SMALL AND MEDIUM SMALL AND MEDIUM ENTERPRISESENTERPRISES

GROUP MEMBERSGROUP MEMBERS

M ASIM MALIKM ASIM MALIKZAMAN AHMAD ZAKIZAMAN AHMAD ZAKIFARHAN HABIB QURESHIFARHAN HABIB QURESHISIKANDAR GHANISIKANDAR GHANIM RAMZAN M RAMZAN M ZAIN MALIKM ZAIN MALIK

OBJECTIVEOBJECTIVEWhat is enterprises and entrepreneurshipWhat is enterprises and entrepreneurshipWhat is SMEs What is SMEs SMEs in PAKISTANSMEs in PAKISTANClassification ,characteristic, challenges Classification ,characteristic, challenges of SMEsof SMEsSources and regulatory frame work.Sources and regulatory frame work.Best practices in different country. Best practices in different country. SMEs polices and SMEs development- SMEs polices and SMEs development- policy statement.policy statement.

EnterpriseEnterprise……involves measures to encourage individuals to involves measures to encourage individuals to become entrepreneurs with the necessary skills to become entrepreneurs with the necessary skills to make a business successful make a business successful (Mason, 2000)(Mason, 2000)

In essence, enterprise is about spotting opportunities, In essence, enterprise is about spotting opportunities, creating new ideas and having the confidence and creating new ideas and having the confidence and capabilities to turn these ideas into working realities capabilities to turn these ideas into working realities (Nixon, 2004)(Nixon, 2004)

Define EntrepreneurDefine Entrepreneur

“ “ Is a person who organized and manages a Is a person who organized and manages a business undertaking assuming the risk for the business undertaking assuming the risk for the sake of profit ”sake of profit ”

“ “ Its mean who takes the risk of converting a new Its mean who takes the risk of converting a new idea into reality ”idea into reality ”

SME DefinitionsSME Definitions

SMEDA SME DefinitionSMEDA SME Definition

Small & Medium Enterprises are defined as follows, as approved inSmall & Medium Enterprises are defined as follows, as approved in

SME Policy 2007SME Policy 2007

Enterprise CategoryEmployment

Size (a)Paid Up Capital

(b)Annual Sales

(c)

Small & Medium Enterprise (SME)

 Up to 250Up to Rs. 25

MillionUp to Rs. 250

Million

The Small And Medium Enterprises The Small And Medium Enterprises Development Authority - SMEDADevelopment Authority - SMEDA

Premier institution of the Govt. of Pakistan under Ministry of Premier institution of the Govt. of Pakistan under Ministry of Industries and Production, SMEDA was established in October 1998 Industries and Production, SMEDA was established in October 1998 to take on the challenge of developing Small & Medium Enterprises to take on the challenge of developing Small & Medium Enterprises (SMEs) in Pakistan(SMEs) in Pakistan

SMEDA VisionSMEDA Vision

Growth of globally competitive SME sector through a conducive and Growth of globally competitive SME sector through a conducive and facilitating environment and support services as an engine of growth facilitating environment and support services as an engine of growth and sustainability to national economy.and sustainability to national economy.

SMEDA ObjectivesSMEDA Objectives

Formulate Policy to encourage the growth of SMEs in Formulate Policy to encourage the growth of SMEs in the country and to advise the Government on fiscal and the country and to advise the Government on fiscal and monetary issues related to SMEs. monetary issues related to SMEs.

Facilitation of Business Development Services to SMEs. Facilitation of Business Development Services to SMEs.

Set up and manage a service provider’s database Set up and manage a service provider’s database including machinery and supplier for SMEs.including machinery and supplier for SMEs.

Facilitation of SMEs in securing financing. Facilitation of SMEs in securing financing.

Strengthening of SMEs by conducting and facilitating Strengthening of SMEs by conducting and facilitating seminars, workshops and training programs. seminars, workshops and training programs.

Identification of service opportunities on the basis of Identification of service opportunities on the basis of supply/demand gapsupply/demand gap

SME DefinitionsSME Definitions

  

Defined by State Bank of Pakistan Defined by State Bank of Pakistan  

SME (Small and Medium Enterprise) means an entity, ideally not a public limited company, which does not employee more than 250 persons (if it is manufacturing concern) and 50 persons (if it is trading / service concern).

