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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.
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.
TABLE OF CONTENTS
EXECUTIVE SUMMARY........................................................................................................II SMALL AND MEDIUM ENTERPRISES.......................................................................................................3 1.1 ROLE OF SMES IN ECONOMY........................................................................................................4 1.1.1 PROMOTING INDUSTRIALIZATION THROUGH SMES.............................................................................5 FOREIGN EXCHANGE EARNINGS..............................................................................................................5 CATERER OF LOW INCOME GROUPS...........................................................................................................6 CARRIERS OF CULTURAL HERITAGE..........................................................................................................6 SMES IN PAKISTAN............................................................................................................................6 1.2 SMALL AND MEDIUM ENTERPRISE SECTOR OF PAKISTAN (IN BRIEF).................................................7 1.3 DEFINITION OF SMES IN PAKISTAN................................................................................................8 1.3.1 SBP DEFINITION OF SME............................................................................................................8 1.3.2 SMEDA DEFINITION OF SMES.....................................................................................................9 1.3.3 SME BANK DEFINITION OF SMES.................................................................................................9 1.3.4 SINDH INDUSTRIES DEPARTMENT DEFINITION OF SMES..................................................................10 1.3.5 FEDERAL BUREAU OF STATISTICS DEFINITION OF SMES.................................................................10 1.3.6 PUNJAB DIRECTORATE OF INDUSTRIES...........................................................................................10 1.3.7 PUNJAB SMALL INDUSTRIES CORPORATION DEFINITION OF SMES.....................................................10 1.4 SIGNIFICANCE OF SMES...............................................................................................................10 1.5 ADVANTAGES OF SMES...............................................................................................................12 1.6 PROBLEMS FACED BY SMES.........................................................................................................12 1.7 RESEARCH OBJECTIVE..................................................................................................................13 1.8 RATIONALE OF THE STUDY............................................................................................................13 1.9 SCOPE OF THE STUDY...................................................................................................................15 1.10 METHODOLOGY.........................................................................................................................15 1.11 ORGANIZATION OF THE STUDY....................................................................................................15 CHAPTER 1 LITERATURE REVIEW...................................................................................22 1.1 SMALL AND MEDIUM ENTERPRISES..................................................................................................22 CHAPTER 2 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.................................................23 FINDINGS..................................................................................................................................23
........................................................................................................................2 ISSUES IN SME DEVELOPMENT................................................47 2......47 2.........1 EFFECTS OF WTO ON SME.................4 SINDH SMALL INDUSTRIES CORPORATION........................................4 MYBANK.................................................................................................................................109 4.......2 STREAMLINING THE FISCAL POLICY...........42 2......................................57 2.......................................................81 3........113 BIBLIOGRAPHY.....................................................115 LIST OF TABLES....1 SMALL AND MEDIUM ENTERPRISES DEVELOPMENT AUTHORITY ....112 4.49 2.............................................................................3.......................................................2.....1...........................................................................................2 SME BANK....................................................111 4....2 SME BANK LIMITED.......................................78 3................1........................1 UNION BANK....................5 NWFP SMALL INDUSTRIES DEVELOPMENT BOARD..............................................................................................................................117 2 ........................................................................................1........................................2 PERFORMANCE OF SME BANK....................3 BASIC SITUATION OF SME AND THEIR SUPPORT STRUCTURES...................2..1 ESTABLISHING A COMMON DEFINITION OF SMES.................................................1 CURRENT STATUS OF SME........................................................64 CHAPTER 3 ANALYSIS.................................................................86 CHAPTER 4 CONCLUSIONS AND RECOMMENDATIONS........3 PROMOTION OF LINKAGE AMONG FIRMS....................3.......................................................54 2............................................1.........................................................2........................................................108 4..........................................................................23 2..........2.82 3......................3 PUNJAB SMALL INDUSTRIAL CORPORATION....................................6 THE DIRECTORATE OF SMALL INDUSTRIES BALOCHISTAN...............................................................................................................................................77 3.....................................................108 4....................2 SME PRODUCTS OF DIFFERENT BANKS................6 BOLSTER THE TECHNOLOGY TRANSFER AND R&D INITIATIVES......2......48 2.............................24 2.................112 4....................................2 ADMINISTRATIVE COSTS.....................................4 EASY ACCESSIBILITY TO FINANCE.....1 ORGANIZATIONS WORKING FOR UPLIFT OF SMES..116 LIST OF ABBREVIATIONS..............................5 STRENGTHENING THE HUMAN RESOURCE DEVELOPMENT OF SMES................................................................................................................2..................................................................................................................2.1......79 3.......................................................................................................................108 4.........................................................................................................................................................3 BANK ALFALAH..........8 STREAMLINING PRIVATE SECTOR ORGANIZATIONS...............................................................................7 EFFECTIVE ROLE OF GOVERNMENT INSTITUTIONS......................1......................46 2.........................................1 FINANCIAL RATIOS...................77 3..............................................82 3.............110 4............49 2..
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. and is bound to further widen the gap between rich and poor nations. contributing 30 per cent to GDP and adding to export earnings to the extent of 1/4th of total industrial sector contribution. Experience has shown that neglect of this sector is bound to keep that country below its potential growth level. particularly in Asian countries. SMEs account for almost 90 percent of privately-owned businesses and bulk of employment all over the globe. for which strength of the indigenous SME sector is one of the most forceful parameters. they are flexible and can adapt quickly to changing market demand and supply situations. They stimulate private ownership and entrepreneurial skills. but it is the common profile of service and manufacturing business concerns. SMEs are found to generate 80 per cent of total industrial employment. 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. Thus it is imperative for economic survival of Asian countries that they review their national economic policies. The SME sector covers all types of businesses. help diversify economic activity and make a significant contribution to exports and trade. They must boost up their economic competitiveness. If viewed in global scenario. they generate employment. 3 . which is a favored move on the part of the developed countries has increased the competition for SME sector in all the developing countries. The globalization and trade liberalization.Small and Medium Enterprises Small and medium enterprises (SMEs) are one of the principal driving forces in economic development.
not only with regard to its policy towards the SME sector but are also keen in forging actual business and trade links with SMEs in China. China is in a very comfortable position to face the challenges of globalization and in fact now poses as economic giant for developed countries. the small and medium enterprises have become very critical for economic growth. Resultantly. 1. its SMEs continue to play a major role in boosting export of products specially relating to computers. 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. This rule holds good for all countries of the world. The SME sector with the full backing of the government has been the main contributing factor for excellent performance of its economy. management.Though Japan has reached the most developed status.scale sector continues to assume the major role in economic development. Large Scale Enterprises (LSEs) of today were SMEs in the past and SMEs of today would be LSEs of tomorrow. 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. China is rapidly emerging as a powerful nation. This is particularly the case with Pakistan where although economy is in transition but still large . Developing countries are trying to replicate China. marketing expertise and latest technology. 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. its parts and those products which involve latest technology and are skill intensive. 4 .1 Role of SMEs in Economy Due to fast developing modern technologies and production scales. This sector is now very important for those nations whose desire is to be prosperous as it is the starting point of industrial development.
There are various advantages of SMEs. exports goods from Sialkot are worth $ 650 million and export of cutlery and knives from Wazirabad are $ 25 million.1 Promoting Industrialization through SMEs The SMEs in the developing countries are both large and growing. At present. 5 . imparting education and training to increase productivity and augment earnings of the informal workforce. leather goods. exports of surgical goods. 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. 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.1. The experience around the world suggests that SMEs have played an important role in industrialization of the country. Governments all over the world including Pakistan have recognized the important role of the informal sector in the economy. Considering its potential in generating employment opportunities. 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 worl Foreign Exchange Earnings SMEs are very important contributors of export earnings in Pakistan. For instance. More emphasis should be placed on the development of working skills than on entrepreneurship. the government should promote the SMEs by enhancing availability of formal credit. For example. 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.1. 26 percent of foreign exchange earnings is being contributed by this sector. SMEs not only earn foreign exchange but also exonomize on foreign exchange by relying mainly on domestic machinery and inputs.
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. Cheap labour.scale sector continues to assume the major role in economic development. SMEs in Pakistan The SME sector. marketing expertise and latest technology. In Pakistan. For example.Caterer of low income groups Realistically. SMEs' contribution to GDP is only 15 percent. purchasing power of major portion of population is very low and products of SMEs are compatible to their needs. 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. 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 6 . 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. 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. This suits Pakistan’s population so long as they are in the existing income bracket. This is particularly the case with Pakistan where although economy is in transition but still large . especially in the sub-continent has mostly been neglected and discriminated against in terms of government attention and access to credit. management. yet they employ 60 per cent of the industrial labour force. indigenous raw material is the reasons of low cost and thus low sale price of their goods.
it is estimated that there are approximately around 3. In a way this ensures employment of rural population in industrial sector. The different categories of businesses based on the number of people employed are given below: Micro Scale Enterprises: Less than 10 people employed 7 . vendors and agro-based businesses that cluster around townships and population centres have a tremendous capacity to provide employment). Furthermore.2 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.8 million SMEs in Pakistan which constitute almost 90 percent of all businesses. workshops. Direct and indirect contribution of SMEs to total exports is almost 50 per cent.rural sector. craft industries. the growth of the country's exports of value added goods. A breakup of this sector is shown below: Breakup of SME Sector of Pakistan M anufacturing 15% Trade 51% Services 34% Although no accurate data is yet available. household units. which: provide employment to over 80 percent of the labour force (since artisans. 1. achieved in recent years is indebted to low cost and labour intensive products manufactured by SMEs.
Does not use credit from formal institutions 8. Has an inherent nature or occupies temporary premises 6. Employs workers with fewer than six years of schooling In many cases. In some cases. an informal sector is also classified according to the complexity of accounting systems. 2 million Between 10 to 35 people employed Productive Assets limit of Rs. Does not operate at fixed hours 4. Employees not more than 10 people 2. Does not use electrical or mechanical energy 7.1 SBP Definition of SME SME (Small and Medium Enterprise) refers to an entity. 20 million Between 36 to 99 people employed Productive Assets limit of Rs. Avoids social regulation 3. 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: 8 .3. it is defined as a unit which fufills the eight conditions listed below: 1.Small Scale: Medium Scale: Productive Assets limit of Rs.3 Definition of SMEs in Pakistan There are many different ways in which the informal sector is defined in Pakistan. 1. Employs workers from the household of the head of enterprises 5. 40 million 1.
3. i 1. a. 20 million Between 36-99 people Productive assets limit of Rs. b. (b) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. b. Medium Enterprises 1. (c) Any concern (trading. Micro enterprises a.2 SMEDA definition of SMEs SMEDA defines micro. b. 2 million Between 10-35 people Productive assets limit of Rs. Small enterprises 3. 40 million 2. 100 9 . 2.3. small and medium enterprises as: 1. a. 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. million. Less than 10 people Productive assets limit of Rs.3 SME Bank definition of SMEs The SME Bank defines Small and Medium Enterprises as: 1.(a) A trading / service concern with total assets at cost excluding land and buildings up to Rs 50 million. service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.
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. It does not recognize small enterprises. 1.10 million including land & building. 1. 10 . excluding the cost of land. 20 million.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.3. PSDI defines medium scale enterprises with assets excluding land valued between Rs. The Punjab Small Industries Corporation (PSDI) sets this limit as Rs.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. valued between Rs.4 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. 100 million. 20 million and Rs.6 Punjab Directorate of Industries The PDI defines a small unit as one with fixed assets worth Rs. 1.5 Federal Bureau of Statistics Definition of SMEs The Federal Bureau of Statistics defines Small Enterprises as entities having less than 10 employees. According to PDI.1. The FBS does not define Medium enterprises.3.3. 10 million and Rs. 10 million of less.3. all enterprises with assets excluding land. 20 million excluding the cost of land and building. 100 million are medium scale units. 1.
