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PhD Dissertation Development of Small and Medium Enterprises (SME’s) in N.W.F.P, Special Reference to Peshawar, Bannu and D.I.Khan
Submitted by
Mr. Sher Kamal PhD Scholar
To
Supervisor: Dr.Muhammad Bashir Khan
Department of Public Administration
Gomal University, Dera Ismail Khan, NWFP, Pakistan
ii
Development of Small and Medium Enterprises (SME’s) in N.W.F.P, Special Reference to Peshawar, Bannu and D.I.Khan
Submitted by
Mr. Sher Kamal PhD Scholar
Department of Public Administration
Gomal University, Dera Ismail Khan, NWFP, Pakistan
iii
Development of Small and Medium Enterprises (SME’s) in N.W.F.P, Special Reference to Peshawar, Bannu and D.I.Khan
Submitted by
Mr. Sher Kamal
PhD Scholar This thesis is presented to the Gomal University, Dera Ismail Khan in partial fulfillment of the requirements for the award of degree of Doctor of Philosophy in Management Studies.
April 2009
iv
DEDICATED
To
My Parents (Late)
They have extended all efforts toward my prosperity and success in their
lives. Never, they give me loneliness in my life and even after when they
depart from this world. I feel happy with their memories and pray for their
souls. May Allah Shower all His blessings upon them.
v
ACKNOWLEGDMENT
Efforts and work done in thesis enthusiastically invite the attention of readers’ towards
the existing and future challenges faced by SMEs sector. All these have been made
possible by my different fellows’ and colleagues’ support and efforts.
I am really grateful to my supervisor Dr. Muhammad Bashir Khan, Assistant Professor,
Department of Public Administration, Gomal University, Dera Ismail Khan, have
advocated and supported me with his encouragement and fruitful advice/discussion. The
completion of my research work has been possible only with his co-operation and
dedicated efforts.
My special thanks goes to Prof. Dr. Shahdiullah Khan, Chairman, Department of Public
Administration, Gomal University, Dera Ismail Khan, and Dean, Faculty of Arts, who
give this identity to me, and greatly enriched my vision and knowledge with his enlighten
guidance and literary touch to my research work.
I acknowledge the support extended by Dr. Farzand Ali Jan, Director Finance and the
founder of Institute of Business and Management Studies, Agricultural University,
Peshawar, regarding my research work. Whenever I called his attention, he never
discouraged me but has given full support and cooperation. As per my own thinking, his
support represents today, what new change happen to me and my research creditability.
I may be wrong, if I do not mention the name of my Ex-Chairman and Senior Colleague,
Mr. Gul Nawaz Khan, the top most statistician, for his valuable and result oriented
analysis of my research data. He extended full support and cooperation in statistical
analysis in my research work.
I would also like to thank Dr. Gohar Zaman, Dr. Bahadar Shah, Mr. Allah Nawaz Khan,
and Mr. Amanullah Khan Miakhel, of Public Administration, Gomal University, Dera
Ismail Khan, for their valuable and healthy discussion.
vi
I am also indebted to my Chairman, Dr. Rashid Rehman, Department of Business
Administration, Gomal University, Dera Ismail Khan, for his academic discussions and
support in writing my thesis.
I am grateful to Mr. Jamshad Raza M Phill Scholar DBA, Mr. Shahid Kamal, Lecturer in
ICIT, and Mr Umer Hayat, Superintendent, Department of Public Administration, Gomal
University, Dera Ismail Khan, for their dedicated efforts in the field of computer and
research assistance for my thesis writing and compilation.
Finally I am going to do justice to the deprived members of my family, to express my
deepest gratitude for their constant support, love and devotion that I received from my
wife, daughter Nabeela Kamal, and my sons, Atif Kamal, Mussadaq Kamal and Little
Muazzam Kamal. I really feel that they were deprived of time they deserved during the
past few years, when I left home for my research work and came too late during day and
night.
Sher Kamal
vii
CONTENTS
Title I Dedication IV Acknowledgement V List of Tables and Figures (Chapter 1-4) XII List of Tables (Chapter-5) XIII List of Acronyms XVI List of Annexure XVII
Abstract 1-3
Chapter I Introduction
1.1 Background of the Study 4-7 1.2 Problem Statement 7-9 1.3 Selected Problem Areas 9-10 1.4 Definition of SME 10-11 1.5 Objectives 11-15 1.6 Significance/importance of the Study 15-18 1.7 Justification of the Research Topic 18-19 1.8 Literature Review 20-25 1.9 Hypothesis 1.10 Methodology 26 1.11 Population of the Study 26 1.12 Selected Sample for the Primary Data 27 1.13 Overview of the Procedures 27 1.14 Data Collection Methods 27 1.14.1 Primary Data 28 1.15 Secondary Data 28-29
1.16 Orientation Sessions 29-30 1.17 Data Analysis 30-31
1.18 Analytical Procedures 31 1.19 Assumptions 31 1.20 Limitations of the Study 31-32
1.21 Business Model influencing Parameters 32-33 1.22 Plan of the Study 33-35
viii
Chapter II Small and Medium Enterprises in NWFP (Reference to District Peshawar, Bannu and Dera Ismail Khan)
2.1 Introduction 36-41 2.2 Background of the Area 41-46 2.3 Role of SME’s in Economic Development 46-56 2.4 Types of SMEs in the Area 55-58 2.5 Weak and Strong Dimensions 58-64 2.6 Government’s Role in SMEs Development 65-72 2.7 Structure of SME Sector 72-77
Chapter III Profile of SME’s in the Area (NWFP)
3.1 Historical Perspective 78-82 3.2 Assessment of SME’s in the Areas 83-87 3.3 Small Industrial Estates in the area 87-91 3.4 SWOT Analysis of Pakistan Industrial Sector ( with reference to
NWFP) 91-117
Chapter 1V Problem Areas of SMEs
4.1 Broad Overview of the Problem Areas 118-119 4.2 Barriers to the Progress 119-126
a. Social Barriers b. Political Barriers
c. Bureaucratic Barriers 4.3 Problems of SMEs in Developing Countries 127-134 4.4 Forces Responsible for SMEs Backwardness in NWFP 134-137 4.5 Problem of Industrialization in NWFP 137-141 4.6 State of Industrialization in NWFP 141-144
Chapter V Results of the Study
5.1 Introduction 145 5.2 Responses Showing SMEs Contribution to Economy 145-146 5.3 Sector wise Categories of Business 146-147 5.4 Responses Showing Different Forms of Businesses 147-148 5.5 Responses Exhibiting Channels of Distribution 148-150 5.6 Responses Showing Jon Creation, deficiency of Skilled labor, Performance of SMEDA, Lack of Infrastructure, Legal Problems, Government Incentives, Availability of Financial Support, Marketing Problems, Investment Profiles, Awareness of WTO and the Impact on SMEs 150-166
5.7 Inter-correlation among the Five Categories of Problems 166-180 as Measured with the help of Questionnaire
x
List of Tables and Figures S. No. Title Page Table-2.1 SMEs Definition by Various Countries 38 Table-2.2 SMEDA: Definition of SMEs 38 Table-2.3 Classification of SMEs by IFC (International Finance
Corporation) 40
Table-2.4 Classification of SMEs by EC 40 Table-2.5 Growth Rate of Small Industries 75 Table-2.6 Existing Status of Industries, Employment & Investment in
N.W.F.P. 76
Table-2.7 Loan Distribution to Provinces by Major Banks/DFIs (in Million Rs.).
77
Table-2.8 Contribution of SMEs in Manufacturing Sector 73 Table-2.9 SME Sector Contribution to Manufacturing Exports 73 Table-3.1 List of Sub-Sectors of SMEs 83 Table-3.2 Classification of SMEs on Zone Bases 85 Table-3.3 Profile of SIE, Peshawar, Bannu and Dera Ismail Khan 88 Table-3D.E.F Profile of SIE, Bannu and Dera Ismail Khan 88-89 Table 5.1 Responses Including SMEs Contribution to Economy 145 Table 5.2 Sector-wise Categories of Businesses 146 Table 5.3 Responses Showing Reasons for Business Opting Grounds 146 Table 5.4 Responses Showing Different Forms of Business 147 Table 5.5 Responses Exhibiting Manager’s Perception of Business
Success Rate. 147
Table 5.6 Responses Elucidating Prospects of Precinct Tuning 148 Table 5.7 Responses Exhibiting Distribution Channels 148 Table 5.8 Responses Showing Methods of Price Setting 149 Table 5.9 Responses Displaying Impacts of Competitor’s Campaigns 149 Table 5.10 Responses Showing Complications in Channel adoption 150 Table 5.11 Responses Accentuating SMEs Role in Job Creation 150 Table 5.12 Responses Showing Quandaries in Price Settings 151 Table 5.13 Responses Showing ISO Certified Firms 151 Table 5.14 Responses highlighting Market Problems 152 Table 5.15 Responses Showing the Legal status of the firms 152 Table 5.16 Responses Revealing the Legal Problems associated with
the firms 150
Table 5.17 Responses exhibiting Availability of Government Incentives.
153
Table 5.18 Responses Showing Major Incentives 154 Table 5.19 Responses Showing the Satisfaction Gauge of SMEDA 154 Table 5.20 Responses Showing the Capacity of the Institutions in the
Growth of the SMEs 155
Table 5.21 Responses Showing Smuggling and its Effects on SMEs 155 Table 5.22 Responses Showing the Nature of the SMEs 156
xi
Table 5.23 Responses Showing Magnitude of Workforce 156 Table 5.24 Responses Showing % of Skilled Labor in the Respective
Organizations 157
Table 5.25 Responses Showing Deficiency of Skilled Labor 158 Table 5.26 Responses Showing Impact of Job Swapping 158 Table 5.27 Responses Showing Frequencies of Training Programs 159 Table 5.28 Responses Showing Propensity towards Training Programs 159 Table 5.29 Responses Showing Impact of Job Swapping in Terms of
Turnover and Wage Expense Raise 160
Table 5.30 Responses Showing Investment Amount of Firms 160 Table 5.31 Responses Evaluating the Exigency of Budget and Its
Prospects. 161
Table 5.32 Responses Showing Sources of Capital. 161 Table 5.33 Responses Exhibiting Property Acquisition types. 162 Table 5.34 Responses Showing the Availability of Financial Support. 162 Table 5.35 Responses Highlighting the Problems with credit Financing. 163 Table 5.36 Responses Exhibiting the Factors Effecting financial Position. 164 Table 5.37 Responses Showing the Stress on the Lack of Infrastructure. 164 Table 5.38 Responses Elucidating the Awareness of WTO. 165 Table 5.39 Responses Showing the Impact of WTO on SMEs. 165 Table 5.40 Inter-Correlation Among the Five Categories of Problems as
Measured with the Help of Questionnaire. 166
Table 5.41 Responses Showing Difference in Management Problems faced by Successful, Partially Successful and Breakeven organizations in the Region.
167
Table 5.42 Responses Showing Differences in Marketing Problems Faced by Successful, Partially Successful and Breakeven Organizations in SMEs Sector.
167
Table 5.43 Responses Showing Differences in Legal Problems Faced by Successful, Partially Successful and Breakeven Organizations in the Region.
167
Table 5.44 Responses Showing the Differences in HR Problems Faced by Successful, Partially Successful and Breakeven Organizations in the Region.
168
Table 5.45 Responses Showing the Differences in Financial Problems Faced by the Successful, Partially Successful and Breakeven Organizations in the Region.
169
Table 5.46 Cross Tabulation Layout of Frequency Distribution for Different Categories of Form of Businesses Vs. Business Units Rating.
170
Table 5.47 Cross Tabulation Layout of Frequency Distribution for Different Categories of Awareness Of WTO Vs. WTO Impact on SMEs in the Region.
170
Table 5.48 Cross Tabulation Layout of Frequency Distribution for Different Categories of Major Incentives Vs. Government
171
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Incentives Package for SMEs in the Region. Table 5.49 Cross Tabulation Layout of Frequency Distribution for the
Amount of Investment Vs. Sources of Capital Available for SMEs in the Region.
171
Table 5.50 Cross Tabulation Layout of Frequency Distribution for the Strength of Workers Vs. Lack of Skilled Labor in SMEs in the Region.
172
Table 5.51 Cross Tabulation Layout of Frequency Distribution for Amount of Investment Vs. Budgetary Position for SMEs in the Region.
172
Table 5.52. Cross Tabulation Layout of Frequency Distribution for Training Programs Vs. Percentage of Skilled Workers in Organization in the Region.
173
Table 5.53 Cross Tabulation Layout of Frequency Distribution for the Level of Training Programs Vs. Dispensation of Training Programs in SMEs sector in the Region.
173
Table 5.54 Cross Tabulation Layout of Frequency Distribution for the Amount of Investment Vs. Form of Business Units In SMEs in the Region.
174
Table 5.55 Cross Tabulation Layout of Frequency Distribution for the Amount of Investment Vs. Strength of Workers in SMEs in the Region.
175
Table 5.56 Cross Tabulation Layout of Frequency Distribution for the Business Rating Vs. Sector-Wise Distribution of Business Units in SMEs in the Region.
175
Table 5.57 Cross Tabulation Layout of Frequency Distribution for the Types of Distribution Channels Vs. Sector-Wise Business units in SMEs in the Region.
176
Table 5.58 Cross Tabulation Layout of Frequency Distribution for the Satisfaction with the Role of SMEDA Vs. Business Units Success Rate in SMEs in the Region.
177
Table 5.59 Cross Tabulation Layout of Frequency Distribution for the Budgetary Position Vs. Sector-Wise Business Units in SMEs in the Region.
177
Table 5.60 Cross Tabulation Layout of Frequency Distribution for the Awareness of WTO Vs. Business Success Level in SMEs in the Region.
178
Table 5.61 Cross Tabulation Layout of Frequency Distribution for the Satisfaction with the Role of SMEDA Vs. Form of Business Units in SMEs in the Region.
178
Table 5.62 Cross Tabulation Layout of Frequency Distribution for the Awareness of WTO Vs. Form of Business Units in SMEs in the Region.
179
Table 5.63 Cross Tabulation Layout of Frequency Distribution for the Awareness of WTO Vs. Sector-Wise Business Units in SMEs in the Region.
179
xiii
Table 5.64 Cross Tabulation Layout of Frequency Distribution for Percentage of Workers Vs. Strength of Workers in SMEs in the Region.
