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.
FACTORS STIFLING PROMOTION OF SMES
The main obstacles are discussed below:
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
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:
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.
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.
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.
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
LACK OF SPECIAL PURPOSE BUILDINGS:
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:
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:
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
ACCOUNTS AND FILING OF RETURNS:
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.
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
FRAUDS IN EXPORTS:
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.
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.
ACTION AREAS FOR DIFFERENT STAKEHOLDERS
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:
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.
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
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:
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.
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
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 /
SME Bank / Creditors- While lending, following may also
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
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.
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
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
SMEs Sponsoring - The sponsors would lose most if the
SME does not perform as expected or planned. They have to carefully
assess the following:
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.
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.
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.