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What Are SMEs

As defined by State Bank of Pakistan - SME (Small and Medium Enterprise) means an entity, ideally not a public limited company, which does not employee more than 250 persons (if it is manufacturing concern) and 50 persons (if it is trading / service concern) and also fulfills the following criteria of either as relevant: (a) A trading / service concern with total assets at cost excluding land and buildings up to Rs 50 million. (b) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. (c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

SME definition
SMEDA defines Small & Medium Enterprises, as approved in SME Policy 2007, as an enterprise that has up to 250 employees, or a paid up capital of 25 Million PK Rupees, or an annual sale of up to 250 Million PK Rupees. The Federal Government, in line with the economic development of Pakistan may, from time to time modify the eligibility criteria as it sees fit. All providers of services receiving funding from the Government may define more narrow scopes for specific targeting purposes. For detailed information see SME Policy 2007.

Significance of SMEs
SMEs is considered the engine of economic growth in both developed and developing countries, as they: Provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units.

Assist in regional and local development since SMEs accelerate rural industrialization by linking it with the more organized urban sector. Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities. Contribute significantly to export revenues because of the low-cost labour intensive nature of its products. Have a positive effect on the trade balance since SMEs generally use indigenous raw materials. Assist in fostering a self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes. Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and selfsufficiency.

Problems Faced by Pakistans SME Sector?


Pakistans economy has amazing potential for development but sadly, we haven't been able to derive optimal benefits despite a series of efforts launched by various policy makers at different times. The impetus of all these endeavors was on the large scale industries and manufacturing concerns. High rate of failures, owing to economic slumps, institutional malpractices, political motives and damaging activities of labour unions in that sector, left the formal lending institutions with huge infected portfolios, in addition to adverse effects on the entire economy e.g. insufficient and low quality production to meet the demands of local and international markets, deficit in balance of payments and ever rising unemployment, etc. Pakistans SMEs are still unable to achieve their maximum potential and are in dire need of hand-holding' and business support services.

SME Financing and Hand-Holding


Research reveals that despite the lack of collateral, SMEs are a better credit risk, as the default rate of this sector is much below that of large enterprises (LEs). Throughout the world, SMEs have provided tremendous opportunities to financial institutions to design various tools for the sector's development (e.g. Program Lending Schemes, Credit Scoring, Venture Capital Financing, etc.). Then there are clusters, technology parks and industrial estates, all being fuelled by the dynamism and vibrancy of small and medium enterprises. Banking institutions, running on Islamic principles, are also experimenting with interest free financial instruments (e.g. Mudarabah, Murabaha, Ijarah etc.) for this sector.

Role of SMEs in Pakistan


Pakistan has emerged as the second rapidly growing economy in Asia after China in 2004 2005, as claimed by government and well accepted by international raters and financial institutions. According to Economic Survey 2004-05 this increase in real GDP is the courtesy of robust performance of large scale manufacturing and services sector. Even though the large scale manufacturing registered 15.4% growth but small and medium enterprises (SMEs) is the core issue in the countrys progress and especially for the prosperity of masses that are surviving with low scale income due to which Pakistan ranks 135th out of 174 countries on Human Development Index. When we think about SMEs, we consider it as one person manufacturing enterprise but according to SMEDA Small Enterprises should possess ten to thirty five employees with two to twenty million rupees capital intact in equity. Medium Enterprises should possess thirty six to ninety nine employees with twenty to forty million capital intact in equity. Here we have to see the role SMEs have in the progress and well being of masses in Pakistan.