Firms with sales less than $1 million spend 2x . Have a positive effect on the trade balance since SMEs generally use indigenous raw materials. skill and equipment to process these into finished goods. And result is SMEs’ producing 55 percent more innovations than LSEs’. The SMEs act as engines through which the growth objectives of developing countries can be achieved. Attracts direct foreign investment since multinationals and big conglomerates have started to outsource from countries with strong SME sectors.ii Converts the raw material within the country into semi-finished items and later pass it on the LSEs that have capital. This helps to achieve fair and equitable distribution of wealth by creating nationwide non-discriminatory job opportunities. reducing dependence on imported machinery. Assist in fostering self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes. 11 . Assists in regional and local development since SMEs accelerate rural industrialization by linking it with more organized urban sector. The low labour cost makes production of semi finished goods very economical for large concerns operating in international markets.3x more on R&D per $ of sales than the average. Contribute significantly to export revenues because of the low cost labour intensive nature of its products. Provide rural people an opportunity for income generation and personal growth since they can work at home. raw material or labour. Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities. Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency.
Out of many problems. It has a number of advantages over large scale industries. Most of local consumable products are produced by small scale industries. be it labour intensive or otherwise are manifold. the development of small and medium industries in any country has specific effects on the balanced and dynamic growth of a country. lack of formal technical education.5 Advantages of SMEs The advantages of SMEs in an economy. finance. It also generates cheaper goods and services to the general population which attempts to break the cycle of the ever increasing price hikes.6 Problems faced by SMEs SME sector in Pakistan over the years have been facing many difficulties due to negligence by Government of Pakistan. Similarly it is also strongly integrated into the domestic economy. Some of these are mentioned below: It generates more jobs per unit of capital and is more capital efficient. but also to his/her family members and associates. The small businesses are remarkably flexible because they operate near the customer. The increased employment and the goods/services produced has a positive effect on the GNP of a country. 12 . thus it has the ability to adapt according to the ever changing needs of the customer. 1. cumbersome procedure by Government agencies. 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. This becomes a catalyst in breaking the poverty cycle. non-internalization of new technologies.1. taxation and other charges promoting lack of documentation or incorrect documentation done by SME entrepreneurs. Therefore. Small industries use a high percentage of local raw materials. It taps the resources at the grass root levels. inconsistent government policies discouraging entrepreneurs to develop long-term vision. lack of basic infrastructure.
marketing etc. and most important of all, these factors discouraged commercial banks to extend financing to SME sector especially when specialized Government institutes such as SBFC, RDFC etc. failed to be feasible. Some of the other problems are described below: Poor record keeping by SMEs, particularly the accounting information. Lengthy and cumbersome application procedures, which discourage both SMEs and Banks. Poor operational performance. Problems with packaging bankable loan requests by SMEs. The limited knowledge of financing options for the SMEs. Stringent collateral requirements and other banking regulations. Low productivity of the SMEs and also the inability to improve quality over time. Lack of skills in banks for identifying needs and structuring the delivery of financial assistance to SMEs.
1.7 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.
1.8 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:
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 earningsiii. They are generally seen as labor intensive capital saving and capable of helping to create most of the on billion new jobs, the world will need in the neat future. Their adoptability and flexibility are considered desirable attributed in adjusting to a fast changing technological landscape. SMEs with growth-oriented management can adopt faster to change, create new products faster and bring them to market more swiftly, while feeding the larger companies with low cost, high value services. SMEs in traditional areas of production fit the classical stereotype of small-scale industry. Such enterprises do not exhibit economies of scale. In such enterprises, lack of economies of scale, and the low-skilled labor-intensive aspects of their production and management technologies, renders them an ideal vehicle for employment creation and poverty alleviation. Such enterprises survive on direct production to the market, or subcontracting with larger enterprises that produce goods for a larger market.
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.
1.9 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.
Information will be congregate for the research purposes from the following mediums: Primary data Libraries Articles Research material Internet Financial Magazines
Secondary data Questionnaires Interviews Discussions Visits
1.11 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 16 .
Presented in the following table is a summary of alternative definitions. UNIDOs definition for Developing Large Firms with 100+ workers. 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. Table 2: Alternative Definitions of SMEs World Bank since 1996 Grinde et al. The reality is that “small business” plays an important role in the economies of many nations has also been recognized. definitions that employ measures of size (number of employees. while the same size definition when applied to a different sector would lead to a different results. Hence. Firms differ in their levels of capitalization. net worth etc) when applied to one sector could lead to all firms being classified as small. The first attempt to overcome this definition problem was by Bolton Committee (1971) when they formulated “economic” and “statistical” definition.1 Small and medium enterprises There is no single. (1989:9-10) USAID in the 1990s Firms with fixed assets (excluding land) less than US$ 250. 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. Moreover. uniformly acceptable definition of a small firm. countries Medium Firms with 20-99 workers . profitability. Firms with less than 50 employees and atleast half the output is sold. turnover.Chapter 1 LITERATURE REVIEW Small and medium enterprises have been a subject of interest for the past many years. 1.000 in value is a small scale enterprise. sales and employment.
more than 50 definitions were identified in 75 different countries. These organizations are mostly Government based. 23 . In a study carried out by International Labor Organization (ILO). The enormous variety of criteria applied includes size of workforce or capital. production techniques. levels of energy consumption etc. client numbers. form of management or ownership. it can be said that there is no unique definition for a Small and medium scale enterprise. volume of sales.1 Organizations working for uplift of SMEs There are many different organizations working for the uplift of Small and Medium Enterprises in the country. with considerable ambiguity in the terminology used. FINDINGS 2.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 Chapter 2 From the various definitions above.
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. encouraging and facilitating the development of SME and to protect their interests. 2. Its functions are: 1. the importance of the SME sector cannot be overemphasized because: 1. SMEDA is creating a SME focus within the Government for this crucial sector of the economy which provides low cost employment opportunities and helps the economy in two valuable ways: Boosting exports Poverty reduction 24 . Facilitation on policy making and provision of overall planning Programming. 40 percent. 2. 3. 3. Its functions include.2. SMEs constitute nearly 90 percent of all enterprises in Pakistan. Industrial and commerce policies have been uniform for all scales of enterprises. the GoP has not distinguished between large and small enterprises in industry or trade. research and evaluation of matters related to SMEs in Pakistan Monitoring and evaluation. encouraging and facilitating development of SME and to protect their interests. They employ 80 percent of non-agriculture labour force Their share in the annual GDP is approx. the facilitation on policy making and the provision of overall planning. Historically.1. As a consequence of which specific needs of Small and Medium Enterprises could not be addresses. In the industrial development of a country. programming. research and evaluation of matters related to SME in Pakistan. inter alia. monitoring and evaluation.
financial and human resource training & development. unlike large enterprises in the formal sector. Local research showed that there were varying numbers of definitions in use by different organizations. In Pakistan. a small and medium enterprise is constrained by financial and other resources. 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. 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. Technical support. Removes all regulatory retardants in the shortest possible time 2. 3. Technical upgradation b. SMEDA has defined SMEs in terms of employment generated as well as investment in productive assets. The secondary criteria for classification of the SMEs. 2.However. Thus SMEDA first of all developed a uniform definition of SMEs that would be acceptable to all concerned. is the value of productive assets employed the enterprise. Assist SMEs with… a. especially in export markets 25 . 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. 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. The creation of a conducive and enabling regulatory environment. Adhering to a clear mandate and a logical path to achieve quantitatively verifiable targets SMEDA: 1. SMEDA’s definition of SMEs is primarily based on the number of personnel employed in the enterprise. marketing. Development of industrial clusters.
During this interaction. handloom. Institutional & networking support. SMEDA provides support to SMEs By creating networking amongst the concerned stakeholders. the issues are prioritized and the important problems are selected for detailed working through which the projects/ programs are identified. 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. marble & granite. At the same time. they also interact with the SMEs working in industrial sectors such as agriculture. This interaction takes place at the individual as well as collective level to provide proactive and responsible financial. 2. textiles. technical. leather. SME support through cluster development program is provided on two fronts: 1. 3. Access to formal capital comprehensive analyses of international trends 4. At the institutional level. SMEDA interacts with the stakeholders operating in such clusters on a regular basis and collects fist hand information about their problems and needs. management and marketing services to the SMEs. transport. 5. 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. These projects also include upgrading technology in a particular 26 . Such projects may include establishing a training institute. carpets and light engineering.c. By directly starting development projects in the clusters. building a common facility centre. weaving. Human resource development through training & organization structure development. Regulations and policy level support. fisheries. At the collective level. building a model plant with state-of-the-art technology for SMEs to emulate through reverse engineering.
Transport. Distribution Promotion etc) Company Incorporation. Textiles. 27 . 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 . Excise Duty etc Training & Development Information Services (Library. Leather.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. 2. Packaging. Handloom Weaving. This interaction takes place at the individual as well as collective level to provide proactive and responsive financial.the SMEs of Pakistan. technical. At the same time. Labelling. management and marketing services to SMEs. Databases. we also interact with the SMEs working in industrial sectors such as Agriculture.1. Fisheries. Custom Duty.industrial sector and starting a program lending scheme for this purpose in collaboration with the financial institutions. Carpets and Light Engineering. SMEDA carries out comprehensive analyses of international trends. Project briefs.1. Pre-feasibilities) Business matchmaking Adhering to a clear mandate and a logical path to achieve quantitatively verifiable targets. Export Registration & Regulatory Advice Sales Tax. Marble & Granite.
the issues are prioritized and the important problems are selected for detailed working through which the projects/programs are identified. building a common facility centre.At the collective level SMEDA addresses the problems and needs of SMEs in the form of an industrial cluster . SMEDA interacts with the stakeholders operating in such clusters on a regular basis and collects first hand information about their problems and needs. Such projects may include establishing a training institute. Up to now. carpet Weaving. Some of the important cluster development projects undertaken by SMEDA are: Textile/Apparel Ginning Technology Up-Gradation 28 . wooden furniture. if found valid. Marble & Granite. credit for auto vendors. cotton ginning. 2.a concentration of largely homogenous enterprises within a certain geographical area. At the institutional level. Dates & apples Processing. 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. SMEDA has been involved in cluster development projects in the areas of boat modification in Marine fishery sector. building a model plant with state-of-the-art technology for SMEs to emulate through reverse engineering. SME support through cluster development program is provided on two fronts: 1. ceramic kilns. Regulations and policy level support Institutional & networking support In the policy level support. are advocated with the concerned authorities. SMEDA provides support to SMEs by creating networking amongst the concerned stakeholders or by directly starting development projects in the clusters. leather garments. During this interaction. and glass bangles cluster. problems related to any Government department or Government policy/regulation are studied and.
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 Ceramics Kiln Up-Gradation: Common Facility Centre. Apple Treatment Plant in Balochistan (co-ordination with EPB) Fisheries Program Lending Boat/Engine Modification. Gujrat Sanitary Ware & Pottery Sector Kiln Up-Gradation 29 . 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.
Financial advice.) Company Incorporation. databases. 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. Information Services (library. etc. project briefs. Bangles Kiln Up-Gradation (Hyderabad) Agriculture Agri-Mall . Business plan development.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. SMEDA also provides human resource training services by conducting extensive training need analysis of different SME clusters. Accounting & Bookkeeping Services. Excise Duty. Technical advice (marketing advice etc. SMEDA has so far conducted more than 230 training courses and workshops focusing on developing sector specific skills. Sales Tax. Custom Duty. along with advice on specific problems. Export Registration. Business Matchmaking. Project identification. Pre-feasibility studies and Regulatory procedures. 30 . SMEDA helpdesk services include: Assistance in raising finance. business guidebooks). & Regulatory Advice. Electronic Commerce Support. As a part of its Business Development Services.
