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Small & Medium Enterprises in Pakistan SMEDA May 10, 2005 Lahore

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Page 1: Small & Medium Enterprises In Pakistan

Small & Medium Enterprises in Pakistan

SMEDA

May 10, 2005Lahore

Page 2: Small & Medium Enterprises In Pakistan

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

Page 3: Small & Medium Enterprises In Pakistan

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, finance, tax, accountingManagement, finance, tax, accounting

Page 4: Small & Medium Enterprises In Pakistan

Classification of SMEs

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

Criteria For Definition: 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

Page 5: Small & Medium Enterprises In Pakistan

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

Page 6: Small & Medium Enterprises In Pakistan

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

Page 7: Small & Medium Enterprises In Pakistan

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

Page 8: Small & Medium Enterprises In Pakistan

Issues in SME Financing

Page 9: Small & Medium Enterprises In Pakistan

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

Page 10: Small & Medium Enterprises In Pakistan

Sources of Investment for SMEs

Trade Credit2%

Banks/ FIs8%

Equity17%

Informal2%other

12%Retained Earnings

59%

Financial Sector Contributing 8% Investment

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

Page 11: Small & Medium Enterprises In Pakistan

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

e E

xpo

sure

to

Eac

h C

ateg

ory

Page 12: Small & Medium Enterprises In Pakistan

Loan Disbursement Pattern

Size of Firm Age of Firm (years)% age of Total

No of Employees

0-5 6-10 11-2021 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

Page 13: Small & Medium Enterprises In Pakistan

Legal Structure of Business Unitsin Pakistan

Corporates & Others

8%

Proprietorships &

Partnership85%

Public Sector7%

Source: ILO SMEDA Study 2001

Page 14: Small & Medium Enterprises In Pakistan

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

Affordability of Loans

High

Timeliness of loans

Pakistan

High

High

Low

Affordability of Loans

Access to loans

Source: ITC publication - SMEs and the Global Market Place

Page 15: Small & Medium Enterprises In Pakistan

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 billionestimated to be 250 to 400 billion

Page 16: Small & Medium Enterprises In Pakistan

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 mitigationrisk mitigation start-up financingstart-up financing collateralizationcollateralization

Page 17: Small & Medium Enterprises In Pakistan

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 Characteristics: Little knowledge, inadequate

collateral, Less affordability and likelihood for success collateral, Less affordability and likelihood for success

– high rate of failures– high rate of failures

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 – Considered a case for directed or subsidized credit –

has to regain its Reputationhas to regain its Reputation

Page 18: Small & Medium Enterprises In Pakistan

Situational Analysis 2/3

Medium Enterprise – Informally formalBusiness Organization formal but little Business Organization formal but little

cushioncushionOften 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 Have access to finance but adequacy and

timing is an issuetiming is an issueIncome stream estimation difficult - taxation Income stream estimation difficult - taxation

laws discourage sharing of operational datalaws discourage sharing of operational data

Page 19: Small & Medium Enterprises In Pakistan

Situational Analysis 3/3

Govt. Policy Risk

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

International Competition Risk

Impact of globalization on Markets, Investment Impact of globalization on Markets, Investment

DecisionsDecisions

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 Capacity building of SMEs - roles of support

institutions SMEDA, EPB, PVTC, PITAC, PCSIR etc.institutions SMEDA, EPB, PVTC, PITAC, PCSIR etc.

Page 20: Small & Medium Enterprises In Pakistan

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

Page 21: Small & Medium Enterprises In Pakistan

International Best Practices -Countries Studied

Developed CountriesGermany Germany JapanJapan

Neighboring CountriesChinaChina IndiaIndia

Developing CountriesThailand Thailand TurkeyTurkey

Page 22: Small & Medium Enterprises In Pakistan

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 Products development for risk mitigation in respect of

financing by financial institutionfinancing by 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

Page 23: Small & Medium Enterprises In Pakistan

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

Credit Insurance Law (Japan), Credit Guarantee Association Credit Insurance Law (Japan), Credit Guarantee Association

Law Law

Institutions are the outcome of these laws e.g.

Credit Guarantee Corporations is the outcome of

Credit Guarantee Association Law in Japan.

Page 24: Small & Medium Enterprises In Pakistan

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

Page 25: Small & Medium Enterprises In Pakistan

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)

Page 26: Small & Medium Enterprises In Pakistan

International Best Practice – China

Special Funds in Federal Budget for SME Development Fund Sources of fundsSources of funds: federal budget, all governments : federal budget, all governments

above county level, profits from operation of fund, above county level, profits from operation of fund, donation, donorsdonation, 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 will provide SMEs loans,

financial consultation and investment management

Page 27: Small & Medium Enterprises In Pakistan

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

Page 28: Small & Medium Enterprises In Pakistan

SMEDA & SME Development

Page 29: Small & Medium Enterprises In Pakistan

Evolutionary Phases of SMEDAPhase - 1

Dec ‘98-Dec ‘00

Textile Vision 2005Fisheries TransportDairyLight EngineeringInformation TechnologyLeather

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

Page 30: Small & Medium Enterprises In Pakistan

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 ImplementationCluster 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

Page 31: Small & Medium Enterprises In Pakistan

Priority Sectors

Gems & Jewelry

Marble & Granite

Dairy

Sports Goods

Furniture

Fisheries

Light Engineering

Page 32: Small & Medium Enterprises In Pakistan

SMEDA Performance

80Pre-feasibilities under Process

9,379SMEs facilitated through Library

97Pre-feasibilities 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 facilitated through helpdesks

Page 33: Small & Medium Enterprises In Pakistan

SME Policy

Business Environment

SME Financing

Access to Resources & Services

Human Resource DevelopmentHuman Resource Development

TechnologyTechnology

Market and Industry InformationMarket and Industry Information

SME Definition, Feedback, Monitoring & Evaluation Mechanism

Over 1000 stakeholders consulted

12 Workshops

Page 34: Small & Medium Enterprises In Pakistan

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

Page 35: Small & Medium Enterprises In Pakistan

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”

Page 36: Small & Medium Enterprises In Pakistan

Thank You

Page 37: Small & Medium Enterprises In Pakistan

%age Contribution by Dominating sectors in value addition

SectorsLarge-Scale

ManufacturingSectors 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)