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Small & MediumEnterprises

WASIM AHMAD

M.Com(Pb), JAIBP, DBL(PU)

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OUTLINE

Importance of SMEs

Definition of SME

Problems & Issues for SMEs Govt. Initiatives for SME development

SME Policy

Financing To SMEs

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Importance of SMEs

SMEs account for 25 % of the exports ofmanufactured goods.

SMEs are sharing 35 % in manufacturing valueadded.

According to the economic survey of 1998-99,SMEs with a mere 20 per cent investment andresource to less than 10 per cent of the total formalcredit, generated 80 per cent of the country's totalemployment. Various types of loans available are

small loans for business and industry, small loansfor industrialists, lending for small and mediumindustries.

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97%

2.50%

0.23%

0.1%

0.09%

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

1 to 9

10 to 49

50 to 99

100 to 199

200 & above

Source Census ofEstablishments 1988

Business Units byEmployment Size

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Industrial Units byEmployment Size

28%

57%

11%

3%

2%

0% 20% 40% 60%

1 to 9

10 to 49

50 to 100

101 to 250

250 & above

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Sectoral Split of BusinessUnits

Community Services

33.06%

Transport0.94%

Finance & Insurance

1.74%

Trade, Hotels49.67%

Electricity/ Water

0.18%

Construction

0.04%Manufacturing

14.37%

Mining & Quarrying

0.01%

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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 WorkingCapital from Banks.

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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

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SME- Definition

SMEDA SME BANK FBS UNDP Sindh Industries Deptt. Punjab Industries Deptt.

PSIC SBP

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SME as defined by SBP

Small and Medium Enterprise (SME)means an entity, ideally not a public limitedcompany, which does not employ more than

250 persons (if it is manufacturing / serviceconcern) and 50 persons (if it is tradingconcern) and also fulfills the following criteriaof either a and c or b and c as relevant:

(a) A trading / service concern with total assets atcost excluding land and building upto Rs 50million.

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SME as defined by SBP

(b) A manufacturing concern with total assets at costexcluding land and building upto Rs 100 million.

(c) Any concern (trading, service or manufacturing)with net sales not exceeding Rs 300 million as perlatest financial statements.

An Individual, if he or she meets the above

criteria, can also be categorized as an SME.

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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

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Challenges & Issues in SMEDevelopment Business Environment Relationship between Government and

SME

Taxation issues Labor issues Delivery of assistance and access to

resources Finance

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Challenges & Issues in SMEDevelopment Human Resource Development Technology Transfer and Up-gradation Market and Industry Information Literacy Law and Order Intellectual Property Rights Infrastructure

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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%

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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 assessthe impact of their actions on smallbusiness prior to implementation.

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Relationships betweenGovernment and SME

The relationship between Government andSME seems to be fundamentally flawed. Inmany cases this extends also to other

large organizations and their interactionwith smaller clients as SME.

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Relationships betweenGovernment and SME A second point is how we may increase the

share of SME participating in the provisionof goods and services to the public sector,

as it is common practice in manycountries. A typical SME in Pakistan catersto the domestic private sector. It is notedthat fewer than 4% are supplying to the

government sector. Some of the issues arerelated to tough bargaining price (36%)and supplies on credit (34%) and other arerelated to absence of rules on how to the

public sector should increase its

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Taxation

Findings &Observations

Lack of awareness about the taxationsystem (58%-income tax, 44%-salestax)

Perception about tax agencies (32-36%said that fines and harassments are themajor factors)

Complexity in procedures results in highcost of compliance

Tax policy is biased in favor of large-scale enterprises

Timeframes for various procedures are

neither followed nor implemented-

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Labour IssuesFindingsand Observations

Source: ILO - SMEDA report

Lack of proper mechanism andimplementation machinery

Inefficient labour judicial system Lack of awareness about laws & policies

amongst SMEs Predatory inspection system Large number of overlapping laws (56

Labour lawsinclusive of sector specific)

Laws not run in consonance withadvancement in industries

Perception about Social Welfare; limitedcoverage and efficacy of the social safety net

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Delivery of assistance and access toResources

Competitive advantage is determined bythe productivity with which a country,region or cluster uses its human, capital

and natural resources. Pakistansinternational competitiveness markedlydeclined over past few years.15 Part of theblame is shared by lower productivity of

the workers. The evidence reveals thatmedian labor productivity, as measured byannual value added per worker, is 25percent lower in Pakistan than in India and

35 percent lower than in China.

