INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN

(Constituted under the Cost & Management Accountants Act 1966)

REPORT ON

THE ROLE OF SMALL AND MEDIUM ENTERPRISES

IN

GDP AND MACRO ECONOMIC DEVELOPMENT OF PAKISTAN

A JOINT STUDY

BY

INSTITUTE OF COST & MANAGEMENT

ACCOUNTANTS OF PAKISTAN

AND

THE FEDERATION OF PAKISTAN CHAMBERS

OF
COMMERCE & INDUSTRY

Printed and published by ICMAP on September 18, 2000

ST-18/C, Block 6, Gulshan-e Iqbal, Karachi 75300
Phone: 4983251-5, Fax: 4983390 E Mail: ed@icmap.com.pk
 CONTENTS
PAGE

EXECUTIVE SUMMARY

INTRODUCTION 1- 4

THE ROLE OF SMEs IN ECONOMIC DEVELOPMENT OF

5-7
A COUNTRY

SUCCESS FACTORS IN SMEs 8 - 11

TECHNOLOGY PERFORMANCE OF SMEs 12 - 13

CAPITAL 14 -16

ROLE OF ACCOUNTANTS AND BANKERS 17

CASE STUDIES 18-19

WORLD SCENARIO FOR SMEs – An IFAC view point 20

GENERAL PROSPECTS FOR DEVELOPMENT SMEs 20-21

PAKISTAN EXPERIENCE IN DEVELOPMENT OF SMEs 22-24

BANGLADESH EXPERIENCE 25

SITUATION AND DEVELOPMENT STRATEGY OF SMEs

OF CHINA 26-30
PAKISTAN MACRO ECONOMIC RECOVERY THROUGH
DEVELOPMENT OF SMEs 31

RESHAPING OF CREDIT POLICIES BY COMMERCAL

BANK 32-33

SETTING OF SMALL BUSINESS AND COTTAGE

INDUSTRIES BANK 34-36

16. GOVERNMENT SUPPORT FOR PROMOTION AND 37-38

DEVELOPMENT OF SMEs

17. BIBLIOGRAPHY 39
 EXECUTIVE SUMMARY OF THE REPORT ON SMALL & MEDIUM ENTERPRISES
(SMEs)

Small and Medium enterprises make a significant contribution in employment generation and
output of a country economy. Developing as well as developed countries have spent large
amounts of money for the promotion of SMEs. There are quantitative as well qualitative
definitions of SMEs. .Some of the quantitative and qualitative measures are number of
employees, assets employed and sales turnover. Some ‘technical’ measures are also used such
as ‘installed horsepower or kilowatts, the number of vehicles, hotel rooms, looms or other
machinery, or the output capacity of a machinery. Agricultural Farms are by far the most
numerous small businesses in most developing countries. Various types of businesses that
SMEs are involved in are carpet industry, poultry farming, seri-culture, rice husking, gur and
sugar making, bee keeping, small repairing workshops, hand and power loom industries,
manufacturing of sports and leather goods, embroidery and tailoring work, making of silver
and gold ornaments, furniture making, ivory works, handicrafts, carpet weaving, spices
industry, wood works etc.

There are three focal points in which SMEs are different from large scale enterprises. These
are uncertainty, innovation and evolution. The SME sector itself can be disaggregated into
micro enterprises, small enterprises and medium enterprises. SMEs are the starting point of
development in countries desiring industrialization. Most large enterprises today have their
origins in small and medium enterprises. SMEs lack the research capacity, the ability to take
substantial risks, or any other advantage of expansion. SMEs have their effect on the GDP,
income distribution, tax revenue, employment, efficient utilization of resources and stability of
family income.

SMEs provide more jobs than LEs. Entrepreneurs prove their ideas in the market places in the
form of their products. Small enterprises provide a valuable opportunity for earning income
and personal development to women, especially in rural areas. SMEs can be easily managed
and do not require highly formalized management structures. SMEs are funded usually by
owners through their personal savings unlike Large enterprises which borrow loans. SMEs can
serve as by-product industries of the big industrial units. The various production of SMEs have
international markets and may earn foreign exchange for their economies. SMEs can be easily
developed in the backward areas. SMEs provide the necessary semi-finished raw materials for
large scale enterprises.

Two factors are crucial in determining the success or failure of an SME. In the long run, the
basic underlying soundness of the business is important for the success of SME. An SME may
also be affected by the quality and aims of the entrepreneurs, the quality and cost of labour, the
cost of investment funds and access to credit, the availability of markets and raw materials and
other non-labour inputs, access to information about product market conditions, market
intermediaries and production techniques. The growth of a small business can be divided into
five stages. These are inception, survival, growth, expansion, maturity. Factors which
influence the growth of an SME can be categorized as the starting resources of the
entrepreneur, the enterprise, strategy.
The key role played by an entrepreneur is in organizing the work of others. SME’s established
by a group of individuals is more likely to grow than businesses owned by a single person.
A technologically strong SME system and network in developing countries is necessary to
develop, attract and work with large enterprises. In developed countries, large scale enterprises
increasingly are downsizing and depending on networks of SMEs. Technological performance
of SMEs can be regarded as the performance of synergistic networks of enterprises.
Achievement of technological performance in SMEs depends on technologically skilled
managers and workers, technology embodying capital and intermediate goods, technological
services, technology innovation and transfer, mastering in gainful technology.

Many entrepreneurs are prevented from starting a business only because of lack of finance
initially. It is very important that whatever capital is available should be used effectively and
efficiently. The vast majority of initial venture capital and subsequent funds for expansion is
provided from entrepreneur himself, his business and his family, suppliers and customers, and
moneylenders or other investors who provide capital in innumerable ingenious ways, often
linked to supply, machinery, employment or customers.

Owner-manager in small and medium enterprises do not seek growth as a major objective and
prefer maintaining control through involving personally into the day-to-day operations and
decision-making processes of the enterprise. Cash flow management is used primarily to assist
owners or entrepreneurs in their survival rather than some other goals such as growth. Survival
and stability are often more important goals. Performance measures employed by large
enterprises are often completely inadequate to small and medium enterprises. Similarly, the
system of accounts adopted by SMEs for control purposes are often influenced by the
relationship between the owner and the business. Banks, individual potential investors,
investment companies, leasing companies, entrepreneur himself, family members, friends and
relatives, suppliers, these are all potential sources of capital for a newly started entrepreneur.

A large part of our economy, which is based on SMEs remains outside the white tax-net
economy. Efforts are necessary both to boost this sector for employment, GDP growth and
also to organize its financial behavior. SMEs are vital for world prosperity; collectively, they
are the largest employers and greatest creators of wealth.

Small Industry can be set up with small capital and produce goods for domestic consumption
by using labour intensive technology. It has been reported that SMEs are capable of helping
create most of the one billion new jobs the world will need in the new century. In developed
countries SMEs have constituted a significant portion of Gross National Product (GNP) and
total employment. SMEs account for between 55% and 80 % of total employment in Western
Europe, US and Japan. Their contribution in output in Japan is 65 %, Germany 48 % and USA
45 %.

In Pakistan SMEs provide employment to 65% of the work force in industrial sector. They
contribute to GDP around four times as much as the large scale industries. According to the
Economic Survey of 1998 – 99, SMEs with a mere 20% investment and resource to less than
10% of the total formal credit, generated 80% of the country’s total employment. Various
types of loans available are Small Loans for Business & Industry, Small Loans for
Industrialist, lending for Small and Medium Industries. These loans are provided as per the
following two categories :

1st Category : Loans ranging from Rs. 10,000 to Rs. 500,000

2nd Category : Loans ranging from Rs. 500,00 to Rs. 5,000,000

Each of the above mentioned category have certain terms and conditions attached for the
sanctioning of the loan.

To develop the small & medium enterprises (SMEs) in Pakistan, an autonomous corporate
body at the Federal level called Small and Medium Enterprises Development Authority
(SMEDA) was formed in October,1998.

The SMEDA may play its role for evolving strategies for introduction of transport and other
schemes to all the four provinces. SMEDA can contribute in a big way to the socio-economic
development of the country.

The Government of Bangladesh had taken up different financial assistance programmes with
a view to extending finance to small industries at relatively favorable terms and conditions.
The Special Credit Programme (SCP) was initiated by the Bangladesh Bank in 1978 to
disburse local currency loans for capital finance and working capital finance to small and
cottage industries. Cottage industries in Banglaesh are exempt from levy of value added tax
(VAT).

Small and medium enterprises have played a very important role in the economic development
of China. At present, there are more than 10 million of SMEs registered in the Bureau of
Industrial and Commercial Administration, comprising 99% of the total number of enterprises
in China. SMEs contributed 60% of industrial output volume and 40% of the total taxes and
profits realized by enterprises in China.

If strategic planning for development of SMEs is made successful, middle class entrepreneurs
may play an effective role in the economic recovery of Pakistan. In Pakistan adult literacy rate
is 48 % majority of entrepreneurs operating small businesses and Industry are not educated
and as such they hesitate to approach Small and Medium Enterprises Development Authority
and the banks for loans. High interest rate is the main hurdle facing SMEs. Credit may be
offered to such enterprises at subsidized rates.

The Punjab Small Industries Corporation [PSIC] should also be restructured. The corporation
claims to have financed 3,600 industrial projects and successfully recovered its stuck up loans
of over Rs. 2.4 billion.

