There appears wide gulf between
the performances of the creditors vis-a-vis the expectations of the
By Muhammad Bashir
May 13 -19, 2002
The government, SME Bank and SMEDA are doing a lot to
promote Small and Medium Enterprises (SMEs) in the country. Against
this, one gets the feeling that the sponsors of SMEs in Pakistan are not
getting the facilities and encouragement they expect. There appears wide
gulf between the performances of the creditors vis-a-vis the
expectations of the sponsors. This worrisome impression has been
gathered from the reports appearing in the English press on recent
meetings between Smeda and SME Bank with the Convenor of the Union of
Small and Medium Enterprises (Unisame). There is, therefore, urgent need
for convergence of views of both the groups so that SMEs show visible
progress for the welfare of the country and its people. Both sides have
to fully realize the present day conditions in Pakistan and re-assess
their respective roles in the best interest of the country. This may not
be easy but is not impossible either particularly when there is genuine
goodwill on both sides. Let us review how each group perceives the
has been reported that Smeda's chief operating officer on 28th March
2002 at a workshop, in Karachi, jointly organized with Unisame, stated
that Smeda is presently working on a plan, which would suggest to the
government how to remove regulatory retardants in the way of promoting
SMEs. He said that the main objective of Smeda is to assist the small
and medium enterprises with technical gradation marketing support
especially in export markets. However, he said without developing human
resource through training and organization structure as well as giving
SMEs easy and quick access to formal capital these objectives could not
be achieved. Speaking on the occasion the Convener of Unisame assured
full support to Smeda and reportedly raised the following main points:
giving institutions are demanding collaterals from small entrepreneurs
and secondly the procedure is lengthy and time consuming; it is a
normal practice with loan giving institutions to reject even a
feasible project and in case it is accepted entrepreneurs have to
undergo lot of hardships regarding registration and other formalities
for arranging finances.
government should be asked to enhance limit of small loans without
was requested to arrange such projects, which could work as 'jump
start' projects to facilitate new entrants. A very large number of
items being presently imported could be indigenously manufactured
provided the SMEs are encouraged and given fully support at government
was stated that there is a lot of talent in the country and
engineering goods can be manufactured by SMEs, which would save
country's foreign exchange on their imports. Also that if the country
only manages to manufacture auto parts as well as some stationery
items it would save the country from spending huge foreign exchange
and also generate employment.
SME BANK AND
The office bearers of Unisame were invited by the President of SME
Bank for a meeting on 29th March morning at Karachi to assess the
problems being faced by the entrepreneurs and the facilities required
by SMEs. The Convenor of Unisame requested the SME Bank's president to
hire the services of turnkey engineers for the manufacture of plants
to make goods in Pakistan, which are being imported and sell them to
entrepreneurs namely Overseas Pakistanis who come back to Pakistan and
wish to have fruitful occupation here; and also requested him to use
his good offices to check smuggling and give tariff protection to
goods made in Pakistan. He was also requested to reduce the mark-up
rate, as 17 per cent is too high. The CEO of SME Bank and other
officers reportedly made the following points:
are the engine of economic growth. In Pakistan, SMEs play a
significant role, providing employment to over 70 per cent and
contribute more than 50 per cent towards export earnings. There are
approximately 220,000 SMEs in Pakistan. There is a wide gap between
the lenders and SMEs because only few SMEs avail credit from the
order for SMEs to develop it is necessary to have a conducive
regulatory environment and legal framework — efficient and adequate
business support services and access to financing. This being a major
objective revival strategy. The economic scenario today is extremely
challenging and there is cut-throat competition in the market and
globalization has made technology imperative for success in
businesses. Human resource development and effective managerial,
financial, technical and marketing skills and quality control measures
are some of the key determinants of market share and brand loyalty.
The SMEs should focus on long-term sustainability for them to meet
Bank strongly believes that financing alone is not sufficient to
assist SMEs to develop. They need intensive tailor made and focused
assistance. The SME Bank also provides Business Support Services. The
SME Bank's financial assistance is delivered through programme lending
and project lending and any commercially viable business proposal
merits SME Bank's support. In the first instance, the Bank endeavours
to assist and support enterprises, which use indigenous raw material,
add value and are export oriented. The repayment period would be
linked to the cash flows of the project. However, total period will
not exceed 7 years.
SME Bank is a response to the financial and business support needs of
the SMEs and it aims to provide comprehensive services to this sector.
