SMEs: Enabling environment missing

Development of small and medium enterprises (SMEs) is the favourite subject of the policy makers these days. It is argued that their development would go a long way in creating employment opportunities, because SMEs are usually labour intensive, diversify exports, alleviate poverty and reduce the existing income inequalities to a large extent. There are three general parameters used to qualify a SME. These can be in terms of number of employees, or the total assets or the annual sale of a company. SBP has defined SME in terms of loan from the banking system ie Rs 75 million per bank or total borrowings of Rs 150 million from the financial system. Some banks using the SBP parameter have set up commercial units for SMEs. They are mostly providing working capital.
Since September 2003 to December 4, 2004 the aggregate advances to the SME sector have shown an increase of 175 percent, ie from Rs 173 to Rs 284 billion. What needs to be investigated is the reasons why this rise in credit has not translated into generation of employment and has nearly no visibility. Except for some parts of Punjab, ie outside Lahore, we do see economic activity with mushrooming of unplanned retail outlets, workshops etc on the link roads between towns. As far as other provinces are concerned the visibility is very poor. Small and Medium Enterprises Development Authority (SMEDA) had undertaken detailed feasibilities on various sectors such as garments and fisheries.
This is yet to translate into establishment of a chain of units for exports. Banks were supposed to co-ordinate their SME lending with SMEDA. Not much has been reported from the recent conference in regard to progress thus far. While the SBP Governor is trying to have the right environment, we would suggest a fresh look at the working of SMEDA. Its Board must comprise of businessmen from the SME sector instead of big guns from the corporate world.
SMEDA and banks must work together to form a cluster of similar industries, in a particular location, close to their market for their goods. There should be trained relationship officers both in SMEDA and the banks working hand-in-hand to guide the entrepreneurs in the basics. How to talk to a bank? Where to train the workforce in a technology to be acquired? And how to market the output? All this requires a missionary zeal.
Governor Ishrat Husain himself has stressed the fact that financing was not the only component, although very critical, which could lead to materialisation of the vision. Technical and institutional support to SMEs by the government was also a pre-requisite, otherwise financing of SMEs without technical know-how, infrastructure facilities and technological absorption would go down the drain. According to the Governor, it was imperative for the banks to "contact" themselves with these elements. In this connection, banks were advised to induct relationship managers having knowledge of industrial activities and well versed with economic activities of the concerned areas.
It was also suggested to recruit young male and female relationship managers from local areas and train them exclusively for SME financing while keeping them away from conventional banking. Many SMEs, holding strong religious beliefs, were reluctant to opt for conventional banking facilities. Therefore, it would be more appropriate if commercial banks introduced SME products under the Islamic modes of financing.
There is no doubt that SMEs represent a significant component of Pakistan's economy in terms of value addition and employment generation and their continued growth could provide jobs to the bulk of non-agricultural labour force and solve many other problems. The Government is not doing much, except lip service, to facilitate and accelerate the activities of SMEs. Units with less then 100 employees need to be exempt from labour laws. Exemption from contributions towards Social Security, Old Age Benefit Scheme, Workers Participation Fund and Education Cess is needed.
Lease of plots not being utilised in industrial areas should be cancelled. Shut-down factories being used as godowns be allotted for establishing new units. Utilities and connecting roads are available in these areas. Developing new industrial estates will take more time, money and effort. Proper enabling environment has not been created for the SMEs to shift to the formal sector of the economy. A number of hurdles like outdated labour laws and harassment potential of the government functionaries have to be removed to enable the SMEs to play their due role and make an effective contribution to the economy. As the SBP Governor has rightly observed, financial support alone cannot be sufficient to accelerate their development.