ISO 14000 is actively

being promoted in the European Union as one way of combining environmental concerns

with quality and thus competitiveness. How may we best use our current and future SME

support structures in order to achieve positive effects?

4.3.2.3 Long-Term Issues

There are issues which are beyond the scope of our current interventions. They are

partially rooted in the multiple cultural structures of our society, frequently exacerbated

by our geo-political situation. We, nevertheless, recognize their importance and therefore

point them out here. However, it is not recommended to attempt to solve these questions

by ways of an SME policy initiative.

4.3.2.3.1 Literacy

The evidence reveals that SME find it extremely difficult to grow because of their

inability to delegate to soundly trained staff. The day, the small businessman feels

comfortable to delegate, SME start progressing.

The low literacy level also determines the potential of our labor force. Higher literacy

rates are essential to enhance the quality of production can be enhanced by multiple

factors which is what we need to be able to effectively compete in the international

economy which is being extended to our local markets by the effects of opening up and

WTO accession.

4.3.2.3.2 Law and Order

104

Page 105: SME Project

Law and order situation in Pakistan has always been regarded as worrisome. One survey

reports that one in five respondents report that the business was the target of at least one

crime during 2002. Another assessment suggests that businesses in NWFP spend 4.5

percent, Sindh and Punjab 1-2 percent of their revenue on security. One in four SME

consider law and order to be a severe problem.

Law and order problems weaken property rights and as a result weaken the investors’

decision to invest. These problems are clearly linked to the manner in which the law

enforcement and criminal justice system functions. The high time cost involved in

seeking legal recourse together with lack of access to both effective informal and formal

enforcement mechanisms, increase the costs associated with contract enforcement.42

4.3.2.3.3 Intellectual Property Rights

Intellectual Property Rights (IPR) is a vital issue that needs to be looked into. It has been

observed that many developing countries, with the help of a change in their IP systems

and laws, are able to attract Foreign Direct Investment (FDI) in the Research and

Development (R&D) especially in the industrial and scientific field. Therefore,

promotion and protection of intellectual property spurs economic growth, creates new

jobs and industries, enhancing the quality and enjoyment of life. Another benefit for

Pakistan in properly adopting IPR culture is that it will protect the indigenous products

such as rice, kinno, traditional knowledge, pottery etc. The owner of IPRs has the most

valuable assets which can be utilized in commercial transactions, whether IP licenses,

joint ventures, manufacturing, purchase or distribution agreements, or mergers and

acquisitions. Licenses to use patents, trademarks and copyrights, are often combined with

transfer of know how in the form of training and are increasingly an important term in

such transactions.

4.3.2.3.4 Infrastructure

42 Commercial disputes in Pakistan are regulated under the Contract Act (1882) and falls in the jurisdiction of civil courts only. Major problems associated with this forum include time delays and judicial corruption.

105

Page 106: SME Project

Basic physical infrastructure is a prerequisite to growth and development. Power outages

and access to connections are considered an irritant which significantly affects the

productivity of firms in Pakistan. It is estimated that a typical business in Pakistan loses

5.6 percent in annual sales revenue due to just this single factor. Differences associated

with firm size recognize that smaller firms are relatively hard hit in comparison with the

larger ones because of inability to arrange alternate power source such as private power

generators. High rates of power, the poor quality of delivery and its reliability are the

serious concerns of SME.

Similarly, access to telecommunication facilities and transport also serve as a detriment

to smooth growth and transition of smaller firms to larger ones. The chief problem in the

provision of telecom services is the shortage of new fixed line connections, which

currently stand at a mere 0.5–0.6 million a year for the whole country. Pakistan could

also save up to 16.5 percent of the value of exports by improving its trade and transport

logistics systems.43 Inefficiency in transport alone is estimated to cost the economy Rs.

320 billion a year. The concentration of power, telecommunication, and transport

services, except for road transport, in the public sector has been regarded as the major

concern. Evidence suggests that Pakistan’s state-controlled and concentrated structure of

infrastructure delivery is highly inefficient.