Other Asian economics have learnt from the Japanese success. A summary of the state of affairs in some of the Asian SME is presented hereunder: 31 .1. compromising thereby their viability abinitio.e. skills. 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.1. 2. based on global information and local wisdom achieved through cross-country analysis. technology.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. 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. experience of indigenous entrepreneurs and constraints of the government. Even when confined to work as subcontractors they have to undercut each other to secure access to business opportunities. management. finance. followed suit and registered significant improvement in their industries which are predominantly small and medium enterprises. 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. Pakistan is presently on the look out for remedial measures for its SME sector.SMEDA.
which hamper their ability to take full advantage of the opening of economy and the increasingly accessible world markets. The Government of Pakistan has thus constituted the SME Task Force which is to define the basic elements of our SME policy. Implementing change requires the formulation of a Policy for SME development and assigning specific responsibilities for its implementation and continuous improvement. A thriving Small and Medium Enterprise (SME) sector has long been recognized as one of the key characteristics of any prosperous and growing economy. In order to move forward.1. They contribute over 30 percent to the GDP.2.3 Projects undertaken by SMEDA: 2.1. Pakistan is an economy comprising mainly of SMEs. there has been concern that in Pakistan the SME sector has not been able to realize its full potential.2 million business enterprises in Pakistan. and account 25 percent of exports of manufactured goods besides sharing 35 percent in manufacturing value added. The areas of constraints are normally identified as labor.140 billion to exports. taxation.1. we need to develop a common vision for SMEs to be the real engine of growth.1.1 SME Policy Development: Promotion of Small and Medium Enterprises (SMEs) entails enhancement of the competitiveness of the economy and generation of additional employment. 32 .3. However. The SMEs continue to suffer from a number of weaknesses. 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. The significance of their role is clearly indicated by various statistics. 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. Our vision also needs to be achievable so we may find motivation in implementing phase. and finance and credit availability. Rs. According to more recent estimates there are approximately 3. trade capacity.
across the board recognition for SMEs as a sector requiring separate policy & regulatory space. finalized their recommendations. institute SME support mechanism in both public & private sectors. the cornerstone of the policy development process. In order to enable the SME Task Force to work effectively. methodology and effective management systems. i.e. SMEs. These two organizations are working together to provide technical assistance to various industrial sectors through Japanese Senior Experts. 2. propose counterbalancing measures to eliminate disadvantage of size. Textiles being the most vital sector of our economy and in order to provide support to our industry with the modern techniques. In order to achieve the above.1. The participation of stakeholders has been therefore.2 Industry Support Program SMEDA and JICA (Japan International Cooperation Agency) have initiated an Industry Support Program in Pakistan. and SME in particular. JICA has placed five textile experts as Senior Volunteers (SVs) at SMEDA The tenure of each of the SVs is for two years. define SMEs that qualify for support. The broader objectives to be achieved by this policy exercise are. working Committees were setup to carry out technical analyses and deliberate the findings. wide scale consultation with the Provinces is being undertaken to elicit views of the ultimate beneficiaries. and to cope up with the challenge of post WTO regime. Where the SME Task Force deems it necessary or useful. 33 . the SME Task Force is composed of diverse sectors and levels of Government and includes major stakeholders of the private sector.3. it may invite specific organizations or individuals to assist its work. The Working Committees after due deliberation.1. improve support delivery mechanisms and establish policy evaluation and review systems.As there are many cross-cutting issues to be addressed. It may also co-opt further members. remove unnecessary regulatory burden.
cost controls and effective management techniques (based on the needs of each individual unit). In the process of technical guidance. This cell is comprises of textile professionals and interpreters at Lahore and Karachi. With more than 35 years of experience. Japanese expert(s) are attached with individual industrial unit(s) for a certain time period. Normally. 22 Knitting and 35 Garment factories) have received the direct benefit of this program in all over the country. 21 Weaving. expertise and methodology to the local industry on truly voluntary basis. As a part of the program. Since the inception of this program in March 2004. 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. quality. 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. a total of 94 factories in different sectors of textile industry (including 16 Spinning. efficiency.These SVs are presently working for technical support to Textile Industry in Pakistan. These professionals are working closely with the SVs. coupled with pertinent education in respective fields. the selected units are evaluated thoroughly by the experts and comprehensive advice and guidance is given on improving the levels of productivity. 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 34 . All the Senior Volunteers are based at SMEDA Lahore with travel to other cities of country as per needs of the program. these experts transfer their knowledge.
3. the relevant industrial units are invited to be the part of this program as model unit(s). The project is initially focused on facilitation of Textile and Leather sectors with more sectors to be added later.com. It is anticipated that the program will lead to improvement of textile industry at various steps of the value chain. The concerned trade associations would also be requested to select their members who are relatively small to medium scale in size.iin.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.1. In order to share the benefits of the expertise and knowledge of the Japanese Experts. 35 . 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. These improvements will lead to higher productivity of Pakistani manpower and better product quality for enhancing exports for the textile sector.1.3 Industrial Information Network The Industrial Information Network (IIN) (http://www. After the departure of these SVs. effort and investment for moving on to a higher level of business operations.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. Upon request. the Industry Support Cell at SMEDA with Pakistani professionals will continue to provide these services to industry. genuinely interested in up-grading their level of operations through the Japanese experts and are ready to put-in the required time. 2. Cost controls Skill up-gradation at middle management level Introducing concept of on-the.
Access to the other businesses will enable Pakistani businesses finding and exploring international markets. 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. government rules & regulations. 36 . trade facilitation bodies and the Government institutions. IIN is designed to become a one-stop-shop for businesses for all their Information and eCommerce needs. 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. IIN also offers elearning opportunities to executives with focus on business management tips & tricks. IIN will act as a catalyst to trigger a ripple effect and usher paradigm shift in the way businesses are currently operated in Pakistan. 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. accessing real time market information. IIN offers comprehensive sector specific information as well as information on financing. and import & export procedures etc. access to the new technologies and information for work flow enhancements. suppliers.Pakistani businesses face a severe challenge in international market competitiveness due to lack of IT & eCommerce infrastructure. In addition. “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. In short. enabling online buyer seller interactive exchanges. business startup procedures. Ministry of Information Technology & Telecom (MoITT). 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.
The specialized services and technology offered through such an arrangement will be those which do not justify investments by a single enterprise. The SMEs will use these facilities for improving quality and for value addition in their products or processes.1. 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. These funds will be utilized for establishment of Common Facility Centers (CFCs) in major SME clusters throughout Pakistan over a period of 5 years. whether manufacturing or services. SMEDA. The consultant firm was to comprehensively review SME related issues and design well-sequenced priority measures to be implemented under an ADB supported SDP.4 Common Facility Centers In May 2002. will provide machinery and know-how. GFA of Germany to design the SME Sector Development Program (SDP) for Government of Pakistan. The CFC Scheme will be open to all SME sectors. 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. Typically these Centers (expected to be around 50) provide a common pool of machinery. the Asian Development Bank (ADB) signed a consulting agreement with M/s. where the establishment of a CFC can contribute in at least one of the following ways 37 .1.2. testing/inspection or technology related services for the collective up-gradation of SMEs. Based on the findings of the Consultants. the GoP is to extend a grant of US$ 12 million to SMEDA for supporting its Cluster Development Program. whereas the local partners will provide space and manpower for the CFC. the Government of Pakistan (GoP) has signed an agreement with the Asian Development Bank (ADB) for initiating an SME Sector Development Program.3. through this grant.
and would complement the activities being carried out by agencies such as SMEDA. Fans in Gujrat 5. Ready-made garments in Lahore 4. amounting to a total of US$ 235. This project has hitherto been funded largely from two separate trenches of UNIDO seed money. released respectively in 2001 and 2003.5 Cluster Development Given the large number of existing SME clusters. Karachi 3. Export Promotion Bureau (EPB) and the National Productivity Organization (NPO).3.000. Gems and Jewellery in Saddar. A project was initiated in mid-2001 covering five pilot clusters: 1. Leather and leather products in Korangi. supplemented by contributions in kind from various Pakistani counterparts in the public and private sectors. in some cases from an already high base. most of which are widely acknowledged to be performing below their full potential. 38 . Cutlery in Wazirabad. a cluster development program has been recognized as being ideally suited to Pakistan. All of these clusters have been selected by the Pakistani counterparts for their potential to increase significantly their export revenues. 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.1. Karachi 2. This relatively modest outlay.1. Value addition into a product or process New (export) market development Enable compliance with international standards or statutes 2.
some of which have begun to be implemented. 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. many of which are existing or potential exporters. specialized suppliers of raw materials. These include: Efforts to benefit from common opportunities and overcome common weaknesses by taking advantage of external economies (e. innovation and collective learning. 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. 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 39 . popularizing the cluster development concept and UNIDO methodology among public and privatesector decision-makers in Pakistan.g. coordinated ongoing activities.) Promoting the emergence of specialized technical. 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. sector specific skills etc. Comprehensive diagnostic studies carried out in each of the pilot clusters and corresponding action plans for follow-up sub-projects drafted. A national focal point established. components and machinery.
In the particular case of the selected clusters. to enhance the R&D potential of these institutes. Emphasis will be placed on strengthening these institutes and promoting and improved alignment of the services provided by them (e. In addition.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. 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. In 2003 the Government of Pakistan announced its decision to 40 . with regard to vocational. Wherever possible and appropriate. Efforts will also be made. this trust building will initially be channeled towards helping the cluster actors to formulate and promote a common brand or logo. and the measures they can take jointly for their common advantage. and based on the trust-building and networking activities described above. but which are still operating at a very low level of effectiveness. and achieved considerable successes. Current Status: The awareness-creation role of the project has been particularly important. management and marketing training) with the existing and potential requirements of their respective clusters. with the support of international experts where necessary. since they are comprise industries with a strong export potential. Lastly. the project will seek to enhance the institutional capacities of the clusters. these activities will facilitate joint actions on both the supply and demand sides. The entrepreneurs will also be helped to understand more fully the opportunities and challenges facing their industry.g. such as the development of raw materials and marketing consortia for the ultimate up-gradation of all tiers of these clusters. achieve increased (external) economies of scale and enhance their competitive advantage. 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.
program may subsequently be expanded In addition. The EPB will make a further contribution for the new clusters. 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 as co-funding to the implementation phase of the program.000 have already been transferred to UNIDO for implementation. would give the resources to move forward with the cluster development program in Pakistan on a broad front. 41 . allocated an amount more than US$ 200. It is expected to allocate a proportion for UNIDO's SME cluster development activities in Pakistan. First trenches of US$ 70. it will also enable UNIDO to participate more effectively in the cluster development project embarked upon by SMEDA and PSIC.000 for preliminary stages of project in 20042005.adopt SME cluster development as a principal element of its trade policy. In particular. 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.000 in cash towards the implementation of the follow-up sub-projects in the five pilot clusters. EPB declared its willingness to provide substantial sums to use UNIDO’s services for the development of export-oriented SME clusters throughout Pakistan. UNIDO has also added USD 50. Italian donors have also approved Euros 1. to be deployed jointly with SMEDA. 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.4 millions. with UNIDO’s support.
When the present management was put in place in SBFC in February 2000. Guidance to fresh and existing entrepreneurs In the past.org/financial percent20products. inherits only the best practices.1. Non-performing loans. institutions like SBFC have lacked in performance and efficient client handling. a great deal of effort has been undertaken for turning around the institution and putting it on the right track. product development and lending while providing state-of-theart services to SMEs through out Pakistan.htm 42 . All entrepreneurs who have a proposal with potential can gain access to loans by SME Bank. exorbitant expenditures. As part of the financial sector restructuring.1 Introduction1 On 1st January 2002. therefore. 1 http://www. lack of credit appraisal skills. the SME Bank has been established through an amalgamation of SBFC (Small Business Finance Corporation) and RDFC (Regional Development Finance Corporation). It provides loans for acquiring raw materials and adding value for products that are export oriented. adequate debt equity rates and securities. overstaffing and lack of institutional integrity were some of the major issues affecting the organization’s productivity and ability to function.2.2 SME Bank Limited 2. 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. This Bank aims to fulfill 1. The new SME Bank.smebank.2. These efforts are guided by a focused mission statement and vision. the institution was a sad case of inefficient management.1. The requirements for obtaining a loan are a viable business plan. Since then. Financing needs of small and medium enterprises 2.
