literature review of microfinance sme in pakistan

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Chapter 2 LITERATURE REVIEW Micro financing is of much importance so far as economies of developing countries are concerned . Due to importance of this issue , there is vast literature available on this subject. Rana (2004) is of the view that small businesses depend on micro financing for their smooth growth and development , due to their structure , have a good opportunity to raise productivity and quality more confidently than the larger one’s . The traditional organizational system , which may have entrenched for years , must change now owing to a tough global competition , According to him there are two things that have affected our SMEs business norms regarding profitability . These are productivity ( the effectiveness with which we use all our resources ) and price recovery (the degree to which enhancing unit costs of inputs) that can be recovered by enhancing the selling price . It is only that productivity , which can guard us against this rising cost of inputs. The role of productivity becomes even more significant when the

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Page 1: Literature Review of microfinance SME in pakistan

Chapter 2 LITERATURE REVIEW

Micro financing is of much importance so far as economies of developing countries are concerned . Due to importance of this issue , there is vast literature available on this subject. Rana (2004) is of the view that small businesses depend on micro financing for their smooth growth and development , due to their structure , have a good opportunity to raise productivity and quality more confidently than the larger one’s . The traditional organizational system , which may have entrenched for years , must change now owing to a tough global competition , According to him there are two things that have affected our SMEs business norms regarding profitability . These are productivity ( the effectiveness with which we use all our resources ) and price recovery (the degree to which enhancing unit costs of inputs) that can be recovered by enhancing the selling price . It is only that productivity , which can guard us against this rising cost of inputs. The role of productivity becomes even more significant when the organization is facing international competition . It is also a tool of success in the local market.with out the availability of micro finance facility ,it would have been difficult if not impossible for the small business to finance their ever increasing need for the working capital .This is so because lending institutions focus more on large and established organizations then on smaller ones.

Shehzad (2003) concluded that the establishment of micro finance sort of a system development efforts require full support and involvement of top management , because without their commitment there is little hope of achieving any thing beyond the quality and productivity system development programme. For that purpose management awarness should be raised . At present they do not realize that existing organizational system and

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processes do not effectively reinforce quality and productivity improvement. Due to inadequate knowledge of various elements and processes of this quality productivity systems , they fail to recognize for a change and do not appreciate their role in promoting change. Only by creating a felt need to change can be expected to obtain the requisite commitment through properly designed awareness building programmes .It is much needed to have such a system (micro financing ) through out the country to help small business and to help the poor ones to meet their financing needs easily through a well established nationwide microfinance system. Ghausi (2002) is of the view that the major problems in financing Small – scale businesses stem from their lack of credit worthiness. The high rate of interest and the fact that credit facilities offered by financial institutions are security rather than project oriented . In order to solve the problem of poor credit worthiness small – scale businesses should form trade association, the membership of which should be compulsory . These associations could either provide loans themselves or provide guarantees acceptable to banks . The problem of interest cost can be solved by adopting a multiple interest rate policy such that a lower interest rate is charged initially on a project and raised later on. However, the change from one rate of interest to another should be gradual. The other cost can be reduced if the government were to construct its own go downs and rent them to small businesses. Moreover the insurance should be provided at a cheaper rate . There is need for introducing more efficient methods of management in the commercial and co-operative banks, adopting more sophisticated methods of loan / project appraisal, and collecting data on small-scale industry .

Abro(2002) is of the view that micro financing is the engine of economic growth in both developed and developing countries .Micro financing helps to finance the small business , poor people and also in generating self employment Micro financing helps fulfill the following important needs of SME:

They provide low cost employment since the unit cost of persons employed is lower for SMEs than for large – size units.

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Assist in regional and local development since SMEs accelerate rural industrialization by linking it with more organized urban sector.

Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities.

Contribute significantly to export revenue because of the low-cost labors and intensive nature of its products.

Have a positive effect on the trade balance since SMEs generally use indigenous raw materials .

Assist in financing a self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes.

Impart the resilience to with stand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self – sufficiency .

Aziz (2001) states that development of small-scale industry is also one of the effective means of stimulating and disseminating entrepreneurship in society .With out the proper availability of micro credit the establishment of small-scale industry and doing own business is not possible.Furthermore,Individual may develop potential for entrepreneurship in large enterprises. However, owing to storage of capital , they may be able to realize this only through the establishment of a small enterprise . Similarly, individual from all walks of life can realize their drive towards entrepreneurship through the establishment of small companies . The development of the skills of traditional artisans is another important gain stemming from small industry development . Certain traditional artisans may need only to improve their marketing ability as increased purchasing power improves the market , domestically in abroad , for the traditional artistic products . Other artisans are encouraged to undertake new lines of services and manufacturing activities to fit in with the requirements of a modern economy .