In the past SBP had been allocating funds for small loans but commercial banks making
sincere efforts to make the disbursement against the mandatory quotas allocated to them
found shortage in meeting requirements of SMEs. A small business and cottage industries
bank can be established whose main objective is to boost the development of existing and
developing new small and medium enterprise. The bank may be established with an
authorized and paid-up capital of Rs.1 billion sponsored by IDB, FPCCI, Leasing
Companies, investment banks, Modarba Companies, various association of exporters,
NIT, Insurance companies and general public.

The State Bank of Pakistan should a policy decision for lowering the interest rate to 10%
only for SMEs. SBP being the controlling authority of all the Commercial Banks should
monitor credit financing to SMEs at large-scale. It is needless to mention that unless and
until SMEs are promoted, the dream of economic revival may not come true.

All commercial banks should re-shape their credit policies, try to approach to small and very
small borrowers and launch to sell their new products. The banks include National Bank of
Pakistan, Habib Bank Limited, United Bank Limited, Muslim Commercial Bank Limited and
Allied Bank of Pakistan Limited and others.

Ultimately, the success of an SME – centred approach to industrialization will depend

upon the government’s willingness to formulate an industrial policy that draws upon
some of the successful models.
 INTRODUCTION

Small and Medium Enterprises (SMEs) are present in majority in all economies of the world.
These enterprises make a significant contribution in employment generation, and output of
their economies. SMEs can be very helpful in employing the ever-growing workforce of an
economy that cannot find employment in Government or in large-scale industry. Various
aspects in which small and medium enterprises need attention are credit, training, technology,
buildings, raw materials and availability of markets. Developing as well as developed
economies have spent large amounts of money for the promotion of SMEs. A wide range of
international experience exists in this regard which we can refer to.

We need to analyze as to what precisely constitutes a small firm. One thing that appears to be
very clear is that there is no single, uniformly acceptable, definition of a small firm. A small
firm in a developed economy might not be ‘small’ in an underdeveloped or developing
economy. More than 95 percent of all firms in the economies of the European Community are
classified as ‘small’. Definitions can be formed which relates to the measures of size such as
number of employees, sales turnover, profitability, and net worth etc. Small-scale enterprises,
particularly in poor countries, are very difficult to count. Definitions of SMEs, however, can
broadly be classified from two aspects.

 quantitative
 subjective or qualitative

Table I below briefly summarizes the results of a survey undertaken in 1975. The table shows
that most of the countries use quantitative measures and qualitative measures are usually
preferred by industrialized countries.

TABLE –I
Criteria for determining size of enterprises

Criterion Developing Countries Industrialized Countries

No. of employees 6 countries 9 countries
Assets employed 10 countries 1 country
Sales Turnover 1 country -
Employees & Turnover 1 country 2 countries
Employees & Assets 16 countries 3 countries
Turnover & Assets 1 country -
Employees, Sales & Assets 4 countries -
Total sample 39 countries 15 countries
Source: Anciello et al, 1975
Number of Employees :

It is the mostly used measure in industrialized countries. The lesser the number of
employees, the more small would the enterprise be called.

The value of capital: [Assets employed]

Capital is usually a scarce factor in SMEs. Exact amount of capital limiting the definition of
SME differ from industry to industry and from economy to economy. A small enterprise in a
petro-chemical industry would have a much larger value of capital than a small enterprise in
car repair industry. Capital is more difficult to measure than counting the number of
employees. The machinery may be very old or home made, buildings are often used as
dwellings as well as workshops, and in many countries the market for land is almost not real
and therefore any valuation must be arbitrary.

In India, such problems are overcome by finding and using only the value of plant and
machinery at cost (original). A problem that occurs in this regard is that the value of
equipment changes when it is sold. If sold at a higher price, it means that the business is no
more ‘small’ but there is no physical change that has taken place.

Other measures of Scale:

There are many quantitative definitions suitable to a particular type of business. For trading
enterprises, sales turnover is a reasonable measure. But such a measure is subject to seasonal
variations. Value added, that is the difference between sales and the cost of purchased
materials and supplies, is a refinement over sales turnover. Some ‘technical’ measures are also
used such as ‘installed horsepower or kilowatts, the number of vehicles, hotel rooms, looms or
other machinery, or the output capacity of a machinery.
The scale of enterprises differs with countries. What is a heavily capitalized large industry in a
small and very under-developed country may be a medium or even small-scale enterprise in a
large economy.

Qualitative Definitions:

Qualitative definitions relate to the essential operating differences between small and large
enterprises. In Tanzania, only enterprises which are ‘within the reach of the people’ are said to
be small. Small enterprises, according to such a definition, are those in which ‘management
lies in the hands of one or two people who are also responsible for taking important and
significant decisions.’
Types of businesses SMEs are involved in:

Farms are by far the most numerous small businesses in most developing countries. However,
there are many non-farm activities also that SMEs are engaged in. There are also many
similarities between small farms and small industrial businesses. These include the retail
industry, the catering industry, the service industry and many more. Various types of
businesses that SMEs are involved in are carpet industry, poultry farming, seri-culture, rice
husking, gur and sugar making, bee keeping, small repairing workshops, hand and power loom
industries, manufacturing of sports and leather goods, embroidery and tailoring work, making
of silver and gold ornaments, furniture making, ivory works, handicrafts, carpet weaving,
spices industry, wood works etc.

Another aspect of defining SMEs:

In the United Kingdom, the Bolton Committee (1971) attempted an economic definition of
SMEs. According to the Committee, the economic definition of SMEs includes satisfying
three criteria. These are:

 they have a relatively small share of their market place;

 they are managed by owners or part-owners in a personalized way, and not by
using a formal management;
 they are independent, in the sense of not forming part of a large enterprise.

There are three central respects in which SMEs are different from Les; these are

Uncertainty:

SMEs are price takers; they have limited customer and product base. SMEs are highly
dependent on selective customers. Owners of SMEs are not answerable to anyone for their
decisions. Therefore, these is an uncertainty in the behaviour of the owners of SMEs.

Innovation

This is the role that Schumpeter (1934) saw SMEs playing. SMEs initiate ‘gales of creative
destruction’, through the introduction of totally new products. Small enterprises are more
likely to introduce fundamentally new innovations than larger firms.
Evolution

The structure and organization of the small firm is more likely to be in a state of change as it
moves from one stage to another, than is the case for larger firms.
The SME sector itself can be disaggregated into three components:

 micro enterprises: those with between ‘0’ and 9 employees;

 small enterprises : those with 10 to 99 employees;
 medium enterprises : those with 100 – 499 employees.

Small firms are not homogeneous. Each is different and has special characteristics. However,
it is important to differentiate between two types of SMEs, broadly classified. One of these is
the ‘life –style’ SMEs that provides the owner-manager with a certain ‘life-style’ opportunity.
The owner becomes comfortable when a certain life-style is achieved. Little attention is then
given on strategic management or growth perspectives. Most small firms fall into this
category.
The other is the ‘entrepreneurial’ SME set up with the intention of growth. These are not easy
to manage and are extremely risky.
 THE ROLE OF SMALL AND MEDIUM ENTERPRISES IN ECONOMIC
DEVELOPMENT OF A COUNTRY

Small and Medium Enterprises [SMEs] are the starting point of development in countries
desiring industrialization. A sudden shift to modern technology and large-scale production is
more difficult without a prevailing SME sector. Most large enterprises today have their origins
in small and medium enterprises. Therefore, supporting SMEs today can promote evolution of
LEs tomorrow. Hoselitz has noted that many small cottage & handicraft in Europe and Japan
“did develop into small and medium sized factories, and this process appears to be of special
importance in under-developed countries.”

There is a wide variation that exists in the growth paths of SMEs, which makes in difficult to
generalize their significance and contribution as a group to the growth of total employment or
output at a given point in time. SMEs often serve as training grounds for entrepreneurship,
thereby creating a business-oriented middle class, spreading entrepreneurial attitudes
throughout the population, and providing future managers.

Technological or managerial economies of scale may permit large-scale enterprises to operate

with lower production costs than the SMEs. SMEs lack the research capacity, the ability to
take substantial risks, or any other advantage of expansion such as entering a new market,
which requires a well-developed sales capability. The role of SMEs at the economy wide level
is very important. The International Labour Organisation (ILO) in its Kenya report has argued
for a number of special measures for the growth of SMEs, and removal of restrictive public
policies. India has gone as far as to reserve certain branches of industry for small producers.
SMEs are supported by certain measures which include better access to credit, greater
availability of services, which can enhance managerial capacity and upgrade operational
technology and improvements in the input and output markets.

SMEs have their effect on the GDP, income distribution, tax revenue, employment, efficient
utilization of resources and stability of family income. Small enterprises have displayed
remarkable capacity to absorb labour. Small enterprises are almost always locally managed
and owned thus extending the strength of family and other social systems and cultural
traditions. It is not beneficial for a country to have its economy mostly controlled by foreign
interests or to rely on foreign technology, expertise and method.