The assessment of the role of SMEs in Pakistan is of vital importance. Sometimes we have shinny figures and data regarding economy like GDP growth or per capita income but these can be misleading because the earners of these massive growth are not masses but the capitalists in the country. SME produces the income stream for masses located in the countryside and the capitalists associated with this activity that is generally medium or small as the name suggests. In Pakistan SME sector is not only the minor sharer till yet, reality is that Pakistans whole economy is highly dependable on the pace and productivity of SMEs. Out of Pakistans 3.2 million enterprises 95% are those who possess 99 employees in private industrial sector and employ about 78% of non agriculture labor force. SME contributes 25% export of manufacturing goods and 30% of GDP is the outcome of business efforts of SMEs. The vital question is not what SMEs have produced? But, what they are capable to produce? The simple answer is if they produce on their full potential and capacity Pakistan would be way ahead on economic racetrack of the world. They can produce billion of dollars worth items that is why SMEDA is quite right in stating its mission as Turning potential into profits. Turning potential into profits gives us a truer and fair picture of the role of SMEs in Pakistan. Now we will see what potential we have and the threats associated with it and how we can turn potential into profits by overcoming existing threats. Firstly we have to talk about the main potential we have to boost the progress and efficiency of SMEs. The real potential of SME growth in the country is the deprived people of this country who are quite keen to raise their standard of living. It simply means the future of SMEs is associated with the temptations of highly talented but deprived masses of Pakistan and their will to turn their dark days in to glittering ones. But the real problem associated with their will and dreams is finance and technical assistance. Financing concerns have two issues; first is availability of finance and second is the rate plus the terms on which the finance is available. Financing SMEs in heavy liquidity period for banks is not a burden but an opportunity because bank can utilize their liquidity by advancing finances to SMEs. By advancing to SMEs they can have two advantages. First when they advance to many small and medium enterprises as compare to large ones, their lending amount will be distributed to a number of clients that will increase the probability of recovery. Secondly, the contribution in national economic growth via utilizing their liquidity that is excess due to great activity in economy in the period after 1999 and especially after 2001 that will further expand the activity in banking sector in near future. Exploring a specific niche product is another way to boost SMEs sector. Niche is a unique product that we can produce at low cost with an absolute advantage. In Pakistan we are producing Niche from Wazirabad by producing the international quality surgical instruments and Saialkot is there for sport goods. SMEDA and other concerns like EPB have to come up to explore more niches that are sure available in this country of highly

skillful workforce. In this regard Prime Ministers program of ONE VILLAGE ONE PRODUCT is of high importance. Even we could not achieve economy of scale through this niche but available glittering demand in international market can offset the cost burden and causes the inflow of foreign exchange. The movement of masses from rural to urban areas is another hot slot of the time. While developing a well integrated SME sector in the country, it is the clear cut advantage that we can stop this mobilization that certainly is creating the urban problems and increasing the urban development overheads and cost of maintaining big cities like Karachi. Even it will be a factual probability that through SMEs we can convert our villages into new towns and sources of revenue and progress. Stock markets in the country are in deprivation of number of newly listed companies; I think it is for the sake of well being of stock markets and SMEs that SMEs should be authorized to get listed in shape of a venture of 3 to 5 SMEs on stocks on relatively smaller amount of capital that is how the SMEs could muster the very capital and while becoming a part of corporate culture that can give way for them to have good management. In early stages the board of SME companies (as they would not be able to pay handsome amount to experts) should consist of experts of Federal, Provincial governments and specialized financial institutions and the small and medium enterprises. Small and medium entrepreneurs should possess the majority shares and the shares of these stakeholders have to be to the extent of their support and inline to compensate nominal through the profitability of the companies. SMEs will be the main source of poverty reduction in Pakistan that will create the value and innovation for the country in the days to come. The thing that really needs serious attention is to remove the unnecessary bureaucratic procedures. It is essential to make it possible that the opportunities for small entrepreneurs should not be wasted through excess processing of finance applications or other official terms. Assistance to SMEs is not enough; the government and specialized financial and technical institutions should stand as partners of small and medium entrepreneurs, this is the only way that the financial institution can recover their funds with yield. Government could achieve its goal for poverty reduction, economic progress and above all the value creation process by promoting the culture of SMEs. This is the only way that can make sure the poor masses of Pakistan shall not live poor anymore. Global Challenges and SMEs Governments commitment to withdrawal of subsidies, reduction in tariffs, and export duties under WTO arrangements have thrown up new challenges to the small and medium sized firms of Pakistan [Berry, 1999]. The adjustment process is difficult with significant employment implications. Experiences of successful adjustment process in operation in some sectors of the economy leave a trailblazer for others. For example, the Surgical Instruments Manufacturing Industry of Sialkot has the usual oligopolistic market structure. Following the WTO directives for adoption of ISO-9000, the medium firms adopted the detailed production procedures so as to meet the new directives. In cases where less resourceful firms faced practical difficulties in adopting the ISO-9000

