SMEs are not coming up fast and accelerating economic activity as much as is expected


Aug 12 - 18, 2002

Small and Medium Enterprises (SMEs) benefit society by generation of local economic activity and wealth, creation of new ideas and jobs, and introduction of new products and services. According to SME Institute of Finance, SMEs are not the whole economy, but the economy cannot be whole without SMEs. In the context of developing countries, the World Bank considers SMEs to generally have 11 to 150 employees and sales up to USD 5 million. SMEs have great relevance and potential for Pakistan. According to one estimate, in Pakistan there are about 220,000 SMEs, a substantial number of which are sick or have been closed due to problems.

In spite of government's efforts, SMEs are not coming up fast and accelerating economic activity as much as is expected. There is need to identify major hurdles and to remove them effectively at the earliest. The promotion of SMEs is much more than provision of fiscal concessions or subsidies. As per SME Bank, financing alone is not sufficient to develop SMEs; they need intensive, tailor made assistance and conducive environment to flourish. This paper discusses factors that inhibit promotion of SMEs and suggests certain remedial measures.


The main obstacles are discussed below:

SMES INITIATION: In Pakistan there are no formal restrictions to start a new undertaking. However, license is required from the municipal authorities. Procedures are generally not transparent. The process might take a few weeks, even after supplying relevant details and payment of prescribed fees.

CONNECTION TO UTILITIES: Getting connection for power, telephone, water and gas is the next stage. The officers at each utility have their own priorities and enjoy lot of discretion. Personal visits, recommendations and sometimes engagement of certain contractors are pre-requisites for getting a connection. One is obliged to spend time, money and effort to get these facilities.

LACK OF INFORMATION: The sponsors need authentic details about markets, prices, suppliers, customers, credit reports, machinery suppliers and prices, and so may other things. Information is not easily available and so many times it leads to faulty decisions or expenses that could be avoided. The government authorities and Smeda are already doing some work but much more needs to be done.

FORM OF ORGANISATION: Majority of SMEs start as sole proprietorships. Bank loans in modest amounts are available if security is adequate and there is sufficient collateral. This form does not support raising of larger funds. There is need to allow limited partnerships in Pakistan on the pattern of USA.

LOAN FINANCE: SME Bank, IDBP, local and foreign banks, leasing companies, etc. provide finance for fixed assets or working capital. Practices and views differ on collaterals, processing time, transparency, security registration, loan limits, mark-up rate, projects suitability for new entrants, venture or risk capital for new process or technology development. The creditors must bring out informatory brochures to help SMEs.

EQUITY FINANCE: There is need for institutionalising the equity contribution or loaning by rich persons to SMEs on standardized terms and using standard agreements. Proper framework and rules need to be developed to allow such investment. Smeda could play a major role. Equity investment cannot jump-start private sector development, but a private sector cannot be mature without it.

POOR INFRASTRUCTURE: SMEs are operating with very poor quality of physical infrastructure such as roads, bridges, railways, air cargo facilities, ports, drainage, power supply and proper transport. Due to this, there are delays and costs go higher.

LACK OF SPECIAL PURPOSE BUILDINGS: There are not many special-purpose buildings for housing the wholesalers, service providers, light industries, trade, packing and repacking units, etc. within municipal limits. Women may particularly benefit from locating in such buildings. SMEs could become operative with less capital and within a shorter time.

DIFFICULTY IN LOCATING PARTNERS: At times SMEs need to add a partner or to engage an expert to enhance resources, management capability or technical expertise. Wrong choices create trouble. There should be credit bureau that provides background information and certification for suitability of such persons for a fee.

MACHINERY AND BUILDING CONSTRUCTION: A new entrant often ends up with unsuitable machines, or pays more than reasonable price. Building contractors might over-charge, delay completion or violate important conditions of contract. Smeda can help SMEs by providing details, guidelines and standardized contracts for such purposes.

ACCOUNTS AND FILING OF RETURNS: SMEs are obliged to maintain accounts and details as specified by the respective government departments in addition to the financial accounts. SMEs are often operating with less staff; every employee is handling many assignments that are handled by different persons in bigger corporation. SMEs find it difficult to meet the requirements of a large number of government agencies. Mistakes or non-submission on timely basis invite penalties. Formats used and procedures may be simplified.

PAYMENT OF DIFFERENT TAXES: The SMEs are required to file CED, Sales Tax, and Income Tax returns and to pay the respective amounts. In addition, there are a large number of other agencies that require payment of different fee. Failure invites penalties and threat of business closure or confiscation. Reduction in the number taxes, the agencies dealing with SMEs and returns to be filed will help SMEs a lot.

REFUND TAXES: SMEs pay different taxes, sometime in advance; a part of some of the taxes is refunded or adjusted as per government policy. The refunds are often delayed. Textile value-added sector, an important segment of SMEs is particularly suffering due to the delays. As a result, SMEs run short of working capital that adversely affects production.

RECOVERY OF RECEIVABLES: SMEs face credit risk. The buyers of goods and services might not pay on time, or simply refuse to pay on pretext of business slump or failure. The preferred route for this is Dispute Resolution Forum at CCI or FPCCI level. This will save time and effort. SMEs may concentrate on improving quality and competitiveness.

