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Small & Medium

Enterprises

WASIM AHMAD
M.Com(Pb), JAIBP, DBL(PU)
OUTLINE

 Importance of SMEs
 Definition of SME
 Problems & Issues for SMEs
 Govt. Initiatives for SME development
 SME Policy
 Financing To SMEs
Importance of SMEs
 There are about 3.2 Million Business
Enterprises in our Country.
 Enterprises employing up to 99 persons
constitute over 95 %.
 SMEs employ about 78 % of the Non-Agri
labor force.
 SMEs contribute over 30 % to GDP.
 SMEs contribute around Rs. 140 B to
Exports.
Importance of SMEs
 SMEs account for 25 % of the exports of
manufactured goods.
 SMEs are sharing 35 % in manufacturing value
added.
 According to the economic survey of 1998-99,
SMEs with a mere 20 per cent investment and
resource to less than 10 per cent of the total formal
credit, generated 80 per cent of the country's total
employment. Various types of loans available are
small loans for business and industry, small loans
for industrialists, lending for small and medium
industries.
Importance of SME Sector

100
90
80
70
60
50 USA
40 France
30 Pakistan
20
10
0
# of SME as Share in Share in Share in Share in Share in
Share of Employment Production Exports Investments Loans
Total # of
Enterprises

SMEs contribute significantly to the local economies


but have limited access to loan funds
Business Units by
Employment Size

200 & above 0.09%


0.1%
100 to 199
0.23%
50 to 99
2.50%
10 to 49 97%
1 to 9

0% 20% 40% 60% 80% 100%

Source Census of Establishments 1988


Industrial Units by
Employment Size

250 & above


2%

101to 250 3%

50 to 100 11%
57%
10 to 49

1to 9 28%
0% 20% 40% 60%
Sectoral Split of Business
Units
Mining & Quarrying
0.01%

Manufacturing Construction
14.37% 0.04%
Community Services
33.06%

Electricity/ Water
0.18%
Finance& Insurance
1.74%

Transport Trade, Hotels


0.94% 49.67%
Credit To SMEs

 57 % of New Investment and 67 % of


Working Capital Comes from Internal Finance
or Retained Earnings
 Only 7 % of New Investment and Working
Capital from Banks.
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
SME- Definition
 SMEDA
 SME BANK
 FBS
 UNDP
 Sindh Industries Deptt.
 Punjab Industries Deptt.
 PSIC
 SBP
SME as defined by SBP
 Small and Medium Enterprise (SME)
means an entity, ideally not a public limited
company, which does not employ more than
250 persons (if it is manufacturing / service
concern) and 50 persons (if it is trading
concern) and also fulfills the following criteria
of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as relevant:
 (a) A trading / service concern with total assets at
cost excluding land and building upto Rs 50
million.
SME as defined by SBP
 (b) A manufacturing concern with total assets at cost
excluding land and building upto Rs 100 million.
 (c) Any concern (trading, service or manufacturing)
with net sales not exceeding Rs 300 million as per
latest financial statements.
An Individual, if he or she meets the above
criteria, can also be categorized as an SME.
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
Growth of SMEs vis-à-vis Large
Scale
Large-Scale Small-Scale
Output Capital Output Growth Capital
Growth Rate Formation Rate Formation
Growth % 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
Challenges & Issues in SME
Development
 Business Environment
 Relationship between Government and
SME
 Taxation issues
 Labor issues
 Delivery of assistance and access to
resources
 Finance
Challenges & Issues in SME
Development
 Human Resource Development
 Technology Transfer and Up-gradation
 Market and Industry Information
 Literacy
 Law and Order
 Intellectual Property Rights
 Infrastructure
World Bank Survey

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%
Business Environment

 Large size of the SME sector.


