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The role of Small and Medium Enterprises

PAGE Report
Oct 23 - 29, 2000

Institute of Cost and Management Accountants of Pakistan (ICMAP) and the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) have made a joint research on the role of SMEs in economic uplift of the country.

The report was presented to Fazlur Rehman Dittu, president, FPCCI at the Federation House on October 12, 2000 by Jalal Ahmed Khan, Executive Director and Syed Jamil Ahmed Rizvi, Director Research, ICMAP. Engineer M.A Jabbar, Member Managing committee, FPCCI, Chairman FPCCI Standing Committee Legal Affairs and Chairman, FPCCI, Standing Committee, WTO was the moving spirit behind the project. He floated this idea and persued with M.H. Asif, ICMAP president and the directors of the Institute to prepare the report on SMEs.

The report has been prepared in view of the significant role of SMEs in Pakistan, which provide employment to about 65 per cent of work force in the industrial sector. They contribute to the GDP around four times as much as the large scale industries.

The Director Research of ICMAP briefed on this occasion that revolutionary support from the government will be needed for the development of SMEs in the country. He further added that the government should make strategic policy decision to provide both technical and financial assistance to the SMEs sector.

Developing as well as developed countries hare spent large amounts of money for the promotion of SMEs.

There are three focal points in which SMEs are different from large scale enterprises. These are uncertainty, innovation and evolution.

The SME sector itself can be desegregated into micro enterprises, small enterprises and medium enterprises. SMEs are the starting point of development in countries desiring industrialization.

Most of the larger enterprises today have their origins in small and medium enterprises. SMEs lack the research capacity, the ability to take substantial risks, or any other advantage of expansion. SMEs have their effect on the GDP income distribution, tax revenue, employment, efficient utilization of resources and stability of family income.

Efforts are necessary to boost this sector for both employment, GDP growth and to organise its financial behaviour. SMEs are vital for world prosperity. Collectively they we the largest employers and greatest creators of wealth.

Small industry can be set up with small capital, and can produce goods for domestic consumption by using labour intensive technology.

The report highlighted about the successful experience of SMEs in Bangladesh and China. The Government of Bangladesh had taken up different financial assistance programmes with a view to extending finance to small industries at relatively favourable conditions.

SMEs have played a very important role in the economic development of China. At present, there are more than 10 million of SMEs comprising 99 per cent of the total number of enterprises in China. SMEs contributed 60 per cent of industrial output volume and 40 per cent of the total taxes and profits realized by enterprises in China. SMEs of China provide 75 per cent of the total township and urban employment and as such they play an important role in releasing the employment pressure and maintaining social stability.

It has been reported that SMEs are capable of creating most of the one billion new jobs the world will need in the new millennium. In developed countries, SMEs have constituted a significant portion of GNP and total employment.

SMEs account for between 55 per cent and 80 per cent of total employment in Western Europe, Japan and USA. Their contribution in output in Japan is 65 per cent, Germany 48 per cent and USA 45 per cent.

According to the economic survey of 1998-99, SMEs with a mere 20 per cent investment and resource to less than 10 per cent of the total formal credit, generated 80 per cent of the country's total employment. Various types of loans available are small loans for business and industry, small loans for industrialists, lending for small and medium industries.

If strategic planning for development of SMEs is made successful; middle class entrepreneurs may play an effective role in the economic recovery of Pakistan.

In Pakistan adult literacy rate is 48 per cent and majority of entrepreneurs operating small businesses and industry are not educated and as such they hesitate in approaching small and medium enterprises development authority and banks for loans.

High interest rate is the main hurdle facing SMEs. Credit may be offered to such enterprises at subsidized rates, the study said.

The research report proposes the setting up of a 'small business and cottage industries Bank' with an authorized and paid-up capital of Rs. One billion to boost the development of existing and developing new small and medium enterprises.

The bank could be sponsored by IDB, FPCCI, leasing companies, investment banks, modarba companies, various associations of exporters, NIT, insurance companies and general public.

It has been suggested in the report that the State Bank of Pakistan should seriously consider reducing interest rate to 10 per cent for SMEs and all commercial banks should also re-shape their credit policies for promoting the SMEs and achieving self sustaining economic development.

The report concludes that unless and until the SMEs are promoted, the dream of economic revival may not come true.

At the presentation ceremony of the report, those present were members managing committee of FPCCI which included Engineer M.A. Jabbar, Shaikh Shakeel Ahmed, Aziz Damji, Ubaidullah Qadri, Siddique Suleman, Muhammad Munsha Churra, Dawood Usman Jakhoora, Ilyas Bari, Yousuf Abdul Rehman, Secretary General FPCCI Anwarul Haque, Senior Joint Secretary Shahid Anwar and FPCCI Economic Advisor.

The ICMAP and FPCCI are also conducting joint research on preparing another study entitled "Input Costs and Corporate Tax Structure — An Analysis of Trends in SAARC Region" whose draft will be released before the end of year for review by FPCCI.

The report on the 'Role of Small and Medium Enterprises in GDP and macro Economic development of Pakistan has already been submitted by FPCCI to the Chief Executive, Finance Minister, Commerce Minister, Governor of SBP for active consideration and implementation.