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


SME Sector 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


Characteristics of SMEs: 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 : 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 : Growth of SMEs vis-à-vis Large Scale


Barriers to SME Growth: 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: 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: Issues in SME Financing


Sources of Working Capital for SMEs : 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: 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: Loan Disbursement Pattern Loan Size Rs. in ‘000 Source: State Bank of Pakistan %age Exposure to Each Category


Loan Disbursement Pattern: Loan Disbursement Pattern Source: Dr. Ehsan ul Haq, Dr. Faisal Bari- LUMS; Barriers in SME Growth - 2002


Legal Structure of Business Unitsin Pakistan : Legal Structure of Business Units in Pakistan Source: ILO SMEDA Study 2001


Comparative Access to Financial Sector: Comparative Access to Financial Sector Comparatively low financial sector access in Pakistan Source: ITC publication - SMEs and the Global Market Place


Our understanding of the Situation: 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: 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


Situational Analysis 1/3: 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: 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: 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: 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 : International Best Practices -Countries Studied Developed Countries Germany Japan Neighboring Countries China India Developing Countries Thailand Turkey


International Best Practices –SME Financing Infrastructure : 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 : 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: 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 finance Financing from one source Guarantee Information Advice Advisory Network Cost covering margin


International Best Practice - Japan: 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: 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: 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: SMEDA & SME Development


Evolutionary Phases of SMEDA: Evolutionary Phases of SMEDA Phase - 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 - 2 Jan ‘00-Dec ‘00 Boat Modification Auto Vendors Carpet Weaving Power Loom Cluster Ceramic Cluster Marble & Granite Dates & Apples Wooden Furniture Leather Garments Trade Secrets Phase - 3 Jan ‘01- May ‘03 Help Desk Launched OTC Products Business Plan Develop- Training & Development Website Launched Publications Sector Strategies and Implementation Business Dev. Services Cluster Development Sector Strategy Updates Strategic Focus - WTO Phase - 4 Oct ’03 - onwards SME Policy SME Info. Services SME Networking Group Policy and Conducive Environment 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 ILO Study World Bank ADB PPTA


Operational Strategy : 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: Priority Sectors Gems & Jewelry Marble & Granite Dairy Sports Goods Furniture Fisheries Light Engineering


SMEDA Performance: SMEDA Performance


SME Policy: 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: 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: 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”


Slide36: Thank You


%age Contribution by Dominating sectors in value addition: %age Contribution by Dominating sectors in value addition Source: CMI (1987-88, 1995-96), SSHMI (1987-88, 1996-97)