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-à-vis Large Scale Large-ScaleSmall-Scale Output Growth Rate Capital Formation Growth % Output Growth Rate Capital Formation Growth % 1970s4.84-2.284.45.5 1980s8.168.154.710.5 1990s3.6-5.022.67.2

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 IdentifiedPercentage  Lack of finance55%  Shortage of skilled labour39%  Getting business site38%  Bribes21%  Orders/Marketing of Product28%  Lack of Knowledge12%  Government interference12%  Raw Material10%  License for work8%  New Technology8% SME Policy Note – World Bank 2002

8. Issues in SME Financing

9. Sources of Working Capital for SMEs Financial 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 Size of Firm Age of Firm (years) % age of Total No of Employees 0-56-1011-20 21 and more All Firms 0-10 0% 11-49 0%35%0% 29% 50-99 100%67%75%15%50% 100 or more 100%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 Source: ILO SMEDA Study 2001

14. Comparative Access to Financial Sector Comparatively low financial sector access in Pakistan India High Low Access to loans Timeliness of loans Affordability of Loans Bangladesh High Low Access to loans Timeliness of loans Affordability of Loans High Timeliness of loans Pakistan High Low Affordability of Loans 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 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, inadequate collateral, 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 or projects 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 Financing Infrastructure  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 focusing on 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. 24 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 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 Fisheries Transport Dairy Light Engineering Information Technology Leather SES Monitoring HEXPO 2000 & beyond Leather Outlook 2010 Cool Chain Flatted Factories Fisheries Implementation Marble & Granite Gems & 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 Policy SME Info. Services SME Networking Group 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 80Pre-feasibilities under Process 9,379SMEs facilitated through Library 97Pre-feasibilities on Web site 120Business Plans 159Total Hits (25,669,736) from countries 1,433,52 7 Business Guide Series Downloaded 25,533 Number 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 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 1995-961987-881996-971987-88 Textiles22.31%17.35% Weaving11.16%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% Chemicals8.53%6.98% Furniture6.18%5.96% Mineral Products 7.15%7.69%Leather Footwear 3.65%4.11% Tobacco6.18%10.08%Structural Products 5.08%3.26% Total67.03%61.32%Total38.98%39.00% Source: CMI (1987-88, 1995-96), SSHMI (1987-88, 1996-97)