small medium enterprise in pakistan

Small & Medium Enterprises in Pakistan

SMEDA

May 10, 2005Lahore

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 InvestmentInvestment Management, f inance, tax, accountingManagement, f inance, tax, accounting

Classification of SMEs

SMEs have been historically classif ied as: Industry Industry Trade; Wholesale, Retail & Services Trade; Wholesale, Retail & Services

Criteria For Definit ion: The criteria is based on;Fixed AssetsFixed AssetsEmploymentEmploymentTurnover/salesTurnover/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 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 Legislat ion Human Resource Development Technology Market & Industry Information Lack of Infrastructure Environmental issues & compliance Social compliance issues Intellectual Property Rights

World Bank Survey 2002

Issues Identif ied Percentage

Lack of f inance 55% Shortage of ski l led 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

Retained Earnings

68%

other8%

Informal1% Equity

12%

Banks/ FIs7%

Trade Credit4%

Financial Sector Contributing 7% Working Capital

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

Sources of Investment for SMEs

T rad e C red it2 %

B anks / F Is8 %

Eq uity17%

Info rmal2 %o ther

12 %R eta ined Earning s

59 %

Financial Sector Contributing 8% Investment

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

Loan Disbursement Pattern

0.5%2.9%

5.7%5.0%

3.1%2.1%

6.4%4.3%

69.9%

0%

20%

40%

60%

80%

Loan Size Rs. in ‘000

Source: State Bank of Pakistan

%ag

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xpo

sure

to

Eac

h C

ateg

ory

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 Unitsin Pakistan

C o rp o rates & O thers

8 %

Pro p rie to rs hips &

Partners hip8 5%

Pub lic Secto r7%

Source: ILO SMEDA Study 2001

Comparative Access to Financial SectorComparatively low financial sector access in Pakistan

India

High

High High

Low

Access to loans

Timeliness of loans

Affordability of Loans

Bangladesh

High

High High

LowAccess to loans Timeliness

of loans


High

Timeliness of loans

Pakistan

High

High

Low


Access to loans

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 The size of SME credit market is estimated to be 250 to 400 bil l ionestimated to be 250 to 400 bil l ion

Demand Side Issues

Assessment of total demand by region/ sector

Access to Industry/ Business Benchmarks Informal accounts and management systems Proposal Formulation Securit ization of Business operation Diff iculties in managing loan documentation

(volume/language) Inadequate capitalization particularly for

New Business and issues of risk mitigationrisk mitigation start-up f inancingstart-up f inancing collateralizationcollateralization

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, Characteristics: Little knowledge, inadequate collateral, Less affordability and likelihood for success – high rate of Less affordability and likelihood for success – high rate of failuresfailures

Often confused with Medium EnterprisesOften confused with Medium Enterprises No special Policy attention or SupportNo special Policy attention or Support Considered a case for directed or subsidized credit – has to Considered a case for directed or subsidized credit – has to

regain its Reputationregain its Reputation


Medium Enterprise – Informally formalBusiness Organization formal but little cushionBusiness Organization formal but little cushionOften subject to Policy Shocks e.g. poultryOften subject to Policy Shocks e.g. poultryNo formal financial management to analyze No formal financial management to analyze

vulnerabilityvulnerabilityHave access to finance but adequacy and timing Have access to finance but adequacy and timing

is an issueis an issue Income stream estimation difficult - taxation laws Income stream estimation difficult - taxation laws

discourage sharing of operational datadiscourage sharing of operational data


Govt. Policy Risk

Cushion for Policy shock – Public sector responsibilityCushion for Policy shock – Public sector responsibility

International Competit ion Risk

Impact of globalization on Markets, Investment DecisionsImpact of globalization on Markets, Investment Decisions

Exogenous for SMEs – Policy support for financing Exogenous for SMEs – Policy support for financing economic activity adjustment e.g. Korean Corporate economic activity adjustment e.g. Korean Corporate Restructuring FundRestructuring Fund

Commercial/ Management Risk

Capacity building of SMEs - roles of support institutions Capacity building of SMEs - roles of support institutions SMEDA, EPB, PVTC, PITAC, PCSIR etc.SMEDA, EPB, PVTC, PITAC, PCSIR etc.

