Business Strategy 499 '10

What Are SMEs

As defined by State Bank of Pakistan - SME (Small and Medium Enterprise) means an entity, ideally not a public limited company, which does not employee more than 250 persons (if it is manufacturing concern) and 50 persons (if it is trading / service concern) and also fulfills the following criteria of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as relevant:
(a) A trading / service concern with total assets at cost excluding land and buildings up to Rs 50 million.
(b) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million.
(c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

Significance of SMEs

SMEs are considered the engine of economic growth in both developed and developing countries, as they:
Provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units.

· Assist in regional and local development since SMEs accelerate rural industrialization by linking it with the more organized urban sector.

· Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities.

· Contribute significantly to export revenues because of the low-cost labour intensive nature of its products.

· Have a positive effect on the trade balance since SMEs generally use indigenous raw materials.

· Assist in fostering a self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes.

· Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency.

· Problems Faced by Pakistan’s SME Sector?

· Pakistan’s economy has amazing potential for development but sadly, we haven't been able to derive optimal benefits despite a series of efforts launched by various policy makers at different times. The impetus of all these endeavors was on the large scale industries and manufacturing concerns. High rate of failures, owing to economic slumps, institutional malpractices, political motives and damaging activities of labour unions in that sector, left the formal lending institutions with huge infected portfolios, in addition to adverse effects on the entire economy e.g. insufficient and low quality production to meet the demands of local and international markets, deficit in balance of payments and ever rising unemployment, etc.

· Pakistan’s SMEs are still unable to achieve their maximum potential and are in dire need of ‘hand-holding' and business support services.

· SME Financing and Hand-Holding

· Research reveals that despite the lack of collateral, SMEs are a better credit risk, as the default rate of this sector is much below that of large enterprises (LEs). Throughout the world, SMEs have provided tremendous opportunities to financial institutions to design various tools for the sector's development (e.g. Program Lending Schemes, Credit Scoring, Venture Capital Financing, etc.). Then there are clusters, technology parks and industrial estates, all being fuelled by the dynamism and vibrancy of small and medium enterprises. Banking institutions, running on Islamic principles, are also experimenting with interest free financial instruments (e.g. Mudarabah, Murabaha, Ijarah etc.) for this sector.