This document discusses small and medium enterprises (SMEs) in Pakistan. Some key points: - SMEs make up over 99% of business units in Pakistan and generate a significant portion of GDP, exports, and employment. However, most SMEs are small, self-financed operations with limited access to formal financing. - The document analyzes barriers facing SME growth, including issues related to government policies, taxation, access to finance, skills, and infrastructure. International case studies on SME support mechanisms are also presented. - In Pakistan, most SME financing comes from retained earnings rather than banks. The document proposes recommendations to strengthen the SME sector such as improving access to credit

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

2. 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

3. 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
 IInnvveessttmmeenntt
 MMaannaaggeemmeenntt,, ffiinnaannccee,, ttaaxx,, aaccccoouunnttiinngg

4. Classification of SMEs
 SMEs have been historically classified as:
IInndduussttrryy
TTrraaddee;; WWhhoolleessaallee,, RReettaaiill && SSeerrvviicceess
 Criteria For Definition: The criteria is based
on;
FFiixxeedd AAsssseettss
EEmmppllooyymmeenntt
TTuurrnnoovveerr//ssaalleess
 Fixed Assets include Land, Building,
Machinery
 Employment: Essence of SMEs is job
creation.
 Turnover/Sales: Sales have been
researched to arrive at the Annual

5. 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

6. 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

7. 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

8. Issues in SME
Financing

9. Sources of Working Capital for SMEs
Financial Sector Contributing 7% Working Capital
Retained
Earnings
68%
other
8%
Informal
1% Equity
12%
Trade Credit
Banks/ FIs
7%
4%
Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors

10. Sources of Investment for SMEs
Financial Sector Contributing 8% Investment
Info rmal
Eq uity
17%
Trad e C red it
2%
o ther 2%
12%
B anks / FIs
8%
R etained
Earning s
59%
Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors

11. Loan Disbursement Pattern
0.5%
2.9%
5.7%
5.0%
3.1%
2.1%
6.4%
69.9%
4.3%
80%
60%
40%
20%
0%
Loan Size Rs. in ‘000
%age Exposure to Each Category
Source: State Bank of Pakistan

12. Loan Disbursement Pattern
Size of Firm Age of Firm (years)
% age of Total
No of
Employees 0-5 6-10 11-20 21 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

13. Legal Structure of Business Units
in Pakistan
C o rp o ra tes &
O thers
8%
Pro p rieto rs hip
s &
Partners hip
8 5%
Pub lic Sec to r
7%
Source: ILO SMEDA Study 2001

14. Comparative Access to Financial Sector
Comparatively low financial sector access in Pakistan
High
Low
High High
India
Access
to loans
Timeliness
of loans
Affordability
of Loans
High
Access
to loans Low
Timeliness
High High
Bangladesh
of loans
Affordability
of Loans
High
Timeliness
of loans
High
Affordability
of Loans
Pakistan
High
Low
Access
to loans
Source: ITC publication - SMEs and the Global Market Place

15. 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 ccrreeddiitt mmaarrkkeett iiss
eessttiimmaatteedd ttoo bbee 225500 ttoo 440000 bbiilllliioonn

16. 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
rriisskk mmiittiiggaattiioonn
ssttaarrtt--uupp ffiinnaanncciinngg
ccoollllaatteerraalliizzaattiioonn

17. 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 ccoollllaatteerraall,,
LLeessss aaffffoorrddaabbiilliittyy aanndd lliikkeelliihhoooodd ffoorr ssuucccceessss –– hhiigghh rraattee ooff
ffaaiilluurreess
 OOfftteenn ccoonnffuusseedd wwiitthh MMeeddiiuumm EEnntteerrpprriisseess
 NNoo ssppeecciiaall PPoolliiccyy aatttteennttiioonn oorr SSuuppppoorrtt
 CCoonnssiiddeerreedd aa ccaassee ffoorr ddiirreecctteedd oorr ssuubbssiiddiizzeedd ccrreeddiitt –– hhaass ttoo
rreeggaaiinn iittss RReeppuuttaattiioonn