180
Figure-9.1 Entrepreneurial Linkages 249 Figure-9.2 Conceptual Scheme of the Entrepreneurial Nature with its
Impact on SME. 250
Figure-9.3 Model of Entrepreneurial Strategic Decision Making. 251 Figure-9.4 Entrepreneurial Traits 252 Table- 9.5 Model developed by the scholar 253
xiv
List of Acronyms ABP Allied Bank of Pakistan APTMA All Pakistan Traders and Manufacturing Association BOK Bank of Khyber CBR/FBR Central Board of Revenue/Federal Board of Revenue CDA Capital Development Authority CFC Common Facility Center FBS Federal Bureau of Statistics GDP Gross Domestic Product HBL Habib Bank Ltd IDBP Industrial Development Bank of Pakistan ILO International Labor Organization LCD Least Developed Countries LE Large Enterprises LIDO Large scale Industries Development Organization MCB Muslim Commercial Bank MIRDC Medium scale Industrial Research and Development Council NBP National Bank of Pakistan NCB Nationalized Commercial Banks NDFC National Development Finance Corporation NPO National Productivity Organization PCSIR Pakistan Council for Scientific and Industrial Research PHMP Pak Holland metal project PIA Pakistan International Airlines PICIC Pakistan Industrial Credit & Investment Corporation PSED Pakistan Small Enterprise Development PTCL Pakistan Tele Communication Limited PTV Pakistan Television RDFC Regional Development Finance Corporation SBFC Small Business Finance Corporation SBP State Bank of Pakistan SCCI Sarhad Chamber of Commerce and Industry SDA Sarhad Development Authority SES Self Employment Scheme SIDB Sarhad Industrial Development Board SMEB Small and Medium Enterprises Bank SMEDA Small and Medium Enterprises Development Authority SMEs Small and Medium Enterprises UNIDO United Nations Industrial Development Organization
xv
List of Annexure S. No. Title Page
I. Questionnaire 271-278 II. Summary of definitions of SMEs in Pakistan 279 III. Industrial Units Investment and Employment Sector-Wise Break
Up. 280-282
IV. Detail of Manufacturing Units in Small Industrial estate, Peshawar, Bannu and Dera Ismail Khan.
283
V. Economic Overview (Chronology of Key Events affecting Economic Performance of Pakistan )
284-285
VI. Detail of NWFP District –wise Industrial Structure 285 VII. Highlights of the separate Prudential Regulations for SMES
Financing 286-289
VIII A Case Study of a Business Incubator 289 IX The Terms and Conditions of Loans offered by the Schedule
Banks in Pakistan 290-291
X Detail Study of D.I. Khan SME 292
X1 Taxes Imposed on Enterprises in Pakistan (NWFP) 2001-2002 293
1
ABSTRACT
For the development of a country, it is realized that the nation has not been able to reap
full benefits of industrialization without the capability and capacity of Small and Medium
Enterprises (SMEs) in the country. To increase the growth and development of the
country, the importance of SMEs in the region can not be ignored. SMEs development is
the process of gradually becoming a major driving force of the global economy. With the
help of SMEs introduction, Pakistan’s economy continues to post an impressive growth
rate for the last few years. From this recent growth, SMEs has been declared an engine of
the economic growth of the country. Sustainable economic development plays a pivotal
role in bringing about prosperity and reducing poverty. Small and Medium Enterprises
are often found at the heart of local and regional economies. Enterprises create jobs,
wealth and feel good factor for local communities, encouraging further investment.
Greater relevance must be given to the role that small and medium enterprises can play in
generating wealth and eradicating poverty.
Communities are responsible themselves for identifying the need for SMEs growth and
skill development training. The culture of enterprise development exists with the
objectives set against a number of performance indicators namely, enhanced business and
technical skills, good govern improved access to product markets, reliable taxation
structure and finally access to credit facilities to support business initiatives and support
by local government is a symbol of their commitment to local development and
empowerment.
Pakistan being a developing country needs attention in most of the potential areas, where
efforts have been made from the last few decades. SMEs are the backbone of Pakistan’s
economy. It’s represent 901 per cent of all enterprises in the country, providing millions
of jobs and is essential source for entrepreneurial spirit and innovation. SMEs profile in
the Province is neither accessible nor readable for the investor, because number of
problems is attached inherently to this region. In the light of these problems, the local
1Pakistan Country Assistance Strategy, World Bank Report, Annex. II, page 3.
2
investors and side by side the foreign investor’s are hesitating to come here for
investment purpose. Secondly, disparity on the part of the Government, has also
neglected this region. But this region has a fertile approach for SMEs establishments.
NWFP possesses a potential structure for promoting SMEs sector, so as to bring at par
with other provinces of the country. For this purpose proper strategic planning is needed.
The research conducted in this field highlights number of problems and the status of
SMEs in the region. This study has examines the present structure of SMEs and its
problems through primary and secondary data collected. Further, the study gives the
possible direction for evaluating the prospects of SMEs in the region. These problems are
pushed with a sustainable recommendation for future development. SMEs are the most
sensitive of all to changes in the business environment. They are the first to suffer if
weighed down with excessive number of bureaucracy. They are first to flourish from
initiatives to cut down red tapeism and reward success system. SMEs must be considered
as a main driver of innovation, employment, poverty reduction and social integration.
This research study having a theoretical background for determining different
hypotheses, in the name of i.e. failure of SMEs is the result of lack of managerial
knowledge, marketing effectiveness leads to the success of SMEs, Ineffective HRD is the
basic cause of SMEs failure, non-availability of legal framework is a problem for SMEs,
in-sufficient financial support is another setback for SMEs and finally, lack of
communication with the venders.
These hypotheses were tested in the light of information collected by a written
questionnaire distributed among different business units in the region. Then these
responses were analyzed by using different statistical tools like frequency distribution,
Chi-Square, Cross Correlation and ANOVA techniques, to obtain the desired results for
the support of the problems faced by the SMEs sector in the region. The results obtained
from the different analysis regarding the various problems in the realm of SMEs are in
the command of an ordinary entrepreneurs in the region, while some of the problems not
come in the direct command of the entrepreneur that need facilitation from the
government. The problems faced by SMEs are conformed by the results obtained from
data regarding them are the following:
3
Depending on the old and cultural style management in SMEs region is the basic
root cause of backwardness.
Lack of marketing techniques and its adjustment with the current change in the
market is another flaw on the part of SMEs, where they can not afford these
commercial expenditures.
HR application in SMEs are not of acquired standard nor sufficient to meet the
requirement of the sector.
Legality and growth of SMEs rotate around the Government legal structure
enforceability in the region.
Funds are the life blood of SMEs, if it is properly managed. Lack of funding and
access to the source of funding is the basic issues for SMEs development.
Measures should also be adopted to strengthen the relationship among the SMEs and
Government to promote top class SMEs support system. Emphasis must be placed on
education and training for the entrepreneurship. Tax system must be made conducive for
SMEs expansion and job creation. Measures should be adopted to improve the
technological capacity of SMEs. These reforms should be included in the program
launched for promoting technology dissemination towards SMEs as well as the capacity
to identify, select and adapt technologies to improve their capabilities to enter in the
domestic as well as in the International markets freely.
Chapter # 1
4
Introduction 1.1 BACKGROUND OF THE STUDY Since independence Pakistan pursued the path of industrialization with objectives of
absorbing surplus labour, proper utilization of raw materials and bringing about a
balanced regional growth. Despite rapid growth of the GDP, employment opportunities
have been quite inadequate to absorb the rapidly increasing labour force in Pakistan.
Inward-looking policies coupled with fiscal incentives, mostly to the large-scale
industries (LIs) in the manufacturing sector have resulted into allocation of resources
towards the capital-intensive activities and adoption of highly capital-intensive
techniques which generated few employment opportunities and aggravated the balance of
payments un-equilibrium with a heavy dependence on imports. There was no explicit
policy framework, which exists for small and medium-sized industries (SMIs). It was
never thought that SMIs are capable of exhibiting any dynamism. These industries have
been expected to develop automatically with the development of the LIs. However, the
unemployment, under-utilization of raw materials and lower income resulting from
radical nationalization policy and labour unrest in large unionized manufacturing sector
in the early 1970s, provided an unintentional stimulus for the growth of SMEs.
Recently, a major resurgence of small and medium businesses throughout the developed
world has got the pace of development in every economy. Even in developing economies
like Eastern Europe, Malaysia, and Turkey such skills are now greatly prized. In the
underdeveloped economies significant growth potential is being observed since 1990. In
the developed economies 6% to 15% of the working populations are engaged in small
businesses. Only in U.K over half of the population is in commercial and industrial
employment directly related to small businesses. In Italy 90% small businesses absorb
84% of the total employment. In Denmark 92% of all manufacturing firms are in the
shape of small businesses, employing 43% of the workforce (Barrow Colin, 1997, p.3).
Small businesses have been flourished in almost all ancient cultures. The Arabs,
Babylonians, Egyptians, Jews, Greeks, Phoenicians and Romans had a substantial
population working in this area in the name of small businesses. Their products and
Chapter # 1
5
services however, were often of poor quality. Consumers often were cheated and
defrauded. As a result small and medium businesses become the subject of
contemplation, that’s why even 4000 years ago it was considered necessary to protect the
consumer from business and business from consumers (Edward C. Bursle, 1963, p.1-2).
In a country like Pakistan, unemployment has been problem for quite sometimes. SMEs
are one of the most important ways of combating this problem at a very affordable cost.
At present, the Government is putting emphasize on self-employment and rural
industrialization. For the same Government agencies are launching a campaign towards
this end. But Social Scientist is giving word of caution with a view that SMEs are not a
magic to bring miracle just by helping the people to start them. It needs a meticulous
preparation and planning before establishing industry followed by a lot of hard work to
run it successfully with reasonable growth.
To produce quality goods and to market the same for better return in the competitive
environment, it is essential to know how to do it. To be competitive, SMEs must have
inputs of material science, manufacturing technology, management, and marketing at
minimal cost, if not always free. This is what distinguishes it from a Large scale
Industries (LIs), where all these have to be paid for.
With this perspective, industrialization in Pakistan, the development of the SMEs is now
being considered as a more appropriate alternative to promote industrialization. In fact
the SMEs are now playing an important role for Pakistan. Their significant contribution
in production and employment coupled with significant shares in export has made them a
potential source of sustainable growth and development.
There was no single Industry in N.W.F.P., at the time of partition in 1947, only few
industries were present in Pakistan. So the Government of Pakistan faced a lot that how
to industrialize this newly created under developed part of the country. In this regard,
“Small Industries Corporation” was established for the whole West Pakistan to develop
and promote the cottage and small industries, to create skilled labor. To reduce the rate of
un-employment and to feed the new coming industrial units, this corporation had to cover
Chapter # 1
6
a vast area, priority was given to such places where there was greater potential for the
new industry.
But after the disintegration of the One Unit1 in 1971, and after NWFP becoming a
province, realizing the fact that small industries is a breeding ground for SME as well as
for large industries. The Government of NWFP established the “Sarhad Small Industries
Development Board” on July 1st 1972, with the same objectives and role as that of Small
Industries Corporation previously for promotion and development of cottage and small
industries in the province. Its creation was later embodied in a Legislative Act of the
Provincial Assembly, “The N.W.F.P. S.I.D.B Act No 11 of 1973”.
The North-West Frontier Province (NWFP) ranks third among Pakistan’s Provinces and
territories in term of industrial development, albeit with a large gap. The industrial census
shows that the province accounted for only 7.5% of fixed industrial assets and less than
7% of gross industrial output in the med-1980s. While these shares may have increased
modestly in the meantime in response to a number of schemes to promote the
development of small and medium enterprises (SMEs) in particular, industrial
development on a more ambitious scale has been constrained by a dearth of resources,
remoteness from major markets, and lack of adequate infrastructure. The most important
industrial branches in terms of output value are food and tobacco processing, textiles and
garments, wood and furniture, non-metallic minerals especially the processing of the
regional large and varied deposits of marble, and cement, etc (PSED 1998, Vol, 9, No. 1).
For promoting the economic base of the country, the government has open and started
some leading institutions and organizations for the establishment and development of
SME’s include:
Small Industrial Development Board (SIDB) Peshawar.
Youth Investment Promotion Services (YIPS).
1Before 1970, the whole country (today Pakistan) was considered “One Unit” But after 1971, the country
was divided in four Provinces.
Chapter # 1
7
Regional Development Finance Corporation (RDFC).
Small Business Finance Corporation (SDFC).
Micro Financing (of various banks/Development Financial Institutions
DFI’s).
Small and Medium Enterprises Development Authority (SMEDA).
In this regard, N.W.F.P. possesses potential for promoting SME’s so as to keep pace with
other provinces of the country. However, proper planning is required for exploring the
available business avenues. N.W.F.P. has long historical background1, while the SME’s
structure in the district Peshawar, Bannu, and Dera Ismail Khan is not remarkable one. In
this regard the industrial biography of SME’s of the above three districts are as under:
Table1: Industrial Biography of SMEs in the Three Districts of N.W.F.P.
______________________________________________________________________
Date of Units Units Units Total S.No. District Starting in near to under Units Working Completion Process ________________________________________________________________________ 1. Peshawar 1961-62 59 1 10 70 2. Bannu 1974-75 8 5 3 16 3. D.I.Khan 1973-74 20 8 7 35 ________________________________________________________________________ Source: (Bearue of Statistics, NWFP, 11th April, 2005) 1.2 PROBLEM STATEMENT
SME’s is a challenge for today management group in the context of industrial
development and economic growth of the country. The leading characteristics of
sustainable SMEs growth and development in the economy are contributing in the form
of sound & conducive growth opportunities and productive employment, for competing
in the global export markets or open new domestic markets for international competitors.
A successful participation of any firm (SMEs) in local as well as in global markets
depends heavily on the capacity to innovate through efficient economic networks (which
includes technological, financial, economics, commercial and managerial and
organizational viability). Thus SMEs can be considered as the basic constituents and
building blocks towards fortifying the edifice of the economy.
Chapter # 1
8
For many years now expectations concerning small and medium scale industries (SMEs)
have been growing rapidly across the world both in developing and developed countries.
After a distinct period of a considerable fascination of SMEs, the world economic
literature together with economic and political leaders around the world have been
pointing in recent years at the importance of SMI Sector for both advanced market
economies as well as economies in transition.
One of the main reasons for such reorientation has been the new way of thinking by
managers and economists in developed market economies and a new perception of
opportunities of economic success in the name of the standardized mass production.
Which has lost its weight already some time ago on the account of the quality orientation
in management and ability to tailor production to individual and changing needs of ever-
stronger customers?
Another main reason is to provide a feedback to the country Large Scale Industries.
Which are easily available through SMEs, proved to be more flexible in responding to the
customers needs, capable of an authentic customer focus, faster in adapting to and
learning from changing world market situations more risk prone in introducing new
technologies and new creative methods of management in the name of LIs.
Afterward the developmental problems can be highlighted with the help of experience
from various transition economies put together a comprehensive list of most common
problems hindering SME’s development. These problems are divided into two major
groups: Internal Problems within the enterprises themselves and External Problems in
their business environment.
Internal Problems Relate to SMEs:
Internal Problems refer first of all the limited own resources of entrepreneurs and limited
possibilities to identify business opportunities. They are complemented by lack of market
economy experience, understanding of modern business and ability to cope with risky
and unpredictable market environment.
Chapter # 1
9
External problems:
External problems stem from the economic and business system surrounding the
entrepreneurs. In the process of their decision-making, entrepreneurs are not guided
directly by anyone, however, they try to optimize their criterion functions under given
constraints and parameters (mainly financial), which are given from outside. The rules
and norms of taxation, as well as the availability and conditions of credits are usually the
two most controversial areas of SME’s environment, usually interpreted by the business
community as major problems in the development of the sector, which are highlighted
under the separate head namely, Selected Problem Areas.
The purpose of this study is to have a valuable survey of the available literature on the
subject, to examine the practical experience of other regions of the province/country
facing like wise problems and to develop a frames-work for its remedies. But
unfortunately, the SMEs sector failed to develop and attract local entrepreneurs. This
sector is faced with special problems likely, over production of labor, higher
transportation cost, higher cost of building construction, shortage of skilled labor, and
above all lack of entrepreneurship qualities. Now these problems are arising in the new
form to the SMEs sector are as under:
Managerial problems.
Marketing problems.
Legal problems.
Human resource problems.
Financial problems.
1.3 SELECTED PROBLEM AREAS
1.3.1 Managerial Aspects:
The area related to the management procedures of the SME’s and their
impact of structural readjustment in the sector development is demanding
attention on priority. Further, the impact of hierarchies and forms of the
businesses run under the organizational structure present in the country.
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10
1.3.2 Marketing Aspects:
The area of marketing demand analysis for the impact of distribution
channels, the impact of the competitors on the organization, problems
relating to the setting of the prices and quality concerns, including ISO etc.
1.3.3 Legal Aspects:
SME’s in Pakistan are subject to severe legal technicalities that in various
ways hinder the growth of the SMEs. The research will focus on the legal
problems related to the formations, penalties and incentives available to
the SME’s in N.W.F.P. specifically and generally in the country from the
government.
1.3.4 Human Resource Aspects:
The division of HR will be chosen from the available human capital to
analyze the situation of the skilled labour, impact of job switching, the
increase in the wages of the workforce and its ultimate impact on the
SME’s.