 Limits the ability of Government and
business support institutions to achieve
complete coverage by support programs.
 “Think Small First” initiative which
requires
all Government organizations to assess
the impact of their actions on small
business prior to implementation.
Relationships between
Government and SME
 The relationship between Government and
SME seems to be fundamentally flawed. In
many cases this extends also to other
large organizations and their interaction
with smaller clients as SME.
Relationships between
Government and SME
 A second point is how we may increase the
share of SME participating in the provision
of goods and services to the public sector,
as it is common practice in many
countries. A typical SME in Pakistan caters
to the domestic private sector. It is noted
that fewer than 4% are supplying to the
government sector. Some of the issues are
related to tough bargaining price (36%)
and supplies on credit (34%) and other are
related to absence of rules on how to the
public sector should increase its
Taxation
Findings & Observations
 Lack of awareness about the taxation
system (58%-income tax, 44%-sales
tax)
 Perception about tax agencies (32-36%
said that fines and harassments are the
major factors)
 Complexity in procedures results in high
cost of compliance
 Tax policy is biased in favor of large-
scale enterprises
 Timeframes for various procedures are
neither followed nor implemented
Labour Issues
Findings and Observations
 Lack of proper mechanism and
implementation machinery
 Inefficient labour judicial system
 Lack of awareness about laws & policies
amongst SMEs
 Predatory inspection system
 Large number of overlapping laws (56
Labour laws–inclusive of sector specific)
 Laws not run in consonance with
advancement in industries
 Perception about Social Welfare; limited
coverage and efficacy of the social safety net
Source: ILO - SMEDA report
Delivery of assistance and access to
Resources
 Competitive advantage is determined by
the productivity with which a country,
region or cluster uses its human, capital
and natural resources. Pakistan’s
international competitiveness markedly
declined over past few years.15 Part of the
blame is shared by lower productivity of
the workers. The evidence reveals that
median labor productivity, as measured by
annual value added per worker, is 25
percent lower in Pakistan than in India and
35 percent lower than in China.
Finance

 It has been observed that 57% of new


investment for Small and Medium
Enterprises and 67% of working capital
finance come from internal finance or
retained earnings; only about 7% of funds
for investment or working capital come
from banks or other financial institutions.
Even suppliers’ credit rivals the
contribution of the banks as a source of
working capital (4.5%). Another survey
concludes that SME are indeed being
rationed out of the credit market, rather
Human Resource Development

 One of the major challenges that SME


have to face is the emergence of the
knowledge-based economy. People must
continue to innovate, change and upgrade.
There is a need to nurture the
entrepreneurial spirit and skill
development for adopting innovative
technologies.
Technology Transfer and Up-
gradation
 In our country, growth oriented exporting
firms still have problems sourcing quality
inputs due to the lack of a network of
reliable suppliers. This adds to their
transaction costs. Likewise, the SME are
not large enough to furnish sufficient
demand to be an incentive for a big high
quality input supplier.
Market and Industry Information

 Access to market and industry information


is one of the keys to develop successful
business strategies. Frequently, business
and trade associations are able to provide
their members with such services. By
associating with like institutions in foreign
countries, they are also able to establish
links and obtain information on foreign
markets.
Literacy

 The evidence reveals that SME find it


extremely difficult to grow because of their
inability to delegate to soundly trained
staff. The day, the small businessman
feels comfortable to delegate, SME start
progressing.
Law and Order

 Law and order situation in Pakistan has


always been regarded as worrisome. One
survey reports that one in five
respondents report that the business was
the target of at least one crime during
2002. Another assessment suggests that
businesses in NWFP spend 4.5%, Sindh
and Punjab 1-2% of their revenue on
security. One in four SME consider law and
order to be a severe problem.
Intellectual Property Rights

 Intellectual Property Rights (IPR) is a vital


issue that needs to be looked into. It has
been observed that many developing
countries, with the help of a change in
their IP systems and laws, are able to
attract Foreign Direct Investment (FDI) in
the Research and Development (R&D)
especially in the industrial and scientific
field. Therefore, promotion and protection
of intellectual property spurs economic
growth, creates new jobs and industries,
enhancing the quality and enjoyment of
Infrastructure

 Basic physical infrastructure is a


prerequisite to growth and development.
Power outages and access to connections
are considered an irritant which
significantly affects the productivity of
firms in Pakistan. It is estimated that a
typical business in Pakistan loses 5.6% in
annual sales revenue due to just this
single factor.
GOVT. Initiatives for SME Development

 Small and Medium Enterprise


Development Authority (SMEDA)
 SME Bank
 Small and Medium Enterprise Center
(SMEC)
 One Village One Product (OVOP)
 National Technical Education and
Vocational Training Authority (NTEVTA)
SME POLICY
Objective
 The objective of SME Policy is to provide a
short and a medium to long- term policy
framework with an implementation
mechanism for achieving higher economic
growth based on SME led private sector
development.
Scope

