SMALL AND MEDIUM ENTERPRISES IN PAKISTAN Presentation By
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
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 5
SMEs in Pakistan Numbers Micro Manufacturing and Processing (Total) 569, 763 Services (Total) 649, 787 Construction 1, 380 Community, social and personal services 648, 407 Trade, Restaurants/Hotels (Total) 1, 564, 858 Extractive Industries (Total) 554 Mining and quarrying 554 Infrastructure (Total) 51, 323 Electricity, gas and water 116 Transport, storage and communication 51, 207 Financing, insurance, real-estate and business services 47, 866 Primary Agriculture (Total) 46, 201 Agriculture, forestry, hunting and fishing 46, 201 Total 2, 930, 352 Percentages SMEs % Micro % SME 13, 410 11, 246 30 11, 216 1, 859 157 361 8 353 19. 4% 22. 2% 0. 0% 22. 1% 53. 4% 0. 0% 1. 8% 0. 0% 1. 7% 48. 3% 40. 5% 0. 1% 40. 4% 6. 7% 0. 6% 1. 3% 0. 0% 1. 3% 567 177 27, 777 1. 6% 100% 2. 0% 0. 6% 100%
SMEs AS HIDDEN CHAMPIONS The Champions where Investors avoid to invest in those enterprises: 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 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 Because of this SME’s can’t trade on national and international market. Financial institutions Corporate sectors 10
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 11/25/2020
Facing Problems by SME’s Financi al plannin g 8/19/10 Low product ion capacit y Limited knowle Ineffect dge/ ive lack of marketi skill ng labour Credit policy Identifi cation of new market Not Contin adopta bility of uous modern new technol ization ogy Lack of Govern ment support 12
ACCESS TO FINANCE: PRACTICAL ISSUES FOR SMEs IN PAKISTAN 13
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 Banking Sector Issues Human Resources Informal Economy Interest Rates Collateral Infrastructure SME LEVEL Legal Framework Accounting Practices The Banks 11/25/2020 Tax Issues 16
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) 18
THE REAL CHALLENGE!!! HOW CAN WE IMPROVE ACCESS TO FINANCE FOR SMEs? 11/25/2020 19
RECOMMENDATIONS �Adopt an Integrated approach to the problem �Reduce the administrative burden of SMEs �Work on changing the culture of Government Organizations 20
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
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