It is a globally recognised fact that small & medium enterprises (SMEs) have played an important role in boosting the economies of developing countries and particularly, the development success of the South East Asian countries and their achieving considerable reduction in poverty and unemployment levels. SMEs account for almost 90% of privately owned businesses and the bulk of employment all over the globe.
Experience has shown that neglect of this sector in any country is apt to result in keeping 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.
The reason being that the large-scale manufacturing sector is unable to cater to all the demands of goods and services and depend largely on sub-contracting arrangements with smaller business units.
If viewed in the global scenario, SMEs are found to generate 80% of total industrial employment, contributing 30% to the GDP and adding to export earnings to the extent of 1/4th of the total industrial sector contribution.
Globalisation and trade liberalisation, which is a favoured move on the part of developed countries has increased the competition for the SME sector in all the developing countries, particularly in Asian countries and is also bound to further widen the gap between the rich and poor nations. Thus it is imperative for the economic survival of Asian countries that they review their national economic policies. They must boost their economic competitiveness, for which the 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 the export of products, specially relating to computers, its parts and those products which involve the 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 the excellent performance of their economy. Resultantly, China is in a very comfortable position to face the challenges of globalisation and, in fact, now poses as an 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 the World Trade Organisation (WTO) regime bringing an onslaught of innumerable economic disadvantages for them, for quite a long time.
Developing countries of South East Asia 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 the SMEs in China.
Another development in the region is trade liberalisation, particularly within the boundaries of the Association of South East Asian Nations (ASEAN) and the Asia Pacific Economic Co-operation (APEC).
The more recent being India's move to form an economic union of SAARC countries, minus Pakistan and Maldives, alongwith other interested Asian Nations for trade liberalisation and a very recent South Asian Free Trade Agreement (SAFTA) signed at the SAARC Moot held at Islamabad in the first week of January this year. These developments are of great importance as these trade liberalisation arrangements have emerged outside the regime of World Trade Organisation (WTO) and thus will provide a cushion to growth of the industrial, particularly the SME, sector and also the agriculture industry of member countries against rigorous and discriminatory implementation of WTO's policies.
In most of the 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 the latest technology. This is particularly the case with Pakistan where, although the economy is in transition, but still the large-scale sector continues to assume a major role in economic development.
In fact, in transition economies, private sector development must have a 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 the SMEs contribution to the GDP is only 15%, yet they employ 60% of the industrial labour force. To some extent these small and medium sized industrial entities have contributed towards making a fair distribution of national income and creating employment opportunities by forging links between the more organised sector in the urban with rural sector. In a way this ensures employment of the rural population in the industrial sector.
Further, the growth of a 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%.
Since Pakistan's economy is in a transitional stage, facing the challenge of accelerating the economic growth rate, generating employment opportunities and arresting the growing poverty trend, all out sincere efforts are needed to promote the SME sector.
It is hard reality that the large-scale manufacturing sector has totally failed to pass on the 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 SME Bank are the initiatives from the side of the government to facilitate the identification of a viable business project to be undertaken and availing, the required finance. But still research findings of SMEDA are not within the reach of all those who want to venture into the setting up small industrial units. The dissemination of information regarding the latest technology remains inadequate for the SME sector. Similarly, problems of lack of sound collateral and guidance to prepare a bankable business plan has not been taken up by SME Bank.
The commercial banks and leasing companies do not feel comfortable to about financing 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 costs involved in the appraisal, disbursement and recovery of small loan proposals is yet another factor impeding the free flow of bank's finance to the SME sector.
That is why a major chunk of the banks' finance goes to meet only the working capital needs of on going small units. Medium and long-term loans for fixed assets needs of small industrial units are not indiscriminately 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 the SMEs, that is manufacturing concerns having a number of employees not exceeding 250 and not exceeding 50 in case of trading and service concerns, secondly, total assets (excluding land & building) not exceeding Rs 100 millions and Rs 50 millions for manufacturing and trading and service concerns respectively, and thirdly, having total sales not exceeding Rs 300 millions as per latest financial statement, are entitled to avail the clean facility to the extent of Rs 3 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 the group guarantee is arranged.
The group guarantee can be arranged by forming a Mutual Guarantee Association of 25 to 40 SMEs. They, through mutual capital contribution can set up a Mutual Guarantee Fund to provide cover to financing a bank for individual borrowings of member SMEs. Another way of resolving collateral issue is that the government must encourage the 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 the UNIDO has come forward. They are looking into the possibility of creating clusters of SMEs, which apart from facilitating borrowings on a 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 partner ship with private investors, is yet another approach to solving collateral issue. In order to finance viable SMEs, 'Stand by 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 a 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 Pakistan Export guarantee scheme, an SME financing guarantee scheme can be sponsored by an indigenous entity exclusively, or in collaboration with a foreign funding agency like the Asian Development Bank who have already taken initiatives to promote the SME sector in Pakistan.
A very recent move from the Islamic Co-operation 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 approval of this offer by the State Bank of Pakistan), is another appropriate strategy to solve the collateral issue.
It is hoped that the Task Force set up by the government for formulating an exclusive policy for the SME sector will have a due focus on this issue.
In order to avoid hardship on the part of SMEs to meet loan documentation and also the high costs involved thereto, loaning procedures should be simplified and the validity of the stamped charge forms relating to working capital finance should be enhanced to atleast three years as has been done in the case of agricultural credit.
The problem of lack of management and technical expertise can be tackled by enhancing the frequency of the conduct of training programs in these areas, sponsored usually by the SMEDA, Export Promotion Bureau and various Chambers of Industry and Commerce.
These programs 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 subsidise cost of conduct of such programs. It is to be seen when it is materialised.
For sustainability, it is essential that SMEs enter sub-contractual arrangements with large manufacturing concerns. This makes it possible for SMEs to make the use of equipment and warehouses of large - scale concerns thus saving the funds needed for fixed asset investments and also sizeable reduction in over-heads.
Presently, Subcontracting is visible in textiles, engineering, footwear, sports goods and surgical instruments and only 25% of the SMEs are benefiting from such arrangements. There is a need to create more opportunities for sub-contracting. In this regard the SMEDA can play an important role by disseminating the findings of their research studies down the line in the industrial sector.
In order to promote SMEs it is essential that they be given ample relaxation with regard to tarrifs and be differentiated from commercial enterprises in all respects.
The provision of an efficient infrastructure is also essential for the sustainability of this sector, It is specially the uninterrupted supply of utilities and skilled labour which is to be ensured.
To enable Pakistan to integrate into the global economy, it is necessary that our SME sector which shares exports to the extent of almost 50% must have an all out focus on value addition and quality control of exportable items.
In this regard, the Export Promotion Bureau 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 the industrial sector abroad, which, in turn, would enable them to offer highly competitive products in the International market.
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