Small

1
Small Medium Enterprises in PakistanSMEDA
May 10, 2005 Lahore
2
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

3
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

4
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

5
Growth of SMEs vis-à-vis Large Scale
Large-Scale Large-Scale Small-Scale Small-Scale
Output Growth Rate Capital Formation Growth Output Growth Rate Capital Formation 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
6
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

7
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
8
Issues in SME Financing
9
Sources of Working Capital for SMEs
Financial Sector Contributing 7 Working Capital
Source Gallup Survey of 1000 Industries in 2002
covering 12 cities 8 sectors
10
Sources of Investment for SMEs
Financial Sector Contributing 8 Investment
Source Gallup Survey of 1000 Industries in 2002
covering 12 cities 8 sectors
11
Loan Disbursement Pattern
age Exposure to Each Category
Loan Size Rs. in 000
Source State Bank of Pakistan
12
Loan Disbursement Pattern
Size of Firm Age of Firm (years) age of Total Age of Firm (years) age of Total Age of Firm (years) age of Total Age of Firm (years) age of Total Age of Firm (years) age of Total
No of Employees 0-5 6-10 11-20 21 and more All 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
13
Legal Structure of Business Unitsin Pakistan
Source ILO SMEDA Study 2001
14
Comparative Access to Financial Sector
Comparatively low financial sector access in
Pakistan
Source ITC publication - SMEs and the Global
Market Place
15
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

16
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

17
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

18
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

19
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.

20
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

21
International Best Practices -Countries Studied

• Developed Countries
• Germany
• Japan
• Neighboring Countries
• China
• India
• Developing Countries
• Thailand
• Turkey

22
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

23
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.

24
Model for SME Financing - Germany
Actors
Partners
Advantages/ sales factors

Guarantee
EIF
DtA

Risk release
Refinancing Guarantee
Cost covering margin
On-lending bank House bank
Information Advice
Risk release
Microloan
Better access to finance Financing from one
source
Entrepreneur
Advisory Network
25
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)

26
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

27
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

28
SMEDA SME Development
29
Evolutionary Phases of SMEDA
Phase - 2 Jan 00-Dec 00
Phase - 3 Jan 01- May 03
Phase - 1 Dec 98-Dec 00
Phase - 4 Oct 03 - onwards
Textile Vision 2005 Fisheries Transport Dairy Lig
ht Engineering Information Technology Leather
SME Policy SME Info. Services SME Networking
Group
ILO Study World Bank ADB PPTA
HEXPO 2000 beyond Leather Outlook 2010 Cool
Chain Flatted Factories Fisheries
Implementation Marble Granite Gems Jewelry
Sector Strategy Updates Strategic Focus - WTO
Boat Modification Auto Vendors Carpet
Weaving Power Loom Cluster Ceramic Cluster Marble
Granite Dates Apples Wooden Furniture Leather
Garments
Textiles Marble and Granite Ginning Cutlery
Furniture Light Engineering Bangles
Cluster Dairy
SES Monitoring
Trade Secrets
Help Desk Launched OTC Products Business Plan
Develop- Training Development Website
Launched Publications
Help Desk RBCs Tech. Up gradation Training
Development Marketing Services Financial
Services Entrepreneurship
Policy and Conducive Environment
Sector Strategies and Implementation
Cluster Development
Business Dev. Services
30
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

31
Priority Sectors

• Gems Jewelry
• Marble Granite
• Dairy
• Sports Goods
• Furniture
• Fisheries
• Light Engineering

32
SMEDA Performance
33
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

34
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

35
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

36
Thank You
37
age Contribution by Dominating sectors in value
addition
Sectors Large-Scale Manufacturing Large-Scale Manufacturing Sectors SMEs SMEs
1995-96 1987-88 1996-97 1987-88
Textiles 22.31 17.35 Weaving 11.16 13.19
Food Beverages 15.19 15.95 Silk Art Silk 6.96 5.11
Electrical Machinery 7.67 3.27 Jewellery Products 5.95 7.65
Chemicals 8.53 6.98 Furniture 6.18 5.96
Mineral Products 7.15 7.69 Leather Footwear 3.65 4.11
Tobacco 6.18 10.08 Structural Products 5.08 3.26
Total 67.03 61.32 Total 38.98 39.00
Source CMI (1987-88, 1995-96), SSHMI (1987-88,
1996-97)