Mr. shahzad ahmad cheema (1)

Presentation by

Shahzad Ahmad Cheema

General Manager Operations & Regional Head (Off iciating)

NBP Gujranwala Region

Ph: 055-9200338 Fax: 055-9201229

E-mail: [email protected]

STRUCTURAL REFORMS AND SUSTAINABILITY IN SME SECTOR

At

5th SME Conference October 6, 2011

Organized by Shamrock Conferences International

What are SMEs?

An entity, ideally not being a public limited company, which does not employee more than 250 persons (manufacturing) and 50 persons (trade / services) and also fulfills one of the following criteria:

• A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million.

• A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million.

• Any concern (trade, services or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

As per State Bank of Pakistan Prudential Regulations

Importance of SMEs

SME growth strategy is critical for Pakistan. This requires private sector development, deep reforms, a broad public debate and a complete commitment by govt.

We have to address complex and long term structural issues, product innovation and increased connectivity for better urban and rural management to ensure level playing for all concerned.

There is also a need for vibrant and competitive markets, quality governance, institutional strengthening, human development and energetic youth.

Contribution of SMEs in

Economic Growth

3.2 million SMEs in Pakistan

SMEs which are employing up to 99 persons constitute over 95% of all enterprises

SMEs employ nearly 80% of the non-agriculture labour force

SMEs contribute 40% of GDP

SMEs are more labor-intensive than large enterprises

The significance of SMEs is associated primarily with their role in stimulating economic growth.

Structural Facilities Provided by the

Government

Establishment of Industrial Estates

Setting up of Technical Service Centers

Providing Marketing facilities

Providing Pre-Investment guidance and counseling for new customers

Handicraft Development Center

Issuance of Specific SBP Prudential Regulations for facilitating financing to SMEs.

Launch of Credit Guarantee Scheme for SMEs by SBP.

Organizations Working for the Development of SMEs

Organizations

Advisory & Facilitation

Bodies

Regulatory Institutions

Financial Institutions

NGOs, Technical Education

Institute & trade Associations

Organizations Working for the Development of SMEs

Advisory & Facilitation Bodies

Small & Medium Enterprise Development Authority (SMEDA)

Business Support Fund (BSF)

Pakistan Small Industrial Corporation (PSIC)

Punjab Small Industrial Corporation (PSIC)

Sindh Small Industrial Corporation (SSIC)

The Small Industries Development Board (SIDB) - Khyber Pakhtunkhuwa

The Directorate of Small Industries Baluchistan

Regulatory Institutions

State Bank of Pakistan (SBP)

Federal Board of Revenue (FBR)

Securities and Exchange Commission of Pakistan (SECP)

Trade Development Authority of Pakistan (TDAP)

Organizations Working for the Development of SMEs Financial Institutions (FI)

Commercial Banks (especially SME Bank) Micro Finance Banks

Non-Governmental Organizations (NGOs) For example: Kashf Foundation

Technical Education & Skill Development Institutes For example: Technical Education & Vocational Training

Authority (TEVTA)

Trade Associations / Chambers of Commerce For example: Gujranwala Chamber of Commerce & Industry

SBP’s Focus on SMEs

Current Schemes

Re-Finance for Re-Modernization

Financing for New Plant & Machinery

Credit Guarantee Scheme (Rural)

No Collateral, however, it discourages FIs due to high risk

SBP refunds 70% of defaulted loan, however only after post facto audit which makes FIs shaky

Same Prudential Regulations (PRs) for all SMEs

Financing from Rs. 1000 to Rs. 100 Million is regulated by the same PRs

PRs for smaller SMEs should be lenient

Priority Sectors

Sports Goods Gems and Jewelry Handicrafts Leather Goods Surgical Items Cutlery Fisheries Dairy Light Engineering Furniture Marble & Granite Ceramics & Sanitary

Problems & Challenges Faced by SMEs

And Structural Reforms Needed for their

Sustainability

A) Lack of Finances & Capital

Problems

SMEs are relatively smaller organizations so they have limited finances and capital at their disposal. SMEs fulfill 90% of the finances demands from equity or informal sources.

Lack of capital could be addressed by SBP, Financial Institutions (FI) and NGOs.

FIs demand as much documents from SMEs as from corporate clients.

Default ratio of SMEs is approximately 30% so considering a high risk sector banks avoid lending to SMEs

Solution

Documents should be reduced and simplified.

Relief in markup should be provided to SMEs for growing sectors of economy

Bankers should be trained to help SMEs in selection of business

NGOs should provide finance where banks couldn’t finance due to lack of documentation

Turnaround time for SMEs loan application should be reduced to 20 days

Cash flow based lending should be encouraged instead of collateral based lending for smaller SMEs. However, this scheme should take into account the ground realities of our market.

Startup businesses should be provided access to formal means of finance

Processing , valuation, mortgage and other legal fees should be as less as possible

B) Lack of Skilled Human Resources

Problem

Un-skilled manpower

Lack of managerial skills in the entrepreneurs

Solution

NGOs, training institutes and trade associations could provide the necessary training

Female entrepreneurs should be provided training to start up their own businesses.

C) Lack of Market Knowledge

Problem

SMEs have inadequate knowledge about the market in which they are operating.

They do not know what exactly is happening in national or international market?

Solution

Advisory Institutions (SMEDA), Trade Associations, NGOs and FIs should provide the necessary advice to SMEs

Trade Associations should facilitate SMEs for participation in international fairs & exhibitions

D) Lack of Awareness about Technology

Problem

SMEs are not up to date about new technologies

Solution

Advisory Institutions (SMEDA), Trade Associations and technical Training Institutes should impart necessary training

Trade Associations should send working papers to regulators for necessary relief in duties and markup especially for new technology equipments

E) Taxation and Licensing Problems

Problems

SMEs are Less documented as per tax requirement

Fear that documentation may expose to excessive taxes

License Fee are sometimes very high

Solution

Advisory Institutions, Trade Associations and FBR should review tax problems

Unnecessary documents should be eliminated

An easy process must be devised for tax assessment

Licensing Policy should be fair

License fees should be nominal

F) Power Crisis

Problem

Electricity and gas crisis is badly hurting the SMEs.

SMEs do not have the resources to employ alternate power resources

Solution

Energy efficient production methods should be utilized.

Government should be approached for helping the businessmen

Future of SMEs in Pakistan

170 Million population and over 3 Million SMEs are a real potential for economic growth

Human resource needs to be trained and educated

General public will adopt self employment through SMEs

Regulators, FIs and on the larger part government need to provide them a hassle free level playing field by addressing the earlier discussed issues.

I believe in hope, courage and confidence. Let us mobilize all our resources in systematic and organized way. We have to tackle the grave issues that confront us with a grim determination and discipline worthy of a great nation. The real success story behind Asian Tigers like South Korea, Taiwan, Hong Kong, Singapore and Malaysia is the development of SMEs.

Why can’t Pakistan be an Asian Tiger?

Thank You