1.3.5 Financial Aspects:
Finally the most important i.e. the financial problems of the SME’s will be
analyzed. The focus here is on the investment, availability of funds,
external environmental impacts, taxation and others.
1.4 DEFINITION OF SMEs in the Country
Each country uses different definitions for various sizes of industries/enterprises.
Pakistan has no standard definition of the MSME. Various government departments and
public-sector agencies have created their own definitions, based mainly on financing
needs. Other critical parameters (investment, technology, Human resource development-
and the regulatory framework) are generally not included. The SMEDA has proposed
defining these enterprises in terms of either their assets or their number of employees, so
that development programme could be initiated with more focus.
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1.4.1 Current Definitions of the SME’s, Pakistan, 2001.
Institutions Micro Small Medium State Bank of Capital assets up to Pakistan N/A PKR 20 million N/A (Excl. land & Building) Revised in 1992 Federal Bureau Of Statistics N/A Less than 10 employees N/A Small Business Productive assets up to Prod. Assets of PKR Finance Corporation N/A ` 20 million 20-100 million Revised in 2001 Punjab Small Fixed investment up to Industries N/A PKR 20 million N/A Corporation (Excl. land & building) Small &Medium Less than 10 10-35 employees, or 36-99 employees, Enterprise employees, prod. Assets from or Development prod. Assets PKR 2-20 million prod. Assets from Authority PKR 2 PKR 20-40 million Million Source: SMEDA (Dec. 2004).
1.5 OBJECTIVES
The objectives of the present study are to evaluate critically the growth potential of the
SMEs and to identify entrepreneurial activities at provincial level with special emphases
in the sector mentioned. Which can play a significant role in the provincial development
and their contribution to the GDP, export promotion, employment and technology
diffusion?
The study also provides an assessment of new industrial activities where the export-
oriented SMEs can inject new dynamism and examine possibilities for linkages and other
avenues for cooperation of these industries with similar industries in other part of the
country region and extra region1.
_______________________________________________________________________
1Province is Constitutional geographical location defined by the Country Constitution but Country region
means Different Provinces, while Extra region means region announces by the Industrial groups
irrespective of Province geographical location.
Chapter # 1
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Efforts to encourage the development and growth of SMEs must be a part of larger
development strategy. The barriers to the growth of SMEs and/or the deepening of the
technological capabilities of existing SMEs are multidimensional. In most developing
countries, financial initiatives to improve technological, managerial, marketing, human
resource management and financial capabilities are proven to failure unless they co-
evolve with efforts to decrease government corruption, strengthen the operation of capital
markets, improve the educational system and nurture the numerous other constituents of a
smoothly functioning political economy. In other words, the establishment of SME’s is
interdependent with the political and economic environment within which it is embedded.
This research revolved around the five hypothesis that are the inadequate financing,
ineffective marketing activities, incompetent management, insufficient human resource
management and legal restrictions is the root cause in the promotion of the SME’s in
N.W.F.P. with special reference to Peshawar, Bannu and D.I.Khan.
SME’s have always been present in all countries of the world. That’s where business
begins, whether it is manufacturing or trading, in any form or manifestation. In the recent
past, there has been an increasing realization of the importance of SMEs, as the vehicle
for economic growth. During the last decade (1990’s), particularly, SMEs are more
focused and their role has been better defined.
In the changed economic circumstances of today, however, it is the capacity to adjust a
rapidly changing market that is most important. At the company level, therefore,
flexibility—as the ability to respond appropriately to market trends—is vital. As a
consequence of these factors, there has been a growing interest in small and medium size
enterprises, especially those that are most innovative in terms of technology and
processes, whose main source of flexibility is precisely their medium or small size.
Dynamic and flexible SMEs have served not only to create employment and earn foreign
exchange, but also to upgrade the quality of the workforce, improve the business
management skills, and diffuse technological know-how throughout the economy. These
enterprises have also helped to mobilize domestic resources towards productive use
which otherwise may have remained idle and unutilized. These enterprises are not only
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serving domestic low-income consumers, they are also producing a wide variety of
quality goods for international market and intermediate goods for the large scale
industries.
Unfortunately, we have taken too late to recognize the importance of SME’s in Pakistan.
But the good news is that this recognition has finally come in the last few years. Some
institutional arrangements have already been established and more would come in the
future. Despite the increasing interest in SME’s, the level of knowledge about major
issues within this context seems to be generally at low level. The aim of this exploratory
research study is to identify the problems, which are the core issues/obstacles for the
development of SME’s in N.W.F.P. with reference to D.I.Khan. Specific issues include:
Lack of managerial knowledge and skills is a major limitation in the
growth of SME’s and is one of the potential causes of it under-
development.
The implication of the growth of SME’s bears a significant relationship to
their successful marketing activities.
Whether innovative human resource management and industrial relations
practices are developing in SME’s, or whether the traditional image of
small size being associated with poor employment conditions and
protection still holds true.
One of the major constraints in the economic progress of the SME’s is the
lack of government support and legal constraints.
Lack of strong financial support can be a cause of slow progress of SME’s
in the province.
Data on these issues is very limited in Pakistan in general and particularly in N.W.F.P.
(Peshawar, Bannu and D.I.Khan), but the aim here is to pull together whatever evidences
exist. Another reason is being the lack of awareness among the entrepreneurs of the
different business group in the economically backward Province (N.W.F.P.) of the
country.
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The development of SMEs in the study context reveals the following operational
objectives:
1. Identifying the general texture of SMEs in N.W.F.P. (Peshawar,
Bannu and D.I.Khan) in the presence of national scenario.
2. Exploring the different constraints factors which influence the
growth of SMEs in N.W.F.P. (Peshawar, Bannu and D.I.Khan).
3. Assessing the product range and manufacturing facilities of SMEs
provided by the Vendors and to study their relationship among
themselves.
4. Analyzing of the above input and its comparison with some other
model of similar nature for identifying the development aspect of
SMEs of the specified area of N.W.F.P. in Pakistan.
5. Developing a new course of SME in the department for the
academic improvement of the business students for the industrial
sector competition.
When any types of business activity are undertaken, there may be some objectives behind
its establishment. Without any purpose, no human activity can be fruitful. But these
objectives are either economic or non-economic in its perception. Economic activities are
undertaken to earn money and satisfy human wants, whereas non-economic activities are
undertaken to fulfill their social obligations. Business is an economic activity which
qualifies the different objectives, e.g. economic objectives, social objectives, human
objectives and national objectives.
It is generally believed that every business has a single objective that is to make profit.
But it is not the only objective of the business while pursuing the objective of profit, a
business unit no doubt keeps the interest of its owners in view. However, it cannot ignore
the interest of its employees, customers, the community as well as the interest of the
society as a whole (Country). For instance no business can prosper in long run unless fair
wages are offered to its employees, provide satisfaction to its customers and contribute to
the national growth. Objectives of the study can be grouped under the following broad
categories:
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15
1.5.1 Economic Objectives
SMEs are undertaken for the purpose of earning profits through diversified business role.
In fact profit-making is the primary goal for which a business unit is brought into
existence. The owners expect a fair return on the capital invested in the business. Profit
must be earned to ensure the survival of business and its growth and expansion over time.
In order to achieve this primary objective, certain other objectives are also necessary to
be pursued by business. For example, creation/motivation of customers, innovation in the
business activity with the passage of time, and maximum utilization of resources etc.
1.5.2 Social Objectives:
SMEs are undertaken for some business objectives, while business is a socio-economic
activity. No business activity can be performed successfully without the cooperation and
support of various sections of the society. Business must, therefore, fulfill the
expectations of society while pursuing its economic objectives. Every business units
expected to contribute to the social funds in the form of providing anti-social and unfair
business dealings. SMEs can contribute such as avoidance of anti-social and unfair trade
practices, avoidance of slums and pollution, and contributing to the general welfare of the
society.
1.5.3 Human Objectives:
The success of every business unit depends to a large extent upon the quality of human
resources and their attitude towards its environment. In order to get the co-operation of
the employees, business unit must fulfill their expectations regarding pay, working
conditions, living conditions, and overall conducive working environments. Hence,
business units are expected to fulfill the expectations of its employees as well as the
expectations of people who are disabled, handicapped or deprived of proper education
and training. It may includes, economic welfare of the employees, social and
psychological satisfaction of employees, development of human resources, creating
employment, and helping socially and economically backward people and handicapped
persons.
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1.5.4 National Objectives:
National objectives are fulfilled at the end of the business transaction period. National
objectives are obligatory towards the nation.National Objectives includes to increase
export, to provide employment and to increase capital flow in the country. SMEs are
under the umbrella of SMEDA are directed to achieve the following objectives:
Promoting Social Justice.
Production according to national priorities
Self-sufficiency and export promotion.
1.6 SIGNIFICANCE OF THE STUDY
All businesses are dynamic. So some grow into large enterprise, some stabilize without
changing the scale of operations, while other disappear. The success of these businesses
can be measured by their ability to survive and prosper. SMEs are also strongly affected
by other factors such as the business environment, market forces, finance availability,
supporting services, and interaction with social, economics, politically and technological
environment.
The human resource function of an enterprise relates to many necessary skills in
production, management, and marketing, which in case of small and medium enterprises
are concentrated in a very small number of persons, including the entrepreneur.
Entrepreneurship development is therefore essential for the success of enterprises in
which a little work is done because the country has established its regulation through the
establishment of SMEDA in 1998 showing the cold response on the part of the
Government.
Dynamic and flexible SMEs have served not only to create employment and earn foreign
exchange, but also to upgrade the quality of the workforce, improve the business
management skills, and diffuse technological know-how throughout the economy like
Pakistan. Further, SMEs provide labore force, raw material, and easy marketability in the
country. These industries have also helped to mobilize domestic resources towards
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productive use which otherwise may have remained idle and unutilized. These industries
are not only serving domestic low-income consumers, they are also producing a wide
variety of quality goods for international market and intermediate goods for the LIs.
It is very generally believed that at an early stage of development, small enterprises are
predominantly craft-base, located mainly in rural areas to response to local demand. At
higher stages of development these enterprises grow into, or are replaced by modern
small business with larger market potential and better quality of products. Comparison of
developing and advanced countries is well expressed in a way by taking into
consideration technology policy but ignoring other important aspects of enterprises
development.
The Small & Medium Scale industrial sector plays pivotal role in industrial development
of Pakistan because it employs less capital investment, generates more employment
opportunities, uses indigenous technology and raw material, and helps in reducing urban
migration. Its share in GDP is 4.7 percent and employs about 80 percent of industrial
labour force1. Its share in manufacturing sector export is 30 percent, whereas contribution
to the industrial value added is 27 percent2. This growth in the importance of the
manufacturing sector has taken place entirely since Pakistan gained independence in
August, 1947. The growth process has been patchy, however, with a number of policy
shifts over the years resulting in alternating periods of high and low growth. For most of
this period, moreover, the industrialization process exhibited a strong import-substituting
bias behind a variety of protective tariffs and non-tariff barriers. This has had significant
implications for the productivity, efficiency and competitiveness of the sector.
From a Small base equivalent to about 2% of GDP at the time of independence,
Pakistan’s manufacturing sector grew at an average annual rate of 9% in real terms
during the following two decades in response to the establishment of a policy and
institutional framework favoring private industrial investment and the availability of
substantial financial and technical support from external donors. This impressive growth
1Economic Survey of Pakistan, 1996-97 GDP % (1988-1997). 2Survey of Manufacturing Industries, 1996-97, Source; SMEDA, 2001.
Chapter # 1
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performance ended adversely in the 1970s, when a change in government resulted in the
introduction of a wide-ranging nationalization program, which prompted a slump in
private investment and a slowdown in the rate of industrial expansion to less than 3% per
year. Although policy changes stimulated a recovery in the rate of manufacturing growth
to an annual average of 7.6% in the 1980s, the sector’s performance weakened again in
the 1990s due to a variety of economic and political difficulties. During the first half of
the decade it recorded an annual average growth rate of 5.5% per year, and in the 1996/97
fiscal year this rate dropped to mere 1.3% before recovering to 6.9% the following year.
Recently, the present government assurances regarding an annual average growth rate are
6.5% that increased by the coming med term policy implementation (2004-05).
Rightly termed as backbone of an economy, the SME sector bears the capacity to
generate economic activity thereby assisting in equitable wealth distribution and
promotion of local craftsmanship. Although there remains a need for additional concrete
data on Pakistan’s SMEs, it is believed that this sector contributes 30% to country’s GDP,
50% to FOREX earnings and employs almost 80% of country’s urban labour force. This
is in addition to the role of SMEs in import substitution and mobilization of indigenous
resources. Pakistan’s entrepreneurs have bravely faced several challenges to start and
establish their enterprises since the process involves intricate documentation for business
registration, locating appropriate marketing channels, tracing affordable sources of
financial assistance & business support services and surviving the cut throat competition
in markets at home and abroad.
The significance of this study can be viewed with reference to changes, which occurred
in economic structure, in the last five years, additional emphasis on micro financing to
SME’s by various DFI’s and with special reference to WTO conditionality after January
2005.
The findings of the study will be helpful to the Ministry of Finance, Production, Financial
Institutions, and Chamber of Commerce and Industries, for the future planning in the
area. Further the study will be of great use, when the fragmentized bodies for the human
Chapter # 1
19
resource management and development merged toward one common issue that is SME’s
development.
The sector today has several role players providing set of support and financing facilities
to the SMEs. These include SMEDA (Small and Medium Enterprise Development
Authority), NPO (National Productivity Organization), SME Bank, Habib Bank, Union
Bank, PEDF (Pakistan Enterprise Development Facility), PEFGA (Pakistan Export
Finance Guarantee Agency), Local Chambers of Commerce & Industry and Others.
1.7 JUSTIFICATION OF THE RESEARCH TOPIC
All business is dynamic. So some grow into large enterprise, some stabilize without
changing the scale of operations, while other disappear. The success of these businesses
can be measured by their ability to survive and prosper. SMEs are also strongly affected
by other factors such as the business environment, market forces, finance availability,
supporting services, and interaction with social, economic, political and technological
environment.
The human resource function of an enterprise relates to many necessary skills in
production, management, and marketing, which in case of small and medium enterprises
are concentrated in a very small number of persons, including the entrepreneur.
Entrepreneurship development is therefore essential for the success of enterprises in
which a little work is done.
N.W.F.P. is a fertile land having rich opportunities in different phases of business run by
some raw entrepreneur. Where raw technology/low conceptual knowledge are applied,
which are giving no positive response in the output of the factors of production. The net
result from economic parameter point of view is very passive in the sense that these are
not properly contributing in the economic development of N.W.F.P. In today complex
business environment this area demands the attention of some miracle. During my
academic career (M. Phil) in management studies, I feel this responsibility as a
student/teacher of the business administration, to select the SMEs topic for the academic
Chapter # 1
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improvement and also for the economic/social uplift of the areas to be followed by the
new researcher.
A number of characteristics and functions in economic development have been attributed
to SMEs, making them important in development strategies. SMEs are considered to have
advantages over Large- Scale establishment because:
1. SMEs are labor-intensive and use relatively simple techniques of
production that correspond to the abundance of labor and the scarcity of
physical and human capital that prevail in most developing countries.
2. SMEs demonstrate a higher degree of efficiency in using capital and in
mobilizing savings, entrepreneurial talent and other resources that
otherwise would remain idle.
It is argued that SMEs can be efficient suppliers for large establishments and can satisfy
areas of demand neglected by large enterprises, thus contributing to manufacturing
industries becoming more efficient, more flexible, and less prone to external shocks.
In reality, SMEs are able to meet the future expectations and challenges in the name of
WTO. And Quality Control etc. Even to day SMEs are potentially efficient suppliers of
goods and services. The promotion of SMEs can be possible by effective demand, low
income and price elasticity. This means that the output of smaller establishments relative
to larger establishments can be raised significantly without negative effects on national
income only in a limited number of circumstances. If domestic final demand is
sufficiently responsive, then the smaller establishments strengthen their role as suppliers
of immediate goods/raw materials to large establishments and these smaller
establishments can penetrate to world markets easily.