 Business environment
 Access to finance
 Human resource development
 Support for technology up-gradation and
marketing
Recommended Definition
Recommended Definition

(a) To be eligible, an enterprise must fall


into the respective size category as
measured by "Employment".
(b) The number of persons employed
includes the owner and his or her family
members i f they are working in the
enterprise e.
(C) "Assets" exclude the value of land and
buildings.
Cost of Doing Business
 The small entrepreneurs spend on the
average
 over Rs. 15,000 per year

 and 12% of their entrepreneurial time in

coping with government regulations


 Respondents highlighted rising cost of
business due to
 government taxes (56%)

 corruption (39%)

 utility charges (30%)

 oppressive role of local officials (26%).


Policy & Regulation
A list of laws assigning levies or taxes on SMEs
Taxation Laws

 1. Income Tax Ordinance 2001


 2. Sales Tax Act, 1990
Laws Assigning Levies
 3. Employer’s Old Age Benefit Act, 1976 (EOBI)
 4. (Provincial) Employees Social Securities Ordinance, 1965
 5. Workers Welfare Fund Ordinance, 1971(WWF)
 6. West Pakistan’s Maternity Benefits Ordinance, 1958
 7. Workers Children (Education) Ordinance, 1972
 8. Companies Profit (Worker’s Participation) Act, 1968
 9. Employees Cost of living Relief Act, 1973
 10. Worker’s Compensation Act, 1923
Laws Assigning Standards for Wages and Workplace
 11. The Payment of Wages Act, 1936
 12. The Minimum Wages Ordinance, 1961
 13. Pakistan Minimum Wages for Unskilled Workers Ordinance, 1969
Policy & Regulation
Impacts of Regulations on Business Entry
77
80 Business Days required to receive operational legal
status India
60 50 Pakistan
35 Thailand
40
22 Singapore
20
4 4 USA
0 UK
India Thailand USA

ILO-SMEDA Study 2001


Policy & Regulation
Key Indicators of Regulatory
Environment - Problems
71% 70%
65%
56%
52%

Sales Tax / Excise Income Tax Government Government laws Non availability of
Tax interference and Regulations finance
Constraints to Business
Expansion Figure 1
Constraints to business expansion in Pakistan
Tax
administration 46.1

Tax rates 45.6

Cost of financing 42.6

Corruption 40.4
Regulatory policy
uncertainty 40.1

Electricity 39.2

Access to financing 37.6

20 30 40 50 60
Issues in SME
Financing
Sources of Working Capital for
SMEs
Financial Sector Contributing 7% Working Capital
Informal
other
1% Equity
8%
12%
Trade
Credit
4%
Retained
Banks/ FIs
Earnings
68% 7%

Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
Sources of Investment for
SMEs
Financial Sector Contributing 8% Investment

Informal
other 2%
12% Equity
Retained
17%
Earnings
59% Trade C redit
2%
Banks/ FIs
8%

Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
Loan Disbursement Pattern
80%
%age Exposure to Each Category

60%
69.9%
40%

2.9% 5.0% 2.1% 4.3%


20%
0.5% 5.7% 6.4%
3.1%
0%

Loan Size Rs. in ‘000

Source: State Bank of Pakistan


Loan Disbursement Pattern

Size of Firm Age of Firm (years)


% age of Total
No of 21 and All
0-5 6-10 11-20
Employees more 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 Units
in Pakistan
C orporates & Public Sector
Others 7%
8%

Proprietorship
s&
Partnership
85%

Source: ILO SMEDA Study 2001


Comparative Access to Financial
Sector
Comparatively low financial sector access in Pakistan
High High
Affordability Affordability
of Loans of Loans

Low
Access
Access Timeliness High Low Timeliness
to loans
to loans of loans of loans
Affordability
of Loans
High High High High
India Bangladesh

Low

Access Timeliness
to loans of loans

High
High Pakistan

Source: ITC publication - SMEs and the Global Market Place


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
Internet Resources

 www.smeda.org.pk
 www.smebank.org
 www.sbp.org.pk
 www.ibp.org.pk
 http://caribbean.smetoolkit.org
 www.pasme.org.pk
 www.unisame.org
 www.smepromotions.org

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