procedures, they forged informal production links with the large firms and started working as ISO-9000. The new arrangement has also lessened their other financial obligations like business taxes as the these firms have opted to become informal and work as the backyard workshops of the large units. The post-WTO regime poses adjustment challenges for the Pak industry, particularly for the SMEs, and has brought into focus the significance of the role of clusters in the Known cities like Sialkot and Faisalabad, which are major Centres of surgical goods and textile products, respectively. The fact is that both the small and large firms gain from the collective efficiency of clusters. The dynamic Pakistani firms (i.e. large) have gained the maximum in terms of increased sales under the new system. Collective efficiency is definitely important to the firms working in the clusters, though the gains of small partners are less than the resourceful large partners. [Nadvi, 1997] points out with reference to Surgical Goods Industry of Sialkot that the dynamic firms are generally run by better-educated persons, use more advanced equipment, and display a greater degree of specialization. The point is that external economies in the markets for labour, inputs, services, and information are important to firms of all sizes. So in the context of global challenges, the SMEs of Pakistan shall have to maximize collective gains of clustering, wherever possible. Collective efficiency has to be seen and generated for dynamic benefits to the entire cluster. The Pakistani SMEs thus have to build technically interactive relations with external buyers besides linkages with subcontractors to be able to compete with the foreign competitors and also to be able to survive. Their informal subcontractors and thus managed to avoid the financial burden of Environmental Problems Like the large firms, the SMEs also contribute to environmental degradation because of absence of control on the use of production methods. So there is a strong case to put in place policy-guided mechanism for the education of entrepreneurs and effective control of environmental damage by SMEs. Reducing material waste can be one means of reducing cost. Similarly saving national resources (electricity and water etc.) may translate into competitiveness and economic gains at the SME level. The Pak SMEs generally dont manage to effectively utilize the available technology suited to their resources. Identification and acquisition of appropriate technology is a difficult task for SMEs. It is recommended that credit be provided to firms who are looking for opportunities of environmental damage control. The most effective method to reduce environmental damage is to educate entrepreneurs about the cost of environmental damage. At the ground level the SMEs and the large firms are equally ignorant and careless about their role in environmental degradation in Pakistan. This is essentially due to poor institutional capacity and little emphasis on environment in fiscal policy and insufficient allocation of funds for environmental protection of forestry, biodiversity, water and sanitation. The Mid Term Development Framework (MTDF: 2005-10) has laid down the long term objective of sustainable economic growth without environmental degradation [GOP, 2005]. Its real success would depend on how effectively the environmental laws cover the National Environmental Quality Standards (NEQS) and whether or not the

violators of the laws are made to pay for damaging the environment.

Pakistan Small and Medium Enterprise Development Authority


Small and Medium Enterprises Development Authority (SMEDA) Premier institution of the Government of Pakistan under the Federal Ministry of Industries and Production, SMEDA was established in October 1998 to take on the challenge of developing Small & Medium Enterprises (SMEs) in Pakistan. With a futuristic approach and professional management structure, it has focus on providing an enabling environment and business development services to small and medium enterprises. SMEDA is not only an SME policy-advisory body for the Government of Pakistan but also facilitates other stakeholders in addressing their SME development agendas. History Premier institution of the Government of Pakistan under the Federal Ministry of Industries & Production, SMEDA was established under Prime Minister Notification in October 1998 to take on the challenge of developing Small & Medium Enterprises (SMEs) in Pakistan. In 2002President of Pakistan promulgated a Presidential Ordinance (No. XXXIX OF 2002) for the assortment of the Small and Medium Enterprises Development Authority as an autonomous body under the Federal Government of Pakistan for encouraging and facilitating the development and growth of small and medium enterprises in the country. Since its inception in October 1998, SMEDA had adopted a sectoral SME development approach. A few priority sectors were selected on the criterion of SME presence. In depth research was conducted and comprehensive development plans were formulated after identification of impediments and retardants. The all-encompassing sectoral development strategy involved recommending changes in the regulatory environment by taking into consideration other important aspects including finance, marketing, technology and human resource development.

SMEDA Structure
Under the Federal Ministry of Industries & Production, SMEDA is headed by a Chief Executive Officer who is a public appointment; a senior federal public official from the Federal Public Service Commission of the Government of Pakistan who directly reports to the Federal Secretary for Industries & Production. The Organization is divided in to four divisions on functional basis that are Central Support Division, Policy & Planning Division, Out Reach Division, and Business & Sector Development Service Division. Each division is headed by a General Manager directly reporting to the CEO. The General Managers, in most cases, are also senior federal public officials from the Federal Public Service Commission. The middle and frontline management are hired from the private sector on two year contract basis. The Central Support Division include support departments like Human Resource, Administration, Account, PR & Marketing, MIS/IT, with an exception of Donor Coordination & International Linkages department which is responsible for developing

and facilitation of International linkages and donor involvement in the country on SME development level. Policy & Planning division is the research organ of the organization further divided into Research wing, Planning & Development wing and Policy development wing. SMEDA has a country wide out reach with four main regional offices each headed by a Provincial Chief for each of the four provinces of Pakistan i.e. Punjab, Sindh, Balochistan and North West Frontier Province these are further extended to 23 major cities of the country with a one-man office housed in prominent Chambers of Commerce & Industry which are called Regional Business Coordinators. The Outreach Division also includes Industry Support Cell and Training Services Department which is responsible for providing training services to SMEs. Business & Sector Development Service Division works to extend various consultancy services such as Financial, Legal, Technical & Innovation, and Sector development. This division also houses the E-Services that SMEDA provides and the Industrial Information Network.