12 July 2004	Monday	23 Jamadi-ul-Awwal 1425

We are so much impressed with the slogan, "small is beautiful" that grandiose schemes have been floated extolling virtues of small and medium enterprises (SMES) and special banks (SMEDA) have been set up to promote small enterprises.

Although numerous seminars were held extolling good points of these SMEs yet the strangest thing about it is that so far no uniform definition for SMEs has ever been evolved and different agencies use different definitions for 'small' enterprises.

The result is that due to "variation in definitions which are used for attaining qualifications and approval of facilities from institutions, most of the SMEs die out much before gaining strength" says an article in Dawn dated 1.6.04 page 9). Under the circumstances, it may not be wrong to say that SMEs is merely a slogan as yet.

On the other hand, banks are reluctant to give loans to small concerns and the existing procedures help only the larger enterprises while regulators also put up regulations to the detriment of SMEs.

Meanwhile, the 'Regulation and Prevention of Monopolies and Cartels' and the Restrictive Trade Practices Ordinance have been thrown overboard and policies are pursued which are favourable to large enterprises.

Take for example the reversion to the pre-1970 position of the establishment of monopolies and cartels. The liberalising of the rules including the permission for 100 per cent ownership of entities is in itself a negation of the Monopolies Ordinance.

It may be recalled that in 1970 the Ordinance was promulgated to keep a 'balance between the policy objectives of rapid capital formation and economic development, on the one hand and of social justice and consumer protection on the other."

The synthesis between the two aims was achieved through governmental regulations as was done in the USA, Britain, Canada and other countries. Anti-monopoly legalisation was considered to be best enacted just 'when concentration of economic power, monopolies and restrictive trade practices were beginning to take shape.'

Therefore, Pakistan also followed the line by promulgating the Ordinance to "provide measures against undue concentration of economic power", monopoly power and restrictive trades practices.

However with the decade of 1990s and the ensuing enthusiasm for liberalization, the Ordinance was thrown overboard; liberal concentration of power was encouraged through various measures and while both the Companies Ordinance and the Security Exchange Ordinance were changed/amended to suit the genius of the new financial and economic cowboys, the Monopoly Control Ordinance was consigned to the dustbin. All efforts to make the Ordinance more effective were snow-balled.

The result is that we have once again entrepreneurs owning mills, banks, financial institutions, brokerage houses and insurance companies. Some banks like the UBL, the HBL and the Allied Bank have been privatized without giving a single share to the public.

The second point to be considered is the attitude of bankers vis-a-vis small entrepreneurs. They are reluctant to give even small loans without a security. For an example, the SBP had issued instructions that banks can provide clean loan facility (i.e. loans without securing the interest of the bank through appropriate collateral) upto Rs500,000 to women entrepreneurs.

As far as my personal knowledge goes, no bank is willing to do so and in one case have asked that the sewing machines be made the collateral for such a loan. It takes months to have loan processed beyond this limit. Securities in the form of shares of some of the multilateral are also refused as they are not on their "approved list".

So far as exports are concerned, we recently wanted to send a draft of about $4000 as a rent for a stall in an exhibition to the Pakistan Embassy which we found to be an uphill task as the bank wanted the company to have foreign exchange account to facilitate the payment. Very few small companies have such accounts.

Insurance sector: The insurance sector has a number of small units suffering due to the official policies, their implementation by the SECP and the treatment mated out by banks.

There are at present about 54 insurance companies including five life insurance companies. The rest are general insurance companies. According to 2002 statistics, the two top companies, the Adamjee (premium Rs46122 million) and the EFU (3079.62 million) account for nearly 62 per cent of the business while the top five account for 75.7 per cent and top 15 account for nearly 95 per cent.

The remaining 39 companies vie for five per cent business. Most of them, with a capital of Rs50 million (as compared to the Adamjee's Rs624.65 million) and a net premium ranging from Rs1.83 million to about Rs50 million.

In 2000, a new Insurance Ordinance was promulgated on the advice of the Asian Development Bank. This Ordinance made the following important changes:

a. It laid down that the minimum capital for all general insurance companies would be Rs50 million by 3Ist December, 2002 and Rs80 million by 31st December 2004 (as against existing capital ranging from Rs2.5 million to Rs 50 million).

b. It also laid down that solvency margin would be as prescribed. It specifically excluded vehicles furniture and equipment from the solvency margin although being service and marketing companies they had to have a fleet of vehicles and mobile phones thereby affecting their viability.

c. It prescribed that second surveys could only be carried out on directions of the SECP thereby depriving the companies of remedial action either on request of a client or itself.

d. It provided for a Tribunal to adjudicate disputes and for the appointment of an ombudsman, both of which remain undone.

These changes were to be implemented by the SECP which was to issue the rules which it did on 12th December, 2002 (two years after the promulgation of the Ordinance). These rules mostly dealt with procedural matters rather than vital issues except for solvency requirements for insurance companies. For general insurance companies it was prescribed that the solvency margin was to be raised to:

i) Rs15 million by 31st December 2003.

ii) Rs25 million by 31st December 2004 and

iii) Rs50 million by 31st December 2005 and thereafter.

An analysis of the above measures would show that most of the requirements for capital and solvency were made keeping in view the larger companies and there was no rationale for doing so.

Capital requirements: In case of capital requirements, most companies managed to raise their capital to Rs50 million by the due date either by issuance of bonus shares, right shares or merger. Quite a few were unable to do so and were closed.

In order to issue bonus shares a company must have reserves of 25 per cent of the enhanced capital i.e. Rs20 million. This is not possible for small companies. Issuance of rights issues is again subject to certain conditions prominent among which is to appoint underwriters (in case of shares to be issued at discount) under the Balloters, Transfer Agents and Underwriters Rules 2001.

Hitherto, directors could underwrite the issue but now only registered underwriters (who are a company) can do so. This is posing difficulties as well known underwriters are reluctant to underwrite small amounts (which are required by the small companies) and where past transactions on stock exchanges are small.

By giving liberal permission to financial institutions and banks for setting up their own insurance companies, the existing small companies cannot obtain their assistance in raising capital besides being unable to compete with the financial institutions and banks in giving preference to their own insurance companies (a fact despite a clause in the Ordinance prohibiting it).

Solvency margin: It has been fixed arbitrarily as it treats both the large and small companies equally instead of differentiating them. Solvency margin is meant to safeguard the insurers in similar manner as a bank's depositors are protected through the Statutory Liquidity Requirements SLR).

It has to be linked with the quantum of business done and not on an ad hoc figure. In the case of SLR the SBP has fixed it at 15 per cent of the total Time and Demand liabilities as required under Section 29 of the Banking Companies Ordinance 1962.

Company             Gross premium           Prescribed          Solvency



                    (Rs in million)         solvency             amount to



                                           (Rs in million)       gross 



                                                                 premium %



Adamjee             4612.173                 15                  0.32%



EFU                 30799.616                15                  0.48%



Silver Star         23.912                   15                  62.73%



Asia                22.186                   15                  67.61%



Ittefaq             1.83                     15                  819.67%



Pakistan



Equity             5.034                     15                  297.97%



BBICL              30.95                     15                  48.46%



(2002 figures - source Insurance Journal Dec 2003).