1. Acceptable securities Facilities: All entrepreneurs having proposal with potential can gain access to loans by SME Bank.2. The requirements for obtaining a loan are a viable business plan. Such enterprises are vital to our economy since these are labor intensive and thus create employment opportunities.2. A viable business plan 2.2 Products & Services: 2. adequate debt equity rates and securities. It is Bank’s effort to assist and support enterprises that use indigenous raw material. SME Bank is reaching out to small and medium entrepreneurs through: 1.2.1. Adequate debt equity rates 3.2. Program Lending (Hunarmand Pakistani Schemes) 3. add value and are export oriented. Leasing through its subsidiary Bank’s three main requirements are: 1. Working Capital & Medium-Long term financing 2.1 Financial Products Any commercially viable business proposal merits SME Bank’s support. It provides loans for acquiring raw materials and adding value for products that are export oriented. 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 43 .
According to this approach. Customized financing products for the following are also available: 1. Carpet Manufacturers 4. Carpets Manufacturing 7. Schemes for the following sectors have been developed: 1. Beacon house Informatics 8. Women Entrepreneurs 10. CNG Kits 5. Date Processing 3. It is expected that a larger number of SMEs can be reached through such schemes. Marine Fisheries 2. The lending criteria and credit analysis for such proposals varies on a case-to-case basis. Gems & Jewellery 5. Beaconhouse School Systems 3. Gems & Jewelry 6.Customized Services Bank generally adopts a Program Lending approach for its financing activities. Information Technology 4. are processed individually. Motorcycle Rickshaws Enterprises. OEM (Original Equipment Manufacturers) – Autoparts 44 . specific sectors with large SME presence have been identified and specific lending schemes have been designed targeting these sectors. which are commercially viable and meet SME Bank's eligibility criteria but do not have a Program Lending Scheme available. Power Looms Up Gradation 2. Beacon house School Systems 9.
to Pak Rs. 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 45 .2.2 General Lending Criteria Financing Limit SME Bank can provide financing within the range of Pak Rs.2.1.000.50. 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..2.
000 people. 17603 lacs to 6319 small entrepreneurs in the province of Punjab while against recoverable loans. 8 billion and job opportunities for 60. 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. PSIC has disbursed an amount of Rs.3 Punjab Small Industrial Corporation In order to facilitate the expansion of the cottage industry in the province. 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. the Punjab Small Industrial Corporation (PSIC) was established. 13. 2 billion per annum have been developed for setting up of small industrial units which have provided jobs to over 26000 people.2. Inspite of financial constraints.6 million. There is enough potential for expansion of value addition upto Rs. it has recovered Rs. the Corporation continued its two credit schemes of rural industrialization program and self employment scheme for the small entrepreneurs.1. 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 46 .
Wood working. Cutlery Surgical instruments and Agricultural implements. skill upgradation and run training program. to small entrepreneurs. preparation and implementation of development schemes pertaining to small industries in the province of Sindh. provision of industrial infrastructure in industrial estates and extend' financial help. The Corporation has established 17 small industrial estates in almost all district headquarters of Sindh with 1983 developed industrial plots with required infrastructure facility. 2. 2.1. 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. electric wiring. The SIDB has established nine small industrial 47 . The Corporation is also running 64 Technical Training Centres where training has been imparted to 1625 pupils.4 Sindh Small Industries Corporation The main function of SSIC is planning. 96 million to 179 small industrial units under this scheme.1. SSIC has established 51 training centres of traditional crafts where training has been imparted to 1917 students in various trades. wood working. 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.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. gas welding and ready made garments etc. The SSIC has sanctioned 258 applications for 1998-99 and disbursed loans worth Rs. radio / TV repair. The training is imparted in both traditional and non-traditional fields like carpet weaving. 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.
The Board has established (our regional offices at D. No allocation has been made in public sector development program (PSDP) for last three years. The poor performance is due' to financial and institutional constraints. Peshhawar. The total sanctioned strength of trainees in the centers is 1470 against which 803 trainees are on roll. The Board has established Arts and Crafts. to women.6 The Directorate of Small Industries Balochistan The Provincial Directorate of Small. Industries.Khan. The Board has closed 10 carpet training centres and handicraft development centers after seeking desired results.I. handicraft development. 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.estates throughout the province with all basic amenities which contain: 1620 factory plots. dari making etc. The Directorate is also running four handicraft development / training centers. out of which 1222 are already allotted. Galleries at Peshawar and Islamabad which are generating enough revenue and promoting traditional handicrafts. In technical training centers a large number of persons arc obtaining technical.1. Abbotabad and Mingora (Swat) to facilitate 'small investors. 48 . on nominal interest. Sibi and Loralai are facilitating the prospective small entrepreneurs of the province. know-how in several trades such as carpets. is serving the cause. four zonal offices at Kalat. 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. 28 carpet centers and three sales & display' depots for providing external exposure to local handicraft. and knitting training centers are established for imparting training. while 5 carpet training centers and 4 handicraft development textile centers are operative where 1936 pupils are being trained. The Directorate lagged behind its other counterparts in other provinces in many fields. Balochistan. Under its women development program. six embroidery. The Board has provided financial assistance of 187 million. 2. It has only established one industrial estate in Quetta with all necessary industrial infrastructures.
e.2. SME Group strives to apply a unique blend of finance.1. Its features include Payment of Mark up on utilized amount only. industry and technological expertise to keep pace with dynamic markets and translating insights into solutions that meet your diverse financial needs. seeds and pesticides. For a more focused approach to the unique needs of different markets &/or geographical areas. 49 .1 Union Bank Union Bank is one of the many banks which has a reputable management. Markup calculated on daily product basis and payable on monthly basis. Make free online transactions and get pay orders/demand drafts made. Now you can use the facility of LG without paying bank commission.2.2.2 SME Products of Different Banks 2. It also understands your needs and has efficient solutions to offer to the problems. It extends a credit line up to Rs 20 million. SME Group has four Regional Heads who oversee customers in their region. 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. Agri Deal not only provides funds to purchase fertilizers. has a vast network of financial partners across the globe. commands extraordinary respect & recognition in the market. i.1 Agri Deal Agri Deal is a Running Finance Facility for the dealers of agricultural inputs. seeds and pesticides. but also provides Letter of Guarantees (LG) on highly competitive terms and conditions. fertilizers. The different products that they offer are described below: 2.
2 Business Power . Rawalpindi. Faisalabad or Multan. 50 . Peshawar. Between 25-60 years old. Hassle free simplified documentation. you can access your account from more than 50 branches from all across Pakistan. 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. With the Union Bank online connectivity. Sialkot. 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. Islamabad. 2.1. 1 million to Rs. Running your present business for the last 3 years. Business expansion and growth becomes a reality not a dream. It can extend a credit line from Rs.2. Gujarat. Gujranwala. Business Power. 20 million. With the comfort of availability of capital. 36. Everyone can avail this powerful facility if the applicant is : A resident Pakistani living in Karachi. one of its kind product where the only collateral required is property. seeds and pesticides from the companies and get a better profit margin by availing cash and volume discounts. 20 million depending on the market value of the property.000. It is a stand-alone. Willing to provide your own or co-borrower's residential property as a security. Earning a net monthly income of at least Rs. Lahore. you can easily avail business opportunities and expand your business as much as you want. The credit line offered ranges from Rs. Book fertilizers. you can easily enjoy various schemes offered by the companies. With the availability of surplus capital. 1 million to Rs.
Having a Performance Certificate of at least last three years form the MNCs or 2.2. This product helps them avail cash and bulk purchase benefits without increasing pressure on their current cash flow.5 million to MNCs and LSEs Age is between 22 and 65 years. Union Bank’s Elektro Finance is an 51 .2. Book bigger orders earn more profits Business expansion and growth becomes a reality not a dream.1. Pay cash to procure raw material and reduce the cost of production thus making more profits. Markup calculated on daily product basis and payable on monthly basis. 1. rather it will provide them with a financial muscle to further expand their business horizons.1. Make free online transactions and get pay orders/demand drafts made up to a certain limit.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.2.4 Elektro Finance It is a unique Running Financing Facility for the dealers of electrical and electronic home appliances. Fulfill business requirements through own sources. Pakistani Citizens. Features Payment of Mark up on utilized amount only. Authorized Vendors of Multinational (MNCs) and Large Scale Entities (LSEs). no Pledge is required. Minimum annual sale of Rs. Eligibility Criteria LSEs.
Its features include: Payment of Mark up on utilized amount only. Markup calculated on daily product basis and payable on monthly basis. they try to avail them. Its features include: Payment of Mark up on utilized amount only. businessmen often have short term capital requirements.easy way to success for the authorized dealers of electronics & electrical appliances. Facility to avail cash free limit of 30 percent against every Purchase Order.1. but can not because of shortage of funds. Union Bank brings a Running Finance Facility which is made according to your requirements and at very competitive rates. 10 million by just following simplified eligibility criteria without burdening them with laborious paperwork.2. 52 . Hassle free simplified documentation Collateral Free Pledge based facility. With the availability of surplus capital. Free Warehousing facility. To cater to the short term needs. and when they come their way. Union Bank’s Elektro Finance will instantly extend them a credit line up to Rs.5 Rang hi Rang As a dying and printing operator in the textile industry. informal sources of lending are available but at very high mark up rates. and thus the opportunities are not viable any more. Markup calculated on daily product basis and payable on monthly basis. Union Bank pays for the Insurance. you can easily avail business opportunities. 2. Every businessman is in search of golden opportunities.
you can easily avail business opportunities. By using Rang hi Rang. Through this facility fabric weavers can obtain a Running Finance Facility ranging up to Rs. Tana Bana not only provides funds to purchase raw materials. 7 million by mortgaging their residential. get the raw material on cash and maximize profits by availing cash discounts. Its features include Payment of Mark up on utilized amount only.6 Tana Bana Union Bank’s Tana Bana is an exclusive credit line for textile fabric weavers to procure cotton yarn. 53 . you can access your account for more than 50 branches from all across Pakistan. By using Tana Bana. Business expansion and growth becomes a reality not a dream.1. Make free online transactions and get pay orders/demand drafts made up-to a certain limit.2. Now you can use the facility of LG without paying bank commission. 2. but also provides Letter of Guarantees (LG) on highly competitive terms and conditions. Hassle Free simplified documentation. Markup calculated on daily product basis and payable on monthly basis. With the Union Bank online connectivity. commercial or industrial property. but also provides Letter of Guarantees (LG) on highly competitive terms and conditions. Rang hi Rang not only provides funds to purchase raw materials. get the raw material on cash and maximize profits by availing cash discounts With the availability of surplus capital.
g.I. Quality control. product design and development.000 upto an amount of Rs. Quetta. Services are also available to assist SMEs to develop and write bankable business plans.Khan.50.2. D. Marketing. Up to 60 percent would be financed by SME Bank.2. and Development of bankable business proposals. Gilgit. Sialkot.30 Million. SME Bank also provides Business Support Services in the areas of Management.2 SME Bank SME Bank Limited is a public limited company incorporated in Pakistan on October 30. The bank has an exclusive mandate to provide financial services to the hitherto neglected SME sector. Multan. SME bank launched Commercial Banking Operations at its Islamabad Branch. which represents that at least 40 percent of the project’s/enterprise’s financing should come from the borrower in the form of equity. Gujranwala. Banking at SME Bank is based on one of the leading Banking Software available in Pakistan. stronger marketing channels and assist in business start-ups and expansions. The bank is operating through 35 branches with its network in SME concentrated areas e. etc. Sialkot. 2001 by merging Small Business Finance Corporation (SBFC) and Regional Development Finance Corporation (RDFC). etc. Hyderabad. The bank finances all projects/enterprises that are commercially viable and meet the Bank’s lending criteria. BSS (Business Support Services) are provided in the areas of marketing. Product positioning. Banking Operations also started at Lahore and Karachi Branch followed by Peshawar. SME Bank extends two financial assistance packages: 54 . Sukkur. It is mandatory for the borrower to meet the debt: equity ratio of at least 60:40. The bank ensures that financing is used for productive activities. In May 2005. Mirpur. accounting. Product innovation and development. Acquisition of new technology. SME Bank provides financial assistance from Rs. Gujranwala and Faislalabad Branch. It is a Development Financial Institution (DFI). They facilitate better pricing and selling strategies.
