Small & Medium Enterprises in

Pakistan

SMEDA

May 10, 2005

Lahore
 SME Sector in Pakistan

 3.2 million business units in Pakistan

 Over 99% business units employ less than 99
persons i.e. 3.16 million SMEs
 Generate 78% of non-agri sector employment
 Direct Contribution to GDP over 30%
 Generate 25% of Manufacturing Export Earnings
 Contribute 35% in Manufacturing Value addition
 Characteristics of SMEs

 Owner is the manager & few employees

 Owned & operated independently
 Relatively small investment, production, sales,
dealings etc.
 Inadequate efficiency of business operations -
no relationship with other firms or parties for
 Investment
 Management, finance, tax, accounting
 Classification of SMEs

 SMEs have been historically classified as:

 Industry
 Trade; Wholesale, Retail & Services
 Criteria For Definition: The criteria is based on;
 Fixed Assets
 Employment
 Turnover/sales

 Fixed Assets include Land, Building, Machinery

 Employment: Essence of SMEs is job creation.
 Turnover/Sales: Sales have been researched
to arrive at the Annual Turnover/Sales
Growth of SMEs vis-à-vis Large Scale

Large-Scale Small-Scale
Output Capital Output Capital
Growth Rate Formation Growth Rate Formation
Growth % Growth %

1970s 4.84 -2.28 4.4 5.5

1980s 8.16 8.15 4.7 10.5
1990s 3.6 -5.02 2.6 7.2
 Barriers to SME Growth
 Govt. & SME Interaction
 Taxation
 Finance
 Labour Legislation
 Human Resource Development
 Technology
 Market & Industry Information
 Lack of Infrastructure
 Environmental issues & compliance
 Social compliance issues
 Intellectual Property Rights
 World Bank Survey 2002
Issues Identified Percentage

 Lack of finance 55%

 Shortage of skilled labour 39%
 Getting business site 38%
 Bribes 21%
 Orders/Marketing of Product 28%
 Lack of Knowledge 12%
 Government interference 12%
 Raw Material 10%
 License for work 8%
 New Technology 8%

SME Policy Note – World Bank 2002

Issues in SME
Financing
 Sources of Working Capital for SMEs
Financial Sector Contributing 7% Working Capital

other Informal
8% 1% Equity
12%
Trade Credit
4%

Retained
Earnings Banks/ FIs
68% 7%

Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
 Sources of Investment for SMEs
Financial Sector Contributing 8% Investment

Inf o rma l
o t he r 2%
12 % Eq uit y
R e t a ine d
17 %
Earning s
59 % Tra d e C re d it
2%
B a nks / F Is
8%

Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
 Loan Disbursement Pattern

80%
%age Exposure to Each Category

60%
69.9%
40%

2.9% 5.0% 2.1% 4.3%

20%
0.5% 5.7% 6.4%
3.1%
0%

Loan Size Rs. in ‘000

Source: State Bank of Pakistan

 Loan Disbursement Pattern

Size of Firm Age of Firm (years)

% age of Total

No of 21 and All
0-5 6-10 11-20
Employees more Firms

0-10 0% 0% 0% 0% 0%

11-49 0% 35% 0% 0% 29%

50-99 100% 67% 75% 15% 50%

100 or more 100% 75% 75% 83% 80%

All Sizes 50% 67% 64% 50% 59%

Source: Dr. Ehsan ul Haq, Dr. Faisal Bari- LUMS; Barriers in SME Growth - 2002
 Legal Structure of Business Units
in Pakistan
C o rp o rat e s & P ub lic S e c t o r
Ot he rs 7%
8%

P ro p rie t o rs hip
s &
P art ne rs hip
8 5%

Source: ILO SMEDA Study 2001

 Comparative Access to Financial Sector
Comparatively low financial sector access in Pakistan
High High

Affordability Affordability
of Loans of Loans

Low
Access
Access Timeliness High Low Timeliness
to loans
to loans of loans of loans
Affordability
of Loans
High High High High
India Bangladesh

