According to the definition in the State Bank Prudential Regulations for SMEs, the term SME applies to an entity that does not employ more than 250 persons if it is a manufacturing /service concern or 50 persons if it is a trading concern. There is no separate definition for small enterprises.
This is irritating for small businessmen because the term SME is too broad and covers a large number of entities so essentially different from each other both in size and nature of business. Besides, most of the problems facing small businesses are non-issues for medium-sized enterprises.
“The policy doesn’t offer any hope for really small enterprises,” says Mr Bashir Miandad, Chairman, Small Chamber of Commerce & Cottage Industry. “Whatever the government is doing is going to benefit medium-sized industries and not the small ones. The government has never been in touch with the small enterprises.”
Mr Miandad identifies the lack of bank financing as problem number one for small businesses. “Banks refuse to lend to smaller enterprises in the absence of any collateral,” he laments and proposes that they should be facilitated in securing insurance guarantees acceptable to banks as collateral.
President, Union of Small and Medium Enterprises (UNISAME), Mr Zulfiqar Thaver also says that whatever banks report as their lending to SMEs mainly comprise the loans given to medium-sized enterprises and not to the small ones. At end-December 2006, SMEs had the second largest share of 17 per cent in bank loans, second only to manufacturing sector whose share was more than 53 per cent.
“I have been pleading with the government to draw a strategy for small business financing but to no avail,” says Mr Thaver who is also a member of the National Committee on SMEs. One of the main functions of the committee, headed by the minister for industries is to oversee the implementation of the SME policy.
The SME policy, to be implemented fully by 2015, with Rs13 billion, aims to create globally competitive SMEs. The government believes that the policy would help increase the share of small-scale manufacturing sector from 5.5 to seven per cent of the GDP.
The policy initiatives include establishment of a credit guarantee agency for SMEs, a SME development institute, a SME export house and a SME promotion council. Under the policy a data development bank and credit information centres are also being set up.
A plan is underway to equip banks with the expertise and the technology needed for disbursing loans to very small, small and medium enterprises. The SBP is also conducting a feasibility study with the help of the ADB to devise a system, which would enable banks to accept movable property as collateral.
However, as of now, bank head offices are flooded with complaints that they lend mostly to medium-sized enterprises and not to the small ones. At end-December 2006, the number of SME borrowers was 168,000 —only a fraction of the estimated 3.8 million SMEs across the country. This lends credence to the complaint that banks have left out small enterprises.
Besides, the mark-up on financing to SMEs is very high. Even the SME Bank is charging roughly 14-18 per cent mark-up on its various products. Businessmen say other banks are charging almost the same mark-up. They fear that SMEs cannot survive in such a high interest rate regime.
“Mark-up on SME financing should not be more than nine per cent,” says Mr Zulfiqar Thaver adding that lowering of mark-up is one sure way for banks to reach out to maximum number of SMEs.
A SBP study says, however, that lack of documentation, reluctance to disclose the financial position, dependence on collateral based lending and complexity of lending procedure discourage SMEs access to bank financing.
“Banks need to focus on developing SME-specific products and programme based lending. They also need to standardise and simplify the documentation besides giving due attention to traditional relationship based banking,” the study recommends.
Though bankers admit they need to go a long way in promoting SMEs, some of them have got success stories of SME financing to tell the world. The First Women Bank has one such story:
“Zoya Aliem made a beginning from her kitchen, preparing skin and hair care products from vegetables, fruits and herbs, for her friends. Today she owns a factory that produces herbal, skin and hair care ranges. Purely made from 100 per cent natural Pakistani herbs, the products of “Herbal Workshop" are simple and effective solutions for hair and skin care. Her hard work and dedication has made her achieve great success. Her products are available at Avari Hotels and the Lahore Gymkhana Club.”
Bankers say whereas a few enterprising souls have made their SMEs a success story, many have failed to catch up with the changing dictates of the competitive market.
A recent survey conducted by the United Nations Industrial Development Organisation has concluded that many SMEs neither realise the importance of investment in quality culture nor employ qualified staff for testing and calibration.
The survey — Compliance Issues Affecting Enterprise Clusters in Punjab — is the result of UNIDO research on seven clusters of SMEs, including those of textile and textile garments, sports goods, cutlery, fans for identification of the compliance issues.
Businessmen associated with SMEs say that in Pakistan most of the SMEs are located in major cities of the Punjab adding that a sizable number of SMEs are also operating in Sindh.
There are not many SMEs in the NWFP and literally very few in Balochistan. The SME sector is well spread in more than a hundred categories of different sectors and sub-sectors of the economy.
These include agriculture, food, fisheries and livestock, textiles, chemicals, construction, dairy, education, IT and services, electronics, entertainment, furniture, carpets, gems/jewellery, leather, light engineering.
The list includes marble/granites, minerals, paper, petroleum, pharmaceuticals, plastic and tents/canvas manufacturing. “Besides, Karachi is known for the SMEs making auto parts and in the interior of Sindh many SMEs are engaged in ceramic manufacturing,” says Mr. Bashir Miandad.
SMEs are operating in many diverse areas capable of producing exportable surplus or raw materials and support services for exports. They need to be developed not only for creating employment and reducing poverty but also for boosting exports.
But to ensure that their output and products are compatible with the demands of the local and international market, the most important thing to do is to increase the literacy level of their employees. The SME policy has addressed this issue to some extent. “But for the time being, all official documents to be filed by SMEs should be in Urdu,” suggests Mr Zafar Iqbal, President, Small and Medium Enterprises Alliance (SAMEA).
Another important thing to do is to carry out a wide-scale survey to know exactly the number and the nature of business of small and medium-sized enterprises separately.
This is required to help the government take specific measures for boosting both small and medium enterprises without prioritising one over the other.
Businessmen associated with SMEs believe that there must be a separate ministry to look after the interests of the SME sector. India, Indonesia and some other countries have such ministries.
Some clusters hav evolved over time in major cities like Karachi, Lahore, Faisalabad, Sialkot etc. all hosting SMEs of some particular businesses. There is a need to develop these clusters by allocating large pieces of land at affordable prices for business expansion and by ensuring smooth supply of water, gas and electricity. The Sindh Small Industries Corporation has recently earmarked 100 acres of land near the Northern Bypass for development as a small industry zone.
“This would help develop the really small scale industries,” says Mr Bashir Miandad adding that 30 per cent of the land in this project is reserved for women entrepreneurs.
Above all, there is a need to create a human resource base to be used in SMEs. Whereas SMEs want the government to set up educational institutes for production of skilled workers with its own expenses, the authorities want to involve the private sector in these areas.