small medium enterprise in pakistan
TRANSCRIPT
Small & Medium Enterprises in Pakistan
SMEDA
May 10, 2005Lahore
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
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 InvestmentInvestment Management, f inance, tax, accountingManagement, f inance, tax, accounting
Classification of SMEs
SMEs have been historically classif ied as: Industry Industry Trade; Wholesale, Retail & Services Trade; Wholesale, Retail & Services
Criteria For Definit ion: The criteria is based on;Fixed AssetsFixed AssetsEmploymentEmploymentTurnover/salesTurnover/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
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
Barriers to SME Growth
Govt. & SME Interaction Taxation Finance Labour Legislat ion Human Resource Development Technology Market & Industry Information Lack of Infrastructure Environmental issues & compliance Social compliance issues Intellectual Property Rights
World Bank Survey 2002
Issues Identif ied Percentage
Lack of f inance 55% Shortage of ski l led 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
Issues in SME Financing
Sources of Working Capital for SMEs
Retained Earnings
68%
other8%
Informal1% Equity
12%
Banks/ FIs7%
Trade Credit4%
Financial Sector Contributing 7% Working Capital
Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
Sources of Investment for SMEs
T rad e C red it2 %
B anks / F Is8 %
Eq uity17%
Info rmal2 %o ther
12 %R eta ined Earning s
59 %
Financial Sector Contributing 8% Investment
Source: Gallup Survey of 1000 Industries in 2002 covering 12 cities & 8 sectors
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
%ag
e E
xpo
sure
to
Eac
h C
ateg
ory
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
Legal Structure of Business Unitsin Pakistan
C o rp o rates & O thers
8 %
Pro p rie to rs hips &
Partners hip8 5%
Pub lic Secto r7%
Source: ILO SMEDA Study 2001
Comparative Access to Financial SectorComparatively 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
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 The size of SME credit market is estimated to be 250 to 400 bil l ionestimated to be 250 to 400 bil l ion
Demand Side Issues
Assessment of total demand by region/ sector
Access to Industry/ Business Benchmarks Informal accounts and management systems Proposal Formulation Securit ization of Business operation Diff iculties in managing loan documentation
(volume/language) Inadequate capitalization particularly for
New Business and issues of risk mitigationrisk mitigation start-up f inancingstart-up f inancing collateralizationcollateralization
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, Characteristics: Little knowledge, inadequate collateral, Less affordability and likelihood for success – high rate of Less affordability and likelihood for success – high rate of failuresfailures
Often confused with Medium EnterprisesOften confused with Medium Enterprises No special Policy attention or SupportNo special Policy attention or Support Considered a case for directed or subsidized credit – has to Considered a case for directed or subsidized credit – has to
regain its Reputationregain its Reputation
Situational Analysis 2/3
Medium Enterprise – Informally formalBusiness Organization formal but little cushionBusiness Organization formal but little cushionOften subject to Policy Shocks e.g. poultryOften subject to Policy Shocks e.g. poultryNo formal financial management to analyze No formal financial management to analyze
vulnerabilityvulnerabilityHave access to finance but adequacy and timing Have access to finance but adequacy and timing
is an issueis an issue Income stream estimation difficult - taxation laws Income stream estimation difficult - taxation laws
discourage sharing of operational datadiscourage sharing of operational data
Situational Analysis 3/3
Govt. Policy Risk
Cushion for Policy shock – Public sector responsibilityCushion for Policy shock – Public sector responsibility
International Competit ion Risk
Impact of globalization on Markets, Investment DecisionsImpact of globalization on Markets, Investment Decisions
Exogenous for SMEs – Policy support for financing Exogenous for SMEs – Policy support for financing economic activity adjustment e.g. Korean Corporate economic activity adjustment e.g. Korean Corporate Restructuring FundRestructuring Fund
Commercial/ Management Risk
Capacity building of SMEs - roles of support institutions Capacity building of SMEs - roles of support institutions SMEDA, EPB, PVTC, PITAC, PCSIR etc.SMEDA, EPB, PVTC, PITAC, PCSIR etc.
Regulatory Framework
Missing l inks between SMEs and the financial institutions – Credit Guarantee and Insurance (Laws & Institutions)
Tax Related Laws – SMEs unwil l ing 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
International Best Practices -Countries Studied
Developed Countries Germany Germany JapanJapan
Neighboring Countries ChinaChina IndiaIndia
Developing Countries Thailand Thailand TurkeyTurkey
International Best Practices –SME Financing Infrastructure
Separate legislation Specialized Institutions for :-
Promotion of SMEs- Advisory role-SMEDAPromotion of SMEs- Advisory role-SMEDA Products development for risk mitigation in respect of financing Products development for risk mitigation in respect of financing
by financial institutionby financial institutionCredit Guarantee Mechanism- in all countries studied by the groupCredit Guarantee Mechanism- in all countries studied by the group
Credit BureauCredit Bureau
Securitization and Reconstructions of financial assets- India & Korea Securitization and Reconstructions of financial assets- India & Korea Separate ActSeparate Act
Mechanism for redressal of grievance- Ombudsman for SMEs (India)Mechanism for redressal of grievance- Ombudsman for SMEs (India)
Banks for channelizing the resources to end users Venture Capital arrangements
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 Sectorlaws focusing on the promotion of the SME Sector
laws focusing on the risk mitigation regime e.g. SME Credit laws focusing on the risk mitigation regime e.g. SME Credit
Insurance Law (Japan), Credit Guarantee Association Law 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.