The products of SMEs tend to originate from indigenous craft traditions, and they are also
more likely to satisfy the needs of poor people then are the products of LEs and foreign
technology. The demand for soap in Bangladesh, shoes in Ghana, furniture in Kenya and
bicycles in Malaysia suggests that there is a tendency for local products, produced in small
units using labor-intensive equipment to be more appropriate for the needs of poorer people.
Poorer people are also less well informed and thus prone to the appeal of heavily advertised
branded products of LEs, which might not be appropriate for them. Another important role of
SMEs is that they can manufacture smaller quantities of products since their profits are not
dependent on long production runs. SMEs are only in a situation to
preserve local handicrafts since only they are capable of necessary skills and styles of
producing them. SME satisfy local needs by making differentiated products as well as by
being themselves scattered throughout a country. Thus equitably spreading employment
opportunities more or less in proportion to population.

SMEs are more likely to use locally produced raw material and equipment, thus saving foreign
exchange. In East Java the people of one village are fully occupied in the manufacture of
traditional hats, and simple containers, woven from split bamboo. The bamboo is obtained
from a nearby village, whose people have traditionally lived by growing and splitting bamboo
for their neighbours.

Job Satisfaction:

SMEs provide more jobs than LEs. SMEs also provide more job satisfaction than LEs which is
obvious from the fact that most of labour unrest, strikes, lock outs and such factors are absent
in SMEs. People working in SMEs are happier than those working in LEs, in spite of generally
lower wages and poorer standards of safety, comfort and welfare facilities.

Entreprenenarship and Innovation :

SMEs provide a nursery and proving ground for enterprise. SMEs generate the
entrepreneurship qualities and are usually testing grounds for persons embarking on a
successful business. He may find that he lacks the persistence, imagination and other qualities
necessary for success though. Entrepreneures prove their ideas in the market places in the form
of their products. Pieces of broken window glasses when used to replace imported hurricane
lamp glasses show highly innovative qualities of entrepreneures.

Employment for Women :

Small enterprises provide a valuable opportunity for earning income and personal
development to women, especially in rural areas. Female-owned trading enterprises have a
long history in many parts of the world, such as West Africa. Certain manufacturing activities,
such as sewing, simple machine knitting, food preparation, carpet weaving and many types of
handicrafts represent opportunities for employment of women.

The need for management :

SMEs can be easily managed and do not require highly formalized management structures.
Scarcity of managers can pose serious constraint on economic development. Managers are
vital for any enterprise. SMEs are informal in nature often managed by owners turned
managers. SMEs do not need full time management.
Investments :

Business use as well as create capital. Such businesses play important role in an economy
which pay more emphasis in creation of capital. Capital mobilization is a positive step towards
economic development. SMEs are funded usually by owners through their personal savings
unlike Large enterprises which borrow loans. These loans could be otherwise used but the
savings of SME owners could get wasted if not employed in SMEs. Relatives of a successful
SME entrepreneur may also mobilize similar resources.

Use of Industrial Waste :

SMEs can serve as byproduct industries of the big industrial units. They do not only produce
goods out of the waste of big mills but also provide their own goods at a cheaper cost.

Source of foreign Exchange earnings :

The various handicrafts production of SMEs particularly from wood and metal have
international markets and may earn foreign exchange for their economies.

Balanced Growth :

SMEs can play a very useful role in the balanced growth of a developing country. SMEs can
be easily developed in the backward areas. The regional disparity in income can be reduced
through the development of SMEs in backward areas.

Support to large scale industry :

Small Scale industry enables a country to produce standard goods on a large scale. SMEs
provide the necessary semi-finished raw materials for large scale enterprises.

Reduction in rural migration :

The gainful employment of labour in the villages in small scale enterprises reduces their
migration to cities. Thus reducing the problems of population, unhealthy slum housing,
sanitation, education, transport and health etc.
 SUCCESS FACTORS IN SMEs

Two factors are crucial in determining the success or failure of a small and medium enterprise.
In the long run, the basic underlying soundness of the business is important for the success of
SME. It means whether the basic idea on which SME is based has the potential to produce
profits. There is no point in selling a million rupees worth of your product if it costs a million
and a half to make it. In the short term, the lack of sufficient cash at the right time has caused
fundamentally sound businesses to fail.

An SME may also be affected by the quality and aims of the entrepreneurs, the quality and
cost of labour, the cost of investment funds and access to credit, the availability of markets and
raw materials and other non-labour inputs, access to information about product market
conditions, market intermediaries and production techniques. SMEs economic performance
may also be related to its size, age, location and other quantitatively measurable factors. SMEs
in developing countries usually have relatively low labour costs because few of them are
required to pay minimum wages or social security; at the same time they are discriminated
against in the capital markets. Thus labor-intensive techniques may be favored by SMEs more
than large enterprises. Entrepreneurs play a vital role in the success of an SME. Various
variables regarding an entrepreneur are his educational qualifications, nature of his main skills
and his ambitions.

SMEs show a capacity to grow by the time with respect to efficiency and employment and
output. Success of an SME or any other business can be interpreted in many different ways.
The most common view of success is the financial growth with a high level of profits.
However, other views include owner’s job satisfaction and developing new products. Some
SMEs are successful financially, some technologically, some for providing job satisfaction and
some for being a successful co-operative. SMEs are seen as successful co-operative. SMEs are
seen as successful from the view point of their owners. They know that there exists many
different tasks which vary in relevance and immediacy in developing a business. Different
strategies and activities need to be adopted at different stages in a company’s development to
achieve its various goals. Chances of success and thus survival can be enhanced if
entrepreneurs have a clear and realistic idea of what they want to achieve and adoption of
appropriate operating procedures.

Examples of businesses which were once small but are financially successful, now include that
of Marks and Spencer. They celebrated their centenary in 1984. Marks and Spencer had
started trading from a barrow in Leeds market. Kwik-fit was started in 1971 and now employs
almost 2,000 people. Kwit-fit consisted of three colleagues initially who earned 12 pounds and
10 shillings a week each.

Success depends on the entrepreneurs’ ability to delegate, recruit the right people and get the
best out of them. Innovating new methods in every aspect of a company’s function for
attaining even higher efficiency is yet another quality of a successful entrepreneur.
Many SME owners start in business to achieve independence and become self employed or
`their own boss’ . To become successful, businesses need to satisfy the various demands of
their customers better than other enterprises.

A well managed successful SME tends to have qualities which large enterprises lack. These
include more flexibility and willingness to explore new methods. They are a major source of
new products, services and methods. They waste less time in committee meetings and even
more futile pen pushing. Labour relations are usually satisfactory and a sense of involvement
exists among labour. SMEs encourage personal initiative and individual judgment. In an SME
there is more consultation than command.

Another aspect of possible success and growth of SMEs is the favorable government policies.
Any government policy would focus on employment generation and SMEs play an important
role in this regard. They can be identified as a future large scale enterprise and thus may be
invested upon.

Success for SMEs also depend upon the provision of advisory services – such as accountants,
management consultants, etc. Success is often the causal factor of growth in a business. The
growth of a small business can be divided into five stages. These are :

1] Inception.
2] Survival
3] Growth
4] Expansion
5] Maturity

The role of management, the style of management and the organization structure differ in all
these stages of growth of an SME. For example, upon inception the owner or top management
might execirse direct supervision but later on delegates, coordinates and at last decentralize.

Factors which influence the growth in an SME can be categorized into three components.

 the starting resources of the entrepreneur

 the enterprise
 strategy.
Table II shows that each of the above mentioned components can be divided into different
elements.

Table II Factors influencing Growth in SME

S.No FromThe
theFview
The point
Firm of From the From the Strategy point
the entrepreneur view point of of view
the firm
1. Motivation Age Workforce training
2 Unemployment Sector Manage Management training
3 Education Legal form External equity
4 Management Experience Location Technological sophistication
5 Number of Founders Size Market positioning
6 Prior-self employment Ownership Market adjustments
7 Family History Planning
8 Social Marginality New products
9 Functional Skills Management recruitment
10 Training Govt. support
11 Age Customer concentration
12 Prior business failure Competition
13 Prior sector experience Information & advice
14 Prior firm size experience Exporting
15 Gender

The entrepreneur and their access to resources can be identified prior to the business being
established. This is discussed below in detail. The elements identified about the business itself
reflect decisions made by the entrepreneur upon starting of the business. These are not
operational decisions. The elements described or listed in the strategy are of prime importance.
The elements listed have been considered by researchers as dimensions of strategy which
could influence small enterprise growth.

The Role of Entrepreneur :

In the advanced economies, entrepreneurs in SMEs that can demonstrate growth potential are
regarded as the engine of economic development and change. Those individuals starting their
business with a positive motivations are more likely to establish a growing business. Positive
motivation includes the perception of a market opportunity for a product or service and the
desire to make more money. An educated entrepreneur provides him with a greater confidence
in dealing with customers and bankers. In short, education is a key constituent of the human
capital needed for a successful (SME). The educated individual also has high earning
expectations. The key roll played by an entrepreneur is in organizing the work of others.
SME’s established by a group of individuals is more likely to grow than businesses owned by
a single person. Prior managerial experience is likely to be an important part of growth of an
SME. Entrepreneurs who have past experience of handling a business are more likely to
contribute in the success of an enterprise. An other factor regarding an entrepreneur is his
family history. Enterprises owned by a single family are more successful. Social marginality is
the relationship between the individuals physical characteristics, intellectual qualities, social
behaviour and his role on status in a society. It is hypothesized that individual may respond to
a social marginality by a determination to prove themselves. Management of an SME require a
range of skill including marketing, production, personnel, research and development in finance
as well as general managerial skill. Individuals with all such functional skills are better
positioned to lead an SME’ towards success. Young entrepreneurs have the energy and
commitment to work long hours which generally are necessary for a business to be successful.
Older entrepreneurs have credibility as well as business experience in the market place.
Individuals who have failed in business before are more likely to have lower growth rate
businesses.