1.8 LITERATURE REVIEW
SME is the important element of business in the world and has been widely studied since
1931, starting with Macmillan committee, GR Driver and John C. Mills 1950, the
Babylonian Laws, The Bolton Report 1971, Wilson Committee 1979 and Key Staff
Employment Study of Cranfisld School of Management 1990. In general several studies
Chapter # 1
21
have been conducted in the area, but majority of the studies have focused on single issue,
where no study has been conducted in N.W.F.P. with much more deep emphasis on such
type of sectors and possible variables.
The related studies of the SMEs are available in different ways in different directions.
Few of them are, Small and Medium Enterprises Promoting their growth in Pakistan
(NBP, Economic Bulletin Vol, 30, No. 5 September-October, 2003, pp.5), Creating a
conductive Policy Environment for Micro, Small and Medium-Sized Enterprises in
Pakistan (Series on Conducive policy Environment For Small Enterprise Employment by
SMEDA of Pakistan and International Labour Office, Geneva. Working Paper No. 29,
2002, pp. 10, 14, and 32), Globalisation and the Apparel Industry of Pakistan, by
(SMEDA of Pakistan, 2002, pp.1-45), WTO and Agriculture, Implications for Pakistan,
(By SMEDA Participation, 2002, pp 4-52),
The Developing Entrepreneurship (Pillar of the Commission’s 1999 Employment
Guidelines),http:/europa.eu.int/comm./employment_social/employment_strategy/index_e
n.htm (Dec 2004), SMEs Support in Production and Employment.
SME Business Constitution in Pakistan, SME_Financingi, Small-scale and Cottage
industries in Least Developed Countries (LDCs) , ILO Kenya Report (Special Measures
for the Growth of SMEs)ii, Promotion of SMEs in different provinces of Pakistan,
(Economic Survey of Pakistan 2002-03), SMEDA prepared feasibility of 8 project and
working on 38 more projects, (With International Donors to obtain their cooperation and
expertise in development of SMEs)iii, Loan Disbursement to Provinces by Major
Banks/DFIs, (Annual Report of Banks/DFIs), Directory of Industrial Establishment 2002
on Industrial Perspective Reports on N.W.F.P. 2001-2002, pp. 47, Mullins and Forlani,
tried to identify the elements of perceived venture risk by entrepreneurs, (Forlani, D.&
Mullins, J.W. (2000) ‘Perceived risks and choice in entrepreneurs’ new venture
decisions’. Journal of Business Venturing Volume 15, Issue 4, July 2000, pp 305-322),
Barriers to SMEs growth in Pakistan, by F. Bari Cheema and A. Haq, (An analysis of
Constraints), June, 2003. Small and Large Businesses and their environment for seeking
foreign patents, by United States GAO. “Experts’Advice for Small businesses seeking
Chapter # 1
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Foreign Patents”, June 2003. Credit Worthiness of SMEs, (Survey Report of
Philippines)iv SMEs input, and Sick Industrial Units in the N.W.F.P: An analytical
Perspective, by Muhammad Irshad Anwar, 1998. Accelerated pace of Industrialization in
N.W.F.P. (Industrial perceptive of N.W.F.P.), Sarhad Development Authority, August,
2001, PP. 21.
The role of small and medium scale industries in economic development has been a
growing concern of economic researchers, policymakers and numerous international
agencies for the past three decades. A large number of studies have been conducted on
the subject. The earlier investigations from the late 1950 to about 1970, focused on
describing the broad features as well as the special characteristics of SMEs. Formal
definitions of SMEs have exhibited a wide range. Some earlier writers focused on the use
of household labor to differentiate small and medium-size firms from large firms.
However, the definition that has come to be most widely accepted is that based on the
number of employees. Staley and Morse (1965) suggested that small enterprises include
those with 1-99 employees, medium-size enterprises, 100-199 employees, and large, 200
employees and over. In recent years this definition has been modified so that small
enterprises include those with 1-49 employees, medium those with 50-99 workers and
large those with 100 or more employees. When production carried on by firms with 1-9
workers the aggregate of these are referred to as “household industry” and fall outside the
SMI designation. This better fits the industrial structure of Asian countries (e.g.,
Bangladesh and Indonesia) where there are few enterprises of 50 or over employees, and
even fewer of 100 or over.
Sometimes, the aggregate value of tangible assets is used as a criterion of size,
particularly in India. Recently, a World Bank Study (1978) defined small enterprises as
those with up to $250,000 of fixed assets (1976 U.S. dollars). But definition based on
asset size is difficult to handle when the practice of assets leasing is correlated with the
firm size, or when comparisons are made during periods of inflation. Inflation will distort
not only inter-temporal analyses of firm size, but also comparisons of different size firms
when (as is often the case) the vintage of asset stocks is correlated with size.
Chapter # 1
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It has been suggested (Hoselitz, 1957)1 that the contribution of SMEs to aggregate growth
undergoes a shift during the development process. According to this view, changes in the
sizes structure of firms occurs in a “stages” pattern which portrays typical shifts in firm-
size composition over time. Household production constitutes the lion’s share of industry
during phase I at the outset of the development process. During phase II a decline in the
population of household firms takes place while the growth of SMEs accelerates, so that
by the latter part of phase II, SMEs are the largest group of enterprises while households
constitute only an insignificant part of the total enterprise population. In phase III, SME
contribution peaks and begins to move into a declining phase. Household industries
continue to contract. Their places are taken by LIs which now assume center stage.
The above firm-growth patterns are well documented in the literature (Hoselitz, 1959;
Anderson, 1982). The latter literature, i.e., from 1970 to the present, continued this search
but emphasized the role of SMEs in the providing employment, reflecting the growing
realization that industrialization strategies of the sixties had failed to deal effectively with
the problem of unemployment and poverty. This review of literature on SMEs first covers
that focused on their major characteristics, then that involved in the debate on their
efficiency, and finally that on their contribution to growth.
One view is that SMEs are a result of market imperfections and the resources used are
sub-optimally allocated. The removal of imperfections, such as inadequate information in
labour or capital markets, is expected to raise total output, and reduce SMI activity. But
where imperfections cannot be removed by policy measures, the use of resources by
SMEs necessarily contributes a second-best allocation of resources. (Journal of the
Institute of Bankers, Pakistan, March, 2000).
Another view is that SMEs could be almost as efficient as large-scale industries, and can
remain competitive for a substantial period of time, if not permanently, and should be
encouraged and supported by public policy. (Journal of the Institute of Bankers, Pakistan.
March, 2000).
1Hoselitz, B. (1957) “Urbanization and Economic Growth in Asia” Economic Development and Cultural
Change, 6 (1).
Chapter # 1
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A World Bank review during the mid-eighties indicated that, in a given economy, lending
to SMEs had generated more jobs with lower investment than the Large-Scale industrial
projects (Levitsky, 1986). For a given amount of activity organized in S&Mes, the level
of economic success and dynamism achieved is roughly proportional to the degree to
which they are provided institutional support. This view has emerged as a product of
empirical research and inductive reasoning, guided in particular by interest in
understanding some well known examples of successful network of small firms (Piore
and Sabel, 1984).
Entrepreneurial establishments of different sizes vary widely in aspects such as
technology used, employment patterns, financing arrangements, market orientation,
product characteristics, type of organization, and locations requirements. With regard to
SMEs the concept of plant size is inherently ambiguous as there are numerous criteria for
measurement.
Researchers have found other characteristics of SMEs that are unique besides the
structure of employment and production. SMEs typically focus on the production of a
fairly narrow range of light consumers goods. They are particularly important in food
processing and beverages, textiles and apparel, and wood products etc. In many cases
two-thirds or more of SMI production is concentrated in these industries (Liedholm and
Mead 1987). The reason for this concentration in output composition is fairly clear: most
of SMI production is directed at satisfying domestic demand, and at low per capita
income levels the income elasticity coefficients for processed food, beverages and
apparel are quite high.
A significant finding of recent research is that in most countries the majority of SMEs are
located in rural areas. This has been documented for a number of Asian countries (e.g.,
see Anderson and Khambata 1981; Ahmed, chuta and Rahman 1978). India seems to be
one of the few exceptions, where a substantial proportion of SMEs are located in or near
large urban centers. Location is related, among other things, to production for export. Ho
(1979) found small producers of foreign sales in the Republic of Korea in 1975
accounting for about 10 % of total production. This is probably the maximum for most
Chapter # 1
25
LDCs, where foreign sales are more likely to be under 5 % of production. Foreign sales
seem limited to a few narrow lines, like handicrafts, apparel and electronics. And in the
case of handicrafts, most are produced by household industries, not SMEs. While this
structure of foreign sales may change in future, for the present time the fact is that SMI
product demand is domestically oriented.
The above discussion should not be interpreted to signify that SMEs limit their
production to a narrow range of traditional products. The reverse is the case. First, SMEs
show promise of a growing capability for subcontracting to larger firms in some
countries. Staley and Morse (1965, 263ff) pointed to promising development along this
line in India and in some Latin American countries. More recent studies document the
exception of SMI deliveries of products for intermediate consumption by other industries.
For example, Johnston and Kilby (1975) describe how SMEs located in Taipei, China
developed farm equipment particularly well suited to the needs of agriculture in that
economy. Meller and Marfan (1981) outline the development of backward and forward
linkages between large and small manufacturers in Chile. Other studies (e.g., Mellor
1976) suggest that SMI proprietors are very responsive to market signals. At present,
research results are not sufficiently robust to clearly support unambiguous statements
about the relative importance of intermediate consumption as a determinant of total
demand for SMI production.
For providing immediate help to the research studies we will summaries the findings of
the four countries studies (Bangladesh, India, Indonesia and the Philippines) on SMEs for
highlighting the organizational features, impact on the economy of SMEs, the
significance of the macroeconomic environment and promotional measures for the
growth of SMEs in N.W.F.P.(D.I.Khan).
A review of Pakistan’s SME sector Pakistan being a developing country has been under
many structural and institutional flaws in its development of Small & Medium Scale
Industries (SMIs). Owing to persistent efforts of policy makers and country central bank,
Pakistan’s economy has shown marked improvement in terms of increasing per capita
GDP and exports of 11 billion US Dollars. ( Export Target was fixed by US $ 11 billion
Chapter # 1
26
up to 2000 but actually the response was 37 million in 1996 and 223million in 2000-
2001. Source: Industrialization in N.W.F.P. by Abdul Ghaffar Soomro, 2002. page, 1-4.)
Special priority has been given to sectors namely Oil & Gas, Agriculture, SMEs and
Information Technology in country’s budget for the current year. Similarly the impetus of
major activities in the financial sector is now the development of SME sector. Much of
this is due to the public sector initiatives that have not only managed a draft of Prudential
Regulations for SME financing institutions but also the keen interest of various
commercial banks now offering financing products to the small and medium
entrepreneurs.
Harper, Malcolm (1985) has explained different case studies on real business situation
with reference to SMEs in the Third World rather than Universal conceptual ideas and
solutions. Bhalla, A.S. (1992) reveals that small and medium enterprises in both
advanced and developing countries cover a heterogeneous group of production units of
diverse size, organizational structure, managerial capability, technological level and
marketing system.
Provided that, the pace of efforts for the support and development of the SME sector
keeps up with international best practices, Pakistan SMEs will soon turn into the engines
of economic growth, giving economy a boost in the right direction.
1.9 HYPOTHESES
In the light of the objectives/major issues of the research topic for the development of
Organizational Texture, Good Governess in Industrial Sector, Good Relationship
between Investors and Venders, and the overall Impact of the study on the Scio-
economics development of the area, the following hypothesis are framed for this
exploratory research, that have been developed to probe into the problems areas:
Failure of SME’s is the result of lack of managerial knowledge.
Marketing effectiveness leads to success of SME’s.
Ineffective HRM/HRD is the basic cause of the SME’s failure.
Because of no legal framework SME’s face problems.
Due to insufficient financial support SME’s do not grow.
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Due to lack of communication with the Venders (Board of Small
Industries Development (SIDB), SME Bank, SMEDA, and Chamber of
Commerce, the growth of SME’s are not possible.
1.10 METHODOLOGY
Research methodology provides information’s about the research design, population
study, data collection and data analysis. Methodology is a set of procedures to observe
the deduced theoretical relationships between different variables quantitatively and
qualitatively (Tariq H. Malik 1998). The researcher intends to follow and combine both.
The descriptive research study will proceed, with a pre-determined plan of action.
The main objective of this study is to investigate theoretically and empirically the growth
and development of SMEs in the province with special reference to Peshawar, Bannu,
and D.I. Khan.
Research methodology for the information on SMEs was collected from the reliable
primary and secondary sources (Published and unpublished) that was compiled, analyzed
and synthesized in the following procedures:
1.11 POPULATION OF THE STUDY
The population of the exploratory research study consists of 160 businesses/ enterprises
working in different sectors of the province (N.W.F.P.) with special reference to
Peshawar, Bannu, and D.I.Khan. In the province the official records shows 1967 units
while more than 2000 units are un-officially working in the province1. Since the numbers
of businesses are very large, therefore at least 120 units out of the total of 160 units will
be selected randomly from the different sectors by requesting to offer their responses on
the questionnaire developed by the scholar to have a minimum of 120 responses of 120
questionnaires.
1Bureau of Statistics, Government of N.W.F.P. 17th November, 2006 in Annex, VI, page 285.
Chapter # 1
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1.12 SELECTED SAMPLE FOR THE PRIMARY DATA
The SME’s overall projection in N.W.F.P will be divided in to the following various
businesses and services sectors for this research study2:
Food and beverages.
Textile, Wearing Apparel and Leather Products.
Wood and Wood Products.
Paper and Paper Products.
Chemical and Petroleum Products.
Mineral Products.
Other Manufacturing Businesses.
1.13 OVERVIEW OF PROCEDURES
The subject matter of the study is businesses/enterprises of different sectors, working in
different locations of the province and the total numbers of respondents are 120 (N=120),
they will provide the information through questionnaire. The Questionnaire was
developed in English because the medium of instruction in this institution is English. At
least 120 respondents information were analyzed for getting the results. For the collection
of data, questionnaire has been developed consisting of the following parts:
Managerial.
Marketing.
Human Resource (HR).
Legal.
Financial.
General.
For rating responses a mixed questionnaire was developed, including support on five
points scale, from strong agreement to strong disagreement. The content of validity of the
questionnaire is to be estimated, by the pilot study from at least 120 business firms and
review of relevant studies.
2 Other details is available in Annex. III & IV on page 280-283.
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1.14 Data Collection Methods
After achievement of the general understanding about the topic, a detailed plan for the
collection of data was chalked out. The sources of primary data and secondary data are as
under:
1.14.1 Primary Data Collection
In the light of the contextual texture of SME’s, the data collection pursuit put equal
reliance on primary and secondary data. The sources of primary data used are as under:
1.14.2 Structured Interview & Unstructured Interview
For the collection of data, both structured and unstructured interviews were conducted,
depending on the contingency and the exigency. In certain instances, the elements of the
sample coincidently met and an interview was also conducted and at other moments
proper meetings were arranged for this purpose. Structured interviews were conducted in
the form of personally administered questionnaires, which are the prime source of data
collection.
1.14.3 Questionnaires
The primary reliance of data collection was on questionnaires. Since stratified random
sampling was used, then the subject matter was identified and personally administered
questionnaires were utilized.
In the whole process, the researcher has used single direction questions and tries his level
best to avoid the ambiguous nature questions. Similarly, leading and loaded questions are
not included in data collection process.
1.14.4 A Survey based Questionnaires
The research subject matters are well known and so therefore, a survey based
questionnaires were used for data collection on the topic.
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1.15 Secondary Data Collection
Secondary data was collected from the following organizations:
1. Small and Medium Enterprise Development Authority (SMEDA),
records/reports etc.