000 to Rs. building or house and hypothecation of stocks and equipment. The bank however. a specific sector with a large SME presence is identified whereby a lending scheme is designed according to the sector requirements. The eligible applicant should have at least 2 years of relevant experience for applying to the program-lending scheme. Such borrowers are assessed separately on a case-to-case basis. Whereas. can have customized terms and conditions which are suitable to the clients. The Program Lending Schemes for Cutlery. The mark up rate is 16 percent to 18 percent for both the schemes. The bank adjusts repayment of loans according to the turnover of the business while assessing the cash generation abilities of the business. demands for traditional collateral and security including mortgage of land. 30 million and can not exceed 60 percent of project value and normally stands below 50 percent. repayable over a maximum period of seven years. Surgical Instruments.2. The financing limit ranges from Rs. By doing so.2. 50. The repayment period is determined by the nature of project and linked to its cash flow. financing under the program-lending scheme though generic in nature.2 Project Lending Scheme: The Project Lending Scheme caters to those enterprises. Personal guarantees of 55 .2. and Fan industry have been developed and launched.2. The aforementioned financial products are by nature term finances. schemes for Date Processing. Any profitable running business can qualify for bank s financing. Women Entrepreneurs. Gems & Jewellery.2. CNG Stations. which are commercially viable and are able to meet the banks’ other eligibility criteria but do not fall under the Program Lending schemes. Therefore. the bank expects to reach a large number of SMEs. Doctor/Dentist Clinic. and Wood Furniture Manufacturing are under development. Transport. 2. Marine Fisheries.1 Program Lending Scheme: Under the Program Lending Scheme.
2. ice-cream parlors Vocational institutes (stitching. 000. 000.2.300. 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. beauty clinics Fitness (gyms. parlors. Swimming pools. arts and 56 . 2. cooking. The mark-up rate is also flexible and ranges from 12-16 percent per annum.50. 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.persons and Trade Bodies or Corporate guarantees that have the capacity to repay the loan amount are acceptable for loans up to Rs. Personal care and grooming (salons.3 Women Entrepreneurs Program This program is in place to facilitate women entrepreneurs in their business and productline expansion. The financing limit given in this scheme is between Rs. Some other benefits include: Repayment Period: Tenure of 1-3 years with no grace period. bakeries. designing.100. roll-outs and franchising. fast food. painting. aerobic centers) Eateries (restaurants. 000 and Rs.
2. Cutlery.3 Bank Alfalah With the objective of diversifying the Bank’s risk.2. Carpet Sector. Gems & Jewellery. CNG Kits. Surgical Instruments. Qingqi Motor –Rickshaw. and Women Entrepreneurs.1 Alfalah Karobar Finance The finance under this scheme is provided on a running finance basis. BAFL has launched diversified products to cater the needs of small and medium businesses.2. The target customers for AKF are small and medium business enterprises. Doctor’s & Dentist’s Set-up. Beacon house School. finished goods and other working capital requirements. The purpose of facility is to finance procurement of raw material. One of the products is “Alfalah Karobar Finance” which is discussed below: 2. Auto looms. provide further opportunities for self-employment.4 Hunarmand Pakistani Schemes: Small-scale activities are being financed by the SME bank under the “Hunarmand Pakistani Schemes”. 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. The scope of industries under the “Hunarmand Scheme” as well as credit facilities will be broadened to 2. The facility can be allowed in the name of the firm/companies and as well as in the name of 57 . Hand-loom Weavers.2. like Auto parts. The “Hunarmand Pakistani” scheme has attracted a lot of attention. Beacon house Informatics. Fan Industry.3. This will greatly help stimulating no only the economic activity but will also generate employment in the country. Track record of 2-3 years in the same field of business 2. CNG Pumps. Furniture Manufacturing. Fisheries.
Unlike the loan extended in the case of CF is not returned in installments but on the end period basis. 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. 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. 58 .individuals who are proprietors and partners in these enterprises. Under this type of financing the loan is repaid in installments of six months. ii. Current Finance: Current finance (CF) is basically meant for financing the working capital requirement which includes the day to day operating finances. 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. 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. This flexibility is provided in view of the customer comfort. Here the loan is granted for a time period of one year. 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. 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. 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. Types of Finances The AKF includes two different types of SME financing these include the: i.
As per the objectives of the bank which is to provide easy access of finances to the undeveloped sectors and areas of the country. 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 59 . It has various branches in all the main cities of Pakistan. being their main areas of concentration. 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. Chakwal etc. Mandibahauddin. Moreover the Enterprise should be operating the existing business at least for the last 3 years. covering Lahore. Faisalabad.Accessibility Bank Alfalah Limited has highly enhanced the accessibility of its services through its network which is spread through out the country. Quetta Peshawar etc. 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. this makes it difficult for an individual or a group of individuals to establish a new business. (Facility will be provided on the assessment of the running business). Islamabad. These include Attock. it also has some branches in some smaller cities for various remote areas to access the credit facilities. Bhurewala. It is noticeable that although it operates number of branches but their network distribution is not uniform. in that case only the citizens of Pakistan are able to access the credit. The province of Punjab and Sindh (Karachi). Karachi. 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.
It is also important that the property is free from all encumbrances 60 . 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. The bank safeguards its interest by making sure that all written evidences are articulate and hold transparency. 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. In case of limited companies. 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. Absence of any kind of restriction on transfer of title or mortgage on the property is necessary for banks interest.for a business to access finances. 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. Security The bank has engaged in a very secure mode of credit offering which aids in enhancing the sustainability of the product. Similarly a defaulter (including that of Credit Card) or a legally incapacitated person cannot have access to the finances. 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. This restricts such an individual form obtaining credit even when he fulfills other criteria and is despair need of credit. 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. The main idea behind securing the principal is restricting to the laid down procedures and the collateral.
One month before the expiry of the credit line. 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. 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.The primary risks in finance against property are concentrated in the title of property. 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. Risk limits The aggregate exposure on the SME sector shall not exceed the following limits specified in the Prudential Regulations: 61 . 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. In case of joint owners. creation of enforceable mortgage and erratic price fluctuation in the residential/ commercial market. the repayment record and utilization of the credit facility shall be reviewed and if found satisfactory. valuation.
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.100 million. Moreover 70 percent of the assessed market value of the property to be mortgaged as security against the facility.75 million. the total facilities (including leased assets) availed by a single SME from all the financial institutions shall not exceed Rs. Cost Effectiveness 62 . in case financial statements are not available or can not be prepared by the income verification agencies. The minimum amount of finance to a borrower under the AKF shall be Rs. 000 and maximum limit up to Rupees 10 million. the maximum exposure on a single SME shall not exceed Rs. This reduces the degree of damage in case there is default since the loan amount is less.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.500. This ensures the mitigation of risk as a result with the reduced amount of exposure to risk the sustainability of AKF is enhanced. However.150 million provided that the facilities excluding leased assets shall not exceed Rs. In addition. the finance is limited to three times the annual income estimation as per the borrower’s last Tax Assessment Order.
Similarly the bank also incurs a CIB fee which is Rs 100 for loan with liquid securities as collateral and Rs. 2500 and for those secured by the liquid security the charges are Rs. 200 for loans with a business property as collateral. Currently the rising KIBOR rate has added to the increased cost of lending. 700. 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. 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. and the cost of legal documents depends on the cost of stamp paper which is further dependent on the amount mortgaged. which costs Rs. 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. 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. The other costs include the cost of Insurance: This cost is not fixed and its rate is dependent on the insurance company. on the other hand under high levels of risk the customer may be asked to mortgage 100 percent of his/her property.The interest rate is related to the KIBOR rate under this relation two types of interests are charged these include the following.1000. 63 . The percentage of the mortgage is variable depending on the customer credibility. 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.
000 to Rs. The bank has a "Easy Credit Commercial" scheme.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.000.4.2.2. quick approval and easy documentation 64 . Any Businessman or a Small Trader.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. The maximum financing is from Rs. can easily apply for a loan of Rs.000 to Rs. the Bank has launched a credit scheme. 1.100. The features of this scheme are low markup Rate.000 without any collateral security. 2. 100. 100.000.000 against two personal guarantees.
causing it Rs. it will be required to obtain as many echo labels for them. 2. . It is due to lack of awareness and smaller size of the businesses. The costs are too big for the SMEs to bear. employment etc. like automobiles. 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). it is going to be the buyers who’d determine how many toilets a factory needs to have for its workforce. 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. 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. For instance. especially in the textile sector are worried that they will be at a disadvantage if WTO is introduced in Pakistan.Chapter 3 ANALYSIS 3.1 Effects of WTO on SME Most of the businesses in Pakistan. 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. Most of the difficulties would be faced by the textile sector that contributed more that 65 percent of the country’s total exports. Even if somebody wants to do something in this respect. 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. he cannot because of the very high costs involved. SMEs could never fulfill the compliance requirements of their buyers for being very costly. Other sectors.5 million annually”. would not feel much impact of the walls being erected by the buyers because they were not much into exports. They do not realize that it is not just about the textile sector alone. Some facts are indicated here to facilitate serious analysis issues involved. there is a lot more to do than that. “If a company is making five products.
the quality improvement and value addition were seldom accorded a serious consideration. During the last few years.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. 78 . and create employment opportunities. bed linen. The industry flourished primarily at the cost of consumers of captive domestic markets. 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. The quota manipulation by the vested interests also encouraged rent seeking tendency in the industry. Pakistan’s quota management policies were also not used as an instrument of value addition. women garments and fancy apparels.1. 2. towels and selected items of ready made garments have shown an appreciable rising trend in exports. 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. The impact of full integration is likely to hit these segments hard. 3. 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. Historically. the country’s textile sector has enjoyed high protection and for longer periods than necessary. The restrictive regimes indirectly protect inefficient and weak producers by assuring market share in the importing countries. Cotton yarn and fabrics have the largest manufacturing base. promote entrepreneurship. 3. However Pakistan’s textile sector is relatively weak in synthetic fiber products. the segments of knitwear. the manufacturers / exporters generally accorded priority to quantity rather than quality. In order not to lost quota entitlement. In the absence of genuine competition.
393 Billion to SBP against its liability and adjusted another Rs. This bank has been in profit since its inception has taken these steps to prepare for privatization by the end of June 2006. It is expected that this decision will reduce the Recovery operations cost considerably. 59 million in 2003 which also resulted in an improved credit rating. the Recovery Operations Division has outsourced the part of recovery operation of the areas where no bank's branch exist. as a DFI. 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.3.2. 3. and A2 in the short term. credit rating of the SME Bank was BBB in the long term.Undergoing a restructuring program has brought about a turnaround in the financial position of the bank. which has been upgraded from A3. SME Bank. declared an after tax profit of Rs. The paid up capital of the bank has been increased to Rs. The bank has also successfully implemented a voluntary staff separation scheme as part of the restructuring. 3.3 Billion receivable from it. The bank has paid Rs. To optimize the organization's operations.897 2004 6.1. 486 million for 2004 as compared to Rs.72 37.1 Billion.67 79 . A branch rationalization program has also been implemented resulting in substantial savings annually.1 Financial Ratios Table8: ROA and ROE of SME Bank ROA 2003 5. The remaining liability is to be liquidated by 2006. Based on the latest credit rating issued by JCR-VIS Credit Rating Company Limited. Profit after tax for the year 2004 is almost 14 times higher as compared to the year 2003. under which about 700 employees have been voluntarily severed. with a “stable” outlook from previous BB+.46 ROE 84.
