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.

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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.

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TABLE OF CONTENTS
EXECUTIVE SUMMARY........................................................................................................II CHAPTER 1 INTRODUCTION.................................................................................................3 1.1 AN OVERVIEW OF PAKISTAN’S ECONOMY........................................................................................3 1.2 SECTORAL OVERVIEW....................................................................................................................6 1.2.1 AGRICULTURAL SECTOR................................................................................................................6 1.2.2 MINING AND QUARRYING..............................................................................................................7 1.2.3 MANUFACTURING SECTOR.............................................................................................................7 1.2.4 SERVICES SECTOR.........................................................................................................................8 1.3 SMALL AND MEDIUM ENTERPRISES..................................................................................................9 1.4 ROLE OF SMES IN ECONOMY......................................................................................................10 1.4.1 PROMOTING INDUSTRIALIZATION THROUGH SMES...........................................................................11 1.4.2 COMPONENT OF INFORMAL ECONOMY............................................................................................11 1.4.3 BURDEN SHARER OF PRESSURE ON LAND........................................................................................12 1.4.4 FOREIGN EXCHANGE EARNINGS....................................................................................................12 1.4.5 CATERER OF LOW INCOME GROUPS.................................................................................................12 1.4.6 CARRIERS OF CULTURAL HERITAGE................................................................................................12 1.5 SMES IN PAKISTAN.....................................................................................................................13 1.6 SMALL AND MEDIUM ENTERPRISE SECTOR OF PAKISTAN (IN BRIEF)...............................................13 1.7 DEFINITION OF SMES IN PAKISTAN..............................................................................................14 1.7.1 SBP DEFINITION OF SME..........................................................................................................15 1.7.2 SMEDA DEFINITION OF SMES...................................................................................................15 1.7.3 SME BANK DEFINITION OF SMES...............................................................................................16 1.7.4 SINDH INDUSTRIES DEPARTMENT DEFINITION OF SMES..................................................................16 1.7.5 FEDERAL BUREAU OF STATISTICS DEFINITION OF SMES.................................................................16 1.7.6 PUNJAB DIRECTORATE OF INDUSTRIES...........................................................................................16 1.7.7 PUNJAB SMALL INDUSTRIES CORPORATION DEFINITION OF SMES.....................................................17 1.8 SIGNIFICANCE OF SMES...............................................................................................................17 1.9 ADVANTAGES OF SMES...............................................................................................................18 1.10 PROBLEMS FACED BY SMES.......................................................................................................19 1.11 RESEARCH OBJECTIVE................................................................................................................20 1.12 RATIONALE OF THE STUDY..........................................................................................................20 1.13 SCOPE OF THE STUDY.................................................................................................................21 1.14 METHODOLOGY.........................................................................................................................21 1.15 ORGANIZATION OF THE STUDY....................................................................................................22 CHAPTER 2 LITERATURE REVIEW...................................................................................22 2.1 SMALL AND MEDIUM ENTERPRISES..................................................................................................22 2.2 DEFINITION OF SMES IN SOME ASIAN COUNTRIES.........................................................................23 2.2.1 BANGLADESH.............................................................................................................................26 2.2.2 CHINA......................................................................................................................................27