18. Situational Analysis 2/3
 Medium Enterprise – Informally formal
Business Organization formal bbuutt lliittttllee ccuusshhiioonn
OOfftteenn ssuubbjjeecctt ttoo PPoolliiccyy SShhoocckkss ee..gg.. ppoouullttrryy
NNoo ffoorrmmaall ffiinnaanncciiaall mmaannaaggeemmeenntt ttoo aannaallyyzzee
vvuullnneerraabbiilliittyy
HHaavvee aacccceessss ttoo ffiinnaannccee bbuutt aaddeeqquuaaccyy aanndd ttiimmiinngg
iiss aann iissssuuee
IInnccoommee ssttrreeaamm eessttiimmaattiioonn ddiiffffiiccuulltt -- ttaaxxaattiioonn llaawwss
ddiissccoouurraaggee sshhaarriinngg ooff ooppeerraattiioonnaall ddaattaa

19. Situational Analysis 3/3
 Govt. Policy Risk
 Cushion for Policy shock – Public sector rreessppoonnssiibbiilliittyy
 International Competition Risk
 IImmppaacctt ooff gglloobbaalliizzaattiioonn oonn MMaarrkkeettss,, IInnvveessttmmeenntt DDeecciissiioonnss
 EExxooggeennoouuss ffoorr SSMMEEss –– PPoolliiccyy ssuuppppoorrtt ffoorr ffiinnaanncciinngg
eeccoonnoommiicc aaccttiivviittyy aaddjjuussttmmeenntt ee..gg.. KKoorreeaann CCoorrppoorraattee
RReessttrruuccttuurriinngg FFuunndd
 Commercial/ Management Risk
 CCaappaacciittyy bbuuiillddiinngg ooff SSMMEEss -- rroolleess ooff ssuuppppoorrtt iinnssttiittuuttiioonnss
SSMMEEDDAA,, EEPPBB,, PPVVTTCC,, PPIITTAACC,, PPCCSSIIRR eettcc..

20. 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

21. International Best Practices -Countries
Studied
 Developed Countries
GGeerrmmaannyy
JJaappaann
 Neighboring Countries
CChhiinnaa
IInnddiiaa
 Developing Countries
TThhaaiillaanndd
TTuurrkkeeyy

22. International Best Practices –SME Financing
Infrastructure
 Separate legislation
 Specialized Institutions for :-
 Promotion of SMEs- AAddvviissoorryy rroollee--SSMMEEDDAA
 PPrroodduuccttss ddeevveellooppmmeenntt ffoorr rriisskk mmiittiiggaattiioonn iinn rreessppeecctt ooff ffiinnaanncciinngg
bbyy ffiinnaanncciiaall iinnssttiittuuttiioonn
CCrreeddiitt GGuuaarraanntteeee MMeecchhaanniissmm-- iinn aallll ccoouunnttrriieess ssttuuddiieedd bbyy tthhee ggrroouupp
CCrreeddiitt BBuurreeaauu
SSeeccuurriittiizzaattiioonn aanndd RReeccoonnssttrruuccttiioonnss ooff ffiinnaanncciiaall aasssseettss-- IInnddiiaa && KKoorreeaa
SSeeppaarraattee AAcctt
MMeecchhaanniissmm ffoorr rreeddrreessssaall ooff ggrriieevvaannccee-- OOmmbbuuddssmmaann ffoorr SSMMEEss ((IInnddiiaa))
 Banks for channelizing the resources to end users
 Venture Capital arrangements

23. International Best Practices - Laws for SMEs
 These laws vary directly with respect to the stage of
development of SME sector e.g.
 llaawwss ffooccuussiinngg oonn tthhee pprroommoottiioonn ooff tthhee SSMMEE SSeeccttoorr
 llaawwss ffooccuussiinngg oonn tthhee rriisskk mmiittiiggaattiioonn rreeggiimmee ee..gg.. SSMMEE CCrreeddiitt
IInnssuurraannccee LLaaww ((JJaappaann)),, CCrreeddiitt GGuuaarraanntteeee AAssssoocciiaattiioonn LLaaww
 Institutions are the outcome of these laws e.g. Credit
Guarantee Corporations is the outcome of Credit
Guarantee Association Law in Japan.