And also fulfills the following criteria of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as relevant:

(a) A trading / service concern with total assets at cost excluding land and buildings up to Rs 50 million.

(b) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million.

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

SME DefinitionsSME Definitions

Institution Small Medium

SME Bank Total Assets of Rs. 20 M

Total Assets of Rs. 100 M

Federal Bureau of Statistics

Less than 10 employees N/A

Punjab Small Industries Corporation

Fixed investment. up to Rs. 20 million excluding land and building

N/A

Punjab Industries Department

Fixed assets with Rs. 10 million excluding cost of land

N/A

SME Sector in PakistanSME Sector in Pakistan

3.2 million business units in Pakistan

Over 90% business units employ less than 99 persons

i.e. 3.16 million SMEs

Generate 80% of non-agri sector employment

Direct Contribution to GDP over 40% approximately

Generate 25% of Manufacturing Export Earnings

Contribute 35% in Manufacturing Value addition SMEs contribute around Rs. 140 B to Exports.

Characteristics of SMEsCharacteristics 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,

Classification of SMEs Classification of SMEs SMEs have been historically classified asSMEs have been historically classified as::

Industry Industry Trade; Wholesale, Retail & Services Trade; Wholesale, Retail & Services

Criteria For Definition: The criteria is based on:Criteria For Definition: The criteria is based on: Fixed AssetsFixed Assets EmploymentEmployment Turnover/salesTurnover/sales

Fixed Assets Fixed Assets include Land Building, Machineryinclude Land Building, Machinery Employment Employment Essence of SMEs is job creation.Essence of SMEs is job creation. Turnover/SalesTurnover/Sales Sale have been researched to arrive at the Sale have been researched to arrive at the

Annual Turnover/SalesAnnual Turnover/Sales

Challenges & Issues in SME Challenges & Issues in SME DevelopmentDevelopment

Business EnvironmentBusiness Environment Relationship between Government and SMERelationship between Government and SME Taxation issuesTaxation issues Labor issuesLabor issues Delivery of assistance and access to resourcesDelivery of assistance and access to resources FinanceFinance Human Resource DevelopmentHuman Resource Development Technology Transfer and Up-gradationTechnology Transfer and Up-gradation Market and Industry InformationMarket and Industry Information LiteracyLiteracy Law and OrderLaw and Order InfrastructureInfrastructure

Growth of SMEs vis-à-vis Growth of SMEs vis-à-vis Large Scale Large Scale

year Large-Scale Small-ScaleOutput

Growth RateCapital

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

World Bank Survey 2002World Bank Survey 2002Issues IdentifiedIssues Identified PercentagePercentage

Lack of financeLack of finance 55%55% Shortage of skilled labourShortage of skilled labour 39%39% Getting business siteGetting business site 38%38% BribesBribes 21%21% Orders/Marketing of ProductOrders/Marketing of Product 28%28% Lack of KnowledgeLack of Knowledge 12%12% Government interferenceGovernment interference 12%12% Raw MaterialRaw Material 10%10% License for workLicense for work 8%8% New TechnologyNew Technology 8%8%

Issues in SME Issues in SME FinancingFinancing

Sources of Working Capital Sources of Working Capital for SMEs for SMEs

other8%

Informal1% Equity

12%

Trade Credit5%

Banks/ FIs7%

Retained Earnings

67%

Financial Sector Contributing 7% Working Capital

Sources of Investment for Sources of Investment for SMEsSMEs

Trade Credit2%

Banks/ FIs8%

Equity17%

Informal2%other

12%Retained Earnings

59%

Financial Sector Contributing 8% Investment

Our understanding of the Our understanding of the SituationSituation

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

The size of SME in credit market is estimated to be 250 to 400 billion

Legal Structure of Business UnitsLegal Structure of Business Unitsin Pakistan in Pakistan

Corporates & Others

8%

Proprietorships &

Partnership85%

Public Sector7%

Regulatory FrameworkRegulatory 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

International Best Practices International Best Practices Countries Studied Countries Studied

