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Title: Small

Small Medium Enterprises in PakistanSMEDA
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
  • 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 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
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
Source Gallup Survey of 1000 Industries in 2002
covering 12 cities 8 sectors
Sources of Investment for SMEs
Financial Sector Contributing 8 Investment
Source Gallup Survey of 1000 Industries in 2002
covering 12 cities 8 sectors
Loan Disbursement Pattern
age Exposure to Each Category
Loan Size Rs. in 000
Source State Bank of Pakistan
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
Legal Structure of Business Unitsin Pakistan
Source ILO SMEDA Study 2001
Comparative Access to Financial Sector
Comparatively low financial sector access in
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
  • 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
  • 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
  • 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
  • International Competition Risk
  • Impact of globalization on Markets, Investment
  • 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
  • Inconsistent government policies S Tax 300
  • 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
  • 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
Advantages/ sales factors


Risk release
Refinancing Guarantee
Cost covering margin
On-lending bank House bank
Information Advice
Risk release
Better access to finance Financing from one
Advisory Network
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 - 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
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
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
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
SME Policy
  • Business Environment
  • SME Financing
  • Access to Resources Services
  • Human Resource Development
  • Technology
  • Market and Industry Information
  • SME Definition, Feedback, Monitoring Evaluation
  • Over 1000 stakeholders consulted
  • 12 Workshops

  • 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

Thank You
age Contribution by Dominating sectors in value
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,
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