43 World Bank, Development Policy Review 2002

106

Page 107: SME Project

Chapter 5 CONCLUSIONS AND RECOMMENDATIONS

5.1 Establishing a common definition of SMEs

The SME sector is of Pakistan has high potential and can take the country into even

higher prosperity. But one of the main problems hampering the sector is lack of common

definition. The Government has taken many steps for the promotion of SMEs by

establishing many organizations which work for SMEs. But the problem is that each

organization defines SMEs in their own terms. This creates unnecessary problems for the

entrepreneurs who find it difficult in approaching the organizations for the solutions of

their problems.

The government should advise its organizations to agree on a uniform definition which

should be applicable in the length and breadth of the country. This will solve the

problems of the entrepreneurs who are mostly confused about the status of their

businesses.

5.2 Streamlining the Fiscal Policy

Pakistan’s fiscal policy exclusively focuses on encouraging the larger sector and does not

take into the interests of the SMEs. Following measures could be introduced to address

these inherent policy biases against SMEs.

The important policy needs to be made completely uniform and import duties

need to be fully rationalized.

Effective measures should be introduced to check smuggling.

All concessions to large companies should be phased out to promote and equitable

competition.

SMEs need support in getting organized through trade associations at local level.

Through these bodies, information and support to SMEs can be disseminated.

Interaction between SMEs and Chambers of Commerce and Industries should be

promoted.

Page 108: SME Project

5.3 Promotion of Linkage among Firms

Large firms are increasingly relying on smaller enterprises and workshops to supply them

with goods and services that were, in earlier times, produced in-house. Therefore, there

are new and increasing opportunities for small companies to act as sub-contractors.

In Pakistan, a balanced growth strategy for the development of industrial sector should be

implemented. According to this strategy, the industrial sector grows through the

backward and forward linkages between the industrial linkages between the industrial

units of different sizes and among industries of same size. Therefore, through this

linkage, large enterprises can enable small firms to enter into large markets both

domestically and internationally.

This model requires:

1. Small firms to focus on their core competency and try to excel in it.

2. These firms should organize themselves and forge strong links among themselves.

Also, with these linkages, large firms can provide technical and support for their partner

small firms. These linkages, would serve to enable small firms to evolve into excellent

modern enterprises competing in local and international markets. An excellent example

of this model is the IT firms.

SMEDA should take the following actions to promote the effective linkages:

1. The establishment and production of industrial sub-contracting exchange

schemes, which would facilitate market linkage between manufacturers, exporters

and industrial subcontractors.

2. Identification of suitable SMEs in the specified fields of activity which should

then be introduced to large firms including MNCs by arranging matchmaking

sessions for further cooperation.

109

Page 109: SME Project

3. Pilot testing if the “Balanced Growth Strategy” in a specified sector should be

carried out. This pilot project should be closely monitored and evaluated for

replication in other sectors later on.

4. SME associations, groups and other trade associations should be strengthened and

activated.

5.4 Easy Accessibility to Finance

While capital is not the only factor that allows for the growth and creation of enterprises,

it is infact the most vital, for without it, creativity, drive and innovation cannot be

transformed into material actions. Unfortunately in Pakistan, just like any other

developing country, the indifference, unwillingness and the inability of most formal

banks to become involved in providing credits to small businesses in predetermined. The

reasons behind this lack of credit availability are high transaction costs, risks, lack of

collateral just to name a few.

Some of the actions are recommended for this purpose:

1. In addition to monitoring banks’ compliance with the mandatory allocation of

credit resources, certain innovative schemes can also be developed to increase

SMEs access to financing.

2. Empirical evidence suggests that the rates of default of SMEs are far less than

those of large organizations, so the risk of default is much less. Thus the central

bank should encourage commercial banks to extend credit to small businesses on

more favorable terms.

3. Another major area of concern is the period of disbursement which is certainly

hurting the growth of small enterprises. Prospective borrowers are prepared to pay

a higher interest rate if their applications are appraised and loan is disbursed

quickly. Loans which take more time to be disbursed are of little use to the

entrepreneur who wants to exploit the business opportunity.

