SMALL AND MEDIUM ENTERPRISES IN PAKISTAN Presentation By Manzoor Ul Haq Malik Regional Chairman and Vice President The Federation of Pakistan Chambers of Commerce and Industry

Small and Medium Scale Enterprise (SME’s) SMEs: ENGINE OF GROWTH Small and Medium Scale Enterprise (SME’s)

INTRODUCTION It is a well-established fact that Small and Medium Enterprises (SMEs) are one of the largest and the most important sector of Pakistan's economy. As defined by State Bank of Pakistan. A small Enterprise (SE) is a business entity which does not employ (including contract employees) more than 50 persons and annual sales turnover is up to Rs.150 million. Small Enterprises can be extended finances up to Rs.25 Million. SMEs constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the non-agricultural labor force; and their share in the annual GDP is 40%, approximately. 

What are the main factors of SME’s? Technology and Skill innovation Employment Generation Entrepreneurial and sector development Foreign export Trade promotions Driving Force of Country Economy

SMEs in Pakistan Numbers Percentages Micro SMEs % Micro % SME Manufacturing and Processing (Total) 569,763 13,410 19.4% 48.3% Services (Total) 649,787 11,246 22.2% 40.5% Construction 1,380 30 0.0% 0.1% Community, social and personal services 648,407 11,216 22.1% 40.4% Trade, Restaurants/Hotels (Total) 1,564,858 1,859 53.4% 6.7% Extractive Industries (Total) 554 157 0.6% Mining and quarrying Infrastructure (Total) 51,323 361 1.8% 1.3% Electricity, gas and water 116 8 Transport, storage and communication 51,207 353 1.7% Financing, insurance, real-estate and business services 47,866 567 1.6% 2.0% Primary Agriculture (Total) 46,201 177 Agriculture, forestry, hunting and fishing Total 2,930,352 27,777 100%

SMEs AS HIDDEN CHAMPIONS The hidden champions (Small but highly successful) : Low level of public awareness; most of their products contribute significantly to the current account of their countries The Champions where Investors avoid to invest in those enterprises: No historical record of business Owners are not well known Introducing a newly experimented product

SUCCESS STORIES IN DIFFERENT MARKETS Junk Bonds by ‘Microsoft’ and other knowledge based products in information technology, chemicals and medicines etc. ‘Grameen Bank’ in Bangladesh to maintain peace and happiness in the country Direct Financing to SMEs in Western India

SMEs AS SUPPORTER OF LS INDUSTRIES SMEs link with large scale industry: Sometime as a horizontal part of chain like in sugar industry, sometime part of vertical chain (backward or forward linkage) with a large scales industry like in textile, chemicals and petroleum It reduces the cost of working capital and inventory management by large scale industry either to store end-user goods or holding raw material inventories for large scale industries.

Pakistan SME’s doesn’t get proper support from Government Departments Banking Sectors Financial institutions Corporate sectors Because of this SME’s can’t trade on national and international market.

THE CURRENT SITUATION Most SMEs do not utilise Banks Self financing of new ventures Retained earnings used to fund growth Larger Firms rely much more on Banks Use of informal credit market 12/7/2018

Facing Problems by SME’s Financial planning Low production capacity Limited knowledge/ lack of skill labour Ineffective marketing Credit policy Identification of new market Not adoptability of new technology Continuous modernization Lack of Government support 8/19/10

ACCESS TO FINANCE: PRACTICAL ISSUES FOR SMEs IN PAKISTAN

Access to Finance Longstanding Constraint in the growth of SMEs Innovative Products being introduced in Developed Countries SMEs in Pakistan are still struggling to access finance Lack of access to finance hampers the growth of the SMEs Multifaceted issues

Why Commercial Banks in Pakistan avoid from Investing in SMEs? Why commercial banks do not finance SMEs in Pakistan? They fill the gap of investment banking (through syndicate financing and consortium) and bond market, DFIs, while big financing in develop countries through investment banking including merchant banking and bond market.

ACCESS TO FINANCE Multifaceted Problem Governments Accounting Practices Banking Sector Issues Interest Rates Human Resources Informal Economy The Banks Collateral Legal Framework Infrastructure SME LEVEL 12/7/2018 Tax Issues

LACK OF ACCESS TO FINANCE Combination of factors are responsible: Financial Institution Level Government Level SME Level All are inter linked...

THE GOVERNMENT Legal Framework exists but implementation is difficult Bureaucracy The Fiscal and administrative burden of taxation Large number of taxes and regulations Intellectual Property Rights protection On the ground reality often different from the government policies The Implementation of SME policy Improvement in Infrastructure(Transport, Electricity)

HOW CAN WE IMPROVE ACCESS TO FINANCE FOR SMEs? THE REAL CHALLENGE!!! HOW CAN WE IMPROVE ACCESS TO FINANCE FOR SMEs? 12/7/2018

RECOMMENDATIONS Adopt an Integrated approach to the problem Reduce the administrative burden of SMEs Work on changing the culture of Government Organizations

Simplification of Taxes It is suggested that one-window services should be provided besides addressing the issues with regard to Employees Oldage Benefits Institute (EOBI) and social security. These should merge into sale tax in order to simplifying the tax procedures.

Allocation of Funds It is suggested that role of Business Support Fund (BSF), Competitive Support Fund (CSF) should be made supportive and active in terms of provision of grant to SME sector. The private sector representation could be encouraged in decision-making regarding allocation of funds and grants of above mentioned organizations.

Preferred sectors for SME financing: Export oriented goods and services establishments. Largely using indigenous technology and resources. Choices of sub-sectors within each industry. Up stream/ down stream serving to medium / larger, cottage / heritage industry.

Marketing for SME loans: Reluctance of SMEs seek bank financing despite ability to meet credit criteria. Need for creating awareness of desirability for and availability of financing facilities. Proper packaging & marketing of SME financing proposals & developing SME financing schemes / products.

Available of Financing at Affordable Mark Up rates Financing may be available at the rate of mark up equivalent to Corporate Sector. The government of Punjab may take the burden of excess mark up out of this fund.

Banks must be directed to develop industry specific products Special product for different industries may be developed keeping in view the industries of the area like surgical industry etc.

Thank you