Small and medium enterprises (SMEs) have played an important role in boosting up economies of the developing countries and particularly in recent times the success of the South East Asian countries is indebted to this very sector.
SMEs account for almost 90 per cent of privately-owned businesses and bulk of employment all over the globe. Experience has shown that neglect of this sector is bound to keep that country below its potential growth level.
The SME sector covers all types of businesses, but it is the common profile of service and manufacturing business concerns. Reason being the large-scale manufacturing sector is unable to cater to all demands of goods and services and depends largely on sub-contracting arrangements with smaller business units.
If viewed in global scenario, SMEs are found to generate 80 per cent of total industrial employment, contributing 30 per cent to GDP and adding to export earnings to the extent of 1/4th of total industrial sector contribution.
The globalization and trade liberalization, which is a favoured move on the part of the developed countries has increased the competition for SME sector in all the developing countries, particularly in Asian countries, and is bound to further widen the gap between rich and poor nations. Thus it is imperative for economic survival of Asian countries that they review their national economic policies. They must boost up their economic competitiveness, for which strength of the indigenous SME sector is one of the most forceful parameters.
Though Japan has reached the most developed status, its SMEs continue to play a major role in boosting export of products specially relating to computers, its parts and those products which involve latest technology and are skill intensive.
China is rapidly emerging as a powerful nation. The SME sector with the full backing of the government has been the main contributing factor for excellent performance of its economy. Resultantly, China is in a very comfortable position to face the challenges of globalization and in fact now poses as economic giant for developed countries. Thus the experience of China in the SME sector is of immense interest for all developing countries in relation to their fears regarding World Trade Organisation (WTO) regime bringing onslaught of innumerable economic disadvantages for them for quite a long time. Developing countries are trying to replicate China, not only with regard to its policy towards the SME sector but are also keen in forging actual business and trade links with SMEs in China.
Another development in the region is trade liberalization, particularly within the boundaries of the Association of South East Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation (APEC). More recent being India's move to form economic union of Saarc countries minus Pakistan and Maldives along with other interested Asian nations for trade liberalization and a very recent South Asian Free Trade Agreement (Safta) signed at the Saarc moot held at Islamabad in first week of January this year. These developments are of great importance as these trade liberalization arrangements have emerged outside the regime of the WTO and thus will provide a cushion to industrial and agriculture sector of member countries against rigorous and discriminatory implementation of WTO policy.
In most of South East Asian parts the SME sector has been neglected and discriminated against in terms of government attention and access to credit, management, marketing expertise and latest technology. This is particularly the case with Pakistan where although economy is in transition but still large - scale sector continues to assume the major role in economic development. In fact in transition economies private sector development must have focus on SMEs to allow these enterprises to grow into medium and large scale entities and take over the functions of state owned enterprises.
In Pakistan, SMEs' contribution to GDP is only 15 per cent, yet they employ 60 per cent of the industrial labour force. To some extent these small and medium size industrial entities have contributed towards making fair distribution of national income and creating employment opportunities by forging links between more organized sector in urban with rural sector. In a way this ensures employment of rural population in industrial sector.
Further, the growth of the country's exports of value added goods, achieved in recent years is indebted to low cost and labour intensive products manufactured by SMEs. Direct and indirect contribution of SMEs to total exports is almost 50 per cent.
Since Pakistan's economy is in transitional stage facing challenge of accelerating economic growth rate, generating employment opportunities and arresting growing poverty trend, allout sincere efforts are needed to promote the SME sector. It is the hard reality that large scale manufacturing sector has totally failed to pass on benefits of industrial growth to the common man.
Pakistan's SME sector is faced with innumerable problems relating to basic infrastructure, finance, marketing, non-existence of business friendly policies of regulatory and legislative authorities and lack of information and advisory services, etc.
Establishment of SMEDA and the SME Bank are the initiatives from the side of government to facilitate identification of a viable business project to be undertaken and availing required finance. But still research findings of SMEDA are not within the reach of all those who want to venture into setting up small industrial units. The dissemination of information regarding latest technology remains inadequate for SME sector. Similarly, the problem of lack of sound collateral and guidance to prepare a bankable business plan has not been taken up by the SME Bank.
Commercial banks and leasing companies do not feel comfortable to finance small industrial units because of their highly risky profile. Lack of business experience and updated business skills are usually the main reasons for failure of these entities.