Work experience in the same size of enterprises and the same sector is a positive factor for a
successful entrepreneur. Female entrepreneur are more likely to face problems in the market
place, this is due to their commitments to children and family preventing them from working
more in developing a business. The most important factor is perhaps the unemployment of
entrepreneur, who are also attracted by a market opportunity.
 TECHNOLOGY PERFORMANCE OF SMEs

A technologically strong SME system and network in developing countries is necessary to

develop, attract and work with large enterprises. In developed countries, large scale enterprises
increasingly are downsizing and depending on networks of SMEs. The “technological
performance” of SMEs is important from the aspect of what SMEs is important from the
aspect of what SMEs actually do technologically. An enterprise must bring together at each
level of production, people with the right technological knowledge and background,
equipment with the right technological capabilities, suitable materials and techniques of
production to be applied. Failure in any of this process might result in the loss of relevance of
industry to the needs of the country, productivity loss, product’s quality loss or might result in
negative externalities.

SMEs face the task of upgrading themselves with respect to their technology. SMEs need not
only to attain a sufficient technological performance but also to sustain it through creative
destruction. Technological knowledge must be embodied in the people, equipment, facilities
and processes of an enterprise. There should be some flexibility in an SME to select from
alternative techniques effectively, to adopt technology to meet newer challenges and to
develop new technology when appropriate and necessary.

Technological performance can be regarded as the performance of synergistic networks of

enterprises. Achievement of technological performance in SMEs depends on the following
factors.
 technologically skilled managers and workers
 technology embodying capital and intermediate goods.
 technological services
 technology innovation and transfer
 mastering in gainful technology

“Advances in knowledge” including both technological and managerial play vital role in the
growth of an economy. Information and communications technologies have progressed at an
unprecedented rates. Biotechnology and materials technologies are just as significant. An
increasingly close application of scientific research in production techniques and other SME
functions is very important. Mastering a technology and development of technological
capacities of entire industries may require a long time. Appropriate social and economic
policies and necessary institutions can benefit technological performance of an enterprise.

Transfer, Dissemination and Adoption of Technology :

SME’s are generally more labour intensive than large enterprises. They also utilize resources
more efficiently. They have the ability to generate employment suitable for a women, reliance
on locally available resources, contribution to regional dispersal of industries, exports,
 adaptation of technology and labour market flexibility as well as an ability to spread the
linkage effects of large scale industries. In the south asian countries, over 80 % of the
manufacturing employment is absorbed by SME’s.

TABLE III.

Share of Small and Medium Enterprises in Manufacturing Output and Employment in selected
Asian countries.

Country (year) Output Employment

Bangladesh (1981-82) 48.47% 87.75%
India (1990) 42.00% 80.00%
Indonesia (1979) 22.38% 80.63%
Malaysia (1981) 14.30% 25.45%
Pakistan (1980-81) 26.69% 79.64%
(1990-91) 28.52% 82.63%
Phillippines (1983) 21.10% 43.30 %
Nepal (1981-82) 56.20% 88.00%
(1986-87) 59.40% 81.40%

There is a strong correlation between labour productivity and the level of technology that is
used. Technology can be provided on SME’s.

i) A process of transfer, adaptation and assimilation and

ii) Indigenous development.

Technologies transfer through direct foreign investment by a joint venturer and MNC’s
technical collaboration, import of machinery and equipment technical assistance through
human resources etc. In formal modes of technology transfer is done through books, journals,
promotional literature and personnel contact.
 CAPITAL

Most small business people believe that shortage of capital is their major if not their only
problem; at the same time they often have huge resources uneconomically tied up and even if
they do get additional capital, it might not be used optimally. Many entrepreneurs are
prevented from starting a business only because of lack of finance initially and existing
businesses can make use of capital remarkably effectively.

Capital is often the lever by which extortionate suppliers or customers effectively control and
exploit small enterprises; if the owner obtains more capital and is prevented in one way or
another from tapping new sources of supply or selling to new markets the situation is unlikely
to be improved, but capital is still an essential part of any ‘package’ which may be designed to
release him from the bondage which makes him in effect no more than an employee without
the benefit of trade union.

Small enterprises will lose one of their major advantages over larger ones if they attain the
same level of capital intensity, but they must invest in equipment, even if this means less
employment, in the interests of long-term survival and growth. Shortages of raw materials,
however caused, lead to the need for higher stocks, while personal customer contact may mean
that small enterprises can more safely extend credit than large ones.

Capital is scarce in developing countries particularly. It is therefore very important that

whatever capital is available should be used effectively and efficiently, in order to maximize
the creation of new jobs and the production of new goods and services, rather than using it for
transformation of small businesses into modern capital intensive enterprises. The money must
be widely spread and effectively used. In both industrialized and developing countries, the vast
majority of initial venture capital and subsequent funds for expansion is provided from
entrepreneur himself, his business and his family, suppliers and customers, and moneylenders
or other investors who provide capital in innumerable ingenious ways, often linked to supply,
machinery, employment or customers. Small businesses are genuinely assisted if there are low
interest rates on credit. However, from the point of view of lenders or lending institutions, it is
more expensive to lend small amounts of money to several small borrowers than large
amounts to fewer borrowers. The cost of promotion, appraisal, disbursement, supervision and
collection are not directly related to the amount of money lent, and smaller, less sophisticated
borrowers may take longer to appraise, and require more skill, because they are unable
themselves to present the necessary financial data. An appropriate level of service must also be
provided, and systems must be designed to minimize costs of transaction.

Capital attainment is thus, very important for a newly launched business from three aspects
which are investment in tangible, fixed assets, intangible investment and for obtaining a
reasonable amount of working capital.
Financial Management

It is a matter of interest for researchers and policy makers to know how small businesses and
medium enterprises use financial management information to plan and control their operations
and make decisions. More importantly how do they manage their cash flow and measure
performance in financial terms?

Owner-manager in small and medium enterprises do not seek growth as a major objective and
prefer maintaining control through involving personally into the day-to-day operations and
decision-making processes of the enterprise. Cash flow management is used primarily to assist
owners or entrepreneurs in their survival rather than some other goals such as growth. Survival
and stability are often more important goals. Performance measures employed by large
enterprises are often completely inadequate to small and medium enterprises. Similarly, the
system of accounts adopted by SMEs for control purposes are often influenced by the
relationship between the owner and the business.

Cash Constraints

There are many cash constraints for an SME. Lenders are understandably reluctant to put
money into a business unless the proprietors are also investing a significant amount of their
own money. Where the personal financial resources of the entrepreneur are insufficient to
provide a significant amount of equity, it is possible to invite other people to invest in the
equity of the business as co-owners. However many sources of finance are out of the question
for SMEs. These are the stock exchange, which offer facilities to bring companies and
investors together, the owner would be reluctant to share ownership and give up his originality
of ideas, the new business has, by its nature, no proved trading record to show to potential
investors and the fact that potential investors are likely to be deterred by dependence on the
personal commitment of an individual founder of the business, in case his or her services are
withdrawn.

Financing Opportunities for SMEs

Twenty years ago (more recently in most developing countries), entrepreneurs would not have
found a leasing company. Demand from new, small and medium sized enterprises turned
leasing in developing countries into a US $ 40 billion-plus industry from nothing- within just
20 years.

Banks, individual potential investors, investment companies, leasing companies, entrepreneur

himself, family members, friends and relatives, suppliers, these are all potential sources of
capital for a newly started entrepreneur.
One of the major sources of finance is leasing company. Leasing companies benefit SMEs in
many ways. Among these are

 Ownership of the asset gives the lessor strong security. In countries where weak collateral
laws hinder bank lending, leasing offers the advantage of (often) not requiring collateral
beyond the security of leased asset itself, and of simpler repossession procedures, because
ownership of the asset already lies with the lessor.

 Dedicated use of funds. Because the lessor purchases the equipment directly from the
supplier there is no opportunity for the lessee to use the funds for other purposes.

 Relatively simple documentation keeps transaction costs down, allowing leasing

companies to achieve high leasing volumes efficiently.

 Lighter regulation. Because leasing companies are not usually deposit takers they tend to
be less tightly regulated than banks.
 ROLE OF ACCOUNTANTS AND BANKERS

A large part of our economy, which is based on small & medium enterprises remains outside
the white tax-net economy. Efforts are necessary both to boost this sector for employment,
GDP growth and also to organize its financial behavior.

Cost and Management Accountants and bankers can assist SMEs. The main issues regarding
SMEs are managing finances and setting achievable directions for courses of actions. SMEs
have three strategic directions which are interrelated.

These are :
 financing arrangement
 business services offered
 Underlying capabilities of SMEs.

Financing arrangements help the underlying capabilities of SMEs creating business services /
products. A conceptual framework is needed to guide the understanding of SMEs. Such a
framework would help professional accounting advisors in guiding their policies and
measures.
 CASE STUDIES

BABA DIDI’s FURNITURE FACTORY

Alhaji Baba Didi started his furniture factory in 1972 and had obtained some years of
experience before starting his own business, as a carpenter. At first he made use of manual
labour and simple hand tools and easily affordable supplies. His working place was a shed and
his total equity was under $ 200. With such an equity he had little working capital and was
thus unable to make furniture for stock. The main products were simple stools, benches, tables
and shutters and produced them only at demand. His main customers were neighbors, market
women, housewives and sales were generally low for his products.