Regulatory Framework

Missing l inks between SMEs and the financial institutions – Credit Guarantee and Insurance (Laws & Institutions)

Tax Related Laws – SMEs unwil l ing 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 Germany JapanJapan

Neighboring Countries ChinaChina IndiaIndia

Developing Countries Thailand Thailand TurkeyTurkey

International Best Practices –SME Financing Infrastructure

Separate legislation Specialized Institutions for :-

Promotion of SMEs- Advisory role-SMEDAPromotion of SMEs- Advisory role-SMEDA Products development for risk mitigation in respect of financing Products development for risk mitigation in respect of financing

by financial institutionby financial institutionCredit Guarantee Mechanism- in all countries studied by the groupCredit Guarantee Mechanism- in all countries studied by the group

Credit BureauCredit Bureau

Securitization and Reconstructions of financial assets- India & Korea Securitization and Reconstructions of financial assets- India & Korea Separate ActSeparate Act

Mechanism for redressal of grievance- Ombudsman for SMEs (India)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 Sectorlaws focusing on the promotion of the SME Sector

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

Insurance Law (Japan), Credit Guarantee Association Law 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.

2424

Model for SME Financing - Germany

DtA

Entrepreneur

EIF

Partners Actors Advantages/ sales factors

Risk release

Microloan

On-lending bank„House bank“

Refinancing +

Guarantee

Risk release

Better access to financeFinancing from one source

Guarantee

InformationAdvice

Advisory Network

Cost covering margin

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 off ices 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 fundsSources of funds : federal budget, all governments above : federal budget, all governments above

county level, profits from operation of fund, donation, donorscounty level, profits from operation of fund, donation, donors Usages:Usages: Credit Guarantee fund, Services for SMEs, Credit Guarantee fund, Services for SMEs,

Technology, specialization for integration with Large Technology, specialization for integration with Large EnterprisesEnterprises

Central Bank support banks for SME financingCentral Bank support banks for SME financing State to provide direct channels for SME Finance All commercial banks wil l provide SMEs loans,

f inancial consultat ion and investment management

International Best Practice – India

Reserve Bank provides Guidelines for directive credit for SMEs

Small business financing is binding for all f inancial institutions

Banking Ombudsman for Small Enterprises

Penalty system Credit Guarantee upto Re.2.5 mil l ion

SMEDA & SME Development

Evolutionary Phases of SMEDAPhase - 1

Dec ‘98-Dec ‘00

Textile Vision 2005

Fisheries

Transport

Dairy

Light Engineering

Information Technology

Leather

SES Monitoring

HEXPO 2000 & beyond

Leather Outlook 2010

Cool Chain

Flatted Factories

Fisheries Implementation

Marble & Granite

Gems & Jewelry

Phase - 2Jan ‘00-Dec ‘00

Boat ModificationAuto VendorsCarpet WeavingPower Loom ClusterCeramic ClusterMarble & GraniteDates & ApplesWooden FurnitureLeather Garments

Trade Secrets

Phase - 3Jan ‘01- May ‘03

Help Desk LaunchedOTC ProductsBusiness Plan Develop-Training & DevelopmentWebsite LaunchedPublications

Sector Strategies and Implementation

Business Dev. Services

Cluster Development

Sector Strategy UpdatesStrategic Focus - WTO

Phase - 4Oct ’03 - onwards

SME Policy SME Info. ServicesSME Networking Group

Policy and Conducive Environment

Textiles Marble and Granite GinningCutlery Furniture Light Engineering Bangles ClusterDairy

Help Desk & RBCsTech. Up gradationTraining & DevelopmentMarketing ServicesFinancial ServicesEntrepreneurship

ILO Study World Bank ADB PPTA

Operational Strategy Building a Conducive Environment

Proposing and facil i tat ing changes in Policy and Regulatory Environment Reducing the Cost of Doing BusinessFacili tat ing Government-SME Interface

Developing Sectors and Clusters Sector Studies, Strategies and ImplementationCluster Development Common Facil i ty Centers (CFCs)

Provision and Facil i tat ion of Services Investment Facil i tat ion Technology, Training, Finance, Business Information, Market ing, and legal support Product ivi ty and Competi t iveness Improvement

Priority Sectors

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

SMEDA Performance

80Pre-feasibil i t ies under Process

9,379SMEs facil i tated through Library

97Pre-feasibil i t ies on Web site

120Business Plans

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

1,433,527 Business Guide Series Downloaded

25,533 Number of SMEs trained (482 programs in +50 cities )

14,500Number of SMEs facil i tated through helpdesks

SME Policy

Business Environment

SME Financing

Access to Resources & Services

Human Resource DevelopmentHuman Resource Development

TechnologyTechnology

Market and Industry InformationMarket and Industry Information

SME Definit ion, Feedback, Monitoring & Evaluation Mechanism

Over 1000 stakeholders consulted 12 Workshops

Recommendations SME Bil l 2005

SME Definit ion

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 alleviat ion. SME development wil l be

achieved by providing conducive business environment, greater

access to formal f inancing and through provision of support in

technical up gradation, human resource development,

marketing and innovation. The Government wil l facil i tate

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

SectorsLarge-Scale

Manufacturing Sectors 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)