Small & Medium Enterprises in Pakistan SMEDA May 10, 2005 Lahore
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, finance, tax, accountingManagement, finance, tax, accounting
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
Growth of SMEs vis-à-vis Large Scale
Large-Scale Small-ScaleOutput
Growth RateCapital
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 Legislation Human Resource Development Technology Market & Industry Information Lack of Infrastructure Environmental issues & compliance Social compliance issues Intellectual Property Rights
World Bank Survey 2002Issues 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
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
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
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 Ex
posu
re 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
moreAll
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
Corporates & Others
8%
Proprietorships &
Partnership85%
Public Sector7%
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
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
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
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
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 Considered a case for directed or subsidized credit – has
to regain its Reputationto regain its Reputation
Situational Analysis 2/3 Medium Enterprise – Informally formal
Business Organization formal but little Business Organization formal but little cushioncushion
Often 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
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.
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 CountriesGermany Germany JapanJapan
Neighboring CountriesChinaChina IndiaIndia
Developing CountriesThailand 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 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 groupCredit BureauCredit BureauSecuritization and Reconstructions of financial assets- India & Korea Securitization and Reconstructions of financial assets- India & Korea Separate ActSeparate ActMechanism 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 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.
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 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 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
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 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. ServicesCluster Development
Sector Strategy UpdatesStrategic Focus - WTO
Phase - 4Oct ’03 - onwardsSME 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 facilitating changes in Policy and Regulatory Environment Reducing the Cost of Doing BusinessFacilitating 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
Priority Sectors
Gems & Jewelry Marble & Granite Dairy Sports Goods Furniture Fisheries Light Engineering
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
SME Policy Business Environment SME Financing Access to Resources & Services
Human Resource DevelopmentHuman Resource DevelopmentTechnologyTechnologyMarket and Industry InformationMarket 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 Sectors SMEs
1995-96 1987-88 1996-97 1987-88Textiles 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)