He worked in this way for four years and did his best to maintain his household. In 1976, the
Government introduced Universal Primary Education. The programme aimed to give free
primary education to everyone and large number of new schools were opened. These newly
established schools needed large number of benches and tables as simple as Baba Didi made.
Thus there was an increased demand and Baba Didi’s efforts were finally rewarded.

Early in 1977 he received a contract to manufacture furniture for two schools. He had saved
some money earlier which he used to pay for the materials and using the earnings from the
school contract he was able to expand his business. The year 1977 was a turning point for
Baba Didi. He used his earnings and moved to a new site, built a bigger shed and hired three
skilled employees, two semi-skilled workers and one labourer, bought a few carpentry
machines and started producing standard designs of furniture.

Baba Didi’s business was now worth $ 80,000. The equipment was worth $ 42,000, raw
material of $ 23,000. Baba Didi never borrowed money from anyone and had accumulated all
this business through reinvesting his earnings. With the improvement in his products, Didi
became the main supplier in the local furniture market. He found himself competing with long
established large furniture factories. In 1979, he bought some more machinery and employed
two new skilled carpenters. His sales increased for $ 160,000 per year with costs around $
100,000 and even in this situation he continued to take only modest salary for himself. He
used his profits for further expansion of his business.

In February 1981, however, disaster struck. A fire broke out in his workshop destroying all
machinery and equipment, stocks of raw material and finished products. Only the finished
goods were saved which were kept in a separate show room. Didi had approached the state
small scale industries credit scheme for a $ 160,000 loan but since the scheme was short of
money Didi could not obtain the loan in time. Therefore, he had to use all his past savings to
rebuild the workshop. He sold the finished goods which were saved and purchased new
machinery. He started his operation again by 1st June,1981 and by the end of the year the
enterprise was back on its feet employing fourteen people.

Baba Didi’s story is a success story of private initiative and determination, un-touched by
Government intervention.
 THE MANYU SOAP FACTORY

The Many Soap Factory in Cameroon is a small-scale traditional enterprise manufacturing

soap by hand; its proprietor, however, has more ambitious plans. He visited a national small
business assistance agency, and presented a plan for expanding the enterprise and totally
transforming its operations. He had already obtained estimates for the necessary equipment
from a foreign manufacturer, for a total of about $450,000. He presented the quotation to the
staff of the agency and asked for assistance in calculating the total capital required and in
preparing a proposal for submission to a bank.

The agency staff estimated that if the necessary machinery alone was going to cost $ 450,000,
the proprietor would need at least $ 700,000 in total to cover the cost of the machinery and the
necessary buildings, vehicles and working capital. This estimate included an allowance for
reduced customs duty, which could amount to $ 50,000 on the assumption that the enterprise
would be granted a special exemption. After making these preliminary estimates the
investigating officer of the agency asked the proprietor to describe the results of his market
studies. It appeared that he had undertaken no market studies and he did not even know how
many soap factories were already established in Cameroon. When asked what his own
financial participation in then project would be, the proprietor replied that he was prepared to
invest $2,000. The officer realized that there was no point in continuing the dialogue and told
the proprietor that the project was not feasible and that an ambitious venture of this type was
beyond his present ability. He was advised to apply for a special tax concession which would
enable him to obtain privileged prices for raw materials; he should take advantage of this
concession and continue making soap by hand as he was doing, to gain more experience in
soap making and thus to accumulate more personal funds before planning to move from a craft
to a modern industry.

The proprietor became very angry and asked why the Government should not help him
implement such an important project by providing him with the necessary funds; he stated that
he would implement his project even if the agency were unwilling to help him. A few weeks
later the proprietor returned to the agency and said that he had been unable to find any help
elsewhere; he asked them to give him whatever advice they could. The officer explained the
situation to him again and suggested that he should not try to achieve too much at once; the
agency prepared a submission for the concession on the interior tax in order to enable him to
pay less for his raw materials; the final analysis of the project showed that his real problem
was raw materials and not his need for more sophisticated equipment.

There are in Cameroon a number of importers who represent foreign manufacturers of

machinery. Since these are traders with no long-term interest in their customers, they sell
whatever machinery they can to local proprietors of small-scale enterprises; foreign machinery
manufacturers without representation in Cameroon also try to do the same. None of these
companies are concerned with the suitability of the machinery which they sell and they ignore
factors such as the capacity of the local market, the need for rapid repairs in case of
breakdown and training of their customers in the use and maintenance of the machines which
they sell. The proprietors of the small-scale enterprises have no source of information on
technology or its developments, and in most cases they buy obsolete or inadequate equipment.
 SMALL AND MEDIUM ENTERPRISES

WORLD SCENARIO FOR SMEs -AN IFAC VIEW POINT

Small and Medium Enterprises (SMEs) are an integral part of the economic lifeline of most
countries around the world . They are a major source of ideas and employment and they both
sustain and stimulate the growth of national economies. Yet many, far too many, fail-because
of an inability to manage their finances, or because their aspirations fall short of their
capabilities. Many are blinded by their enthusiasms and the sheer love of what they do – the
wellsprings of their strength and the value they create. And most would benefit by a
disciplined approach to direct setting, which harnesses their characteristic sense of enterprise,
and their capabilities and potentialities to their provision of goods and services.

Cost and Management Accountants can add value to SMEs – by assisting them to understand
themselves, and by offering guidance to directions that are appropriate and feasible for them.

Comments : William Mc-Elory, Chairman of IFAC’s

Financial and Management Accounting Committee (FMAC)

Small and Medium Enterprises (SMEs) are vital for world prosperity; collectively, they are the
largest employers and greatest creators of wealth. Yet they are often the enterprise most
susceptible to failure. Today’s management accountants are ideally positioned to help these
enterprises adopt to their changing environment and minimize the risks of disruption and
failure.

GENERAL PROSPECTS FOR DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES

Small Industry can be set up with small capital and produce good for domestic consumption
by using simple labour intensive technology. They play vital role in the economy by
providing higher output maintaining lower capital – employment ratio.

They have a dominant role in reducing unemployment greatly solving unemployment

problems. These small industries are confronted with shortage of finance. Normally small
industries do not find their way to access to the capital market due to their weak capital
structure.

It has been reported that Small and Medium Enterprises are capable of helping create most of
the one billion new jobs the world will need in the new century. In developed countries SMEs
have constituted a significant portion of Gross National Product (GNP) and total employment.
SMEs account for between 55% and 80 % of total employment in Western Europe, US and
Japan.
Their contribution in output is given below :

Contribution in Economic

Country Output

USA 45 %
Germany 48 %
Japan 65 %

(Source DAWN EBR)

Those SMEs which are run by aggressive management are capable to adopt faster to charges
introduce new products and market them swiftly, while feeding the large scale industries at
lower cost Automobile manufacture buys components from SMEs is a glaring example of
such industrial production.

CONTRIBUTION OF SMEs IN PAKISTAN ECONOMY :

In Pakistan SMEs provide employment to 65% of the work force in industrial sector. They
contribute to gross domestic product (GDP) around four times as much as the large scale
industries.

According to the Economic Survey of 1998 – 99, SMEs with a mere 20% investment and
recourse to less than 10% of the total formal credit, generated 80% of the country’s total
employment. SMEs are involved in production of textiles, textile value added, food,
beverages, bakeries, metal, foundry etc. According to a report about 4 million people are
employed in the manufacturing sector. Sector-wise figures are quoted below :

No. of Establishments No. of People Employed

Foundry & Metal Workshop-Karachi 130,000 1,300,000

Rural Various Productions - 10,000,000
Light Engineering –Direct employment 30,000 200,000
Light Engineering –Indirect employment - 1,000,000

All these figures signify an important role SMEs are playing in services and towards the
contribution in economic growth.
 PAKISTAN EXPERIENCE IN DEVELOPMENT OF
SMALL AND MEDIUM ENTERPRISES

A) Small Loans for Business & Industry :

Loans and advances given by any bank for business purposes, not exceeding
Rs.300,000/= per borrower, including those to dependent members of his family,
would be treated as “Small Loan.”

B) Small Loans for Industrialist :

Loans and advances given to industrial units, including cottage industries, which have
fixed assets (excluding land and buildings) the original value of which did not exceed
Rs.20 million would be treated as “Small Loans”.

C) Lending for Small and Medium Industries :

This scheme has been commenced w.e.f.15th July,1998. In order to create self-
employment opportunities for the youth, various banks would launch a scheme for
extending small loans giving preference to unemployed and skilled youth, persons
possessing prior business experience, and professionals holding diploma / degree in
operated through NBP, HBL, UBL, MCB, BL, SBFC, BoP and BoK. A time frame of
15-days is enough for these institutions to process and finalize applications.

Such loans are provided as per the following two categories :

1st Category : Loans ranging from Rs. 10,000 to Rs. 500,000

2nd Category : Loans ranging from Rs. 500,001 to Rs. 50,00,000

Later on per party limited on clean loans / advances for self employed loans under the
first category was raised from Rs. 100,000 to Rs. 500,000.