2. Micro Financing Unit, The Bank of Khyber.
3. Institute of Bankers of Pakistan.
4. State Bank of Pakistan.
5. Small Business Finance Corporation (SBFC) - Now merged as SME
Bank.
6. Sarhad Development Authority (SDA), Government of N.W.F.P.
7. Directory of Industrial Establishment, N.W.F.P.
8. Small Industries Development Board (SIDB).
9. Pakistan Banking Council.
10. N.W.F.P. “Development Statistics” Bureau of Statistics.
11. Pakistan Economic Survey.
12. Sarhad Chamber of Commerce, Peshawar, Bannu, and Dera Ismail Khan.
13. Small Scale Enterprise Promotion (SSEP) Program (Pak-Swiss Project).
14. Different Websites.
Along with the above mention sources of secondary data collection, a large number of
national and international published and unpublished data (papers, magazines, books,
journals and newspapers, etc) was also consulted to enrich the base of research on the
topic. Both sources/ information collected were analyzed properly and matched in light of
the topic rationality to wards economic development of the region.
1.16 ORIENTATION SESSION
The research topic was discussed in detail with different allied groups, e.g. with academic
experts and field experts on different issues/problems present in SME’s sectors in the
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Province1. These sessions were very helpful in achieving a general idea and awareness
about the current situation with regard to the different problems environment being faced
by SME’s in general and five others areas (i.e. Managerial, Marketing, Human Resource,
Legal and Finance) for SME’s in particular. It provides a direction to carry out research
in the same area. The general understanding and information achieved in these sessions
were very much helpful in completing the task within the specified time limitation.
1.16.1 Session with the Sarhad Chamber of Commerce
A session with the Sarhad Chamber of Commerce was initiated in order to collect first
hand information about the current business sector and their role for the development of
SMEs in the region.
1.16.2 Session with the SME BANK/Other Scheduled Banks
The views and suggestions about the SME’s was collected from the members of the bank
to facilitate the research, as the relevant problems in the first place and secondly, they
provided sound and realistic remedies for the growth of SME’s. Specially, this
information’s were very useful for future policy formulation for SMEs Sector.
1.17 DATA ANALYSIS
The nature of study demands a range of methods that could assess broad based
information in a quick and efficient manner. This research is conducted to find out
current situation problems and future developmental growth of SME’s within the
province in order to test the hypothesis that the SME’s operating in N.W.F.P. facing the
inadequacy in financing, improper marketing procedure, legal constraints, HR problems
and incompetent management, as a major problems.
1Experts Opinion includes, Chamber of Commerce, SMEDA, SME’s Bank, Khusail Bank, other Schedule
Banks, and different experts from Academic fields includes, Universities, Research Institutions in both
private and public sector, Consultancies in the relevant fields, and Individual expert of the fields.
Chapter # 1
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So the specific focus remained on the mentioned areas of SME’s to assess their adequacy
with the requirement and chalked out the recommendations for the present problems of
SME’s to promote their potential resources for its growth. In order to achieve the
objectives, the data was analyzed in the following steps given below:
1.17.1 STEP # 1
First, the market analysis was carried out on the basis of secondary data for ascertaining
and enumerating the problems and growth of SME’s, operating in the province. The
enterprises were divided in to different sectors for the sake of simplicity.
1.17.2 STEP # 2
The problems faced by SME’s were divided in to two phases. In the first phase, the
general problems about SME’s was tackled as a whole and analyzed in the light of
available literature and expert’s opinion in the relevant field. In the second phase, the
main issues i.e. Managerial, Marketing, Human Resource, Legal and Financial areas were
under consideration. A relevant questionnaire was developed in the light of above
mentioned areas.
1.17.3 STEP # 3
In this stage, the questionnaire was put for testing the comprehensiveness, Correctness
and relevancy by conducting a pilot survey on 120 small and medium enterprises. The
feedback from this pilot study was useful and remolded the questionnaire in a new final
set up (questionnaire) for the main survey.
1.17.4 STEP # 4
One hundred twenty most capable, competent and motivated enumerators were selected
after detailed discussion and consultation sessions. Special orientation session was
arranged on the final questionnaire, then, these questionnaires were completed by the
above group.
1.18 ANALYTICAL PROCEDURE
In order to analyze the collected data in the first attempt, correlation was examined in the
light of the literature review, job description index etc. Chi Square was selected for
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statistical analysis. Chi Square was used because of the violation of the basic
requirements of the statistical analysis and to avoid the doubt in reliability, NPAR test for
association, which is more flexible assumption, was also utilized for the accurate results.
1.19 ASSUMPTIONS
The following assumptions take place/having relevancy with the study:
2 The respondent’s responses on the questionnaire were sincere.
3 The items/areas included in the questionnaire measure the SME’s overall
performance in each sector.
4 Random sampling represent each sector, is considered to be the useful sampling
procedure.
1.20 LIMITATIONS OF THE STUDY
This exploratory research will be carried out in the light of the following limitations of
the area environment:
The study was limited only to the five independent variables i.e. management,
marketing, HR, legal and financial aspects.
The study comprised of the seven broad base divisions of the businesses and
services sectors of the area.
Out-dated data in respect of SME’s operating in the province is the routine
practice because, the last census being made in 1998. This shows the rude
treatment with this sector.
No secondary data is available on the cottage industry, which can not be sit-a-
side from the list of SME’s.
Inconsistency in the data which was collected from different sources, showing
contradictory information (because no proper implementations are present in
SMEs Sector of the region).
Most of the enterprises in SME’s sector are undocumented and access to each
and every enterprise is next to impossible. (No Registration).
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The governmental organizations have set the priority sectors according to their
own needs and requirements, which not match with current market
segmentation in the area.
All type of conceptual problems faced during this study, which are common
for developing a business plan and operational strategy was due to some
inherent dynamism in this sector.
At the end, not the last, the SME is a dynamic sector and is vulnerable to rapid
changes in the region.
1.21 BUSINESS MODEL INFLUENCING PARA-METERS: Product Profile General Characteristics Product (Quality Standard) of SMEs in N.W.F.P. Performance in the light of Vender Profile. Financing Profile Product Profile After Sales (Monetary Policy) Facilities Organization Profile Financing Profile Users Views (Commercial Policy) Marketing Profile Organization Profile (Trade Policy)
Marketing Profile
Socio-economics condition of productive workers
Entrepreneurial Profile Information on these issues will come from the country detail study, various SMEs
related areas studies and other country model, especially from the area specified for
recent development of SMEs sector (NWFP) in the light of globalization of the business
activity under the umbrella of WTO. Detail discussion is available on page. (181-232) to
get the net results about SMEs development.
Vender Govt
Small and Medium Scale Industries
Users general Public
Chapter # 1
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1.22 PLAN OF THE STUDY
The first chapter gives the details of the background of the study, purpose, objective and
significance of study. It defines the selected problem areas accompanied with description
of managerial, marketing, legal, human resource, and financial problems. Overview of
hypotheses and procedure used for the collection of information is included in this part.
Details of data collection, methods of analysis with assumptions and limitations of the
study have also been discussed in detail.
The second chapter is related to “Small and Medium Enterprises” (SMEs) and it deals
with the definitions of SMEs. The European Union and American definition of SMEs is
followed by various definitions prevalent in Pakistan. The role of SMEs in economic
development has been discussed from different viewpoints. The Government’s role in
SMEs development has also been discussed including, structure of SME sector in NWFP,
Peshawar, Bannu, and Dera Ismail Khan, along with diagrammatic representations of
entrepreneurial linkages and traits.
Chapter third is projecting the “Profile of SMEs in Peshawar, Bannu and Dera Ismail
Khan”, focusing on the specific areas. The geographical and sociological history of
Peshawar, Bannu and Dera Ismail Khan, has been briefly discussed. The SMEs in the
areas, along with description of the industrial estates, has been described with the help of
tables. The chapter ends, with a comprehensive SWOT analysis of the areas industrial
sector.
The fourth chapter explains the broad problem areas of SMEs. The problems of SMEs in
developing countries have been discussed, while describing the personnel, marketing,
managerial, financial and legal problems. The barriers to sustainable growth of SMEs are
briefly mentioned. The chapter ends with a brief description of the variables affecting the
backwardness of SMEs in NWFP, the problems of industrialization in NWFP and the
current state of industrialization in NWFP.
In chapter five is “Results of the Study” are given, showing the outcomes of the study in
the form of tables, which have been designed after analysis, of the data with the help of
Chapter # 1
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Statistical Package for Social Sciences (SPSS). Table 1-39 display frequency
distributions of responses, between different response categories under each and every
question. Statistical tools were utilized, including Chi-Square. Coefficient of Correlation
and ANOVA has also been used for tabulation. To make the study more extensive, Cross
tabulation between different variables that are theoretically influencing each other in one
way or another is given. Chi square values for all these Cross tabulation, have been
determined and presented along with their respective levels of significance.
Chapter six relates to findings and discussion of the selected tables, which has shown
significant results. Furthermore, discussion is supported by latest/updated references
which enhance the authenticity of the data analyzed regarding the different highlighted
problems of SMEs.
In chapter seven detailed discussion on SMEs up to current structure present in the areas
for developmental aspects which can be used by the follower with good projection for
future.
Chapter eight contains the solid recommendations derived from the study conducted by
the scholar on the topic mentioned for future development of SMEs in the areas.
Chapter nine will highlight a realistic SME’s Model for the education of prospective
investors and also maintaining pace with current and upcoming change in the SMEs
sector.
The report ends with bibliography and annexure, which includes questionnaire, table of
industrial units, investment and employment, details of manufacturing units in small
industrial estate, Peshawar, Bannu and Dera Ismail Khan and all sort of related material.
Chapter # 1
37
Chapter # 2
36
Small and Medium Enterprises in NWFP (Peshawar, Bannu and Dera Ismail Khan) with Reference to Pakistan
2.1 INTRODUCTION
Small and Medium Enterprise forms an important part of the manufacturing sector. It has
a great significance for a developing country like Pakistan. This discussion will give a
complete projection and all the measures taken by the Government to develop and
promote the SMEs in the country.
SM Scale Industries have been recognized as a golden mean which can bring the benefits
of modern technology and economic production and can emerge as an important plank to
tackle the problem of unemployment, under employment, regional and economic
disparities. Through SMEs it is possible to achieve a balanced industrial development
with social justice called for diffused ownership and controls. The SME sector grows
where Large Scale Units does not germinate. The candle of SMEs shines where the
grease of Large Scale Sector refuses to burn. No doubt it has been recognized the World
over that SME’s having revolutionary role in the development of economy. This has been
true with all developed and developing countries. The Small and Medium scale industries
plays important role in the industrial development of the Pakistan. It employs less fixed
capital investment, creates more employment opportunities, applies indigenous
technology and raw material, and helps to minimize urban migration. As per ILO
definition, small scale industries are those employing less than 10 workers. Many
countries of the modern world, including Japan, have thriving small scale industries. All
these industries are important from entrepreneur’s point of view that access to financial
credit is limited, involve lesser skill and smaller capital but provide maximum
employment opportunities. In the country SME’s, playing an important role in the
economic development, these are the main source of earning foreign exchange as well as
providing employment to a sizeable number of the people. The average capital cost per
labor employed is much less these industries as compared to the large scale industries.
This is important in the sense that Pakistan is a country which has abundant manpower,
and thus labor-intensive techniques of production are more suitable to it. In Pakistan,
industries keeping a capital of less than Rs 2 million including land and building are
Chapter # 2
37
known as small scaled industries. While their share in the GDP is in the surrounding area
of 5 per cent in 1990 0nward, their share in the total industrialized sector is about 35 per
cent. In manufacturing sector their share as about 80%. Nearly about 30 per cent of the
total export receipts are coming from of the manufacturing sector. These industries have a
considerable share in the export of textile, garments, carpets, surgical instruments,
leather, sports and engineering goods, pharmaceutical units, and jam stones, etc.1
2.1.1 Definitions
Each country uses different definitions for various sizes of enterprises. Small and
Medium Enterprises (SMEs), have been define by various criteria, such as the number of
employment, the value of assets, the performance of net sales. In Pakistan SME’s are
defined as under.
2.1.1.1 Definition by State bank of Pakistan
According to SBP says SMEs would be those who fulfill the following criteria in its
whole.
Table-2A Nature of Business
Assets Requirement criteria
Number of Employees Criteria
Net Sales Criteria
Trading/Service Total Assets at outlay up to Rs. 50 Million excluding land and building
Not more than 50 workers
Up to 300 Million
Manufacturing Total Assets at price up to Rs. 100 Million excluding land and building
Not more than 250 workers
Up to 300 Million
Note: SME means a body, preferably not an unrestricted company.
2.1.1.2 Definition of SMEDA
For the time being, SMEDA has defined SMEs in terms of employment generated as well
as investment in productive assets.
1.http://DAWN.com. Role of SME by Rauf Nizamani, 20th March, 2000.
Chapter # 2
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Table-2B Nature of Business
Employment Useful Assets (Rs. Million)
Small Between 10-35 Workers 2-20 Million Medium Between 36-99 Workers 20-40 Million Source: SMEDA, Pakistan. 2.1.1.3 Definition of SME Bank
SME Bank Classification is as under
Business enterprise having total assets of up to Rs. 20 million is known as
small enterprise.
Medium enterprises are those, where their total assets exceed Rs. 20
million, up to Rs. 100 million.
A rationale of the three definitions specify that the State Bank of Pakistan has increased
the asset value but only those manufacturing/trading units who meet all the above criteria
are known as SMEs. Before these definitions public limited companies were excluded
from the list of SME’s but now it is not a constraint. The context of SME’s as define by
SMEDA and SME Bank is very small. Economic Bulletin, Economic Research Wing,
National Bank of Pakistan, (bi-Monthly), Vol. 30, No. 5, September-October, 2003
There growth potential (means structural as well as output, employment, and value added
responses to the economy) is need for promoting SME’s, which work in all phases of the
economy and show the majority of the private sector. They project economic and social
functions in the economies of both urbanized and snub-nosed economy.
2.1.1.4 Definitions of SME in Some Asian Countries Table-2C Criteria Country Definitions Investment Bangladesh Total investment on land and building within TK 2.5
million India Total investment on plan and machinery not
exceeding Rs. 3.5 million (RS. 4.5 million in case of ancillary units). Tiny units are within Rs. 0.2 million in a town having a population up to 50000.
Singapore Fixed production assets not more than $ 2 million in manufacturing, assembly and service enterprises (SIFS).
Chapter # 2
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Size of Employment
Indonesia Small industries employing between 5-19 workers.
Handicraft with fewer than 5 workers. Medium industries between 20-99 workers.
Malaysia Fewer than fifty full time employees. Combination of investment and size of Employment
Hong Kong Employees fewer than 50 and investment less than US $ 50000.
South Korea Employees between 5 and 300 and total assets with in 500 million won for manufacturing, mining and transportation.
Employees between 5 & 50 and total assets with in 500 million won for construction.
Employees between 5 & 20 and assets with in 20 million won for Wholesale.
Thailand Employee fewer than 50 and/or registered capital not more than 5 million baht.
Medium industry employees between 51 and 200.
Philippines SSI with total assets between .50 m to .10 million pesos and employees 10 to 99.
Medium with total assets P10 to P20 million and employees 100-199.
Cottage industry with less than 9 employees, and total assets up to P.25 million.
Source: Email: [email protected]. SME Financing Workshop for SBFC Officers, Islamabad, by Sajid Naseer Khan, GM, Punjab Vocational Training Council, 3-A 3, Gulberg III, Lahore, 25th September, 2001. 2.1.1.5 Definition by ILO
In the developing countries Definition of SMEs are highlighted by the number of workers
employed, as defined by International Labor Organization (ILO) 2.
Table-2D Country Small-Sized Enterprise Medium-Sized Enterprise Bangladesh Less than 50 workers 51-400 workers Lebanon 5-8 workers 10-30 workers Pakistan 1-9 workers 10-300 workers Syria 1-40 workers 40-200 workers Source: (www. ilo.org)
Table 2D, by ILO, classifies SMEs only on the basis of number of workers. The data is
more than a decade an old one.