110

Page 110: SME Project

5.5 Strengthening the Human Resource Development of SMEs

The ability of entrepreneurs to combine resources effectively depends in part on an

educational policy that emphasizes on practical business skills such as accounting,

finance and personal management.

One of the main factors in business is the availability of credit which should be made

available to those who have passed through training programs on how to effectively

manage their enterprises.

However, he integrated approach has been advocated by organizations such as ILO,

UNIDO, World Bank, USAID and has the most successful rate of implementation.

Therefore following actions are recommended for this purpose:

1. Advocacy for improved basic education at the primary and secondary levels.

2. The official policy should be clearly democratic and specify the role of SMEs in

the proposed committees responsible for designing the training programs at the

institutional level. These committees would deliver the desired results with proper

representation of SMEs.

3. The development of Human Resource Development in specific industries must be

identified. Linkages should be established between training and credit programs

so that the SMEs are in a position to invest in the upgradation of skills.

4. Specific economic zones must provide facilities and resources for skills training

for SMEs in their respective zones.

5. SMEs need to be promoted at all levels so that they have the capacity to influence

decisions regarding orientation and structure of formal training. Based on national

and international experiences, the resource bank of training materials and teaching

aids needs to be established which would provide useful input to innovative

approach towards training.

6. The training should be relevant to the environment in which the trainers have to

operate and should only be given to people who can genuinely learn from it.

111

Page 111: SME Project

5.6 Bolster the technology transfer and R&D Initiatives

One of the major challenges faced by Pakistani SMEs is in the area of technology

acquisition and development. This requires information and advice in areas such as the

process of production, selection of machinery and technical collaboration available both

domestically and internationally.

Furthermore, Pakistani SMEs must be equally competent at adapting to imported

technologies and products. It is likewise important to recognize that the key short-run

strategies for technologically developed countries concentrate on the development of

technologies that are best suited to local markets and conditions.

The recommendations for this purpose are:

I. Establish pilot enterprises at village / township level for the purpose of

demonstrating the feasibility of production and management processes as well as

product design and quality control techniques.

II. Train young and enthusiastic people living in both urban and rural areas in the use

of modern technologies for a local application.

5.7 Effective role of Government Institutions

Closely related to the criticism regarding the performance of government agencies has

been the widespread belief that many institutions, supposedly supporting SMEs are

inadequately tuned to the day-to-day needs of their centers.

There is no real contention on the view that government policies in Pakistan have not

been favorable to small enterprises. Infact, some even go to the extent that these policies

are biased against the small businesses e.g.

The banking sector has been criticized for not geared in helping small firms

The cost of capital is very high.

112

Page 112: SME Project

Utility connections take months resulting delays in production in financial

difficulty right from the start.

There are almost 35 tax collecting agencies at different levels.

5.8 Streamlining private sector Organizations

The organizations that can become actively engaged in providing services for SMEs are

the following:

I. Foundations:

Usually NGOs are set-up by the larger organizations or by the business community or by

wealthy individuals with the aim of helping out small or weaker business units.

II. Membership Organizations:

Associations, federations, enterprises, business organizations, chamber of commerce

come into this domain. These organizations can also be referred to as self-help or

representative bodies.

Therefore SMEDA should prepare a framework for the formation of “Small and Medium

Enterprise Association” both at the national and regional levels. SMEDA can pursue an

option of obligatory membership for all the SMEs or it can decide not to impose a

statutory obligation. The following are a source of finance for associations etc

Membership fees

Fees from activities undertaken by organizations

Government subsidies

Support from large businesses / foundations.

Help from external donors.

113

Page 113: SME Project

III. Proper Utilization of Media:

Media is a very strong medium of information and the Government can take advantage of

this medium by helping promote SMEs and highlighting the benefits of entrepreneurship.

The government can buy airtime from private television channels like Geo TV and ARY

TV and can also advertise in PTV, which is a state run enterprise.

IV. Female Participation:

Women constitute more than 50 percent of our population and their participation in the

uplift of national economy is vital for the country. SMEs provide a perfect staging ground

for women to showcase their talents. Many programs can be organized in this context like

spotlighting the “success stories” of women entrepreneurs in certain business areas

focusing mainly on the direct economic benefits extended to them.