High administrative cost involved in appraisal, disbursement and recovery of small loan proposals is yet another factor impeding free flow of bank finance to SME sector. That is why a major chunk of banks' finance goes to meet only working capital needs of on-going small units. Medium and long-term loans for fixed assets needs of small industrial units are not generally entertained.
The collateral issue is yet another problem for borrowing from banks. The recent amendments in prudential regulations specifically meant for the SME sector, have eased up the position to some extent. Now entities falling within the definition of SMEs that is manufacturing concerns having number of employees not exceeding 250 and not exceeding 50 in case of trading and service concerns, secondly, total assets (excluding land and building) not exceeding Rs100 million and Rs50 million for manufacturing and trading and service concern respectively and thirdly having total sales not exceeding Rs300 million as per latest financial statement are entitled to avail clean facility to the extent of Rs3 million. Despite this relaxation entities of small magnitude still find it difficult to borrow from the banking system independently. This issue can be resolved if group guarantee is arranged.
The group guarantee can be arranged by forming a, mutual guarantee associations of 25 to 40 SMEs. They, through mutual capital contribution, can set up a mutual guarantee fund to provide cover to financing bank for individual borrowings of member SMEs.
Another way of resolving collateral issue is that government must encourage clustered location of SMEs. This will also facilitate mutual guarantee arrangements for small enterprises to enable them to borrow from the banking system. In this regard UNIDO has come forward. It is looking into the possibility of creating clusters of SMEs, which apart from facilitating borrowings on group guarantee basis will improve the collective operational efficiency of the entities by promoting collective marketing, warehousing and testing arrangements for such clusters.
Establishment of a loan guarantee fund by the government exclusively or in partnership with private investors is yet another approach to solve collateral issue. In order to finance viable SMEs, standby Letters of credit can be established in favour of financing banks on the strength of the loan guarantee fund, for each loan provided.
For that a reasonable fee can be charged on monthly or quarterly basis from each borrowing entity. This however will be over and above the mark-up or any other charge imposed on loan account.
It is also suggested that on the pattern of the Pakistan export guarantee scheme, an SME financing guarantee scheme can be sponsored by an indigenous entity exclusively or in collaboration with foreign funding agency like the Asian Development Bank which has already taken initiatives to promote the SME sector in Pakistan.
A very recent move from the Islamic Cooperation for the Insurance of Investment and Export Credit (ICIEC) to provide insurance cover to bank finance obtained by small and medium size enterprises in Pakistan (subject to the approval of this offer by the State Bank of Pakistan), is another appropriate strategy to solve collateral issue.
In order to avoid hardship on the part of SMEs to meet loan documentation and also high cost involved thereto, loaning procedure should be simplified and validity of the stamped charge forms relating to working capital finance should be enhanced to at least three years as has been done in the case of agriculture credit.
The problem of lack of management and technical expertise can be tackled by enhancing frequency of conduct of training programmes in these areas sponsored usually by SMEDA, Export Promotion Bureau (EPB) and various chambers of industry and commerce. These programmes should be either cost free or arrangements should be in place to charge the course fee in instalments. Sometimes back an initiative had come forward from the Asian Development Bank to subsidize cost of conduct of such programmes. It is to be seen when it is materialized
For sustainability, it is essential that SMEs enter sub-contractual arrangements with large manufacturing concerns. This makes possible for SME to make use of equipment and warehouses of large - scale concerns thus saving funds needed for fixed assets investments and also sizeable reduction in overheads.
Presently subcontracting exists in textiles, engineering, footwear, sports goods and surgical instruments and only 25 per cent of the SMEs are being benefited from such arrangements. There is need to create more opportunities for sub-contracting. In this regard SMEDA can play an important role by disseminating findings of their research studies down the line in industrial sector.
In order to promote SMEs it is essential that they be given ample relaxation with regard to tariffs and be differentiated from commercial enterprises in all respect.
The provision of efficient infrastructure is also essential for sustainability of this sector, It is specially uninterrupted supply of utilities and skilled labour which is to be ensured.
To enable Pakistan to get integrated into global economy, it is necessary that our SME sector which shares exports to the extent of almost 50 per cent must have allout focus on value addition and quality control of the exportable items. In this regard the EPB and trade bodies must give maximum representation to entrepreneurs from this class in delegations sent abroad for participation in international exhibitions.
This will give them exposure to fashion trends, demanding standards of product quality and new technologies in vogue in industrial sector abroad, which in turn would enable them to offer highly competitive products in international market.