Hassan (2001) describes that the development of small-scale industries have a socio – economic imperative for the country . It

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needs smaller amount of capital , generates greater employment opportunities , disseminates widely the benefits of economic growth , has short gestation period and carries the fruits of industrialization to rural areas . Small industries have shown a remarkable resilience even in adversity. Given an appropriate framework for their development the small industry growth can play a significant role in export led expansion of the economy .

Saeed (2003) has described SMEs as higher level of total factor productivity , relatively large potential in employment generation and positive impact on income distribution and poverty reduction should have been sufficient grounds for promotion of small and medium enterprises .For this the viability of credit on small scale is very necessary Unfortunately the focus of public policy has been on promotion of only large business and various policy measures including higher import duties on inputs compared to those on large producers , non-availability of credit etc has constrained their growth . Just removal of impediments in the way of small business would be sufficient for growth of small and medium enterprises .

Haq (2002) is of the view that if the large firms tended to become less dynamic or become less dynamic or were less inclined to expand employment over time , a vigorous SME sector would be all the more important . It can create desirable competition for large firms , contribute to out put , employment and lay the foundation for large firms of the future . SME also act as channel for new entrants into the entrepreneurial class mobilizing talents , which might otherwise have relatively little chance to emerge . Some of these entrepreneurs eventually join the large- scale sector when their firm grows .

Entrepreneurs in small – scale industry typically come from middle - income back grounds ; a few have low income origins , while a large minority come from well to do families . Entrepreneurs in middle scale industries are relatively high on the income and education scale , where as entrepreneurs in large - scale industry are of course supposed to be at the top of it .

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Khalid(2000) concluded that countries like United States , Japan, Germany and China have strengthened their economies by promoting small medium enterprises in such a way that all factors of production are efficiently and effectively utilized . Their success in the cause is attributed to the planning in right direction and allocation of resources in an organized manner . According to the author SMEs development can become the solution of all socio economic problems of developing nations as it helps in generation of job opportunities , which is the basic requirement for marinating equal distribution of wealth . Moreover , SMEs develop a business culture in the society which paves the way for conversation of small business into large business resulting into the provision of base for the nations due share in international business. SMEs are smart enough to participate in promoting value added experts.

Rana (2003) is of the view that achieving high efficiency is typically more important in SMEs than in the large industrial set ups because of the reason that large organizations have more slack resources which act as shock absorbers of mistakes . Due to fierce competition our SMEs now have less tolerance for the prolonged inefficiencies in this sector . For this reason SMEs should move towards best practice , which satisfy owners for their return on investment and growth in earning . To compensate employees by providing them fringe benefits and to make them satisfied from their working conditions . To satisfy customers regarding the price, quality and services related with the product . Satisfaction of supplies / vendors with regard to the payment , which they made for the products and future sale potential of the product . Low percentage of damage is faced by community / government for involvement in community’s affairs, compliances with laws .

Nadvi (1990) is of the view that informal sector consisting of small enterprises and household units appears to be expanding more rapidly than the formal sector and already provides

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employment to the majority of those engaged in urban manufacturing in Pakistan . Informal sector units are characterized by extremely low levels of employment and a high incidence of unwaged family workers . As capital intensity there appears to be a distinct technology hierarchy on the basis of which household units are the most labour intensive and formal sector concerns the most capital intensive . Furthermore, capital intensity is in real terms growing more rapidly in the formal sector leading to a net displacement of labour . As a result labour productivity is substantially greater in the formal sector while capital productivity is inversely related to unit size . The focus on informal small scale units would appear to lead to the most socially efficient allocation of capital and thereby have the greatest potential for generating productive employment .

Aftab and Eric (1986) is of the view that one reason for the success of the Punjab firms was the overall environment of economic expansion along with the small firms proximity to large enterprise . For the individual small producers “the external economies generated by the large were as important as those it obtained through the evolution of vertical specialization within the small scale sector” .

Asad (1995) conclude that the experience of the successful small scale sector in Japan and Taiwan , argues that the “large scale capital goods sector can create the appropriate linkages for the embodiment of technical change in equipment , which can then enhance the productivity of the small scale sector accordingly. Secondly , because of economies of scale , the large scale sector can contribute towards reducing the cost of intermediate and capital goods for the small scale . Thirdly, with large firms subcontracting to the small , productivity enhancement and technical up gradation is further encouraged through user-producer interactions, quality standards , specification requirements, etc .

Summary :

From the discussion it is concluded that promotion of Small Medium Enterprises is necessary for development and

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growth of developing countries economies, because they provide low cost employment and the unit cost of persons employed is lower for SMEs than for large size units. The history of developed countries like USA , Japan , Germany reveal that they strengthened their economies by promoting Small Medium Enterprises. So for these reasons it becomes the requirement of the time to find out the reasons which are responsible for the backwardness of SMEs (in Charsadda).

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