24. 2244
Model for SME Financing - Germany
Partners Actors Advantages/
DtA
Refinancing +
Guarantee
On-lending bank
„House bank“
Entrepreneur
EIF
sales factors
Risk release
Microloan
Risk release
Better access to finance
Financing from one source
Guarantee
Information
Advice
Advisory
Network
Cost covering margin

25. 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)

26. International Best Practice – China
 Special Funds in Federal Budget for SME
Development Fund
 SSoouurrcceess ooff ffuunnddss:: ffeeddeerraall bbuuddggeett,, aallll ggoovveerrnnmmeennttss aabboovvee
ccoouunnttyy lleevveell,, pprrooffiittss ffrroomm ooppeerraattiioonn ooff ffuunndd,, ddoonnaattiioonn,, ddoonnoorrss
 UUssaaggeess:: CCrreeddiitt GGuuaarraanntteeee ffuunndd,, SSeerrvviicceess ffoorr SSMMEEss,,
TTeecchhnnoollooggyy,, ssppeecciiaalliizzaattiioonn ffoorr iinntteeggrraattiioonn wwiitthh LLaarrggee
EEnntteerrpprriisseess
 CCeennttrraall BBaannkk ssuuppppoorrtt bbaannkkss ffoorr SSMMEE ffiinnaanncciinngg
 State to provide direct channels for SME Finance
 All commercial banks will provide SMEs loans,
financial consultation and investment management

27. 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

28. SMEDA & SME
Development

29. Evolutionary Phases of SMEDA
Phase - 1
Dec ‘98-Dec ‘00
Textile Vision 2005
Fisheries
Transport
Dairy
Light Engineering
Information Technology
Leather
SES Monitoring
Phase - 2
Jan ‘00-Dec ‘00
HEXPO 2000 & beyond
Leather Outlook 2010
Cool Chain
Flatted Factories
Fisheries Implementation
Marble & Granite
Gems & Jewelry
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
Cluster Development
Business Dev. Services
Phase - 4
Oct ’03 - onwards
SME Policy
SME Info. Services
SME Networking Group
Sector Strategy Updates
Strategic Focus - WTO
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

30. 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

31. Priority Sectors
 Gems & Jewelry
 Marble & Granite
 Dairy
 Sports Goods
 Furniture
 Fisheries
 Light Engineering

32. SMEDA Performance
Number of SMEs facilitated through 14,500
helpdesks
Number of SMEs trained (482 programs in 25,533
+50 cities )
Business Guide Series Downloaded 1,433,527
Total Hits (25,669,736) from countries 159
Business Plans 120
Pre-feasibilities on Web site 97
Pre-feasibilities under Process 80
SMEs facilitated through Library 9,379

33. SME Policy
 Business Environment
 SME Financing
 Access to Resources & Services
HHuummaann RReessoouurrccee DDeevveellooppmmeenntt
TTeecchhnnoollooggyy
MMaarrkkeett aanndd IInndduussttrryy IInnffoorrmmaattiioonn
 SME Definition, Feedback, Monitoring & Evaluation
Mechanism
 Over 1000 stakeholders consulted
 12 Workshops

34. 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

35. 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”

36. Thank You

37. %age Contribution by Dominating
sectors in value addition
Sectors Large-Scale
Manufacturing Sectors SMEs
1995-96 1987-88 1996-97 1987-88
Textiles 22.31% 17.35% Weaving 11.16% 13.19%
Food &
15.19% 15.95% Silk & Art
6.96% 5.11%
Beverages
Silk
Electrical
Machinery
7.67% 3.27% Jewellery
Products
5.95% 7.65%
Chemicals 8.53% 6.98% Furniture 6.18% 5.96%
Mineral
7.15% 7.69% Leather
3.65% 4.11%
Products
Footwear
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)