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2.1.1.6 Definition by European Commission
In 1996 the European Commission follows a communication and finalized a single
definition of SME that will be accepted across the community program and proposal.
Table-2E: Classification of SMEs by EC Enterprise Category
Headcount Turnover Or
Balance Sheet Total
Medium-Sized Less than 250 equal or less than € 50 million
equal or less than € 43 million
Small Less than 50 equal or less than € 10 million
equal or less than € 10 million
Micro Less than 10 equal or less than € 2 million
equal or less than € 2 million
Source: SME definition: European Commission Recommendation
The classification in Table 2E, by European Commission, is rather more comprehensive
and latest. It also includes the classification of micro enterprise. Micro enterprises are
sometimes confused with small enterprises. The classification also takes into account the
turnover or balance sheet total along with the headcount.
2.1.1.7 Definition by International Finance Corporation, World
Bank Group:
The IFC, a member of World Bank Group defines SME as follows:
Table-2F: Classification of SMEs by IFC Enterprise Category
Number of Employees
Total Assets Annual Sales
Medium-Sized UP to 300 Up to $ 15 million Up to $ 15 million Small Up to 50 Up to $ 3 million Up to $ 3 million Micro Up to 10 Up to $ 100,000 UP to $ 100,000 Source: www2.ifc.org
Table-2F given here is in terms of dollars and considers the three variables i.e. number of
employees, total assets and annual sales.
2.1.1.8 Refined Definition by SME Bank
For SME, not for a limited company the employees may not exceed the limit of 250
worker for manufacturing sector and 50 workers for trading/ services concern and fulfill
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41
the following criteria. A trading / service concern with total assets at cost excluding land
and building up to Rs. 50 million.
(a) Trading/service concern excluding land and building, the total cost up to Rs
50 million.
(b) The manufacturing concern excluding land and building with a total asset cost
up to 100 million.
(c) Any trading, service or manufacturing concern with a net sales not exceeding
Rs. 300 million as per latest financial statements.
Following the experience of some of the developing countries, the government has
entrusted the research and development task with respect to small and medium scale
enterprises to SMEDA. In order to concentrate its activities on the objectives, SMEDA
felt it necessary to define “the limits” for an enterprise to be named as SME. These limits
are based up on the number of employees and level of investment. For further details see
annexure No II. Page. 279.
Table-2B, by SMEDA, defines SMEs as “Small Enterprises are those having 10 to 35
employees and productive assets valuing less than 20 million. Where as Medium
Enterprises are those having 36 to 99 employees and productive assets of less than 40
million”.
In this research study, SMEDA definition will be used as a base to classify the Small and
Medium Enterprises in Pakistan.
2.2 BACKGROUND
2.2.1 The Evolution of the Small Enterprise Sector in Pakistan
At the inception of Pakistan in 1947, there were very few Manufacturing establishments.
It was totally an agriculture-based economy. In 1949-50 the share of industrial sector in
GDP was around 8% with large contributing 2.2% and the small 5.8% comprising of
cotton ginning, rice husking, wheat milling. The surprising feature is that over the years
the contribution of the small sector in the range of 5% to GDP.
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42
The situation of SMEs is one of a rather loose integration within the mainstream of the
national economy. Many recent studies undertaken by local & international agencies
indicate that although SMEs display the potential for expansion, numerous hurdles thwart
them. In Pakistan as in other countries the recognition is growing that small scale
industries are important for the development of social and economic sectors. However in
spite of the growth of this awareness not much attention was paid to this sector,
“Research has revealed that nothing contributes more to the flourishing of small
enterprises than the favourable policy context” (Thomesen & Thomas 1992). This is
totally lacking in Pakistan and reflects apathy to one of the most potential sector of the
economy1.
2.2.2 Phases of Industrial Development
Pakistan’s comparative advantage was the skill its people had in many fields of small &
cottage industry. It people were famous for hand crafted products whether in metal or
woolen or cotton or wood. But this comparative advantage over time fritted away & was
not exploited or developed. There was no tradition of institution building. No guilds and
associations that would foster the skill and pass it on to the next generation. There were
no laws requiring the skill or recognition of skill, hence the national industrial
development suffered.
Pakistan’s economic development policies favored capital-intensive technology choices,
ignoring the fact it would create unemployment. Even the subsidized credits for small
enterprises stimulated more capital-intensive technologies. This situation is further
compounded by the fact that Pakistan ranks relatively low among other Asian Countries
in such areas as per capita number of science & technology personnel and low on R&D.
Considerable work was undertaken on SEs in 1990s by UNDP, who allocated research
projects on SEs & Micro enterprises to UNIDO and ILO. Similarly a World Bank
funding research was undertaken by the Institute of Social Studies Advisory Services for
________________________________________________________________________1The Nation, Pakistan,22-9-2003. (Iqbal m. Khan)
Chapter # 2
43
Bankers Equity. The Donors Coordination Group on promotion of the SEs set up in 1993
organized a series of activities for SEs promotion. A series of measures were intended
under the Eight Five Year Plan (1993-98)1 to stimulate the growth of SE sector focusing
on improving their productivity and enhancing product quality and standards through
training in vocational & technical skills and up gradation of technology and
modernization. The impetus to the SE sector came from this new focus, which
culminated in the Governments decision to set up another Small Industries Development
Organization (SIDO) in October 1998 called SMEDA- Small & Medium Enterprises
Development Authority. Yet the bottom line is that there has been no policy initiative to
support the growth of SEs.
2.2.3 The Emergence of Small Industries Corporations:
After 1972, the institutional support functions for the micro and small scale sector were
delegated to the provinces, to be managed by a Provincial SIC. The Punjab and Sindh
acquired a Punjab Small Industries Corporation, and Sindh Small Industries Corporation,
respectively. NWFP acquired a Sarhad Industrial Development Board (SIDB). In
Baluchistan, the functions were handed over to the Provincial Department of Industries.
2.2.4 Punjab Small Industries Corporation:
Punjab Small Industries Corporation was set up in 1972 to replace the West Pakistan
Small Industries Corporation as a public sector agency for the promotion and
development of small industries. PSIC has determined on five major functions for the
Micro and Small Scale Enterprise sector in manufacturing,
a. Investment promotion and credit
b. A common technical facilities program
c. A handicraft development program
d. A technical skill program
e. A small industrial Estate (SIE) development program 1Eight Five Year Plan (1993-98) Economic Division, Ministry of Finance, Govt of Pakistan.
Chapter # 2
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PSIC is the most important instrument for providing support to the Small Enterprise
Sector. PSIC now runs a number of credit schemes and has established 15 small
industrial estates in non-urban centers across Punjab. It has established 13 technology
specified service centers covering light engineering, leather, ceramics, metal industries,
cutlery and small tools, pottery, wood-working and agricultural machinery.
The Common Technical Facilities Program the PSIC runs a large common
technical facilities program based on 13 industry specific centers. The industries they
provide facilities for light engineering, leather, ceramics, metals, cutlery, sports goods,
pottery, woodworking, bone china and agricultural machinery.
Handicraft Development Program the PSIC runs a handicraft development program
based on 11 Handicraft Development centers and 8 Craft Development Centers.
It has also been assessed that there is antagonism between bureaucratic procedures and
flexibility requirement. There is also lack of coordination between PSIC and other
agencies dealing with SE’sv.
2.2.5 Sindh Small Industries Corporation
Sindh Small Industries Corporation was regulated in 1972 through Act of the Provincial
Government for the main functions to promote and develop small industries and
handicrafts in Sindh. The SSIC performs three investment promotion functions like the
PSIC. It provides pre-investment advice on profitability and technical feasibility. It
provides a guarantee to schedule banks on behalf of the borrowers. And it has established
a Loan Fund of its own.
The Technical and Skills Training Center, TTC program is probably the largest
program of the SSIC. SSIC runs some 80 TTCs. These provide one-year training courses
in welding, woodworking, radio and television repairs, garments, leather, ceramics,
handicrafts, and carpets.
The Small Industries Estate (SIE) Program the SIE program has established 16
SIEs in Sindh Province. The Artisan Colonies are another good projection by SSIC. The
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SSIC has established 7 Artisan Colonies. These are for Ajrak blocking, weaving, pottery,
lacquer work and shoes. Another good addition of the SSIC is a Technology Transfer
Center established and developed at Hyderabad.
2.2.6 Sarhad Small Industries Development Board
SSIDB, are monitoring the development and promotion of small and cortège industry by
providing technical training and overhead facilitation in form of bank loan, development
of industrial infra structure, and guide-line to the interested entrepreneur. SSIDB was
established in 1972.
SSIDB is basically a promotional organization with the following main objectives:
a. Manpower training-upgrading of skills and development of handicrafts
production;
b. Model pilot projects-with common facility services, consultancy and
extension services; c. Industrial infrastructure-establishing, colonizing and maintaining Small
Industrial Estates; d. Advisory services-appraisal, technical assistance, financial advice and
sponsoring loan applications to banks / financial institutions.
Model Projects:
Since 1972, SSIDB has established 12 model pilot projects throughout the Province.
These include woodworking, sports goods, leather goods, ceramics, electronic,
agricultural light engineering and metal project centers.
The Pak-Holland Metal Project:
The innovation of the project has been to use the traditional master apprentice system to
skill the masters who can then skill their apprentices in turn. The program estimates
approximately 3000 graduates based in 2500 workshops as the beneficiaries.
Pak-German Woodworking Center:
The Pak-German Woodworking Center (PGWC) set up in 1971, is one of the oldest
foreign collaborations. Its objectives were to provide a two-year training course, establish
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a common facility service and a technical extension service and credit. The German
component of this project was Rs. 6 million.
2.2.7 Directorate of Small Industries, Baluchistan:
Directorate of Small Industries, Baluchistan is playing an important role by running a
number of handicraft centers for imparting training in development of traditional crafts
and trades. Side by side the four provinces the government of Pakistan control AJK,
FATA, and Federal Capital area of Islamabad. The pace of industrialization in these
entire regions is not countable because of mountainous terrain and remoteness of the area.
In case of federal capital area all essential facilitation are provided in the small industrial
area of I-9 and I-10 Sector of Islamabad.
2.3. ROLE OF SMEs IN ECONOMIC DEVELOPMENT:
SMEs being the growth engine of the economic development over the world have
immense recognition for the developing countries. No doubt SME is the backbone of the
economy can contribute in the form employment opportunity, expediting revenue cycle,
development of craftsmanship, equal distribution wealth, mobilization and promotion of
entrepreneurial culture. SME are hub of innovation and conceded the only hope foe the
survival of artisanship who are caring unique skill over creation of national and
international buyers in the market.
It is unthinkable to imagine how it will be if a country does not have small and medium
enterprises in the economy. Without the services of small and medium enterprises, the
populace will not get supplies of food and other essentials and manufacturing sector will
not get cheap raw materials and supplies, and the whole economy will come to a
standstill. A country may survive without large enterprises, perhaps at a less efficient
level, but a country can not survive without small and medium enterprises.
The facts reveal that contribution of SME to country GDP and Enhancing export revenue;
Pakistan SME’s are still backward and showing no potential for the country economic
development. No doubt Pakistan economy have a better experience of domestic policy
making and applying in non productive industrial unit (All those units under SME’s
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having no further fabrication of the products) for economic development but their short
response die by itself due to limited scope of operation, adverse economic condition, poor
management and availability of infra structure. Their remarkable services to country
economic development having the recognition of merit, while SME in Pakistan always
face the shortage of business support, regulatory environment, and financial assistance.
All these hurdles are due to absence of conducive-environment of legal, economic, social
and institutional framework resulting in low access to formal financing cycle. Now a day
the government has made a lot in the form of conducive-operative environment for SME
and providing formal access to the banking sector in the form of restructuring different
polices measures for SME. (A journal of SME Bank Ltd, January-March, 2002)
It is unthinkable to imagine how it will be if a country does not have small and medium
enterprises in her economy. Without the services of small and medium enterprises, the
populace will not get supplies of food and other essentials and manufacturing sector will
not get cheap raw materials and supplies, and the whole economy will come to a
standstill. A country may survive without large enterprises, perhaps at a less efficient
level, but a country cannot survive without small and medium enterprises.
Pakistan is a labor surplus economy with scarce capital resources. In view of the
highlighted factor the growth of SME’s has special impact on the balanced and dynamic
growth of the country economy. SME’s contributions are greater as compare to large
scale industries, which are as under:
SME creates more jobs per unit of capital.
SME is more capital efficient.
SME highly integrated to the local economy.
SMEs apply a high percentage of local materials.
All consumable products are manufactured by small and medium scale
industries.
It taps resources at grass root level.
Promotion of SMEs induces rapid growth of large scale manufacturing in
the long run.
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Local integration1 and rationale development’s the name of SME.( 1Local
integration means that in the context of SME’s all participants can share
views with one another as compared to LI’s because all participant belong
from the same local area.)
Creation of varieties and turnover of the economy structure is subject to
SME.
Social interaction is the identity of SME.
Introduction of New technology is the base of knowledge-based society.
This statement is mostly used in the name of “Modern Technology Base
City Culture” by the world wise industrial countries like Japan, Malyshia,
and China etc.
Small and Medium Enterprises or SMEs have always existed in all countries of the
world. That’s where any form of business begins, either it is manufacturing or trading, it
must be the SME. In the recent past, it is recognized that SME is the vehicle for
economic growth. In 1998, the Small and Medium Enterprise Development Authority
started function under the umbrella of Government of Pakistan, for the first time, to
develop the links between the local industrialists and government. The objective was to
provide a new potential to the economy through a leading sector development and SME
facilitation program.
The need for SMEs is dictated by the age of specialization in which we are now living, it
more reliable that Large-scale industries find it more economical and more profitable by
sub-contracting with SME units functioning independently for their contribution to the
economy. In the engineering sector, for example, it is closely a better policy to entrust the
production of simple components to SMEs. One such unit could be producing just one
component with a high degree of specialization to turn out products of high quality and
standard specifications. Such dedicated production is possible only through sub-
contracting to smaller units that have the advantage of specialized skills and economies
of scale, which make them cost-competitive with production efficient.
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In the name of National and International market requirement demand that SME’s basic
functions develop rationale of productivity on the pattern of Large Scale Manufacturing
Sector. While SME’s possess all these functions but need special attention from the
stakes-holders as well as from the investors. The economy is the role model of SME due
to fundamental function performed effectively in the state of manufacturing large scale
production. SME’s possess a number of plus points in the name of economic and social
demand of society by providing feedback to all types of mega projects in the country. In
the last 30 years the economics situation has introduced a number of profound changes to
rise the phases of uncertainty and instability for the future betterment of economic
development. During the crises of 1970 some factors having heterogeneous economic
growth called industrialization process was marked as a road map for SME development.
In the changing economic environment it is the day to adjust SME rapidly with changing
market demand. It is to highlight that flexibility is the ability of SME to adjust with
current market in the name of innovative technology and process of specialization in the
modern phases of development.
2.3.1 Employment Generation
The role of Small and Medium Enterprises in job creation is well known and even in
developed countries over 80% employment is in this sector. Therefore, in order to
develop this sector expansion of infrastructure facilities, deregulation and liberalization
of economy, fiscal and financial incentives are to be provided and promotional activities
such as skill development, industrial estates, common facilities and marketing
arrangements have to be made.
The Micro and Small Industry is considered as “back bone” in the economic development
of any country. It plays a pivotal role in contribution towards GDP and job creation.
SMEs employs over 80% of the labor force in industrial sector which contributes nearly
37% of the manufacturing sector exports from Pakistan and accounts for nearly 1/3 of the
manufacturing sector’s contribution to the Gross National Product1.
1.Economic Bulletin, Vol.30,No.5,Bi monthly,Sept-Oct, 2003. Economic Research Wing NBP Head Office
Karachi, Pakistan.