2.2.3 INDIA........................................................................................................................................28 2.2.4 JAPAN.......................................................................................................................................29 2.2.5 MALAYSIA................................................................................................................................30 2.2.6 THAILAND.................................................................................................................................30 2.2.7 PAKISTAN:.................................................................................................................................31 2.2.8 PHILIPPINES...............................................................................................................................32 CHAPTER 3 FINDINGS............................................................................................................33 3.1 ORGANIZATIONS WORKING FOR UPLIFT OF SMES...........................................................................33 3.1.1 SMALL AND MEDIUM ENTERPRISES DEVELOPMENT AUTHORITY .......................................................33 3.1.2 SME BANK LIMITED.................................................................................................................52 3.1.3 PUNJAB SMALL INDUSTRIAL CORPORATION....................................................................................56 3.1.4 SINDH SMALL INDUSTRIES CORPORATION.......................................................................................57 3.1.5 NWFP SMALL INDUSTRIES DEVELOPMENT BOARD........................................................................57 3.1.6 THE DIRECTORATE OF SMALL INDUSTRIES BALOCHISTAN.................................................................58 3.2 SME PRODUCTS OF DIFFERENT BANKS.........................................................................................59 3.2.1 UNION BANK.............................................................................................................................59 3.2.2 SME BANK..............................................................................................................................64 3.2.3 BANK ALFALAH.........................................................................................................................67 3.2.4 MYBANK...................................................................................................................................74 CHAPTER 4 ANALYSIS...........................................................................................................77 4.1 EFFECTS OF WTO ON SME........................................................................................................77 4.2 PERFORMANCE OF SME BANK.....................................................................................................78 4.2.1 FINANCIAL RATIOS.....................................................................................................................79 4.2.2 ADMINISTRATIVE COSTS..............................................................................................................81 4.3 BASIC SITUATION OF SME AND THEIR SUPPORT STRUCTURES........................................................82 4.3.1 CURRENT STATUS OF SME.........................................................................................................82 4.3.2 ISSUES IN SME DEVELOPMENT....................................................................................................86 CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS...........................................108 5.1 ESTABLISHING A COMMON DEFINITION OF SMES..........................................................................108 5.2 STREAMLINING THE FISCAL POLICY.............................................................................................108 5.3 PROMOTION OF LINKAGE AMONG FIRMS......................................................................................109 5.4 EASY ACCESSIBILITY TO FINANCE...............................................................................................110 5.5 STRENGTHENING THE HUMAN RESOURCE DEVELOPMENT OF SMES...............................................111 5.6 BOLSTER THE TECHNOLOGY TRANSFER AND R&D INITIATIVES......................................................112 5.7 EFFECTIVE ROLE OF GOVERNMENT INSTITUTIONS.........................................................................112 5.8 STREAMLINING PRIVATE SECTOR ORGANIZATIONS.........................................................................113 BIBLIOGRAPHY....................................................................................................................115 LIST OF TABLES...................................................................................................................116

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LIST OF ABBREVIATIONS..................................................................................................117

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

2.4 percent annually2 Life Expectancy3 (2004 estimates) 62.61 years Total 61.69 years Male 63.58 years Female Infant Mortality3 (2004 estimates) Total Females Males Literacy Rate (2003 estimates) 74.84 deaths/1,000 live births 74.43 deaths/1,000 live births 74 deaths/1,000 live births

1 2

http://en.wikipedia.org/wiki/Pakistan www.statpak.gov.pk/depts/fbs/ publications/pocket_book2003/chapter05.pdf 3 http://www.immigration-usa.com/wfb2004/pakistan/pakistan_people.html

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Total Males Females

45.7 percent 59.8 percent 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

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low levels of education and health constrain productivity throughout the economy. Life expectancy for males is 64 years and 63.8 years for females.

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 5

in its support price, agriculture surpassed it’s target of 4.0 percent for the year by a wide margin, registering an impressive 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

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

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

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 subcontracting 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

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.

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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 19th 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.

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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

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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

M anufacturing 15%

Trade 51% Services 34%

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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: Small Scale: Medium Scale: Less than 10 people employed Productive Assets limit of Rs. 2 million Between 10 to 35 people employed Productive Assets limit of Rs. 20 million Between 36 to 99 people employed Productive 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

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

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. b. a. b. a. b.
4

Less than 10 people Productive assets limit of Rs. 2 million Between 10-35 people Productive assets limit of Rs. 20 million Between 36-99 people Productive assets limit of Rs. 40 million

2. Small enterprises

3. Medium Enterprises

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

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1.7.3 SME Bank definition of SMEs
The SME Bank defines Small and Medium Enterprises as: 1. 2. million. Small enterprises are those entities having a project cost of upto Rs. 20 million Medium enterprises are those entities having a project cost of upto Rs. 100

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.

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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
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

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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 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.

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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.

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.

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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.

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. 2. To identify and analyze the problems faced by SMEs in Pakistan and recommend their solutions. 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.

6

Economic Survey Of Pakistan, 1997-1998

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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.

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

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Secondary data     Questionnaires Interviews Discussions Visits

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

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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 Grinde et al. (1989:9-10) USAID in the 1990s Firms with fixed assets (excluding land) less than US$ 250,000 in value is a small scale enterprise. 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. Firms with less than 50 employees and atleast half the output is sold.

UNIDOs definition for Developing Large Firms with 100+ workers. countries Medium Firms with 20-99 workers

Small Firms with 5-19 workers Micro Firms with less than 5 workers UNIDOs definition for Industrialized Large Firms with 500+ workers countries 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

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Table 3: Definitions of SMEs in non-Asian countries Country United States European Union Canada Number of Revenues Employees < 500 < USD 5 MM 10 < X < 250 < USD 50MM < 500 < USD 4 MM manufacturing < 50 services 10 < X < 500 > 10-20 < 100-200 Pakistan Asset Base

< USD 34 MM

Mexico South Africa

> US$ 0.05 MM

> USD 0.07 MM < USD 1 - 8 MM < USD 0.3 – 3 MM < 250 <USD 4 MM < USD 1.35 MM manufacturing manufacturing < 50 services <USD 0.7 MM services

Turkey
0-14 staff MICRO

10 < X < 200
15-49 staff SMALL 50-199 staff MEDIUM > 200 staff LARGE

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

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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 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.