D) Terms and Conditions of Loans :

First Category :

 Loans under this category will be provided by banks / SBFC to borrowers

against one personal guarantee or any other security acceptable to the banks
and hypothecation of the entire business assets.
 All Pakistani citizens (unemployed youth male / female) with minimum middle
pass / degree holders, skilled persons and other professionals will be eligible to
borrow.
  The applicant age should not be less than 19 years.
 He / she should be residing at the current address for the last one year or more.
 Applicant should neither be an employee of a Government / Semi-Government
department nor a full time student of an educational institution.
 The guarantor should be an officer of Government / Semi-Government or
Financial institution.
 Owners of un-encumbered immovable properties or any other security
acceptable to the bank valuing not less than the amount of loans to be
guaranteed by them.
 One person can guarantee a maximum two loans provided the property and
assets owned by him and his financial position so justifies or where the first
loan is being repaid regularly.
 The guarantor’s un-encumbered immovable property/assets equal to the value
of loan is acceptable as mortgage against the loans.
 Loan alongwith its mark-up is repayable in seven years. The grace period for
loans under this category is not exceeding 12 months.
 The guarantor should be a resident of the area at least for last one year.
 Guarantor should be of good moral / sound character.

Second Category :

 Under this category, banks will allow financing for new industrial units, BMR
and expansion of existing units.
 Loan in this category will be provided against the mortgage of property /
machinery / business assets and hypothecation of stocks etc.
 There would be a grace period of 12 months.
 A minimum of five years business experience of the borrower has been
prescribed by the banks. In this category the age of the borrower should be
between 30 to 55 years.

E) Other Terms for both categories :

 The repayment period ranges between 24 – 84 months.

 He / she should neither be a borrower from any other bank / financial institution
nor a defaulter.
 The rate of mark-up to be charged from the borrowers under both the categories
would be 15%, if the loan installments are being repaid on time, otherwise rate
of 16% would be charged.
 The banks / SBFC had earmarked a sum of Rs.6618 million to be provided as loans for
small loan scheme.

F) Small and Medium Enterprises Development Authority :

To develop the small & medium enterprises (SMEs) in Pakistan, an autonomous

corporate body at the Federal level called Small and Medium Enterprises Development
Authority (SMEDA) was formed in October,1998. Its governing board consists of a
chairman and members from Government and private sector. Terms of reference of
SMEDA are that it will be the apex policy making body for SMEs and provide and
facilitate support services, generate massive employment opportunities, drive industrial
growth, revitalize small business and kick start the economy through aggressive launch
of small and medium enterprises (SMES) support programme. Banks / SBFC
participating in the scheme are to co-ordinate with SMEDA.

Loan disbursement position under this scheme is provided in the following Table :

LOANING POSITION CATEFGORY CATEGORY TOTAL

‘A’ ‘B’
Total Applications Received 69,168 181 69,362
Applications scrutinized 55,318 132 55,450
Applications rejected 23,723 74 23,797
Applications sanctioned 31,595 58 31,653
Amount sanctioned Rs.million 5,559.7 153.2 5,712.9
Amount Disbursed Rs.million 4,149.1 81.5 4,230.6
Percentage to sanctioned amount 74.6% 53.2 % 74.0%
SOURCE : Economic Survey 1998 – 99

The SMEDA may play its role for evolving strategies for introduction of transport and other
schemes to all the four provinces. In order to improve transport throughout the country, an
investment of Rs.64 billion may be arranged from syndicates of national and international
transport companies for providing loans to un-employed youth with guaranteed monitoring of
recovery. The corporation may also help the government in small cotton and value added
industries. It may also be involved in other small areas such as dairy, poultry, edible oil. It may
also help cottage industries in export of their products. SMEDA can contribute in a big way to
the socio-economic development of the country.
 BANGLADESH EXPERIENCE IN DEVELOPMENT OF FINANCING

SMALL INDUSTRIES UNDER SPECIAL CREDIT PROGRAMME.

In Bangladesh small industry is currently defined as an industrial undertaking either in

manufacturing process or service activity within a total investment of TK.15 million and the
investment in machinery and equipment not exceeding TK.10 million excluding taxes and
duties. The Tangail saree technology was successfully transferred to west Bengal due to
migration of a large number of weavers from Tangail to West Bengal. Where they setup the
new enterprises.

Bangladesh Tobacco Co. Ltd. successfully transferred the technology of wraping a bidi by
cigarette paper to small sector. Other examples include the Bengal Chemical and
Pharmaceutical works founded by Sir PC Roy and Bengal Immunity, founded by Captain (Dr)
Datta. Such MNC’s have promoted transfer of technology to the small sector in Bangladesh
mainly through provision of employment opportunities and investments.

The Government of Bangladesh had taken up different financial assistance programmes with
a view to extending finance to small industries at relatively favorable terms and conditions.
The Special Credit Programme (SCP) was initiated by the Bangladesh Bank in 1978 to
disburse local currency loans for capital finance and working capital finance to small and
cottage industries. BSCIC monitors the credit programme. Interest @ 10 % is charged per
annum w.e.f. July 1, 1986 for both capital finance and working capital finance. The security
of the loan under the SCP was hypothecation of the stock of raw materials and / or
machineries. Capital finances are repayable in a period of 5 years and working capital finances
are repayable in a period of 2-3 years. Normally, a grace period of 3 months was allowed in
working capital loan and 6 months were allowed in capital finance loans. In case of availing
both type of loans a grace period of 6 months was allowed. Monthly, quarterly and
half-yearly installments were allowed to repay the loan varied from customer to customer. A
debt-equity ratio of 80:20 is maintained. Bangladesh businessmen suggested that a debt-
equity ratio of 90:10 is reasonable.

BSCIC is primarily responsible to study the technical and economic feasibility of the project
and managerial competence of the project sponsor and the lead bank examines the financial
feasibility of the project. Joint inspection report is prepared. The loan proposal is finalized
within two months. It is true that delayed decision is sometimes worse than a wrong decision.
The capital finance was disbursed directly to the supplier phase by phase, the working capital
loan was disbursed only after the unit was ready for commercial production in case of new
projects after verification of existence of industry in case of on going projects. This
disbursement procedure helps to check diversion of fund and investment in short-term gainful
on speculative business.
 SITUATION AND DEVELOPMENT STRATEGY
OF SMALL AND MEDIUM ENTERPRISES OF CHINA

Small and medium enterprises plays a very important role in industrial and economic
development, which has been successfully proved in China. The situation and strategic vision
for SME development in China to be a country case is as follows.

Part 1 Basic Situation of China’s SMEs

1 Position and Role of SMEs

Small and medium enterprises have played a very important role in the economic development
of China. At present, there are more than 10 million of SMEs registered in the Bureau of
Industrial and Commercial Administration, comprising 99% of the total number of
enterprises in China. SMEs contributed 60% of industrial output volume and 40% of the total
taxes and profits realized by enterprises in China. In the annual export value of USD 150
billion of the country, SMEs’ contribution took 60%. Since the reform and opening to the
outside world, the fast development of China’s SMEs has forcefully supported the continuous
development of the national economy of China. 76.6% of the newly increased industrial
output value since 1990 was created by small and medium enterprises.

SMEs provide 75% of the total township and urban employment. Therefore they play an
important role in releasing the employment pressure and maintaining social stability.

2 China Pays Full Attention to Reforms of SMEs

Chinese SMEs have quite a few problems accumulated under the past planned economic
system. The state-owned SMEs have started restructuring in accordance with the requirements
raised by socialist market economy.

The restructuring includes six major methods as follows :

 Re-organizing into the forms of limited liability company or share-holding

Company Law of China;

 Transferring part / whole of the ownership to the staff of the enterprise and
becoming “share-holding co-operative enterprise”;

 Sell the whole ownership to other legal persons or natural persons;

 Leasing part / whole assets to other enterprises or internal management / staff;

 Becoming a member of a large enterprise group through merger and alliance;

 Closing down through bankrupt formalities.

Among the above methods applied in the restructuring, the form of share holding is the basic
one. According to the state statistics, there are 4.5 million of shareholding co-operative
enterprises in China, among which 3.5 million in the rural areas and others in township and
urban areas.

3. Administrative Institutions for SMEs and their Functions :

In order to strengthen the restructuring of SMEs, study and stipulation of supporting policies
for SMEs, as well as to find out tendency in the development of SMEs, Chinese Government
decided to set up a Small and Medium Enterprise Department in the State Economic and Trade
Commission (SETC) in the governmental institutional reform in 1998. It was the first time
since 1949 to appoint such a department whose mandate is solely SME. This adjustment
means to separate the function of government from enterprises. This department is focused on
study and stipulation of SME supporting policy, exert function of macro control and
administration of SME development by economic and legal measures, guiding restructuring of
SMEs, and promoting the establishment of a supporting service system for SMEs. The
implementation of the supporting policies will be handed over to non-profitable institutions
under the government, social organizations and service agents, thus to form a pattern of “small
government and large society”.

China International Cooperation Association of Small and Medium Enterprises (CICASME)

has set up 29 local and sectoral associations and formed a domestic network since its
establishment in 1990. It has been an active agent for SMEs’ international cooperation with
counterparts in 15 countries, e.g. Japan, Korea, Germany, France, The United States, Italy and
others. CICASME promotes international cooperation and exchange between Chinese and
foreign SMEs through the exhibitions, trade talks, seminars and business visits. It has a regular
programme called International Exhibition of New Technology and Products of SMEs and
Trade Talks.They were held in Tianjin in 1992, in Beijing in 1994 and in Changzhou in 1996.
In 1998, CICASME jointly held APEC Exhibition and Exchange of Technology for SMEs in
Yantai, China. The country also implemented ITC training programme on export promotion
and participated in the APEC SME programme. China has committed to implement the tasks
appointed by the international society with ever sincerity and good sense of responsibility, and
set up good partnerships with SME members all over the world.