The SME Bank aims to assist deserving SMEs in achieving all of the
above and more. Suggestions and comments were invited to improve
services and requested the Union to contact SME Provincial Chief,
Sindh, who was also present in the meeting to attend to the SMEs of
NEED FOR CONVERGENCE OF
VIEWS: The points that emerge from the above meetings give
an indication of the SMEs affairs in Pakistan. It is felt that the
Unisame and its members expect too much from the government and the
specialized bodies set up to promote and finance SMEs. In certain
respects, however, their expectations appear to have merit and
remedial measures might be considered to redress the situation. As
regards different concessions and privileges sought for promoting the
SMEs, Unisame and its members might be advised of the current
situation and the conditionality from the IMF / World Bank and the
requirements under the WTO regime. Under the circumstances, steps may
be taken to provide what is possible and practicable. As regards the
SME bank and the Smeda, it is felt, they have to do much more than
what they have been doing, as otherwise, the country may not avail the
benefits from SMEs in the time frame envisaged. Appropriate Measures
for Promotion of SMEs:
1- The Federal / Provincial
Governments and Smeda The Federal and the Provincial Governments:
The government has the most important role in the promotion of SMEs.
The government is urged to streamline and simplify the matters
pertaining to land acquisition in industrial estates, provision of
utilities, levy of sales tax / income tax / CED, improving law and
order situation and continuation of the overall industrial policies.
In addition, the government might ensure that there is coordination
among different agencies concerned with the promotion of different
aspects of SMEs. For effective promotion of SMEs, there is need for a
comprehensive approach, agreed to and implemented by the government
and all the other concerned parties. In this context, the following
steps may also be considered:
Venture capital culture in the country. Measures taken in the past
have not been successful. Situation has to be improved. Steps such as
sale of shares at deep discount and the use of the standardized of
agreements for most of the venture capital financing may also be
of special-purpose buildings for housing light industries, trade,
packing and repacking units, etc. within the municipal limits may be
encouraged. Women may particularly benefit from this.
the loaning by rich persons to the start up businesses on standardized
terms and using standard agreements. This is a useful source of funds
and needs to be encouraged.
technical grant from institutions such as UNDP, US AID, ADB, IDB, the
World Bank and similar other bodies for the promotion of SMEs and for
the training of the sponsors and SME employees.
Smeda for activities such as databank on industry, preparation of
standardized contracts and agreements, guidelines for managing SMEs
and training of the SME personnel. Necessary instructions to be passed
on to the concerned departments to share data with Smeda and also to
cooperate in streamlining the activities for promoting SMEs on fast
government should streamline the procedures and facilities in small
industrial estates. Once land is purchased all other utilities such as
power connection, gas, water, telephone should automatically be
available. The whole process should not take much time if the payment
is made and the project qualifies for the plot as per policy.
has been doing its best in the past to promote SMEs and exports in
Pakistan. However, in the fast changing world, Smeda has to do much
more and do it fast. Some of the things that need early attention are:
on existing industries and the new industries being set up.
Information needs to be available by local, region and country wide,
for different industrial products. In case other businesses providing
services are added to the list, it will be much better. These details
will be useful to the new sponsors and they may not go for a
particular project if there is already excess capacity, or the units
are known to be sick. SME Bank and other creditors may also use such
data. In order to make this facility self-sustaining, Smeda may be
allowed to charge a small fee for sharing the information.
may develop and adapt facilities and documents from national agencies
promoting SMEs in the respective countries. Small Business
Administration, USA and the agencies in Japan might be particularly
may develop authentic list of civic, legal and commercial licenses
required at different locations and keep it always up-dated.
Preparation and standardization of contracts and agreements may also
can prepare documents to help sponsors assess themselves, the SME
project, the Business Plan, etc. against a fee. This may in many cases
save the prospective investors from bigger losses in the shape of
failed businesses at a later stage. Thus, Smeda will help the
prospective sponsors from wasting time, money and efforts in projects
or activities considered unsuitable.
may help identify and establish such businesses and industries, which
have greater chances of survival and success in the present day world.
2- SME BANK AND OTHER CREDIT
SME Bank is a new institution but in its
foundations one can see the remains of the three financial
institutions: Youth Investment Promotion Society (YIPS), Regional
Development Finance Corporation (RDFC), and Small Business Finance
Corporation (SBFC). SME Bank understandably is currently sorting out
the matters it inherited from these three institutions and also
searching for firmer ground for starting operations in its new
capacity. It has many lessons to learn from the past and possibly
devise its future strategy in the light of that. May be outside
experienced consultants can help it in this endeavour. In the context
of SMEs financing, the SME Bank and other creditor institutions must
give particular attention to the following factors:
entrepreneurs for to the right project should be the key policy.
Preferably loans should be in small amounts and for shorter duration.