1. 80 . Upon analysis it is revealed that the ROE decreased in 2004 to 37. But this is due to the fact that major restructuring was being done in the bank. 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.2 6 5.8 5.1 Return on Assetsiv 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.4 6. An ROA of 220.127.116.11 percent of year 2004 is considered satisfactory. Thus. This happened due to a considerable decrease in the amount of asset-base. it is the most stringent and excessive test of return to shareholders.67 percent from 84. ROA 6.72 percent in 2003.6 6.2 Return on Equityv One of the most important profitability metrics is return on equity. The ROA in the case of SME Bank was the favourable for both the years. Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet.6 2003 2004 ROA 3.1. this shows that the company (bank) is efficiently utilizing its available resources.2.
ROE 100 80 60 40 20 0 2003 2004 ROE 3. The loans for the SME sector disbursed by the SME Bank decreased from Rs.059 million in 2004.36 Annual average loan portfolio 34. 1. which was attributed to a decrease in the SME lending in 2004.17 39. Table 9: Administrative Costs Administrative and operating costs as 2003 a percentage of Annual average total assets 5. This was mainly attributed to the low lending and higher recovery rates.2 Administrative Costs The SME Bank significantly improved its performance during the period. However.094 million in 2003 to Rs.99 81 . which is depicted in the decrease in the administrative costs as a percentage of annual average total assets.12 2004 5. 1. This was attributed to the restructuring effort pursued by the bank. the administrative costs as a percentage of annual average loan portfolios for SME Bank increased during the same period.2. due to which the assets as well as administrative expenses both decreased.
and 25 percent of manufacturing export earnings besides sharing 35 percent in manufacturing value added. which distorts the competitive environment for business. are far less capable of adjusting and carrying on successful businessx. due to their size and the resulting peculiarities.3. 82 . and the new job creation potential of the economy is thus constrained while the informal sector tends to growxi.1 Current Status of SME It is fair to say that our economy is an economy of SME. In Pakistan. Central Board of Revenue (CBR). The stability in the economy can be ensured by a desirable mix of various other policies. to name a few. like Board of Investment (BOI). The significant role of SME is clearly indicated by research and statistics. efforts have remained limited focusing on the large enterprises. While spared direct statutory or administrative discrimination.3. For example. small firms. Such an environment does not cater well to innovative activities which come from newly founded. They contribute over 30 percent to GDP. neglecting SME which are at the heart of our economy. PKR 140 billion to exports. Enterprises employing up to 99 persons constitute about 90 percentvi of all private enterprises in the industrial sector and SME employ some 78 percent of non-agriculture labour forcevii.3 Basic Situation of SME and Their Support Structures 3. have been concentrating their efforts on large scale industry. direction and defining broad parameters of activity within the macroeconomic framework.viii Stability of policy is a necessary condition for achieving and sustaining high levels of economic development. The adverse influences of legal environment affect all economic agents. policies in the past have given a general perspective. However. The economic significance of this bias is apparent. Export Promotion Bureau (EPB). And while large enterprises and established holding structures possess the necessary economic and human resource potential to cope with and overcome these difficulties. SME remain subject to unequal treatment. institutions established to facilitate business activity. SME. The evidence suggests small firms are discriminated against relatively large firmsix.
3. 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 reason behind the increased stress on the SME sector is that SME promote entrepreneurial culture. The Government of Pakistan has developed a number of strategies for socio-economic development. these measures are not sufficiently specified and prioritized for us to be able to speak of any coherent SME policy or approach. 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. including even very specific measures for their promotion.1 Government Socio-economic Strategies and SME SME are a distinct pillar of the economy that needs to be given due attention.1. More recently.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. the importance of SME has been realized. create a wider base for employment generation and are a primary vehicle for poverty eradication. 3. with the Government’s efforts focusing on the hitherto neglected informal sector. • • • • • • Poverty Reduction Strategy Paper (PRSP)xii Micro Finance Sector Development Program 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. The SME Sector Development Program seeks to improve this situation by inviting all concerned stakeholders to draft Pakistan's future 83 .
g. Many changes in existing legislation may have direct or indirect effects on SME. tax regulation etc. it should be noted that the task of formulation is not a simple exercise. 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. Similarly. e. the environment for SME is constantly changing. and planning division is pivotal. However. 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. in particular with an increased exposure to world markets due to the opening up of the economy. Provincial and local governments also take their share in responsibility.3. Although SME policy is a sector-specific policy. Ministry of Food. SME promotion therefore comes close to a cross-cutting issue. two institutions Small and Medium Enterprise Development Authority (SMEDA) and SME Bank were created. SME promotion is an important issue for many government departments and central offices. For example. export regulations. As a result of the Governments more recent efforts. Furthermore.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. financial law. in labor law. Agriculture and Live Stock. the Ministry of Finance.SME policy. Therefore. the Ministry of Labor plays an important role in shaping the labor market policy of the state. Ministry of Local Government and Rural Development. and the Ministry of Science & Technology also influence the situation of our SME. banking system regulations. 3. Ministry of Commerce. Other ministries and divisions such as Ministry of Finance. 84 . Planning Division. Ministry of Environment. SME are a cornerstone of our economy. in order to gather information on the health of the SME population the role of Federal Bureau of Statistics.1.
and evaluate initiatives undertaken for SME development which fall outside of its own scope of activities. Business Support Centers. crossdepartmental and stakeholder consultations. as well as other organizations which are established as an initiative of local communities. 85 . SMEDA will serve as the secretariat. Chambers of Commerce.The responsibility for facilitating SME policy development now lies with SMEDA which is attached to the Ministry of Industry and Production (MoIP). The institutions in this network cover all stakeholders involved in SME promotion: Regional Development Agencies. naturally. One of the major reasons for the lack of coordination is that SMEDA has not been provided with a formal mechanism to initiate. SMEDA is responsible for creation and coordination of Government policy for the SME sector. prepares Government documents on policy regarding SME drafts relevant laws and regulations To form a collective view of all stakeholders. Therefore. monitor. Regular information exchange mechanism and networking needs to be developed amongst our public and private sector institutions. the SME Task Force has been established at the MoIP. etc. Parliament. is responsible for monitoring policy and its implementation. resulting in the preparation of our national SME policy are our key to success. specifying their functions in order to avoid duplication of efforts and allowing the best-possible usage of resources. ii. A network of institutions stimulating the growth of SME is being proposed. coordinate. Under the SME Sector Development Program it is expected that SMEDA i. There is a strong need to devise such an information exchange mechanism and redefine the role of institutions.
The bank does not consider the number of employees in the SMEs.3.3. But unfortunately.1 Different definitions hurting SMEs sector xiii Seven government institutions directly linked with the development and working of small and medium enterprises maintains different definitions for SMEs. 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. These versions not only vary in weight age and size but also on assets of these enterprises. When SMEs operate in clusters they transform into vendors and provide support to larger industrial units. 86 . number of workers and investment.2. 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 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. 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. 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.3. Even Small and Medium Enterprise Development Authority (SMEDA) and SME Bank institutions directly involved in the development and promotion of SMEs perceive them differently.2 Issues in SME Development 3. The SMEDA's definition for small enterprises: "10-35 employees or productive assets of Rs2 to Rs20 million. all the seven government institutions are giving different definitions with regard to their weightage to assets.
87 ." However. ideally not being a public limited company. 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. 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. however excluded the cost of land from the fixed capital investment of Rs10 million. 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. But instead all these institutions continue to define SMEs differently creating chaotic conditions for the SMEs. Furthermore. 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 promotion should have also changed their definition accordingly to create uniformity. According to SBP: "an entity. 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. ii) A manufacturing concern with total assets at cost excluding land and building up to Rs100 million. they have not given separate definition for small and medium enterprises. the State Bank of Pakistan (SBP) under SME Prudential Regulation come up with better and more pragmatic qualifying definition for the SMEs. The Punjab Industries Department. 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.Yet another flabbergasting definition is of the Sindh and Punjab industries departments.
They should therefore become major topics of our deliberation and shape the formulation of our SME policy.3. They are also allowed an adequate grace period for the adjustment of economic activity and there is no retroactivity of new regulations. Likewise. i. 88 . special attention is paid to minimizing the room for bureaucratic discretion while developing policy rules or procedures. It is agreed that much more can be achieved only by appropriate policy tools and regulations than with support programs. Most of the developed nations therefore have mechanisms in place to revert the biases against small firms.2. Besides this. 3. participation of small business in government procurement is being facilitated as a matter of routine. until 2011. 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.3.1 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. The absence of a specialized. It is made sure that businesses potentially affected are consulted and informed of any forthcoming policy shifts so as to avoid negative impacts. The result of such policies is that (unfortunate) surprises to small firms are less frequent. 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.3. SME development is hampered more by inappropriate regulations than compensated by means of appropriate support programs.2 Short and Medium-Term Issues This section reflects issues where we feel we may achieve strong impacts in the short and medium-term. For instance.2. All such mechanisms are missing in present policy or legal environment in Pakistan. uniform legal framework for the development of SME hampers SME operationsxiv.2. Furthermore.e.
The present divide is. Some of the issues are related to tough bargaining price (36 percent) and supplies on credit (34 percent) and other are related to 89 . This Issues Paper will be translated to Urdu and circulated so as to enable a debate with all of Pakistan's interested 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. in our official deliberations and communications. 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. And our administration practice is characterized by rent-seeking bureaucrats who. Of course. as it is common practice in many countries. regulations and business support material available in the English language only. reflected in a language gap. we should expect the SME policy we are going to develop to be published in Urdu as well.2. A typical SME in Pakistan caters to the domestic private sector. and to regularly report about the achievements under this policy in Urdu to the policy's clients.2 Relationship between Government and SME The relationship between Government and SME seems to be fundamentally flawed. As a starting point.2. we all know there are also many dedicated and honest professionals on both sides. we propose to consider the increased usage of Urdu in our written documentation.3. In many cases this extends also to other large organizations and their interaction with smaller clients as SME. our nation's SME. Eventually.3. It is noted that fewer than 4 percentxv are supplying to the government sector. Part of the concern for local business people is the inadequate business facilitation process in the local language which includes laws. But the fact of the matter remains that there are severe attitude problems in the relationship between the two sides. among others. given the low level of their pay. take advantage of the semi-literate entrepreneur. Our compulsion of centralized control stems from the fear of the regulator to be misled by the opportunistic profit-seeking entrepreneur.