4 Financial Support to SMEs

All commercial banks in China have set up their own SME Loan and Credit Departments
according to the requirement from People’s Bank of China. The financial institutions regard
supporting the development of SMEs as an important part of their policy. This policy provided
institution and policy guarantee for loans and creditor of SMEs. The People’s Bank of China
further declared that the loan service of urban commercial banks and township and urban
credit cooperatives should focus on SMEs. After a pilot programme in Zhenjiang Urban Credit
Guarantee Centre in Jiangsu Province, The State Economic and Trade Commission issued a
document – Guidance on the Establishment of SME Credit Guarantee System. This document
stipulated that municipal, provincial and central governments should form SME Credit
Guarantee Systems. The funds for such systems should be from municipal finance, social
contributions, membership fees and donations. This shows that the operations of SME loans
are moving towards systematic, specialized, commercialized and standard direction.

5 Reinforce the High-Tech Service to SMEs

Technology innovation is the soul of enterprise. Today’s market is changing quickly.

Consumers demand for a variety of goods and service. SMEs are close to the market, flexible
and quick in responding. Therefore, stronger capability of innovation of SME can meet the
demand of the market in time. China facilitates Science and Technology Parks and New and
Hi-Tech Development Zones to grow high-tech enterprises. China also sets up SME
incubators to promote technology transfer. China encourages enterprises to collaborate with
universities and research institutes. Technology markets are established and technology
transfer agents are active in SME sector. For instance, Start-up Service Centre in Xi’ an New
and High-Tech Developing Zone acts as an incubator. In 5 years, it helped technicians and
scientists to start up their own enterprises as much as 300.

A monthly magazine in name of China SME is issued by CICASME. This comprehensive

magazine facilitates information exchange among SMEs. It introduces practice abroad,
discusses restructuring of SMEs, promotes successful experiences of SMEs and entrepreneurs
and publishes governmental policies and regulations for SMEs.

Part 2 Strategic Vision on Chinese SMEs’ Development

1 Reinforce Construction of Legal System for SMEs
Under the past planned economic system, in-depth problems have occurred in the development
process of SMEs in China. These problems have hindered healthy growth of SMEs’ at various
levels. Creation of a fair environment to be SMEs’ playing field is in the light of the socialist
market economy. This year, the Finance and Economy Commission in the Standing
Committee, National People’s Congress took the lead to set up a Panel for Drafting SME
Promotion Law. Specialists have visited Germany and Italy for investigation and an
international seminar was held in Xiamen. According to experiences in other countries, such a
Promotion Law is not enough to solve all the problems concerning SMEs in the long run. In
future, relative laws and regulations will be stipulated to complement the SME Promotion
Law.
2 Carry on Restructuring of the State-Owned SMEs
The restructuring of the state-owned SMEs will continue with the direction of vitalizing the
SMEs. First of all, SMEs should be given full right of their own operations. Bureaux of
Industry and Commerce, Tax authorities will be more open in the forms, scope and product
varieties in SMEs’ operations, so they can make full use of their flexibility and quick response
to the market.
The second is to be opened with the forms of proper rights of SMEs. SMEs will be allowed to
adopt restructuring, alliance, acquisition, lease, contract operation and share holding
cooperatives, as well as selling.
The third is to open with the ownership structure. According to the spirit of the 15th Session of
the Party, various ownership’s, including individual and private can be applied to industry,
commerce, and part of export and import companies. In the service sector, private ownership
is encouraged.

The fourth is to be opened with employment of managerial staff. The managerial staffs should
be appointed and employed in accordance with the organizational form of assets and laws.

There are different opinions on the share-holding cooperative as a target model for enterprise
restructuring in China. My personal view is that this share-holding cooperative system has its
reasons to exist in the stage when capital market and labour market are not mature. Along with
the improvement of capital control system and social welfare system, and the full growth of
the capital and labor markets, there will be changes happen to the share-holding cooperative
system. For instance, in Wenzhou area, Zhejiang province where the market economy is
comparatively developed, many of the share-holding cooperatives have already restructured
into the wholly solely private or partnership enterprises.

Speed up the Construction of Service System for SMEs in China

The quantity of Chinese SMEs is vast and they are engaged in various kinds of trade. A
nation-wide service network for SMEs should be set up step by step to cover all China. In the
process of system construction, we should to mobilize various social sectors to engage in the
supporting and promotion of SME service system under the macro administration and policy
guidance from the government.

The construction and administration of the SME service system in China can be divided into
three layers as follows:
a. The State Economic and Trade Commission, the administrative authority of
enterprises, plays the driving force of the service system;
b. Non-profitable SME institutes under the government;
c. Non-governmental social organizations and institutions of SMEs; Service
network including loan and credit network, guarantee network, personnel
training network, technology development network, information and
consultation network, manufacturer network, supply network, etc.
Construction of these networks should be based on the former systems and
develop step by step and spread out from pilot areas.

In the present stage of the establishment of the SME service system, the governmental organs
will make relevant policies and regulations to standardize the administration and operation of
various service organizations in the principle of separating functions of the government and
enterprises.

4. Establish SME Promotion Funds

China has made great efforts to provide financial support to SMEs, but still not enough. We
shall make further contribution to satisfy the demand raising from the development of SMEs.
We propose the State to set up a SME Promotion Fund. A department in charge of enterprise
development under the State Council should be responsible for this fund. An Administrative
Committee should be formed to include relevant departments. The Administrative Committee
will stipulate the relevant regulations for the management, utilization and supervision of the
Fund. The operation of the Fund should be in line with the requirement of the market
economic system and secure the capital of the Fund as well as the increase. SME Promotion
Fund can have several branches based on the actual demand. The government should focus its
support on four different kinds of SMEs, i.e., Scientific and technical SMEs, SMEs serving
larger enterprises, SMEs of exploration of a new market and labor-intensive SMEs with good
demand in the market at home and abroad. These measures also benefit the reform and
development of large enterprises in China.

Because of the high risk of high-tech industries, we should explore and set up a venture capital
system, which can fit the real situation in China. We shall learn from other countries’
experience and develop various channels of financial resources of venture capital for start-up
of high-tech SMEs.

These opinions have been presented on the strategic vision for SME development in China. In
order to facilitate the healthy development of Chinese SMEs, we shall learn from good
experiences in start-up and management of SMEs from other countries and areas, and apply
them in connection with concrete conditions of China.
 PAKISTAN MACRO ECONOMIC RECOVERY THROUGH
DEVELOPMENT OF SMEs

If strategic planning for development of SMEs is made successful, middle class entrepreneurs
may play an effective role in the economic recovery of Pakistan. For the last few years
corporate restructuring in public sector and privatization process have made available
trained/experienced manpower with golden handshake who may find alternative sources of
employment with the induction of SMEs at large scale. In Pakistan adult literacy rate is 48 %
majority of entrepreneurs operating small businesses and Industry are not educated and as such
they hesitate to approach Small and Medium Enterprises Development Authority and the
banks for loans. They are reluctant in view of complicated and cumbersome documentation
involved in loan sanctioning. For the successful complementation of small financing schemes,
it is a pre-requisite that documentation procedure should be simplified, made easy and genuine
cases should be dealt without so much documentation. The documentation formalities of the
financing banks are found lengthily, time consuming and cumbersome which make them
disappointed and weaken their enthusiasm. The negative attitude of bankers also demoralize
them and they abandon the idea of starting or expanding the activities of their units. It is
equally true that commercial banks are reluctant to deal with SMEs due to big risks involved
and high cost of processing loan. The banks normally prefer to deal big companies and in this
quest of portfolio of big clientele, they suffered with problem of major loan default. It is
argued that due to high mark up charges increase the ultimate production cost affecting
competitive unit sales price of SME’s products goes on leading to the reduction in demand for
their products.

High interest rate is the main hurdle facing SMEs. Credit may be offered to such enterprises at
subsidized rates. Though subsidized credit affects the development of sustainable banking
institution which may create distortions in money markets. But with the broad financing of
such credit through adopting simplified loan/ recovery procedures, the disadvantage may be
overcome. There is a strong need for creating a conducive environment which can allow easy
access to the owners of SMEs. Serious efforts are required to be made for putting together a
coherent strategy to encourage the development and growth of SMEs. The small businesses
have rich experience. If financially supported, they may switch over towards modern
techniques available at smaller scale for achieving sustainable growth by “expanding their
businesses into successful operations”.