FRAUDS IN EXPORTS: Normally, SMEs produce quality products at competitive prices and on that basis secure export orders. However, once in a while clever importers refuse to accept the goods on flimsy grounds or get the goods but escape payment on some technicality. SMEs suffer big loss, as they are obliged to pursue legal proceedings for recovery in a foreign land. The government has to safeguard interest of SMEs.

LITIGATION WITH CREDITORS: SMEs experience ups and downs that the creditors generally do not appreciate. They start legal proceedings for loan recovery. Rescheduling facility may be provided in genuine difficult situations.

LAW AND ORDER: Law and order deterioration is a killer of SMEs, as delivery schedule is disrupted. Foreign buyers or quality inspectors cannot visit the factory. Export orders are shifted to other countries. The labourers face problems for commuting to the factory, often at odd hours. This increases cost of production and competitive advantage is lost. The government is urged to give more attention to this.

ENVIRONMENT REQUIREMENTS: SMEs are mostly short of cash and find it difficult to install environment related equipment. The government may obtain more grant funds to make SMEs comply with environment requirements. This is essential for higher exports.


The stakeholders including the federal and the provincial Government, Smeda, SME Bank, other financiers SMEs sponsors are to act in a coordinated manner to tackle the obstacles. The stakeholders are also urged to consider further actions as under:

The Government - The following actions may consider:

a. The government to arrange technical grants from institutions such as UNDP, US AID, IDB and the World Bank for the promotion of SMEs and the training of the sponsors and employees. As regards ADB, it has recently agreed for providing a US$800,000 technical grant to Pakistan to prepare a SMEs Sector Development Program. The assistance will develop policy and institutional reforms, including a SME-friendly licensing and regulatory regime, and develop models for business development and financial services customized to the needs of SMEs. Implementation of these measures will be supported under a program, which is expected to start in 2003 and is estimated to cost US$100 million. Actions may be expedited on this.

b. Income Tax rates may be lowered and discretionary powers curtailed. Simplify procedures for collection of income tax, sales tax and CED; and continue the industrial policies over long periods. Venture capital may be further encouraged, as measures taken in the past have not done much for SMEs.

c. SMEs more often come deal with the Provincial Government. Law and order situation is of top priority. The government may streamline procedures and enhance facilities in small industrial estates. Once land is purchased, all utilities such as power, gas, water, telephone should be made available. The discretion of officers may be rationalised.

SMEDA- The following may also be considered:

a. Smeda may develop databank for enabling the sponsors to operate SMEs more effectively. Smeda may also prepare standardized contracts, agreements and guidelines for SMEs affairs. Smeda may develop authentic list of civic, legal and commercial licenses required at different locations and keep it up-dated.

b. Special training courses / workshops may be designed by professional training institutes for the SMEs sponsors / executives at different major cities in the country. Smeda will be helping the sponsors from wasting time, money and efforts in projects or activities considered unsuitable.

c. Smeda may coordinate with the investors and SMEs entrepreneurs to identify best investment practices, provide networking opportunities, adapt suitable standards of performance and promote supportive legal / regulatory environments.

SME Bank / Creditors- While lending, following may also be considered:

a. Right entrepreneurs for to the right project should be the key policy. Loans should preferably be in small amounts, for shorter duration and given to existing businesses. Business people that have earlier availed micro / small loans and repaid satisfactorily and have expanded the business may be considered for further loans in modest amounts. Databank on industry, projects, sponsors, products, import, exports etc. will be extremely useful.

b. Educated new sponsors with actual work experience of 10-15 years in a responsible position in some industry may have greater chances of doing good if they start an SME for same or similar products.

c. Banks may develop guidelines specific to the financing of SMEs. Loan limits to be set separately for service, wholesale trade and manufacturing projects. Training of bank personnel is necessary in most areas.

d. Funds may be released in installments as per need only on completion of all formalities. Compliance of conditions at each release may be checked and disbursement stopped if there are deviations or circumstances change.

SMEs Sponsoring - The sponsors would lose most if the SME does not perform as expected or planned. They have to carefully assess the following:

a. Each sponsor to assess himself for positive attributes such as academic and professional education, work experience in related industry, temperament to work long hours, clean credit history, pool of savings, ability to manage resources and people, creativity and initiative.

b. Assess the project niche market and determine whether he will be able to sell the distinct service or product at prices attractive to the customers. He should know the factors that are favourable for success of the project and develop Business Plan before going out to borrow for starting the business or raising a loan.

c. 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 gains knowledge about supplies, sales, raw material purchase, sales, collections, etc. that help in SMEs promotion. Retail business is easier to start, then comes the wholesale business. Manufacturing comes last. Starting from direct manufacturing is more risky.

FPCCI and CCIs - Their help may be particularly useful in areas such as: dissemination of information on applicable rules and regulations; resolving disputes among SMEs or with other parties; encouraging credit sales; offering training opportunities; encouraging contract production; and further strengthen the activities of the Institute of Entrepreneurs Development.