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

• Investment

• Management, finance, tax, accounting

4. 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

5. Growth of SMEs vis--vis Large Scale7.2 2.6 -5.02 3.6 1990s 10.5 4.7 8.15 8.16 1980s 5.5 4.4 -2.28 4.84 1970s Capital Formation Growth % OutputGrowth Rate Capital Formation Growth % OutputGrowth Rate Small-Scale Large-Scale 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 SMEsFinancial Sector Contributing 7% Working Capital Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors 10. Sources of Investment for SMEs Financial Sector Contributing 8% Investment Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors 11. Loan Disbursement Pattern Loan Size Rs. in 000 Source: State Bank of Pakistan %age Exposure to Each Category 12. Loan Disbursement Pattern Source: Dr. Ehsan ul Haq, Dr. Faisal Bari- LUMS;Barriers in SME Growth - 2002 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 more 11-20 6-10 0-5 No of Employees Age of Firm (years) % age of Total Size of Firm 13. Legal Structure of Business Units in PakistanSource: ILO SMEDA Study 2001 14. Comparative Access to Financial Sector Comparatively low financial sector access in Pakistan Source: ITC publication - SMEs and the Global Market Place India High High High Low Accessto loans Timeliness ofloans Affordabilityof Loans Bangladesh High High High Low Accessto loans Timeliness ofloans Affordabilityof Loans High Timeliness ofloans Pakistan High High Low Affordabilityof Loans Accessto loans 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 credit market is estimated to be 250 to 400 billion

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

• risk mitigation

• start-up financing

• collateralization

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, inadequatecollateral, Less affordability and likelihood for success high rate of failures

• Often confused with Medium Enterprises

• No special Policy attention or Support

• Considered a case for directed or subsidized credit has to regain its Reputation

18. Situational Analysis 2/3

Medium Enterprise Informally formal

• Business Organization formal but little cushion

• Often subject to Policy Shocks e.g. poultry

• No formal financial management to analyze vulnerability

• Have access to finance but adequacy and timing is an issue

• Income stream estimation difficult - taxation laws discourage sharing of operational data

19. Situational Analysis 3/3

Govt. Policy Risk

• Cushion for Policy shock Public sector responsibility

International Competition Risk

• Impact of globalization on Markets, Investment Decisions

• Exogenous for SMEs Policy support for financing economic activity adjustment e.g.Korean Corporate Restructuring Fund

Commercial/ Management Risk

• Capacity building of SMEs - roles of support institutions SMEDA, EPB, PVTC, PITAC, PCSIR etc.

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 orprojects backed by only sound business plans

21. International Best Practices -Countries Studied

Developed Countries

• Germany

• Japan

Neighboring Countries

• China

• India

Developing Countries

• Thailand

• Turkey

22. International Best Practices SME FinancingInfrastructure

Separate legislation

Specialized Institutions for :-

• Promotion of SMEs- Advisory role-SMEDA

• Products development for risk mitigation in respect of financing by financial institution

• • Credit Guarantee Mechanism- in all countries studied by the group

• • Credit Bureau

• • Securitization and Reconstructions of financial assets- India & Korea Separate Act

• • Mechanism for redressal of grievance- Ombudsman for SMEs (India)

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.

• laws focusing on the promotion of the SME Sector

• laws focusingon the risk mitigation regime e.g. SME Credit Insurance Law (Japan), Credit Guarantee Association Law

Institutions are the outcome of these laws e.g. Credit Guarantee Corporations is the outcome of Credit Guarantee Association Law in Japan.

24. Model for SME Financing - Germany DtA Entrepreneur EIF Partners ActorsAdvantages/ sales factors Risk release Microloan On-lending bank House bank Refinancing+GuaranteeRisk 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

• Sources of funds : federal budget, all governments above county level, profits from operation of fund, donation, donors

• Usages:Credit Guarantee fund, Services for SMEs, Technology, specialization for integration with Large Enterprises

• Central 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

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 FisheriesTransport Dairy Light Engineering Information Technology Leather SES Monitoring HEXPO 2000 & beyond Leather Outlook 2010 Cool ChainFlatted Factories Fisheries Implementation Marble & GraniteGems & Jewelry Phase - 2 Jan 00-Dec 00 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 Business Dev. Services Cluster Development Sector Strategy Updates Strategic Focus - WTO Phase -4 Oct 03 - onwards SME PolicySME Info. Services SME Networking Group Policy and Conducive Environment TextilesMarble and GraniteGinning CutleryFurnitureLight EngineeringBangles Cluster Dairy Help Desk & RBCs Tech. Up gradation Training & Development Marketing Services Financial Services Entrepreneurship ILO StudyWorld BankADB 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 80 Pre-feasibilities under Process 9,379 SMEs facilitated through Library 97 Pre-feasibilities on Web site120 Business Plans 159 Total Hits (25,669,736)from countries 1,433,527Business Guide Series Downloaded25,533Number of SMEs trained(482 programs in +50 cities ) 14,500 Number of SMEs facilitated through helpdesks 33. SME Policy

Business Environment

SME Financing

Access to Resources & Services

• • Human Resource Development

• • Technology

• • Market and Industry Information

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 andpoverty 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 Source: CMI (1987-88, 1995-96), SSHMI (1987-88, 1996-97) 39.00% 38.98% Total 61.32% 67.03% Total 3.26% 5.08% Structural Products 10.08% 6.18% Tobacco 4.11% 3.65% Leather Footwear 7.69% 7.15% Mineral Products 5.96% 6.18% Furniture 6.98% 8.53% Chemicals 7.65% 5.95% Jewellery Products 3.27% 7.67% Electrical Machinery 5.11% 6.96% Silk & Art Silk 15.95% 15.19% Food & Beverages 13.19% 11.16% Weaving 17.35% 22.31% Textiles 1987-88 1996-97 1987-88 1995-96 SMEs Sectors Large-Scale Manufacturing Sectors