In order to provide finance for the benefit of lower and middle class borrowers, a micro-credit
fund may be established in which all the commercial banks be invited to contribute in the
fund. The funds should be supervised by Pakistan Banking Council with the State Bank of
Pakistan as its controlling authority. After the successful experience, a micro credit bank in the
private sector may be established.
RESHAPING OF CREDIT POLICIES :

Some of the commercial banks are re-shaping their credit policies, trying to approach to small
and very small borrowers and launching to sell their product.
NATIONAL BANK OF PAKISTAN :

NBP has set a side Rs.1.5 billion for micro financing this year towards small and very small
borrowers. The scheme is so designed that a borrower can use it as a saving account. The bank
will pay to the borrower a saving return if he keeps in his account an amount larger than the
repayment installment. NBP made disbursement under this scheme to about 100 skilled people
in the first quarter of this year [2000]. At present NBP is offering micro credit in the range of
Rs.5,000/= to Rs.30,000 through micro credit financing centers – one each in Badin,
Jacobabad and Gujranwala. The bank plans to set up five more centers. One of them will be
open in Dera Ismail Khan.

NBP new credit policy focuses on augmenting farm credit. Farm credit and micro financing
are complimentary to each other which makes their target of reaching out to small and very
small borrowers at a bit easier. NBP is offering micro loans on two personal guarantees. These
sureties should be amongst the community the borrower belongs to. “Community” has been
defined as a group of 60 or more people living at one place.

HABIB BANK LIMITED :

HBL has earmarked a sum of Rs.2 billion for disbursement under micro-financing scheme this
year. The main feature of HBL Policy is on increased participation in revival of sick units;
project financing in such areas as telecommunication, energy, chemicals and polyester fibers.
Their credit policy appears to be flexible and is subject to change on the dictates of market
forces.

UNITED BANK LIMITED

UBL has been in micro financing business as part of its agricultural lending. These days the
bank is taking a start in micro financing as a separate scheme. The main thrust of new UBL
credit Policy is on value added export financing for import substitution. Under this scheme the
bank will offer financing facilities to those exporters regardless of their size whose exports are
value-added and competitive in the world markets. They may offer micro credit to business-
men importing raw materials that could be used in manufacturing of the products for import
substitution. The bank is prepared to offer trade financing to those small borrowers who are
capable borrowers even on the basis of social collateral guarantees. A capable borrower means
is one who knows his trade. For example bank can finance to rice exporters who is doing this
business for the last 3-years and properly paying taxes to the government either under the
with-holding tax regime as a presumptive discharge of tax liability. Similarly a shoe
manufacturer who has long experience in this field may approach UBL for micro credit
financing.
MUSLIM COMMERCIAL BANK LIMITED :

MBC is giving a fresh look to their credit policies. They are reshaping their credit policies.
They are reshaping their credit policy in such a way that any borrower with a viable project in
trade or industry should not walk past their branches.

ALLIED BANK OF PAKISTAN LIMITED :

Partly privatized ABL appears to be so liquid that it may visualize to chalk out micro-credit
policies and look out for good borrowers with a track record of small and medium enterprises.
The bank may focus more on small and medium size borrowers. This will minimize risk of
potential default arising out of big project financing and financing of BMR projects.”

RESTRUCTURING OF PSIC :

It is a welcome decision of the Punjab government to restructure the Punjab Small Industries
Corporation [PSIC] in a quest of gearing up the process of industrialization. The PSIC may
play its role in enlarging the scope of small and medium enterprises. The corporation claims to
have financed 3,600 industrial projects and successfully recovered its stuck up loans of over
Rs. 2.4 billion. Its targets should be to developing industrial estates at various districts of
Punjab. The corporations activities controlled the activities in Lahore, Faisalabad, Sialkot and
Gujranwala and did not expand its operations in other districts.

The objective for setting up PSIC was to operate for 14 industrial estates for an equitable
industrial development throughout the province.

PSIC may seek cooperation from the private sector and help the government in promoting
business through new micro-credit schemes being introduced for poverty alleviation
programme. A sum of Rs.3 billion is reported to be allocated to Punjab for promotion of
business activities at semi-rural areas, workmen development and poverty alleviation during
the coming financial year (2000 – 01).
SETTING OF SMALL BUSINESS AND COTTAGE INDUSTRIES BANK :

Despite the fact that the small and medium size industries and business which contribute to
gross domestic product around four times as much as the large scale industries and provide
employment to 65% of the work force in manufacturing sector have been receiving less than
10% share in formal credit. They have to depend largely on non-institutional credit at
comparatively much higher interest rates which increases their product cost and make their
products uncompetitive in domestic as well as foreign exports markets.

In the past SBP had been allocating funds for small loans but commercial banks making
sincere efforts to make the disbursement against the mandatory quotas allocated to them
found shortage in meeting requirements of SMEs. Normally commercial banks deal with
large companies and financing small loans is not a core business for them. The documentation
procedure and small loans recovery affects their business of large corporate sector. Dealing
with SMEs involves large volume of work that can only be done wholeheartedly be a separate
bank.

A small business and cottage industries bank can be established whose main objective is to
boost the development of existing and developing new small and medium enterprise. A model
of this new bank is provided below.

LOWER INTEREST RATES :

The State Bank of Pakistan has very recently taken a decision to reduce mark up rate on loans
for commodity operations of the government agencies to 12 percent which should be extended
to the manufacturing sector; particularly to small and medium businesses, which are
considered backbone in economy of every country. In Pakistan unemployment of youth is
getting worse day by day and it is only the small and medium enterprises which can create
new job opportunities with the minimum of investment.

The authorized and paid up capital SMEs which may be financed as follows :-

CONTRIBUTION % No of Shares
Rs. @ Rs. 10/=each

Islamic Development Bank 200,000,000 20 % 20,000,000

Federation of Pakistan Chambers of
Commerce and Industry (FPCCI) 40,000,000 4% 4,000,000
Leasing Companies 40,000,000 4% 4,000,000
Investment Banks 20,000,000 2% 2,000,000
Modaraba Companies 20,000,000 2% 2,000,000
Various Associations of exporters. 30,000,000 3% 3,000,000
National Investment Trust 100,000,000 10 % 10,000,000
Insurance Companies 50,000,000 5% 5,000,000
General Public 500,000,000 50 % 50,000,000
Total paid-up capital 1,000,000,000 100 % 100,000,000
==================================

2
Directors
From
Minority
Shareholders

BOARD OF DIRECTORS

Chairman
3 the Private Sector
From
Directors
From
General
Public President
&
Chief Executive

1
Director
N.I.T
For good corporate governance shares should not be held by one or two family groups. The
Chairman should be selected from private sector. The President and Chief Executive of the
Bank should be highly commercial and prudential banker.

FRAMEWORK :

1. To operate on commercial lines.

2. To finance only profitable and viable projects.
3. To finance only the small and medium size industries and trading organizations.
4. To handle loan cases from Rs.100,000/= to Rs.500,000/= up to maximum of Rs.
2,000,000/=.
5. To finance mainly those industries which are based on indigenous and 100% locally raw
materials using domestically fabricated machinery.
6. Loan applications for speculative activities currencies, hoarding of commodities and
trading of securities at stock exchanges.
7. To finance small and medium size cottage industries which are labour intensive...

FUNCTIONS OF THE SMEs BANK :

1. Receiving deposits and offering good return to its depositors.

2. Lending to Small and Medium enterprises on purely feasible and bankable business
ventures.
3. The minimum capacity of financing at a minimum average of Rs.100,000 will be 5,000
loan cases and maximum capacity at a median average of Rs.250,000 will be 2000 units.
This may help in providing employment to about 45,000 persons who are responsible for
supporting about 180,000 people. With the financing to SMEs, there will be definite
improvement in economy which may widen the tax base and deposit tax of about Rs. 20
million in the government exchequer.
 GOVERNMENT SUPPORT FOR PROMOTION AND DEVELOPMENT OF SMES

SME sector is the backbone of the economy and needs revolutionary support from the
Government of Pakistan. The Government should make a strategic policy decision to provide
both technical and financial assistance to the SME sector for its development.

Taiwan is one of the best example for an active role of the SMEs which helped to achieve an
excellent performance of Industrial sector in the country. In Taiwan thousands of small and
medium size industries have become world leaders with the state help.

In selecting to play a pivotal role in SMEs tolead the next phase of industrialization, Pakistan
should seek benefits from the experience of several countries mentioned in this report.

There are six components within the SME sector wich may be classified as follows:

1. Agriculture: Most of establishments in agriculture are small and

informal.

2. Trade: It is the second taret SME employer. About 5 million

people work in shops and stores.

3. Construction: This is the third larest SME employer employing

about 2.6 million workers.

4. Community and social services is the 4th largest sub-sector

employing 2.4 million people.

5. Manufacturing: This sub-sector employs 2.3 million workers.

6. Transport: It has a significance in which the SMEs have a sizeab

le presence. About 500,000 peopleare employed in this sector.

SMEs generate 80% of the country’s total employment. It is beyond doubt that SME –
focused strategy would yield high dividends is not only accelerating the rate fo economic
growth. The Government should make all possible efforts in providing employment to a
rapidly increasing work force. Also, the SME sector could help address the problem of
poverty by improving the productivity – and, hence, the earning capacity – of millions of
people – But the state will need to get involved in orer to turn the SMEs intoa dynamic force
in the economy.

Sialkot is evaluated as one of the third world industrial centers where the sports goods and
surgical instruments manufacturers take adavantage of the clustering of these activities in one
geographical area.
Ultimately, the success of an SME – centred approach to industrialization will depend upon
the Government’s willingness to formulate an industrial policy that draws upon some of the
successful models and case studies mentioned in the report. Such a policy should use a
combination of approaches such as pomotion of research and development, clusters and
accessibility to credit. These approaches have produced results in other countries, they would
also work successfully in Pakistan.