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Human Resource Development

One of the major challenges that SMEhave to face is the emergence of theknowledge-based economy. People must

continue to innovate, change and upgrade. There is a need to nurture theentrepreneurial spirit and skilldevelopment for adopting innovative

technologies.

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Market and Industry Information

Access to market and industry informationis one of the keys to develop successfulbusiness strategies. Frequently, business

and trade associations are able to providetheir members with such services. Byassociating with like institutions in foreigncountries, they are also able to establish

links and obtain information on foreignmarkets.

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Literacy

The evidence reveals that SME find itextremely difficult to grow because of theirinability to delegate to soundly trained

staff. The day, the small businessmanfeels comfortable to delegate, SME startprogressing.

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Law and Order

Law and order situation in Pakistan hasalways been regarded as worrisome. Onesurvey reports that one in five

respondents report that the business wasthe target of at least one crime during2002. Another assessment suggests thatbusinesses in NWFP spend 4.5%, Sindh

and Punjab 1-2% of their revenue onsecurity. One in four SME consider law andorder to be a severe problem.

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GOVT. Initiatives for SME Development

Small and Medium EnterpriseDevelopment Authority (SMEDA)

SME Bank

Small and Medium Enterprise Center(SMEC)

One Village One Product (OVOP)

National Technical Education andVocational Training Authority (NTEVTA)

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SME POLICYObjective

The objective of SME Policy is to provide ashort and a medium to long- term policyframework with an implementationmechanism for achieving higher economicgrowth based on SME led private sectordevelopment.

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Scope

Business environment Access to finance Human resource development Support for technology up-gradation and

marketing

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Recommended Definition

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Recommended Definition

(a) To be eligible, an enterprise must fallinto the respective size category as

measured by "Employment".

(b) The number of persons employedincludes the owner and his or her familymembers i f they are working in theenterprise e.

(C) "Assets" exclude the value of land andbuildings.

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Cost of Doing Business

The small entrepreneurs spend on theaverage 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%).

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Policy & RegulationA list of laws assigning levies or taxes on SMEsTaxation Laws

1. Income Tax Ordinance 2001

2. Sales Tax Act, 1990

Laws Assigning Levies

3. Employers Old Age Benefit Act, 1976 (EOBI)

4. (Provincial) Employees Social Securities Ordinance, 1965

5. Workers Welfare Fund Ordinance, 1971(WWF) 6. West Pakistans Maternity Benefits Ordinance, 1958

7. Workers Children (Education) Ordinance, 1972

8. Companies Profit (Workers Participation) Act, 1968

9. Employees Cost of living Relief Act, 1973

10. Workers 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

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Policy & Regulation

Impacts of Regulations on Business Entry77

50

35

22

4 4

0

20

40

60

80

India Thailand USA

India

Pakistan

Thailand

Singapore

USAUK

Business Days required to receive operational legal

status

ILO-SMEDA Study 2001

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Policy & RegulationKey Indicators of RegulatoryEnvironment - Problems

71%70%

65%

56%52%

Sales Tax / ExciseTax

Income Tax Governmentinterference

Government lawsand Regulations

Non availability offinance

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Constraints to Business

Expansion

37.6

39.2

40.1

40.4

42.6

45.6

46.1

20 30 40 50 60

Access to financing

Electricity

Regulatory policyuncertainty

Corruption

Cost of financing

Tax rates

Taxadministration

Figure 1Constraints to business expansion in Pakistan

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Issues in SMEFinancing

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Sources of Investment forSMEs

Trade Credit

2%

Banks/ FIs

8%

Equity17%

Informal

2%other

12%Retained

Earnings

59%

Financial Sector Contributing 8% Investment

Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors

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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

%age

ExposuretoEachCategory

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Loan Disbursement Pattern

59%50%64%67%50%All Sizes

80%83%75%75%100%100 or more

50%15%75%67%100%50-99

29%0%0%35%0%11-49

0%0%0%0%0%0-10

All

Firms

21 and

more11-206-100-5

No of

Employees

Age of Firm (years)% age of Total

Size of Firm

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

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Legal Structure of Business Unitsin Pakistan

C orporates &

Others

8%

Proprietorship

s &Partnership

85%

Public Sector7%

Source: ILO SMEDA Study 2001

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Comparative Access to FinancialSector

Comparatively 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

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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

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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

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