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There appears wide gulf between the performances of the creditors vis-a-vis the expectations of the sponsors

By Muhammad Bashir Chaudhry
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 situation.

SMEDA AND UNISAME: It 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:

*Loan 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.

*The government should be asked to enhance limit of small loans without collateral.

*Smeda 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 level.

*It 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 UNISAME: 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:

*SMEs 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 formal sector.

*In 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 these challenges.

*SME 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.

*The 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 Sindh.

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:

*Promote 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 instituted.

*Construction 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.

*Institutionalize 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.

*Arrange 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.

*Facilitate 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 track.

*The 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.

SMEDA: Smeda 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:

*Databank 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.

*Smeda 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 helpful.

*Smeda 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 be useful.

*Smeda 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.

*Smeda may help identify and establish such businesses and industries, which have greater chances of survival and success in the present day world.


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:

*Right 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 modest amounts.

*Develop 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.

*Candidates 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 similar products.

*Banks 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.

*Funds 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 deviations noticed.

*Loan 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.

*Banks 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.

*The 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.


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 determine that:

*Relevance 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.

*Assess 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.

*He 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 opportunity.

*He 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.

*He 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.

*Retail 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.

*Industries 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.


FPCCI / CCIs have an important role in the promotion of SMEs in the country. Their help may be particularly useful in areas such as:

*Dissemination of information on applicable rules and regulations prescribed by different departments and agencies;

*Encouraging its members to promote and help the SMEs by credit sales and training opportunities to the selected owners / employees of the SMEs.

*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.

*Help resolving disputes among SMEs or an SME with other parties.

*Encouraging 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.