Loans to be preferably given to existing businesses. Business people
that have earlier used micro / small loans and repaid satisfactorily
and have expanded the business may be considered for further loans in
and maintain databank on industry, projects, sponsors, products,
import, exports etc. in order to timely appraise loan requests from
the entrepreneurs. This will facilitate quick decisions on approval.
who are educated and have actual work experience of over 15 years in a
responsible position as an employee in some industry may have greater
chances of doing good if they start an SME for marketing the same or
may develop guidelines specific to the financing of SMEs. General
guidelines and those that are issued by the SBP as Prudential
Regulations may also be prepared suitably for the SMEs. Continuous
training of bank personnel is necessary in most areas.
may be considered for releases on completion of all formalities only.
Funds to be released in instalments, compliance of conditions at each
instalment might be checked and disbursement stopped if there are
limits to be set separately for service, retail, wholesale and
manufacturing projects. Depending on the nature and requirements of
each manufacturing unit, loan amount may be adjusted.
to avoid recommending any project to the customers. This may later
attract lender liability, if the project does not succeed and the
sponsor is in loan default. He will turn around and blame the bank for
failure and claim his losses as well.
lenders to deal on the basis of legal money shown in the tax and
wealth tax returns of him or his family. Sanctions should never be
based on black money.
3- SME SPONSORS,
ENTREPRENEURS AND UNISAME
UNISAME and all its members appear enthusiastic to
do a lot for the country. However, it appears they have not fully
realized present day conditions and their impact on SMEs. Bad loans in
the past have ruined the entrepreneurs and harmed the banks / other
stakeholders. Court notices for recovery suits filed by the banks
against loan defaulters and the notices from the liquidators about
liquidation of plant assets as per decision of the honourable courts
should serve as eye-opener for them. Lowering of import tariff and
removal of subsidies as per conditions / arrangements entered into by
Pakistan with the international institutions such as the World Bank,
IMF, WTO, etc. are realities and the sponsors of new projects should
not base their feasibilities on availing such benefits as in the past.
In such a situation SMEs, set up after thorough studies, have better
chance of success by producing same or similar products at lower
rates. Objective assessment of all relevant factors is essential
before going into any venture. Therefore, the project sponsors, in
their own interest, should assess themselves as well as the project to
of academic and professional education to the project, work experience
in related industry, temperament to work long hours, clean credit
history, pool of savings, ability to manage resources and people,
creativeness, initiative, etc. are factors considered on the positive
side. Each sponsor should assess himself using these criteria.
the project niche market, whether he will be able to sell the distinct
service or the product at prices considered attractive by the
customers. Know factors that are favourable for the success of the
project and develop proper Business Plan before going out to borrow
for starting the business.
should know that he could be in business quickly if he uses his own
resources or the resources provided by the family. If he thinks of
borrowing and then starting the business, he may lose lot of time and
in the meantime the market may change and someone else might cash the
should not expect loans in bigger amounts without security. This is
not possible. He should realize that even micro loans carry security
and have to be repaid.
should, if possible, start participation in family business. Depending
upon the family thinking, the incumbent is groomed in many areas. He
also develops contacts and knowledge about supplies, sales, raw
material purchase, sales, collections, etc.
business is easier to start, then comes the wholesale business.
Manufacturing comes last. Starting from direct manufacturing is more
risky and dangerous and it better be avoided.
generally do not extend credit on sales unless he is a relation, is a
nominee of the family, is a close friend, or has grown with the
business since many years. This facility is a big help and SMEs may
qualify to benefit from it.
4- FPCCI AND ALL CHAMBERS OF
COMMERCE AND INDUSTRY
FPCCI / CCIs have an important role in the
promotion of SMEs in the country. Their help may be particularly
useful in areas such as:
of information on applicable rules and regulations prescribed by
different departments and agencies;
its members to promote and help the SMEs by credit sales and training
opportunities to the selected owners / employees of the SMEs.
can produce certain products or perform certain jobs at less cost as
compared to the cost incurred by the big units by producing in-house.
SMEs may be encouraged by institutionalizing contract production.
resolving disputes among SMEs or an SME with other parties.
participation of SMEs in the training courses organized for the
industry and businesses. Further strengthen the activities of the
Institute of Entrepreneurs Development.
SMEs are important for the welfare of the people
therefore these may be encouraged.
People investing in SMEs are risking their life
earnings and /or family savings. The guarantors of bank loans are also
doing the same. They are expected to realistically assess all aspects
of the venture as otherwise they stand to lose most in case the SMEs
do not prosper. The society has to save these resources from going
waste through provision of guidance towards projects that have greater
chances of success and by streamlining of the applicable procedures
and practices. The government and other institutions are urged to
positively contribute for the success of SMEs in Pakistan.