114

Page 114: SME Project

BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Pakistan

www.statpak.gov.pk/depts/fbs/

publications/pocket_book2003/chapter05.pdf

http://www.immigration-usa.com/wfb2004/pakistan/

pakistan_people.html

Prudential Regulations for Small and Medium Enterprises Financing”,

Banking Policy Department, State Bank of Pakistan

http://www.sbp.org.pk/publications/prudential/index.htm

International Finance Corporation - WB Group, Dated May 10, 2005)

http://www.ifc.org

http://www.smebank.org

http://www.smeda.org.pk

http://www.win.org.pk/institutiondetail.php?id=8

Pakistan Country Assistance Strategy, World Bank Report, Annex II,

Page 3

Census of Establishments-1998

Economic Survey of Pakistan 2002-03

Economic Survey of Pakistan 2004-05

Different definitions hurting SMEs sector “ By Parvaiz Ishfaq Rana

SME Bank Limited – Annual Report 2004

Human Development Report 1999 – The Crisis of Governance

World Bank Report of “Country Gender Profile of Pakistan”

http://wwwo.worldbank.org/gender/info/pakist.htm

Country Profile of Pakistan

115

Page 115: SME Project

LIST OF TABLES

Table 1 Pakistan Economy at a Glance

Table 2 Alternative Definitions of SMEs

Table 3 Sector-specific SME definitions in China

Table 4 Definitions of SMEs in non-Asian countries

Table 5 Definition of SMEs in Japan

Table 6 Definition of SME provided in Thailand

Table 7 Aggregate exposure limits for AKF and ARF

Table 8 ROA and ROE of SME Bank

116

Page 116: SME Project

LIST OF ABBREVIATIONS

ADB Asian Development Bank

AKF Alfalah Karobar Financing

ARF Alfalah Rural Financing

BAFL Bank Alfalah Limited

BMRE Balancing, Modernization, Replacement and Expansion

BOI Board of Investment

CF Current finance

CFC Common Facility Centres

CNG Compressed Natural Gas

EPB Export Promotion Bureau

FDI Foreign Direct Investment

GDP Gross Domestic Product

IIN Industrial Information Network

ILO International Labour Organization

IPR Intellectual Property Rights

ISO International Standards Organization

JICA Japan Agency for International Cooperation

LG Letter of Guarantees

LSE Large Scale Entities

MNC Multinational Companies

MoIP Ministry of Industry and Production

MoITT Ministry of Information Technology & Telecom

MOST Ministry of Science and Technology

NPO National Productivity Organization

NPV Net Present Value

NWFP North West Frontier Province

OECD Organization for Economic Co-operation and Development

OEM Original Equipment Manufacturers

PCSIR Pakistan Council for Scientific Industrial Research

117

Page 117: SME Project

PIMS Pakistan Institute of Management Sciences

PISDAC Pakistan Initiative for Strategy Development and Competitiveness

PITAC Pakistan Industrial Technical Assistance Centre

PKR Pakistani Rupee

PRSP Poverty Reduction Strategy Paper

PSDP Public Sector Development Program

PSIC Punjab Small Industrial Corporation

PTV Pakistan Television

R&D Research and Development

RDFC Regional Development Finance Corporation

ROA Return on Assets

ROE Return on Equity

SBFC Small Business Finance Corporation

SBP State Bank of Pakistan

SDP Sector Development Program

SIDB NWFP Small Industries '.Development Board

SME Small and Medium Enterprises

SMEDA Small and Medium Enterprises Development Authority

SSAC Support Services for Agricultural Credit

SSIC Sindh Small Industries Corporation

SSSBE Small Scale Service Business Enterprises

SV Senior Volunteers

TCDC Technical Cooperation among Developing Countries

TEVTA Technical Training and Vocational Authority

TF Term Finance

UNDP United Nations Development Program

UNIDO United Nations Industrial Development Organization

USAID United States Agency for International Development

WEBCOP Workers Employers Bilateral Council of Pakistan

WTO World Trade Organization

118