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

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

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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.

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 Medium Enterprises Construction Small Enterprises Medium Enterprises Wholesale Small Enterprises Medium Enterprises Retail Small Enterprises Medium Enterprises Transportation : Small and Medium Enterprises Posts : Small and Medium Enterprises Hotels and restaurants : Small and Medium Enterprises : : : 300 employees 2000 30 -300 M Yuan in 40-400 M Yuan Asset sales size >300 M Yuan in sales >400 M Yuan Asset size

>2000 employees : 600 employees

3000 30 -300 M Yuan in 40-400 M Yuan Asset sales size >300 M Yuan in sales 30 -300 M Yuan in sales >300 M Yuan in sales 10 -150 M Yuan in sales >150 M Yuan in sales >30 M Yuan in sales >400 M Yuan Asset size

>3000 employees 100 - 200 employees >200 employees 100 - 500 employees >500 employees >500 employees

>400 employees

>30 M Yuan in sales

>400 employees

>30 M Yuan in sales

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2.2.3 India
The definition used by the Indian authorities is based on the level of investment in plant, 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 28

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 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 <300 or Invested Capital Wholesalers :Employees Invested Capital Retailers, Services : Employees Invested Capital B. Small Scale Enterprises Manufacturing and other Industries : Employees Commerce and Services :Employees <20 <5 <300 million yen <100 or <100 million yen 50 or < 50 million yen

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
8

Japan Small and Medium Enterprise Corporation or JASMEC

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

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Type

Small Employees Not more than 50 Not more than 50 Not more than 25 Not more than 15

Capital (million baht) Not more than 50 Not more than 50 Not more than 50 Not more than 50

Medium Employees 51-200 51-200 26-50 16-30

Capital (million baht) 51-200 51-200 51-100 31-60

Production Service Wholesale Retail

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.

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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)

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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. 2. 3. Facilitation on policy making and provision of overall planning Programming, research and evaluation of matters related to SMEs in Pakistan 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. 2. 3. SMEs constitute nearly 90 percent of all enterprises in Pakistan. They employ 80 percent of non-agriculture labour force 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

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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. 2. 3. The creation of a conducive and enabling regulatory environment. Development of industrial clusters. 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:

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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. 2. Regulations and policy level support. Institutional & networking support.

At the institutional level, SMEDA provides support to SMEs  By creating networking amongst the concerned stakeholders.

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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

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. 2. Regulations and policy level support 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:

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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    Gems   Five New Gem Mines To Be operationalized (NWFP) Lapidaries Program Lending (NWFP) Export Warehouse Marble (Azakhel NWFP) Establishment of Model Quarry and Training Institute Marble Joint Ventures and Technology Transfer Arrangements (NWFP)

Glass & Ceramics

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  

Ceramics Kiln Up-Gradation: Common Facility Centre, Gujrat 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).

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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. 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

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

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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. 42

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.

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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 Introducing efficient management techniques

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     

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
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.

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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 elearning 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 (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.

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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. 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

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  

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. 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.

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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 privatesector 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. 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

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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) 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 EUfunded 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

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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 20042005. 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. 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.

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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-theart 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. 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.

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http://www.smebank.org/financial percent20products.htm

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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:    Working Capital & Medium-Long term financing Program Lending (Hunarmand Pakistani Schemes) Leasing through its subsidiary

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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 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

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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 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

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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 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

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   

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 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

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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.

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.

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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.

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.

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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. 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.

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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      LSEs. 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

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

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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 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.

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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    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.

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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, 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:

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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. 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

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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 productline 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  o o o o crafts) o o o     Clothing (cloth shops, boutiques, embroidery work) Educational & Teaching institutes 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 Sector Preference: Women Entrepreneurs involved in the following line of business are particularly encouraged; Personal care and grooming (salons, parlors, beauty clinics Fitness (gyms, Swimming pools, aerobic centers) Eateries (restaurants, fast food, bakeries, ice-cream parlors Vocational institutes (stitching, cooking, painting, designing, arts and

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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. provide further opportunities for self-employment. The scope of

industries under the “Hunarmand Scheme” as well as credit facilities will be broadened to

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:

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

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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. 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.