69 percent of firms. This holds for countries all over the world. Hence. and physiological cost (in terms of anxiety. both in starting up and developing their business.1 million faced the greatest of tax related problems. while 28 percent of businesses felt that taxes in the country are too high. The prevailing system is non-standardized and offers excessive discretion to the tax authorities. including developed countries. According to research. From SME point of view. time cost implications (in the form of time spent by a taxpayer to handle tax issues). These effects are compounded by high compliance costs for small firms to deal with tax laws and other forms of government regulation. whose size of assets was less than Rs. and apprehensions related to possible mistakes or a possible audit by the tax authorities). there has been a constant confrontation between tax authorities and the business communities resulting in very slow expansion in tax basexviii. Firms in Pakistan's SME sector. but frequently also inhouse tax and legal advisors. 3. encounter an increasingly complex legal.2.3. There is no consolidation or rationale in current provincial or local tax structure either. Many small firms claim it is not possible for them to maintain booksxvii as per law or hire a professional due to cost constraints. stress.2. 67 percent of enterprises termed tax regulations as most problematic. Smaller firms found tax related issues more restrictive than larger firms. Compliance costs have monetary implications (such as paying tax advisor fees or salary payments to personnel dealing with tax issues). 56 percentxvi of businesses report a crunch of taxes. the present tax structure and administration generally distort incentives and discriminate against small firms who are harassed by the tax authorities. This is a specific size-related disadvantage compared to large scale firms which have not only the necessary accountants. Two 90 . Further points may possibly emerge from the dialogue.absence of rules on how to the public sector should increase its procurement from SME.3 Taxation issues High tax rates are one of the major reasons for firms to drift into the informal economy. tax and administrative environment.
there have been reforms in the advance stage of implementation of Pakistan’s tax regime. including protection against arbitrary loss of employment. the Ministry of Labor and Manpower introduced an employment security regime. Taking into account the need of labor market and employers. 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. reductions in income and unhealthy work practices are essential requirements of new environment.3. But these reforms are focused on tax administration and management. a higher degree of adaptability and flexibility along with labor market security. The present set of labor laws was the result of checkered initiative of various governments to create a healthy business environment for labor. The labor market dynamics have changed considerably over the years.sectors. Besides. The new labor policy initiatives is aimed at creating a favorable environment for facilitating industrial promotion and 91 .xix There has been no consideration as such for reviewing tax law from an ordinary SME or even micro enterprise perspective. No incentives are being offered to SME to enter the formal economy. 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.2. Labor Laws and regulations in Pakistanxx are considered to be one of the most complicated areas with which any business enterprise deals. instead of addressing the aspects that directly affect SME. the condition for compliance of international labor standards under the global economic system is another issue. 3. the intensity of regulations is the second most important reason for firms to drift into the informal economy all over the world. Consequently.2.4 Labor issues Likewise. enterprises have to deal with fifty six (56) labor laws with some of them being industry specific.
The structure of markets and their demandxxiii is increasingly complex.2. for promoting bilateralism among government employer and employees. rules and compliance cost including facilitation services regarding global issues.3. Pakistan’s international competitiveness markedly declined over past few years. there is growing need for information on global technology trends.5 Delivery of assistance and access to resources Competitive advantage is determined by the productivity with which a country. The business and labor community at large has been supporting the reforms. Pakistan's SME need to be increasingly aware of the world market. In addition. The evidence reveals that median labor productivity. capital and natural resources. 3. is 25 percent lower in Pakistan than in India and 35 percent lower than in Chinaxxii. but protecting the rights and interests of the workers. 92 .revival along with legislative and structural changes to bring in a environment devoid of restrictive labor practices. region or cluster uses its human. 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 practices. They cannot escape it even in their local economy. as measured by annual value added per worker. To meet this challenge. Despite operating locally. 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. government established a forum Workers Employers Bilateral Council of Pakistan (WEBCOP). Competition has become increasingly fierce among the global and regional economies and enterprises.2.xxi Part of the blame is shared by lower productivity of the workers. The only issue highlighted thus far through direct interaction with SME is that of co-ordination. It was proposed that existing labor legislation be simplified and rationalized into six basic laws.
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. These include high transaction costs.6 Finance Access to equity and formal debt financing has repeatedly been identified as a recurring constraint to SME growth and development. This also maximizes the potential for cooperation with private sector organizations and minimizes the distortions in the market economy.2. importantly the existing structure of financial sector was developed to serve medium to large enterprises which are organized as a formal business. 3. are issues that need to be addressed separately by the SME policy. 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. Below we flag the important issues. market-driven support programs are a cornerstone in any SME support system which strives for sustainability. including finance. labor productivity enhancement. hence. Yet the structures for such a system still need to be mutually agreed and implemented in Pakistan.An integrated program for improving competitiveness.2. However. The roles of business development services. Commercial banks apply conservative policies in lending to SME. 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. 93 . research and development.xxiv Training. and developing workforce can help. Old policy tools of protection now require replacement with promotional and facilitation functions.3. More. inability to do away with tangible collateral requirement. promoting trade. 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. become imperative. technology transfer and up-gradation and support to business startups through business incubation and various other business support services.
In particular. and we need to basically start from scratch. 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. 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. and Yellow Cab Scheme. SBFC continued to grant loans to small businesses and disbursed 12 billion by June 1998. xxv Another survey xxviconcludes that SME are indeed being rationed out of the credit market. The Government is seeking to facilitate the participation of commercial banks in SME lending by training with the assistance of the ADB. only about 7 percent of funds for investment or working capital come from banks or other financial institutions. 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. outreach shall remain to be a problem for the due to the limited presence especially in the rural SME market. severe damage has been done because the financial sector has developed disinterest for any such initiatives in future. resulted in disjointed efforts and even corruption. The sooner commercial banks obtain 94 . and. in the absence of any national policy. Other schemes for SME development or employment generation included the Youth Investment Promotion Society. Provincial Small Industries.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 retained earnings.xxvii However. Even suppliers’ credit rivals the contribution of the banks as a source of working capital (4. financing SME is one of the key prerequisites for the future development of the national economy and the achievement of economic growth. rather than merely exhibiting a lower demand for credit. catering to the needs of 157. Furthermore. But all of these efforts lacked coherence across institutions.5 percent).162 unemployed persons. Prime Minister’s Self Employment Scheme. The SME Bank will need to undergo restructuring for next three years. It is likely that market-led mechanisms will take some time to improve the access of smaller firms to formal credit.
the better.2. However.7 Human Resource Development One of the major challenges that SME have to face is the emergence of the knowledgebased economy. new prudential regulations increase the likelihood of viability and sustainability in the financial sector. it is a fact of life which we will not overcome in the short run. 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. Technical Training and Vocational Authority (TEVTA). Pakistan Institute of Management Sciences (PIMS). These institutions. however. change and upgrade. Finally. 3. It is therefore absolutely imperative that we seek intelligent short and medium-term solutions to bridge the literacy gap. There are also only limited training options for 95 . 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. One aspect of the Government's strategy is to strengthen non-formal skills and entrepreneurship development. A frequent complaint is the mismatch of the output of our human resource development institutions with the demand of SME. The low-literacy level of our population poses an immense challenge to our competitiveness.the know-how how to successfully engage in cash-flow based lending to small enterprises. to better prepare workers for employment and to improve the population's general capacity for self-employment. There is a need to nurture the entrepreneurial spirit and skill development for adopting innovative technologies. remained rather passive regarding the shaping of human resource development for SME. People must continue to innovate.3. Provincial Vocational Training Councils. The creation of SME credit endowment fund may be one way of mitigating this effect. Yet. Government Universities and various other support institutions have.2.
Similarly other organizations like Pakistan Council for Scientific Industrial 96 . growth oriented exporting firms still have problems sourcing quality inputs due to the lack of a network of reliable suppliers. The scope of Phase I remained narrow and focused on capacity building of various public sector organizations through training programs.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. 3. the Government used to offer cash grants xxix for ISO certification to those enterprises that chose to be growth-oriented internationalized SME. For a healthy. the SME are not large enough to furnish sufficient demand to be an incentive for a big high quality input supplier. In its other efforts. Low skills of work force. In our country.2. has not yet been able to benefit from the program. inadequate vocational training facilities yet remain outside the scope of the reform agenda. moving them up the economic ladder in terms of firm productivity enhancement.2. But up to date technology also plays a vital role in the vertical integration of firms. it is necessary to foster entrepreneurial culture in Pakistan which goes beyond the inclination to trade in goods. growing business environment.middle management. SME. This can be boosted by entrepreneurial skill development programs. This adds to their transaction costs. The intended final beneficiary. 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.3. Likewise. 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. 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)xxviii.
2. they are also able to establish links and obtain information on foreign markets.Research (PCSIR).3. established to facilitate industrial growth still need to adopt an active approach to provide their services to SME in a effective manner.2. Over half of our SME (54 percent)xxx belong to a business or industry association. Pakistan Industrial Technical Assistance Centre (PITAC).3. business and trade associations are able to provide their members with such services. (SME see it as a financial problem. Their perceived role is limited to lobbing and negotiation with the government.2. Major technology up-gradation obstacles include: Inability to acquire sophisticated testing equipment and R&D facilities.9 Market and Industry Information Access to market and industry information is one of the keys to develop successful business strategies. Ministry of Science and Technology (MOST) etc. Frequently.) 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 3. 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. By associating with like institutions in foreign countries. Yet very few SME (12 percent) perceive their associations to be a source of information on new developments in their fields of business operation. 3.10 Monitoring Developments Harmonizing enterprise size categories Pakistan has no across-the-board legal definition of SME.2. This makes it extremely difficult to monitor the development of our SME economy and to establish benchmarks 97 .
various reasons for them to define SME. Yet our statistical system classifies enterprises with more than 10 employees as large. we. 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. Various government departments and public-sector agencies have adopted their own definitions. of course. and there may even be discussion on just how a strict and reasonable size standard could be defined. There are. retailxxxi and services related enterprises. Many stakeholders consider enterprises with 100 or more employees as large. this consideration is only visible in the SBP definition and missing in all others. 98 . This view also gets credence from various studies on the issue for Pakistanxxxii. 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. and the State Bank of Pakistan considers those with more than 250 employees as large. and enterprises with less than 5 workers as micro. 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. Again.against other countries in order to devise areas of intervention and support. of course. Measuring our success Public resources are as scarce as private sector resources. whole sale. At the same time. The reference to international practice also suggests differentiation among industrial. 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. seek a maximum effectiveness of our support programsxxxiii. 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. For a national policy.
SME constitute the overwhelming part of the economy. After all. sustainable or equitable development. 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. In fact. Discarding either of the genders. implies foregoing the potential benefits which arise from mobilizing the respective human resources for development. And we are not able to correctly state what the Government is spending on SME support annually. There is no current overview of activities. SME. Our present "system" of support is incoherent. textiles and 99 . such as carpet weaving. it is also a perfect ground for duplication of activities and wastage of resources. Their participation in economic activities in the modern society has also progressed beyond agriculture into the local market economy. we do not even have any criteria established by which we are able to determine our success as a nation in fostering SME development. Women are increasingly migrating to urban areas for employment in a range of cottage industries. Pakistani women have been engaged in production process for ages. and Pakistan is no exception. but also knowledge and creativity which may be mobilized to achieve economic ends. we have no mechanism in place for measuring our success. While division of labor with diverse stakeholders is a necessary condition for obtaining a maximum reach. Gender Development Each of the two genders of any society constitutes roughly half of the population.As things stand. we are not making sufficient use of this channel for promoting the development of our country. Currently. for example. SME as a Medium-Term Channel for Other Objectives It is common practice in many countries to make use of the SME in order to further specific development objectives as. People of both genders embody not only labor force. Two issues which also relate to our competitiveness are flagged in the sections below. therefore.
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 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 externalitiesxxxiv 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 constraintsxxxv 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. 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?
18.104.22.168 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.
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.
22.214.171.124.2 Law and Order
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.xxxvi
126.96.36.199.3 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,
purchase or distribution agreements. or mergers and acquisitions. It is estimated that a typical business in Pakistan loses 5. telecommunication. are often combined with transfer of know how in the form of training and are increasingly an important term in such transactions. Evidence suggests that Pakistan’s state-controlled and concentrated structure of infrastructure delivery is highly inefficient. 320 billion a year. 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. except for road transport. The chief problem in the provision of telecom services is the shortage of new fixed line connections.6 million a year for the whole country.5 percent of the value of exports by improving its trade and transport logistics systems.3. and transport services.xxxvii Inefficiency in transport alone is estimated to cost the economy Rs. 3. Similarly. the poor quality of delivery and its reliability are the serious concerns of SME. High rates of power. Power outages and access to connections are considered an irritant which significantly affects the productivity of firms in Pakistan.6 percent in annual sales revenue due to just this single factor. 103 .3. The concentration of power. manufacturing. Licenses to use patents.4 Infrastructure Basic physical infrastructure is a prerequisite to growth and development. which currently stand at a mere 0. Pakistan could also save up to 16.2.joint ventures. access to telecommunication facilities and transport also serve as a detriment to smooth growth and transition of smaller firms to larger ones.5–0. trademarks and copyrights. in the public sector has been regarded as the major concern.