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In country like Pakistan SME is recognized for providing employment of at least 80% of
entire industrial workforce of the country. SME also provide a valuable contribution in
the name of value-added product to the economy varying from 40% to 70% in the
industry of food beverages, jewelry and , leader products jute and jute product, textile,
wood work and handicraft etc. SME in Pakistan constitute 90% of businesses in the form
of trading and services. SME represent a critical role in manufacturing sector by
providing 80% of industrial employment, contributing 30% to GDP and generating
export earning of ¼ in the economy. This contributing share of SME in the form of
employment, recycling of economic activity by using low capital requirement and greater
productivity aspect to the nation is the identity of SME1 &2.
2.3.2. Poverty Alleviation
A bulk of the country’s inhabitants live below the subsistence level and due to financial
constraints the Government lacks resources to improve the lot of the poverty stricken
people. A growth rate of 3% in population further deteriorates the situation. Due to these
reasons the real income and employment level of our population is on the decline. In our
peculiar circumstances the only solution lies in the large network of SMEs especially in
the rural setting. It is a proven fact that investment cost per job created in the case of
small enterprise is many times less than that in case of big business. SMEs not only
create employment opportunity for entrepreneurs but to his family members and
associates. On the other hand, it generates cheaper goods and services to our population
which will break the cycle of ever increasing price rise. The more employment and goods
and services produced will increase our GNP tremendously and become catalyst in
breaking the poverty cycle.
In the whole world the fundamental challenge is the poverty reduction, where 2/3
countries live below the poverty in Asian region. In Pakistan this incident of poverty is
increasing day by day and currently this level has reached around 32% with a higher in
1World Bank Repot from 1978 to 2010.
2Industrialization in NWFP by A G Soomro.2002, page. 1-4.
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rural area. The state poverty reduction strategy focusing on integrated factors foe the
removal of poverty in the name introducing SME based culture in the country. For this
purpose government is inviting private sector to develop partnership in the name of SME
for the revival of economic growth. This strategy highly accorded priority to the
development micro, small and medium enterprises. SME is considered a tool of
development in develop countries like china Japan Korea and Malaysia, while in Pakistan
SME are considered AGRO based SME only for employment of bulk population without
receiving a contributing share manufactured goods for international market. The recent
growth of SME would not accelerate economic growth due to low level of investment
and over employment in the sector by bringing GDP at low level. The poverty reduction
strategy has recognized the promotion that SME will be helpful in providing job
opportunity to 70% population living in rural area which will push back the poverty and
inadequate income allocation.
2.3.3. SME’s is the Engine of Growth
If we are to look at our SMEs the engine of growth, like in Japan or Korea or other
Industrial Countries, government policies will need to be fully geared to support SMEs in
both production and marketing. In Pakistan, the SME sector employs 80% of the
industrial labor force contributing 60% of the manufactured products1&2. It will be quite
satisfactory if the present size of SMEs is provided reasonable support institutionally and
financially to enable them to play their due part in moving forward our economy.
2.3.4. Contribution to Job Creation
SME is the safety of the local artisanship in the name of providing different specialized
job to the local people. In the recent past the European Union countries have focus on
1Economic Bulletin, Vol.30, No.5 Bi-monthly, Sept-Oct. Research Wing, NBP, 2003.
2Website: www.nbp.com.pak
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employment creation and preservation of specialization in the name SME. In this regard
these countries have considered (developing entrepreneurship) is the pillar of
employment generation of different new categories of enterprises for the society
economic development.
2.3.5. Contribution Towards Job Satisfaction
It is revealed from business and management literature that SMEs provide a nursery and
proving ground for enterprise. SMEs generate the entrepreneurial qualities and are
usually testing grounds for persons embarking on a successful business. Entrepreneurs
prove their ideas in the market place in the form of their products. Pieces of broken
window glasses when used to replace imported hurricane lamp glasses show highly
innovative qualities of entrepreneurs.
2.3.6. Women’s Employment Opportunities
Small enterprises provide a valuable opportunity for earning income and personal
development to women folk, 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.
In both urban and rural area SME sector provide an opportunity of vocational skill to the
local residential woman/house wife. Now a day SME have introduced unique and novelty
demand in the market by the skilled woman entrepreneur. SME is considered a platform
and association for enterprising woman to strive for their socio-economic challenges face
by the under develop countries woman.
2.3.7. Innovation and Inventions
In Pakistan big business does not have enough resources to invest large amount on
research and development and large Government institutions which were established for
this purpose (PCSIR, MIRDC, LIDO, etc) have not contributed to innovation and
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invention expected of them. As small businesses are very flexible and operate near its
consumer base, it has ability to adapt according to the ever changing needs of the
consumer. The contribution of SMEs in new inventions and adoption of improved
technologies is much greater than in the large formal sector with its huge capital base.
2.3.8. Provision of Service to Local Community
Small enterprises contribute a very important role in the provision of services to our daily
requirements. Supplies of food, transportation, daily necessities and personal services are
all provided by small businesses. Small wholesalers help the manufacturers to distribute
the goods all over the country, and small retailers make it possible for the customers to
purchase many different items in one shop. Without the services of SMEs, our life will be
hampered and very inconvenient.
2.3.9. Technical Manpower and Suppliers for Large Formal Sector
Major advantages of economy of scale can be achieved only through large-scale
operations. Some business activities require large amount of capital and high level of
technology which are beyond the capability of small enterprises. Hence large enterprises
are also important to the national economy of a country. Like the small businesses, they
also provide employment and training of skills. However, the large enterprises cannot
survive their own. They require the supporting services of SMEs, in terms of supplies of
raw materials, parts and components, semi-finished goods ad distribution of finished
products. Especially in some developing countries which try to attract investment, they
must ensure the foreign investors of sufficient and efficient supporting services available
locally. Subcontracting is becoming increasingly important both to small industries for
survival and to large industries for supporting services. To large industries, the small
enterprises can more economically provide essential parts and services which enabled the
final products of the large corporations to be more competitive in the export markets.
Some products or components and accessories do not require high precision work and
can be produced at the required standard by small industries, freeing resources on the
large industries to concentrate upon more important areas such as marketing, quality
control, product design and research and development. SMES provide largest number of
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skilled labor to large industrial sector due to small number of vocational institutes in
Pakistan. The majority of skilled labors are “Chothas & Shagirds” trained in SMEs.
2.3.10. SMEs in Rural Areas
The role of SMEs in the development of rural areas is important on many counts. The
aspect of employment creation and poverty alleviation has already been discussed above.
The third important aspect is the migration of rural work force to the urban areas creating
very severe civic problems for the cities. This unplanned urbanization can only be
stopped by providing better job opportunities and living conditions at their rural base.
Rural manufacturing in Pakistan is very labor-intensive and generally displays a low
productivity level of production. While it absorbs almost half of the total manufacturing
labor force, it contribution to total manufacturing output is estimated with roughly 5
percent. Amounting to Rs. 6,928 the cost of a job in the rural manufacturing reaches
about two third of the urban equivalent. However, a higher capital output ratio (equaling
a lower productivity of capital) and a lower labor productivity of rural vi-a-vis urban
areas are indicative of a relative competitive disadvantage of the former. Both capital-
output ratios and labor productivity vary significantly across the different manufacturing
sub-sectors. Maximum capital-output ratios have been observed in food, textiles,
printings and basic metals industries while wearing apparel, footwear, paper, electrical
machinery and leather industries report rather low ratios.
According to the 1990-91 Labor Force Survey some 37% of the rural labor force was
engaged in non-agricultural activities, marking a distinct increase from 28% in 1971-72.
With the likely exception of the finance and electricity, gas and water sub-sectors rural
production can be assumed to largely take place in the informal sector. In 1990-91
roughly a quarter of the estimated nine million non-agricultural employed labor force in
rural areas was working in the field of community and social services, followed by
manufacturing (22%), trade (21%) and construction (18%). Over time, three sub-sectors
increased their share with some variations.
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With regard to the status of rural non-agricultural employment, self-employment together
with the contribution of unpaid family members account for more than 60% of the overall
total which is significantly higher than 50% in the informal sector of urban areas. Self-
employment is most pronounced in the trade sub-sector (73%) and exceeds 50% for
construction, manufacturing and transport. Female employment is reported to account for
only 7% of the total informal rural sector, with the largest share observed in
manufacturing of 17%. The average weekly working time given is 45 hours, 22% of rural
informal laborers work at least 56 hours whereas a third are indicated to work 49 hours
and more.1
2.3.11. Role of SMEs in Exports
SMEs contribute about 37% of our export of manufacturing sector. Export development
in the SMEs sector has been accorded high priority in the export strategy of the country
as it results in creation of more employment opportunities, ensures utilization of capacity
for production and improves the quality of products apart from bringing in foreign
exchange. Small scale sector has to increasingly export their products for earning
incomes by exploiting export demand; augmenting purchasing power of their workers on
an effective and self-sustaining basis for economic development in the country and for
financing their import requirements, following an increasing sophistication and
diversification of their production.
For maximizing export effort in SMEs sector, it is necessary to identify the selected
products with production advantage in this sector and export market prospects in view of
international trade conditions. Such identification is to be followed by projecting export
demand for the selected products, reviewing and planned production capacities, for the
same to meet projected export demand.
1Industrialization and its Importance to the Economic Development of Pakistan by Masood Khan, Year,
2006-2007, pp.144.
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demand for the selected products, reviewing and planned production capacities, for the
same to meet projected export demand.
A significant feature of the exports from the small industry sector is the bulk of the
exports are of nontraditional items like ready-made garments, sports goods, finished
leather and leather products, woolen garments and knitwear, processed foods, marine
products, drugs and pharmaceuticals and a host of engineering and electronic goods.
2.3.12. Safety of Local Artisanship
Although SMEs are operated locally on the bases of local art application with the help of
local expertness, which carry low cost of production as compared to large scale industries
due to easy availability of raw materials.. One main point of SME in the protection of the
local art is that having no proper projection in the market, which kept the local art in
limited application due to which they are ready to accept low cost of production. If these
local artisans are properly educated in their own fields, then they will fly to the area
which offers a great package in this regard. Actually, the local art application provides
uniqueness in its projection which is feasible under the umbrella of SME, if the same art
applications are put on the large scale operation, then, the same quality projection will not
be available. So the concluded remarks are that SMEs are playing a basic role in the
protection of the Local Artisanship in Pakistan, which are the great source of exports to
different foreign countries by earning foreign exchange for the country.
2.3.13. Overall Economic Benefits
Although research and development activities in SME sector are very limited and the
structure of SME’s in the area is not so much developed like other developing countries.
The International Labor Organization (ILO), in its Kenya report has argued for a number
of special measures for the growth of SMEs, and removal of restrictive public policies.
SMEs are supported by certain measures which can enhance managerial capacity and
upgrade operational technology and improvements in the input and output markets. SMEs
impact on GDP, tax revenue, Income Distribution, employment and efficient utilization
of resources and stability of family income is countable towards basic economic
development. Small enterprises have displayed remarkable capacity to absorb labor.
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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 interest or to rely on foreign
technology, expertise and methods.
There is vide variation that exists in the growth paths of SMEs, which makes it 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.
2.4. TYPES OF SMEs IN THE AREA
SMEs are involved in far the most numerous small businesses in most developing
countries. However, there are many non-farm activities also those 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. Detail of N.W.F.P District-wise industrial structures are in the annexure No VI.
Various types of businesses that SMEs are involved in are as under:
Carpet industry,
Poultry farming,
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,
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Making of silver and gold ornaments,
Furniture making,
Ivory works, handicrafts,
Carpet weaving,
Paper industries,
Spices industry,
Floor mills,
Metal industries,
Chemical industries,
Ice Factory,
Wood works, etc. SME sector is the backbone of the economy and needs revolutionary support from the
Government of Pakistan. For SME development the Government responsibility lies in the
form strategic policy decision to provide both financial assistant and technical know how
in the real sense to the sector. Taiwan is one of the best examples 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 SME for net phase of industrialization the government can take help from the
experience of several develop countries it has been reported that SME’s are capable of
helping in proving one million new jobs to the world, in the new century. In the
developed countries, SMEs response to the GDP and total employment is considered the
primary aspects. SME’s account in total employment is 55% to 80% in USA, Western
Europe and Japan. Their contribution in output is given below1&2:
1 DAWN EBR, November, 2002, by A G Soomro.
2 Industrialization in Pakistan. By A G Soomro. 2002, page 1-4.(Table. 1.2. and 3).
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Contribution in Economic Country Output U.S.A 45% Germany 48% Japan 65%
Source: Dawn Publications. In 1998-99 economic survey of the country reveal mere 20% investment and resources is
less than 10% total formal credit is generating 80% employment in the country SME
sector. SME’s are involved in production of textiles, textile value added, food, beverages,
bakeries, metal, foundry etc. There are six components within the SME sector which may
be classified as follows1:
1. Agriculture: Most of establishments in agriculture are small and informal
2. Trade: It is the second largest SME employer. About 5 million
people work in shops and stores.
3. Construction: This is the third largest SME employer employing about 2.6 million
workers.
4. Community and Social Services: 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 sizeable
Presence about 500,000 people is employed in this sector.
2.5 WEAK AND STRONG DIMENSIONS
At the time of partition in 1947, there were few industries in the newly established
Pakistan, but particularly in N.W.F.P. there was no single industry. So the Government of
Pakistan faced a lot that how to industrialize this newly created under-developed part of
the country. In this regard, the Government established “Small Industries Corporation”
for the whole West Pakistan to develop and promote the cottage and small industries, to
1 The data is for Pakistan as well as for NWFP. That is clear from Table, 1,2 and 3, in the Industrialization
in NWFP by A.G. Soomro, 2002, pp. 1-4.
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create skilled labor, to reduce the rate of un-employment and to feed the new coming
industrial units. This corporation had to cover a vast area; priority was given to such
places where there was greater potential for the new industry. But after the disintegration
of the one unit in 1971, and after N.W.F.P. becoming a province, realizing the fact that
small and medium scale industries are a breeding ground for small entrepreneurs as well
as for large industries. The Government of N.W.F.P. established the “SIDB on 1st July,
1972, with the same objectives and role as that of small industries corporation previously
for endorsement and growth of cottages and small industries in the NWFP”.
Now, side by side, the Government of Pakistan has introduced “SMEDA” in October,
1998, a federal level agency with the challenge of developing SMEs in Pakistan. SMEDA
is not only a policy advisory body to the Government of Pakistan but also a one-stop-
shop for its SME clients. It is a relatively new organization, based on a futuristic structure
geared to provide business development services for small and medium enterprises.
Nation-wise statistics dealing with business failures reveal that managerial inexperience
and incompetence account for almost 90% of small business failures. Followings are the
main weak dimensions:
Lack of ability to supervise and direct others.
Lack of capital, in indication of poor financial management.
Lack of ability in sales promotion and sales management techniques.
Lack of ability to collect bad debts and to curtail unwise credit policies.
Number of the indicators the failure of SMEs in the country, especially, in N.W.F.P.
regarding its geographical location. Because, the Afghanistan War started in 1979, by
Soviet Invasion, during this period the whole process of development was hampered due
to geo-political relation failure with the neighboring countries. Up till now, the province
is suffering from the burden of Afghan Refugees in every phase of life, especially in the
business sector. Due to this crisis the indicators are as under:
Declining sales record over several fiscal periods.
Progressively higher debt ratios.
Increased operating costs.
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Deterioration of working capital ratio.
Reduction in profits (or increasing losses).
The SMEs strong dimensions are the use of local technology and material which are
helpful for the growth of country technological aspect and other phases of production.
Pakistan has a strong base for industrial development due to large human capital, raw
material availability etc. For many years now expectations concerning small and medium
sized enterprises (SMEs) have been growing rapidly across the world both in developing
and developed countries. After a distinct period of a considerable fascination of SMEs,
the world economic literature together with economic and political leaders around the
world have been pointing in recent years at importance of the SME Sector for both
advanced market economies as well as economies in transition. One of the main reasons
for such reorientation has been the new way of thinking by managers and economists in
developed market economies and a new perception of opportunities of economic success.