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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; 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

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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. 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

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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 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:

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Table 7: Aggregate exposure limits for AKF and ARF Percentage of classified SMEs advances to Maximum limit of exposure total portfolio of SME advances Below 5 percent Below 10 percent Below 15 percent Up to and above 15 percent No limit 3 times of the equity 2 times of the equity 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 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

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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. 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.

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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

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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.

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.

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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

ROA

2003 5.897

2004 6.46

ROE

84.72

37.67 79

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 6.6 6.4 6.2 6 5.8 5.6 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

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ROE 100 80 60 40 20 0 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 2003 a percentage of Annual average total assets 5.36 Annual average loan portfolio 34.12 2004 5.17 39.99

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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 13 14 15 16

Pakistan Country Assistance Strategy, World Bank Report, Annex II, Page 3 Census of Establishments-1998 Economic Survey of Pakistan 2002-03 SME policy Note, the World Bank; ILO SMEDA Study 2001 on MSME, LUMS study on SME constraints

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.

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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. • •
17 18

Poverty Reduction Strategy Paper (PRSP)18 Micro Finance Sector Development Program

Non-Linear Model to estimate underground economy in Pakistan, SBP Research Department

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.

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• • • •

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

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, crossdepartmental 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. ii. prepares Government documents on policy regarding SME 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

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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

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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

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.

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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.

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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.

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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 inhouse 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

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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 base 24. 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.

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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.

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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 29

Investment Climate Survey of Pakistan-2003

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.

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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 riskprone 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

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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.

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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 knowledgebased 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

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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.

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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 World Bank SME policy Note 2001

36

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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.

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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.

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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

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.

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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

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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.

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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

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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.

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

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.

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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. 2. Advocacy for improved basic education at the primary and secondary levels. 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. 5. Specific economic zones must provide facilities and resources for skills training for SMEs in their respective zones. 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.

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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.

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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.

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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.

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BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Pakistan www.statpak.gov.pk/depts/fbs/ publications/pocket_book2003/chapter05.pdf http://www.immigrationusa.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
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Country Profile of Pakistan

LIST OF TABLES

Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8

Pakistan Economy at a Glance Alternative Definitions of SMEs Sector-specific SME definitions in China Definitions of SMEs in non-Asian countries Definition of SMEs in Japan Definition of SME provided in Thailand Aggregate exposure limits for AKF and ARF ROA and ROE of SME Bank

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LIST OF ABBREVIATIONS
ADB AKF ARF BAFL BMRE BOI CF CFC CNG EPB FDI GDP IIN ILO IPR ISO JICA LG LSE MNC MoIP MoITT MOST NPO NPV NWFP OECD OEM PCSIR PIMS PISDAC PITAC PKR PRSP PSDP PSIC PTV R&D Asian Development Bank Alfalah Karobar Financing Alfalah Rural Financing Bank Alfalah Limited Balancing, Modernization, Replacement and Expansion Board of Investment Current finance Common Facility Centres Compressed Natural Gas Export Promotion Bureau Foreign Direct Investment Gross Domestic Product Industrial Information Network International Labour Organization Intellectual Property Rights International Standards Organization Japan Agency for International Cooperation Letter of Guarantees Large Scale Entities Multinational Companies Ministry of Industry and Production Ministry of Information Technology & Telecom Ministry of Science and Technology National Productivity Organization Net Present Value North West Frontier Province Organization for Economic Co-operation and Development Original Equipment Manufacturers Pakistan Council for Scientific Industrial Research Pakistan Institute of Management Sciences Pakistan Initiative for Strategy Development and Competitiveness Pakistan Industrial Technical Assistance Centre Pakistani Rupee Poverty Reduction Strategy Paper Public Sector Development Program Punjab Small Industrial Corporation Pakistan Television Research and Development 117

RDFC ROA ROE SBFC SBP SDP SIDB SME SMEDA SSAC SSIC SSSBE SV TCDC TEVTA TF UNDP UNIDO USAID WEBCOP WTO

Regional Development Finance Corporation Return on Assets Return on Equity Small Business Finance Corporation State Bank of Pakistan Sector Development Program NWFP Small Industries '.Development Board Small and Medium Enterprises Small and Medium Enterprises Development Authority Support Services for Agricultural Credit Sindh Small Industries Corporation Small Scale Service Business Enterprises Senior Volunteers Technical Cooperation among Developing Countries Technical Training and Vocational Authority Term Finance United Nations Development Program United Nations Industrial Development Organization United States Agency for International Development Workers Employers Bilateral Council of Pakistan World Trade Organization

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