Developed CountriesDeveloped Countries– Germany Germany

– JapanJapan

Neighboring CountriesNeighboring Countries– ChinaChina

– IndiaIndia

Developing CountriesDeveloping Countries– Thailand Thailand

– TurkeyTurkey

International Best Practices –International Best Practices –SME Financing Infrastructure SME Financing Infrastructure Separate legislationSeparate legislation

Specialized Institutions for :-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 institution Credit 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 usersBanks for channelizing the resources to end users

Venture Capital arrangementsVenture Capital arrangements

International Best Practices - International Best Practices - Laws for SMEs Laws for SMEs

These laws vary directly with respect to the stage These laws vary directly with respect to the stage

of development of SME sector e.g. 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. Institutions are the outcome of these laws e.g.

Credit Guarantee Corporations is the outcome of Credit Guarantee Corporations is the outcome of

Credit Guarantee Association Law in JapanCredit Guarantee Association Law in Japan. .

International Best Practice - International Best Practice - JapanJapan

National Federation of Credit Guarantee Corporation National Federation of Credit Guarantee Corporation (NFCGC) - Insurance arrangement for SME financing (NFCGC) - Insurance arrangement for SME financing through Credit Guarantee system under JASMECthrough Credit Guarantee system under JASMEC

Credit Guarantee Corporation with 52 offices in all Credit Guarantee Corporation with 52 offices in all prefecture - funded by the Govt. of Japanprefecture - funded by the Govt. of Japan

Shoko Chu-kin Bank(102 Branches), Japan Finance Shoko Chu-kin Bank(102 Branches), Japan Finance Corporation & National Life Finance Corporation are Corporation & National Life Finance Corporation are exclusive institutions for SME Financing Besides, City exclusive institutions for SME Financing Besides, City banks (Commercial Banks)banks (Commercial Banks)

International Best Practice – International Best Practice – ChinaChina

Special Funds in Federal Budget for SME Special Funds in Federal Budget for SME Development FundDevelopment 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 FinanceState to provide direct channels for SME Finance

All commercial banks will provide SMEs loans, All commercial banks will provide SMEs loans, financial consultation and investment financial consultation and investment managementmanagement

International Best Practice – International Best Practice – IndiaIndia

Reserve Bank provides Guidelines for Reserve Bank provides Guidelines for

directive credit for SMEsdirective credit for SMEs

Small business financing is binding for all Small business financing is binding for all

financial institutionsfinancial institutions

Banking Ombudsman for Small EnterprisesBanking Ombudsman for Small Enterprises

Penalty systemPenalty system

Credit Guarantee upto Re.2.5 millionCredit Guarantee upto Re.2.5 million

Operational Strategy 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

Priority SectorsPriority Sectors

Gems & JewelryGems & Jewelry

Marble & GraniteMarble & Granite

DairyDairy

Sports GoodsSports Goods

FurnitureFurniture

FisheriesFisheries

Light EngineeringLight Engineering

SME PolicySME Policy

Business EnvironmentBusiness Environment

SME FinancingSME Financing

Access to Resources & ServicesAccess to Resources & Services

Human Resource DevelopmentHuman Resource Development

TechnologyTechnology

Market and Industry InformationMarket and Industry Information

SME Definition, Feedback, Monitoring & Evaluation MechanismSME Definition, Feedback, Monitoring & Evaluation Mechanism

Over 1000 stakeholders consultedOver 1000 stakeholders consulted

12 Workshops12 Workshops

SME Development – Policy StatementSME Development – Policy Statement

“ “The Government of Pakistan is committed to develop the SME The Government of Pakistan is committed to develop the SME

sector for achieving higher economic growth leading to creation of sector for achieving higher economic growth leading to creation of

jobs and poverty alleviation. SME development will be achieved by jobs and poverty alleviation. SME development will be achieved by

providing conducive business environment, greater access to formal providing conducive business environment, greater access to formal

financing and through provision of support in technical up gradation, financing and through provision of support in technical up gradation,

human resource development, marketing and innovation. The human resource development, marketing and innovation. The

Government will facilitate establishment of new businesses by Government will facilitate establishment of new businesses by

developing policies that help in unleashing the entrepreneurial developing policies that help in unleashing the entrepreneurial

potential of the people of Pakistan”potential of the people of Pakistan”

THANKSTHANKS