Low

Access Timeliness
to loans of loans

High
High Pakistan

Source: ITC publication - SMEs and the Global Market Place

 Our understanding of the Situation

 Most SMEs operate through Self-Financing or

Retained Earnings
 SMEs do not make use of Trade Finance for
Expansion
 Fear of regulations discourage them to come in the
formal fold
 Access to formal credit is strongly correlated to
firm size & age of the firm
 The size of SME credit market is estimated to
be 250 to 400 billion
 Demand Side Issues
 Assessment of total demand by region/ sector
 Access to Industry/ Business Benchmarks
 Informal accounts and management systems
 Proposal Formulation
 Securitization of Business operation
 Difficulties in managing loan documentation
(volume/language)
 Inadequate capitalization particularly for New
Business and issues of
 risk mitigation
 start-up financing
 collateralization
 Situational Analysis 1/3
 SME Business reliant on Support System
 SMEs are insecure – Quick Response Support
System absent i.e. Access, Timeliness & Legal
Support
 Lack of specialization in Banks
 Small Enterprises – Lacking attention
 Characteristics: Little knowledge, inadequate collateral, Less
affordability and likelihood for success – high rate of failures
 Often confused with Medium Enterprises
 No special Policy attention or Support
 Considered a case for directed or subsidized credit – has to
regain its Reputation
 Situational Analysis 2/3
 Medium Enterprise – Informally formal
 Business Organization formal but little cushion
 Often subject to Policy Shocks e.g. poultry
 No formal financial management to analyze
vulnerability
 Have access to finance but adequacy and timing is
an issue
 Income stream estimation difficult - taxation laws
discourage sharing of operational data
 Situational Analysis 3/3
 Govt. Policy Risk
 Cushion for Policy shock – Public sector responsibility
 International Competition Risk
 Impact of globalization on Markets, Investment Decisions
 Exogenous for SMEs – Policy support for financing economic
activity adjustment e.g. Korean Corporate Restructuring
Fund
 Commercial/ Management Risk
 Capacity building of SMEs - roles of support institutions
SMEDA, EPB, PVTC, PITAC, PCSIR etc.
 Regulatory Framework
 Missing links between SMEs and the financial
institutions – Credit Guarantee and Insurance (Laws &
Institutions)
 Tax Related Laws – SMEs unwilling to share operations
related data and information on accounts
 Inconsistent government policies – S Tax 300
amendments
 No policy or legal support for business Start-ups or
projects backed by only sound business plans
 International Best Practices -Countries
Studied

 Developed Countries
 Germany
 Japan
 Neighboring Countries
 China
 India
 Developing Countries
 Thailand
 Turkey
 International Best Practices –SME Financing
Infrastructure

 Separate legislation
 Specialized Institutions for :-
 Promotion of SMEs- Advisory role-SMEDA
 Products development for risk mitigation in respect of financing
by financial institution
Credit Guarantee Mechanism- in all countries studied by the group
Credit Bureau
Securitization and Reconstructions of financial assets- India & Korea
Separate Act
Mechanism for redressal of grievance- Ombudsman for SMEs (India)

 Banks for channelizing the resources to end users

 Venture Capital arrangements
 International Best Practices - Laws for SMEs

 These laws vary directly with respect to the stage of

development of SME sector e.g.
 laws focusing on the promotion of the SME Sector

 laws focusing on the risk mitigation regime e.g. SME Credit

Insurance Law (Japan), Credit Guarantee Association Law

 Institutions are the outcome of these laws e.g. Credit

Guarantee Corporations is the outcome of Credit
Guarantee Association Law in Japan.
 Model for SME Financing - Germany

Partners Actors Advantages/

sales factors
Guarantee
EIF DtA Risk release

Refinancing +

Guarantee Cost covering margin

Information On-lending bank
Advice „House bank“ Risk release

Microloan
Better access to finance
Financing from one source
Advisory Entrepreneur
Network

24
 International Best Practice - Japan
 National Federation of Credit Guarantee
Corporation (NFCGC) - Insurance arrangement
for SME financing through Credit Guarantee
system under JASMEC
 Credit Guarantee Corporation with 52 offices
in all prefecture - funded by the Govt. of Japan
 Shoko Chu-kin Bank(102 Branches), Japan
Finance Corporation & National Life Finance
Corporation are exclusive institutions for SME
Financing Besides, City banks (Commercial
Banks)
 International Best Practice – China
 Special Funds in Federal Budget for SME Development
Fund
 Sources of funds: federal budget, all governments above
county level, profits from operation of fund, donation,
donors
 Usages: Credit Guarantee fund, Services for SMEs,
Technology, specialization for integration with Large
Enterprises
 Central Bank support banks for SME financing
 State to provide direct channels for SME Finance
 All commercial banks will provide SMEs loans,
financial consultation and investment management
 International Best Practice – India