Chapter 4 CONCLUSIONS AND RECOMMENDATIONS 4.2 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. The government should advise its organizations to agree on a uniform definition which should be applicable in the length and breadth of the country. All concessions to large companies should be phased out to promote and equitable competition. The important policy needs to be made completely uniform and import duties need to be fully rationalized. SMEs need support in getting organized through trade associations at local level. The Government has taken many steps for the promotion of SMEs by establishing many organizations which work for SMEs. 4. Following measures could be introduced to address these inherent policy biases against SMEs.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. information and support to SMEs can be disseminated. But the problem is that each organization defines SMEs in their own terms. But one of the main problems hampering the sector is lack of common definition. Through these bodies. Effective measures should be introduced to check smuggling. This will solve the problems of the entrepreneurs who are mostly confused about the status of their businesses. . This creates unnecessary problems for the entrepreneurs who find it difficult in approaching the organizations for the solutions of their problems.
In Pakistan. The establishment and production of industrial sub-contracting exchange schemes. Also. large firms can provide technical and support for their partner small firms. Therefore. which would facilitate market linkage between manufacturers. exporters and industrial subcontractors. These linkages. a balanced growth strategy for the development of industrial sector should be implemented. An excellent example of this model is the IT firms. Therefore. produced in-house. 2. there are new and increasing opportunities for small companies to act as sub-contractors. 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. 2. According to this strategy. Interaction between SMEs and Chambers of Commerce and Industries should be promoted. 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. These firms should organize themselves and forge strong links among themselves. 109 . Small firms to focus on their core competency and try to excel in it. 4. This model requires: 1. SMEDA should take the following actions to promote the effective linkages: 1. large enterprises can enable small firms to enter into large markets both domestically and internationally.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. with these linkages. would serve to enable small firms to evolve into excellent modern enterprises competing in local and international markets. through this linkage. in earlier times.
for without it. groups and other trade associations should be strengthened and activated. Pilot testing if the “Balanced Growth Strategy” in a specified sector should be carried out. 4. This pilot project should be closely monitored and evaluated for replication in other sectors later on.3. Empirical evidence suggests that the rates of default of SMEs are far less than those of large organizations. risks. so the risk of default is much less. 2. the indifference. creativity. The reasons behind this lack of credit availability are high transaction costs. In addition to monitoring banks’ compliance with the mandatory allocation of credit resources. lack of collateral just to name a few. Thus the central bank should encourage commercial banks to extend credit to small businesses on more favorable terms. Unfortunately in Pakistan. Loans which take more time to be disbursed are of little use to the entrepreneur who wants to exploit the business opportunity. Another major area of concern is the period of disbursement which is certainly hurting the growth of small enterprises. unwillingness and the inability of most formal banks to become involved in providing credits to small businesses in predetermined. 3. just like any other developing country. Prospective borrowers are prepared to pay a higher interest rate if their applications are appraised and loan is disbursed quickly.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. 4. 110 . certain innovative schemes can also be developed to increase SMEs access to financing. Some of the actions are recommended for this purpose: 1. SME associations. drive and innovation cannot be transformed into material actions.
6. 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. he integrated approach has been advocated by organizations such as ILO. However. 5. USAID and has the most successful rate of implementation. The development of Human Resource Development in specific industries must be identified. Therefore following actions are recommended for this purpose: 1. World Bank. Specific economic zones must provide facilities and resources for skills training for SMEs in their respective zones. 3. Linkages should be established between training and credit programs so that the SMEs are in a position to invest in the upgradation of skills. 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. 111 . UNIDO. 2.4. 4. Advocacy for improved basic education at the primary and secondary levels. Based on national and international experiences. finance and personal management.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. the resource bank of training materials and teaching aids needs to be established which would provide useful input to innovative approach towards training. These committees would deliver the desired results with proper representation of SMEs. 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. SMEs need to be promoted at all levels so that they have the capacity to influence decisions regarding orientation and structure of formal training.
Infact. 4. 112 . The banking sector has been criticized for not geared in helping small firms The cost of capital is very high.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.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. some even go to the extent that these policies are biased against the small businesses e. Pakistani SMEs must be equally competent at adapting to imported technologies and products. supposedly supporting SMEs are inadequately tuned to the day-to-day needs of their centers. 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.4. There is no real contention on the view that government policies in Pakistan have not been favorable to small enterprises. II. This requires information and advice in areas such as the process of production. 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. Furthermore. selection of machinery and technical collaboration available both domestically and internationally.g. The recommendations for this purpose are: I. Train young and enthusiastic people living in both urban and rural areas in the use of modern technologies for a local application.
Membership Organizations: Associations. business organizations. Therefore SMEDA should prepare a framework for the formation of “Small and Medium Enterprise Association” both at the national and regional levels. 4.8 Streamlining private sector Organizations The organizations that can become actively engaged in providing services for SMEs are the following: I. enterprises. 113 . These organizations can also be referred to as self-help or representative bodies. Utility connections take months resulting delays in production in financial difficulty right from the start. Help from external donors. II. chamber of commerce come into this domain. 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. federations. 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. SMEDA can pursue an option of obligatory membership for all the SMEs or it can decide not to impose a statutory obligation. There are almost 35 tax collecting agencies at different levels.
III. 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. 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. 114 . IV. 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. 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. SMEs provide a perfect staging ground for women to showcase their talents.
org/gender/info/pakist.smeda.org.smebank.BIBLIOGRAPHY http://en.immigrationusa.worldbank.pk/depts/fbs/ publications/pocket_book2003/chapter05. State Bank of Pakistan http://www.pdf http://www.win.php?id=8 Pakistan Country Assistance Strategy.pk http://www.html Prudential Regulations for Small and Medium Enterprises Financing”. Annex II. World Bank Report.org/wiki/Pakistan www.WB Group.wikipedia.com/wfb2004/pakistan/pakistan_people.pk/publications/prudential/index.ifc.org.htm International Finance Corporation .org. Banking Policy Department.sbp.statpak.org http://www. Dated May 10.org http://www. 2005) http://www.gov.htm 115 .pk/institutiondetail. 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.
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 116 .
Modernization.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. 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 118 .
review. Whatever the mechanism to enforce it.000 and those filed under old self-assessment scheme were 275. hopes should not be raised high for tax rate changes to bring immediate tax base expansion. http://www. High Sales tax16 percent and high Income Tax Rate 12 percent xvii In Japan. identify issues of concern and formulate recommendations on various laws effecting .05 million active tax filers in Pakistan. xx 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. However.htm iii Economic Survey Of Pakistan. xvi The 56 percent figure is an addition of the three tax related responses: High taxes 28 percent. 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. 1997-1998 ROA = Net Operating Income/ Average Total Assets iv v ROE = Net Operating Income/ Average Total Equity vi vii Pakistan Country Assistance Strategy. Shahid Hussain. the World Bank.scar. the Ten Year Perspective Development Plan 2001-2011 notes that there is a large range of zoning and other regulations imposed by the federal. Annex II. World Bank Report. xv World Bank SME policy Note 2001. after the war in 1949. In 1999-2000 the number of salaried taxpayers was 440. This restructuring plan is now being made operational with World Bank support. chaired by Mr.000. which includes Regional Small Business Ombudsmen. the results of SMEDA-World Bank Investment Climate Survey 2003 also conforms to the findings. xiii ”Different definitions hurting SMEs sector “ By Parvaiz Ishfaq Rana xiv To this point. xviii There are 1.utoronto. was constituted by the government.i ii “Canadian Federation of Independent Business” Quoted in “Lecture on The Role of Entrepreneurial Small Business”. Lowering tax rates may well lead to substantial expansion of the tax base in compensation and be neutral for government income.ca/~bovaird/c39/lec1. would be considered to ensure the fair and efficient functioning of SME.6 percent against large scale manufacturing growth rate of 3. xix A taskforce on the reform of tax administration. a “level playing field” is one of the cardinal conditions for SME development. The new system allowed certain tax merits if a tax return is made with a “certain formula of quick bookkeeping. 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. without more profound improvements in the relationship between Government and enterprises. provincial and local governments and public sector utilities which affect the functioning of SME hence. Page 3 Census of Establishments-1998 Economic Survey of Pakistan 2002-03 viii ix x SME policy Note. old taxation system was replaced by new system to resolve the problem of incomplete bookkeeping and fear of over-taxation of SME.6 percent.” This system resulted in not only the improvement of financial accounting but also the strengthening of financing systems for SME. which gave detailed recommendations in its report published in May 2001. ILO SMEDA Study 2001 on MSME. xi xii 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. legislation similar to the US Small Business Regulatory Enforcement Act of 1996. Based on this document and comments from the IMF and the World Bank a restructuring plan was drawn up by CBR.
and as such reviewed 101 commercial and labor laws that effect industrial sector. It suggests that the sector is dominated by micro enterprises and there has been considerable organizational. Singapore.businesses. xxiv 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. xxxii The survey of SME for ADB study on SME Constraints reports observed differences for retails sector. To date it represents the most comprehensive data set. xxi World Bank. The goal must be to seek both effectiveness and efficiency at the same time. June 2003. other companies working in the same field (23 percent). xxxvii World Bank. health and safety. and only 4 percent from formal institutes as a source of acquiring technical know-how. drawn from 12 largest cities of Pakistan. Barriers to SME Growth in Pakistan: An Analysis of Constraints. working for another employer (35 percent). There is not internalization of cost at source. & Ehsan-ul-Haque. Sri Lanka) also shared their experiences and expertise with Pakistan. and Explosives Act 1884. xxxiv Upstream producer may affect the viability of a downstream producer without any economic transactions occurring between them. xxxv According to the World Bank’s survey for SME Policy Note 2001. It further elaborates that SME learn their skills from own family (40 percent). 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. management and technological differences between enterprises employing 10-49 workers and those employing 50 or more workers. and less than a third of Philippines— countries whose combined manufacturing exports were less than Pakistan’s in the mid-1960s xxii xxiii Investment Climate Survey of Pakistan-2003 Consumer preferences and market standards have become more sophisticated and exacting. xxxiii Reminder: "Efficiency" measures inputs vs. which finds that over 50 percent of their sample SME who had ever approached a bank reported difficulties in obtaining credit. Government must step in. and the market cannot self regulate. a vast number of small entrepreneurs are highly interested (42 percent) or moderately interested (40 percent) in acquiring new technology. Programs may be very effective and at the same time inefficient. This finding is corroborated by the World Bank (2001) survey. outputs whereas "effectiveness" measures outputs vs. xxxvi Commercial disputes in Pakistan are regulated under the Contract Act (1882) and falls in the jurisdiction of civil courts only. internet (13 percent). xxv 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). Indonesia. Development Policy Review 2002 reveals that the annual manufactured exports of Pakistan are barely 12 percent of those of Malaysia. Development Policy Review 2002 . Ali Cheema. xxviii xxix A few countries (mainly China. Boiler Act 1923. 18 percent of Thailand’s.5 percent of total non-agriculture establishments and employs 20 percent of the labour force. Major problems associated with this forum include time delays and judicial corruption. Competitive advantage is now determined by several non-price parameters such as quality. On sources of technical knowhow it reveals Books and journals (30 percent). xxvi xxvii Faisal Bari. objectives. and educational institutions (25 percent). Drug Act 1976. social equity in employment and production and ecological compatibility of products and processes. Discontinued since June 2003 World Bank SME policy Note 2001 xxx xxxi The Census for Establishments 1988 reveals that retail constitute 42. SMEDA-ILO Study 2001 also reports a similar finding.
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