2424
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 financeFinancing from one source
Guarantee
InformationAdvice
Advisory Network
Cost covering margin
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 off ices 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)
International Best Practice – China
Special Funds in Federal Budget for SME Development Fund Sources of fundsSources of funds : federal budget, all governments above : federal budget, all governments above
county level, profits from operation of fund, donation, donorscounty level, profits from operation of fund, donation, donors Usages:Usages: Credit Guarantee fund, Services for SMEs, Credit Guarantee fund, Services for SMEs,
Technology, specialization for integration with Large Technology, specialization for integration with Large EnterprisesEnterprises
Central Bank support banks for SME financingCentral Bank support banks for SME financing State to provide direct channels for SME Finance All commercial banks wil l provide SMEs loans,
f inancial consultat ion and investment management
International Best Practice – India
Reserve Bank provides Guidelines for directive credit for SMEs
Small business financing is binding for all f inancial institutions
Banking Ombudsman for Small Enterprises
Penalty system Credit Guarantee upto Re.2.5 mil l ion
SMEDA & SME Development
Evolutionary Phases of SMEDAPhase - 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 - 2Jan ‘00-Dec ‘00
Boat ModificationAuto VendorsCarpet WeavingPower Loom ClusterCeramic ClusterMarble & GraniteDates & ApplesWooden FurnitureLeather Garments
Trade Secrets
Phase - 3Jan ‘01- May ‘03
Help Desk LaunchedOTC ProductsBusiness Plan Develop-Training & DevelopmentWebsite LaunchedPublications
Sector Strategies and Implementation
Business Dev. Services
Cluster Development
Sector Strategy UpdatesStrategic Focus - WTO
Phase - 4Oct ’03 - onwards
SME Policy SME Info. ServicesSME Networking Group
Policy and Conducive Environment
Textiles Marble and Granite GinningCutlery Furniture Light Engineering Bangles ClusterDairy
Help Desk & RBCsTech. Up gradationTraining & DevelopmentMarketing ServicesFinancial ServicesEntrepreneurship
ILO Study World Bank ADB PPTA
Operational Strategy Building a Conducive Environment
Proposing and facil i tat ing changes in Policy and Regulatory Environment Reducing the Cost of Doing BusinessFacili tat ing Government-SME Interface
Developing Sectors and Clusters Sector Studies, Strategies and ImplementationCluster Development Common Facil i ty Centers (CFCs)
Provision and Facil i tat ion of Services Investment Facil i tat ion Technology, Training, Finance, Business Information, Market ing, and legal support Product ivi ty and Competi t iveness Improvement
Priority Sectors
Gems & Jewelry Marble & Granite Dairy Sports Goods Furniture Fisheries Light Engineering
SMEDA Performance
80Pre-feasibil i t ies under Process
9,379SMEs facil i tated through Library
97Pre-feasibil i t ies on Web site
120Business Plans
159Total Hits (25,669,736) from countries
1,433,527 Business Guide Series Downloaded
25,533 Number of SMEs trained (482 programs in +50 cities )
14,500Number of SMEs facil i tated through helpdesks
SME Policy
Business Environment
SME Financing
Access to Resources & Services
Human Resource DevelopmentHuman Resource Development
TechnologyTechnology
Market and Industry InformationMarket and Industry Information
SME Definit ion, Feedback, Monitoring & Evaluation Mechanism
Over 1000 stakeholders consulted 12 Workshops
Recommendations SME Bil l 2005
SME Definit ion
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
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 alleviat ion. SME development wil l be
achieved by providing conducive business environment, greater
access to formal f inancing and through provision of support in
technical up gradation, human resource development,
marketing and innovation. The Government wil l facil i tate
establishment of new businesses by developing policies that
help in unleashing the entrepreneurial potential of the people of
Pakistan”
Thank You
%age Contribution by Dominating sectors in value addition
SectorsLarge-Scale
Manufacturing Sectors SMEs
1995-96 1987-88 1996-97 1987-88
Textiles 22.31% 17.35% Weaving 11.16% 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%
Chemicals 8.53% 6.98% Furniture 6.18% 5.96%
Mineral Products
7.15% 7.69% Leather Footwear
3.65% 4.11%
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)