 Reserve Bank provides Guidelines for

directive credit for SMEs
 Small business financing is binding for
all financial institutions
 Banking Ombudsman for Small
Enterprises
 Penalty system
 Credit Guarantee upto Re.2.5 million
SMEDA & SME
Development
 Evolutionary Phases of SMEDA
Phase - 1 Phase - 2 Phase - 3 Phase - 4
Dec ‘98-Dec ‘00 Jan ‘00-Dec ‘00 Jan ‘01- May ‘03 Oct ’03 - onwards
HEXPO 2000 & beyond ILO Study SME Policy
Textile Vision 2005 World Bank SME Info. Services
Fisheries Leather Outlook 2010 ADB PPTA SME Networking Group
Transport
Cool Chain Boat Modification Sector Strategy Updates
Dairy Auto Vendors Strategic Focus - WTO
Light Engineering Flatted Factories
Carpet Weaving Textiles
Information Technology Fisheries Implementation Power Loom Cluster Marble and Granite
Leather Ceramic Cluster Ginning
Marble & Granite
Marble & Granite Cutlery
SES Monitoring Gems & Jewelry Dates & Apples Furniture
Wooden Furniture Light Engineering
Leather Garments Bangles Cluster
Trade Secrets
Help Desk Launched Dairy
OTC Products
Business Plan Develop- Help Desk & RBCs
Policy and Conducive Environment Training & Development Tech. Up gradation
Sector Strategies and Implementation Website Launched Training & Development
Publications Marketing Services
Cluster Development
Financial Services
Business Dev. Services Entrepreneurship
 Operational Strategy
Building a Conducive Environment
Proposing and facilitating changes in Policy
and Regulatory Environment
Reducing the Cost of Doing Business
Facilitating Government-SME Interface

Developing Sectors and Clusters

Sector Studies, Strategies and
Implementation
Cluster Development
Common Facility Centers (CFCs)

Provision and Facilitation of Services

Investment Facilitation
Technology, Training, Finance, Business
Information, Marketing, and legal support
Productivity and Competitiveness Improvement
 Priority Sectors

 Gems & Jewelry

 Marble & Granite
 Dairy
 Sports Goods
 Furniture
 Fisheries
 Light Engineering
 SMEDA Performance
Number of SMEs facilitated through
14,500
helpdesks
Number of SMEs trained (482 programs in
25,533
+50 cities )
Business Guide Series Downloaded 1,433,527

Total Hits (25,669,736) from countries 159

Business Plans 120

Pre-feasibilities on Web site 97

Pre-feasibilities under Process 80

SMEs facilitated through Library 9,379

 SME Policy
 Business Environment
 SME Financing
 Access to Resources & Services
Human Resource Development
Technology
Market and Industry Information
 SME Definition, Feedback, Monitoring & Evaluation
Mechanism
 Over 1000 stakeholders consulted
 12 Workshops
 Recommendations
 SME Bill 2005

 SME Definition

 Feedback, Evaluation & Monitoring

 Capacity building of SMEs

 Specific Support Funds for SME Development

 Credit Guarantee Fund

 Credit Insurance Fund

 Venture Capital

 SME Financing Credit Fund

 SME Bank Reform

 SME Development – Policy Statement

 “The Government of Pakistan is committed to develop the SME

sector for achieving higher economic growth leading to creation of
jobs and poverty alleviation. SME development will be achieved
by providing conducive business environment, greater access to
formal financing and through provision of support in technical up
gradation, human resource development, marketing and
innovation. The Government will facilitate establishment of new
businesses by developing policies that help in unleashing the
entrepreneurial potential of the people of Pakistan”
Thank You
 %age Contribution by Dominating
sectors in value addition
Large-Scale
Sectors Sectors SMEs
Manufacturing
1995-96 1987-88 1996-97 1987-88
Textiles 22.31% 17.35% Weaving 11.16% 13.19%
Food & 15.19% 15.95% Silk & Art 6.96% 5.11%
Beverages Silk
Electrical 7.67% 3.27% Jewellery 5.95% 7.65%
Machinery Products
Chemicals 8.53% 6.98% Furniture 6.18% 5.96%
Mineral 7.15% 7.69% Leather 3.65% 4.11%
Products Footwear
Tobacco 6.18% 10.08% Structural 5.08% 3.26%
Products
Total 67.03% 61.32% Total 38.98% 39.00%
Source: CMI (1987-88, 1995-96), SSHMI (1987-88, 1996-97)