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
Output
Growth Rate
Capital
Formation
Growth %
Small-Scale
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
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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
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Lack of finance
Shortage of skilled labour
Getting business site
Bribes
Orders/Marketing of Product
Lack of Knowledge
Government interference
Raw Material
License for work
New Technology
SME Policy Note – World Bank 2002
Percentage
55%
39%
38%
21%
28%
12%
12%
10%
8%
8%
Issues in SME
Financing
Sources of Working Capital for SMEs
Financial Sector Contributing 7% Working Capital
other
8%
Informal
1% Equity
12%
Trade Credit
4%
Retained
Earnings
68%
Banks/ FIs
7%
Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
Sources of Investment for SMEs
Financial Sector Contributing 8% Investment
o t her
12 %
R et ained
Earning s
59 %
Inf o rmal
2%
Eq uit y
17%
T rad e C red it
2%
B anks/ F Is
8%
Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
%age Exposure to Each Category
Loan Disbursement Pattern
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
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 Units
in Pakistan
C o rp o rat es &
Ot hers
8%
Pub lic Sect o r
7%
Pro p riet o rship
s&
Part nership
8 5%
Source: ILO SMEDA Study 2001
Comparative Access to Financial Sector
Comparatively low financial sector access in Pakistan
High
High
Affordability
of Loans
Affordability
of Loans
Low
Timeliness
of loans
Access
to loans
High
High
Access
to loans
High
Low
Affordability
of Loans
High
High
India
Bangladesh
Low
Timeliness
of loans
Access
to loans
High
Pakistan
Source: ITC publication - SMEs and the Global Market Place
High
Timeliness
of loans
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
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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
Actors
Partners
Advantages/
sales factors
Guarantee
EIF
DtA
Risk release
Refinancing +
Guarantee
Information
Advice
On-lending bank
„House bank“
Cost covering margin
Risk release
Microloan
Better access to finance
Financing from one source
Advisory
Network
Entrepreneur
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
Dec ‘98-Dec ‘00
Phase - 2
Jan ‘00-Dec ‘00
Textile Vision 2005
Fisheries
Transport
Dairy
Light Engineering
Information Technology
Leather
HEXPO 2000 & beyond
SES Monitoring
Gems & Jewelry
Leather Outlook 2010
Cool Chain
Flatted Factories
Fisheries Implementation
Marble & Granite
Trade Secrets
Policy and Conducive Environment
Sector Strategies and Implementation
Cluster Development
Business Dev. Services
Phase - 3
Jan ‘01- May ‘03
Phase - 4
Oct ’03 - onwards
ILO Study
World Bank
ADB PPTA
SME Policy
SME Info. Services
SME Networking Group
Boat Modification
Auto Vendors
Carpet Weaving
Power Loom Cluster
Ceramic Cluster
Marble & Granite
Dates & Apples
Wooden Furniture
Leather Garments
Help Desk Launched
OTC Products
Business Plan DevelopTraining & Development
Website Launched
Publications
Sector Strategy Updates
Strategic Focus - WTO
Textiles
Marble and Granite
Ginning
Cutlery
Furniture
Light Engineering
Bangles Cluster
Dairy
Help Desk & RBCs
Tech. Up gradation
Training & Development
Marketing Services
Financial 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
helpdesks
Number of SMEs trained (482 programs
in +50 cities )
Business Guide Series Downloaded
Total Hits (25,669,736) from countries
Business Plans
14,500
25,533
1,433,52
7
159
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
Sectors
Large-Scale
Manufacturing
1995-96
1987-88
Textiles
22.31%
17.35%
Food &
Beverages
15.19%
Electrical
Machinery
Sectors
SMEs
1996-97
1987-88
Weaving
11.16%
13.19%
15.95%
Silk & Art
Silk
6.96%
5.11%
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)