The importance of the standardized mass production lost its weight already some time
ago on the account of the quality orientation in management and ability to tailor
production to individual and changing needs of ever-stronger customers. Smaller
enterprises proved to be more flexible in responding to the customers needs, capable of
an authentic customer focus, faster in adapting to and learning from changing world
market situations more risk prone in introducing new technologies and new creative
methods of management.
In a natural way a small and medium enterprises is closer to contemporary vision of new
flat and lean, horizontal company, which has created a new role model among enterprises
around the world, the type of an enterprise which can succeed in present competitive
markets, in times where leading giants are struggling to minimize losses after years of
neglecting challenges from the domestic and foreign competitors.
The important features for SME development in the country are as under:
Competitive Balanced Economy.
Sound & Conducive Environment with ample growth opportunities and
Productive Employment.
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In the global export market or open local market SME can provide the floor of
competition. (future involvement of any firm (SME) in local as well as in
international markets mostly to work on thee capacity to introduce new
efficient economic networks)
Thus SME’s can be considered as the basic constituents and building blocks
towards fortifying the edifice of the economy.
On the other hand, it (SMEs) not only contributes, for the most part, in poverty reduction,
being a self reliant earning unit of the economy, but also plays a vital role in employment
generation.
Most of the SMEs in Pakistan are involved in the production of export oriented items.
These SMEs contribute 30% of the total export receipts. Unfortunately, a large majority
of these enterprises are involved in the export of unfinished products. This results firstly
in the increased prices of inputs for the local manufacturer and secondly lower level of
foreign exchange earnings. The contribution of these exporting small enterprises in the
total export exchequer can be increased by making a shift from low value added to higher
value added or finished goods. These finished goods are likely to fetch a better price in
the international market, with comparatively lower cost incurred in the process of value
addition.
History, disclose that the Government of Pakistan has not distinguished between large
and small enterprises in industry or trade. Industrial and Commerce Policies have been
uniform for all scales of enterprises, as a consequence of which specifics needs of Small
and Medium Enterprises have been left unattended to go ahead for the development
purpose. SMEDA is creating an SME focus within Government for this crucial sector of
the economy, which provides low cost employment opportunities and helps the economy
in two valuable ways:
One for boosting exports and
Second one for poverty reduction.
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In Pakistan most of the SME are working in production of export product. Actually SME
contribute 30%1 of the total export of the country. But majority of SME are involved in
exporting un-fabricated product. This approach mostly increased the prices of material
for the local producers and secondly low exchange earning performance foe the state.
SME contribution in the export can be increased by turning from low value added to
higher value added products. If this practice continues then SME can contribute more in
the process of development. From past record it is clear that government has not made
distinguish between large and small industrial approach. Commerce and industrial policy
having equal response to all sort of manufacturing concern without special importance to
SME, the government has introduce SMEDA to focus SME within the government policy
to provide low cost opportunities for economic development mostly it response as under.
Boosting export and
Poverty reduction
The presence of SME provide reliance of the economy by shifting from international
economic fluctuation without any harm while large scale industries are unable to give
quick response in this regards. It is important for the state to facilitate SME internally and
externally for challenges expected in the same sector. In this regard the adverse effect of
different factors for example, geopolitical environment and geographical boundaries can
confine the SME but these factors are state created response in the form of policy to
update SME by counter balancing the impact of the above factors. Its important for both
the investors and government of Pakistan to introduced constant measures for the
solutions of SME problems then country economy can expect maximum potential from
SME by introducing intellectual property right and others important innovative ideas.
The SME culture having orientation with the available structure provided by the state can
do the best for economic betterment. The low pools on the part of management can be
over come by providing intensive training facility to the Human Resource to ensure SME
competitiveness for the future market. To update the financial crises maximum creativity
1 Economic Survey of Pakistan, 2001-2000.
Chapter # 2
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of the banking system cam solves the problem of cash flow in the SME sector by
following the banking sector regulation. Sustainable SME activities can rotate on the
explicate policies for the state for every sector. Now, the research scholar is going
towards the real data on the justification of SMEs development in the present trade
oriented society competition in the world market.
In Pakistan, it is estimated that all small scale manufacturing sector in the 1950s and
1960s, the rates is available in form of 3.2% and 2.5% respectively. This was mainly
because of the facility available to large scale manufacturing and SME, are
discriminating one. One of the main reasons was that SME are paying high prices as
compare to the imported material.
In the 1970s the growth rate of small scale sector increased to 7.9 percent and increase
further to 8.4% in the last period, (1990’s) while in this period SME excess to imported
material was also increased. Unfortunately, in the recent past the data available on SME
sectors is not viable and can be assumed that the improvement may be 8.4%, though it is
clear from the experiment currently available about SME is below the expectation.
(Kamal, 1997)
As regards the manufacturing industries, Mahmood (1999) indicated that there is no
legal, or single, clear-cut definition of what constitutes small and medium industries
(SMIs) in Pakistan. He defined small industries as those firms which employ 10 to 49
workers, and medium enterprises as those firms which employ workers in between 50 to
99. As per Census of Manufacturing Industries (CMI) 1990-91, the SMIs accounted for
about 78.9 percent of the manufacturing establishments. Small enterprises accounted for
67.7 percent, and medium and large accounted for 11.2 percent and 21.1 percent,
respectively. In terms of value added and labor productivity, SMIs accounted for 16
percent of the employment and 13 percent in value added of the total manufacturing
industries. Small enterprises absorbed 10 percent of the labor force and contributed 7.6
percent of value added. Medium enterprises absorbed 6 percent of the labor force and
contributed 5.5 percent of value added. Traditionally, the SMIs have concentrated in
those products more amenable to small and medium scale production requiring relatively
Chapter # 2
65
less capital and catering mostly to local market demands. Consequently, the SMIs have
tended to concentrate more on food, beverages and tobacco, textile, chemical and metal
products1.
In Pakistan, it comes as a surprise that it is not the large scale manufacturing sector that
provides employment to most workers in the industrial sector, but the small scale or
informal sector that dominates the lives of people. The small-scale sector is, by far, the
more dynamic. Exhibiting impressive growth rates in employment, output and
contribution to value added.
The small scale sector has dominated employment in the construction, wholesale, and
retail trading, hotels, transport, communication, and storage industries in urban Pakistan
since at least 1972. In the urban manufacturing sector, which mainly concerns us here, as
many as 98 percent of manufacturing units were small scale unregistered firms, and in
terms of urban manufacturing employment 51.4 percent were in the informal/small scale,
while only 48.6 percent worked in the formal sector. The annual growth rates over last
many years reveal that in many important areas- employment generation, value-added,
and growth in capital stock- the small scale sector has performed far better than the
formal, large scale, manufacturing sector. Nadvi (1990) argues that a focus on small scale
units would appear to lead to the most socially efficient allocation of capital and, thereby,
have the greatest potential for generation of productive employment. Much of the
literature on small-scale sector is that this sector is more efficient than the large scale
sector in the use of capital. However, in the case of Pakistan, Sayeed (1995) concludes
that the claim that higher labor intensity in the small scale sector leads to its higher
capital efficiency is not borne out by the date.
All scholars working on the SMEs have indicated that the state or government has until
very recently treated this sector usually with indifference, and often with contempt. In
Pakistan, the scholar have observed some biased response of the state in favor of large
1 Censes of Manufacturing Industries, Government of NWFP, 2002.
Chapter # 2
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scale manufacturing particularly during the Z.A.Bhutto (Late) regime, while there was
discrimination against small scale sector (ADB, 1985, Aftab and Rahim, 1986).Presently,
our small and medium size enterprises and cottage industries, whose contribution to the
growth of GDP is very significant (approximately three times that of large scale
industries), who form an important sector of Pakistan economy, and as per statistics
quoted by the press reports it provides employment to 80% of work force in the
manufacturing sector, but receives only 20% share of the credit. They largely depend on
non-institutional credit, which is very expensive1.
2.6 GOVERNMENT’S ROLE IN SME DEVELOPMENT
Pakistan is a developing nation has many experiment regarding SME in the name of
structural, and Institutional short comings. SMEs in the countries like Pakistan can
contribute significantly to the economic growth of the smaller urban centers and rural
areas thus lending to a more even distribution of economic activity in a region and
slowing down labor migration to larger cities. Because of their regional dispersion and
labor intensity, they can promote a more equitable distribution of income than the larger
firms. However, the working conditions in smaller enterprises are frequently not good
and abuses such as child labor are not uncommon. SMEs are not subject to labor
legislation or union pressure, and this keeps wage costs down. Often casual labor is
utilized in place of permanent labor.
Capital is usually cheaper for large establishments due to their better standing in the
organized financial markets. Therefore, SMEs are more likely to be competitive in labor-
intensive industries, either because they can tap lower cost labor, or because they can use
labor more efficiently with lower supervision costs. He small firm’s greater flexibility is
also an advantage in industries that face unstable demand, varying product specifications,
etc.
A World Bank review during the mid eighties indicated that, in a given economy, lending
to small enterprises had generated more jobs with lower investment than the large-scale
1 Asian Development Bank Report, 1985.
Chapter # 2
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industrial projects (Levitsky. 1986). For a given amount of activity organized in SMEs,
the response of economic success and dynamism is subject to the degree of competency
provided buy the institutional system. This view has emerged as a product of empirical
research and inductive reasoning, guided in particular by interest in understanding some
well known examples of successful network of small firms (Piore and Sabel, 1984).
A question that arises is that while SMEs have analogous needs for institutional structure,
do they have analogous methods of responding to these needs. Of course, small firms are
facing limitation on the degree of scale available in the economy.
Economic role in the form of problems existence and its response is not countable in the
area of SME. SMEs have less accessibility to external technical support, they lack
qualified technical personnel, and lack the resources to invest in research and
development (R&D) or acquire foreign technology.
It is the dawning recognition about the importance of SME and economic prospective
rotate around the biased response of the policy maker towards this sector. From the last
three years the government of Pakistan has given frontline role in the policy road map
and recognizes the pace of development in the economy is subject to SME.
2.6.1 Government Policies and Plans for SMEs in Pakistan
The environment is conducive for the development of lending to SMEs for a more
equitable distribution of income. Government financial sector and poverty alleviation
policies now provide framework that should encourage development of a sustainable
micro-finance system in which commercial banks can play a major role. The main
objectives of the current financial sector policy are to ensure that monetary expansion is
commensurate with economic activity, while ensuring adequate finance is available for
priority sectors. This is being achieved through reforms to:
Correct the distortions implicit in managed interest rate;
Encourage credit flows and respond to market demand, and
Improve competition and efficiency in the financial sector including
privatization of the nationalized commercial banks.
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The Eight Five Year Plan (1993-1998) envisages:
Provision of credit to small scale and agro-based industries,
Establishment of Kisan banks to ensure increased supply of creditsto rural
areas,
Development of Rural Support Programmes and provision of credit within
such programmes,
Elimination of increasing complexities in loan approval procedures and
reduced collateral requirements, and
Promotion of specialized financial institutions to meet the financial needs
of small firms and enterprises.
Interest rates have been fully liberalized for advances (July, 1997) and deposits (June,
1998), removing a major barrier to entry into higher cost macro- finance markets.
2.6.2. Current Policy of Lending to Small and Medium Industries in Pakistan
Under the Prime Minister’s National Agenda Programme, to create self-employment for
the youth of Pakistan, it was decided that banks would launch a scheme for extending
small loans giving preference to unemployed and skilled youth, persons possessing prior
business enterprise, and professionals holding diploma/degree in any
technical/professional field. The scheme was launched from 15th July, 1998 through the
NBP, UBL, MCB, ABL and the Small Business Finance Corporation. The Bank of
Punjab and Bank of Khyber were included later in the scheme. Special counters of
designated branches have been opened by these institutions all over the country for
distribution and receipt of applications forms for loans under the scheme. Banks/SBFC is
required to process applications (complete in all respects) within 15 days of their receipt.
Under the scheme, small and medium loans are provided as per the following two
categories:
1st category: Loans access from Rs. 10,000 to Rs. 500,000.
2nd category: Loans access from Rs. 500,001 to Rs. 5,000,000.
The banks/SBFC has earmarked a sum of Rs.6,618 million to be provided under the
Small Loans Scheme. The terms and conditions of Loans are in the annexure IX.
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2.6.3. Policy Measure for the Growth of SME
Policy measures regarding SME development has obtained a focal importance for the
policy makers from the last few years. This issue is recently added to the country
economic development forum to provide front line support for SME in the country. From
the past, SME have no existence in the policy and regulatory frame work meant for
economic growth. Now this new addition in the name of SME will point out the potential
sectors for economic development. It has been realized that support and development of
SME is necessary for helping he state economy in the name of export and import and
demand of the local market. SME policy frame work highlights the following three core
area of attention and support,
1. A friendly and responsive business environment is needed for the regulation and
legislating frame work added to the funds of SME.
2. Acceptable and effective business support services in SME sector
3. Prompt excess to formal financing system.
2.6.4. Introduction of SMEDA
The Small and Medium Enterprises Development Authority (SMEDA) started function
from October, 1998. It is high powered Federal level agency set up by the Government of
Pakistan for the promotion of SME in Pakistan. It is an autonomous body at the federal
level which has taken the challenge of promoting SMEs in Pakistan. The SMEDA is to
provide and facilitate support prices, generate greater employment opportunities, drive
industrial growth, revitalize small business. The SMEDA is actively developing programs
for skill development of the workers, managers, providing technical and informative
support to small and medium enterprises.
Objective of SME is available under the work plane of SMEDA based on the following:
1. To overcome all regulatory obstacle in the limited time frame work.
2. To support SME with:
Technological competency
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Advance marketing techniques application for SME export oriented
SME.
Introduction of HRD with special training and organizational
development networking
Availability and easy approach to capital reservoir
SMEDA’s Mandate: The primary objective of SMEDA is to give to inject new
feedback to state economy by initiating an aggressive SME support program. In order to
accomplish this objective, SMEDA has been given the following mandate:
2.6.4.1 SMEDA will work is an agent of SME
SMEDA will not only provide various support services (e.g. financial, technical,
management, marketing, etc) directly to SMEs, the role played for it strengthening in the
existing SME support institutions so that they can assist SMEs in a more effective
manner. For this purpose, SMEDA will create a network of support institutions, experts
and consultants through which the outreach of SMEDA’s program will be extended.
2.6.4.2 SMEDA will be the key resource base for SMEs in Pakistan
SMEDA will play the role of one-window information and support resource base for
Pakistani SMEs through the creation, maintenance, and easy accessibility of SME-related
databases, whether they are socio-economic indicators or listing of technologies or
financial intermediaries, SMEDA will develop both firm-and policy- level knowledge
base to assist in the development of SMEs.
2.6.4.3 SMEDA will be the voice of SMEs within the Government
One important role that SMEDA will perform is that of providing other important
institutions and players within the Government of Pakistan the perspective and point of
view of SMEs. This will not only help create an appreciation of the role of SMEs in
important government institutions, but also coordinate and effectively implement SME
related policies and plans (SMEDA Pakistan.
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2.6.5. SME Bank-AS strategic Partner & Development Catalyst for
SMEs
In the developing countries like Pakistan SME sector has gone through many institutional
and organizational flaws and its development. Taking cognizance of the fact, the
Government of Pakistan had decided to amalgamate two separate entities with more or
less similar functions SBFC & RDFC to form one and yet stronger Development
Financial Institution called SME Bank Ltd with clear mandate to overcome the Financial
& Technical difficulties confronting SMEs and to enable them to thrive with even greater
pace by providing them faster and improved customer and value added services and
products. Later on SBFC & RDFC were merged in 2002 with the new name of SME’s
Bank for granting loan and proper support to SME sector. The whole idea is to surround
SMEs from all the four corners and carryout comprehensive diagnosis to identify the
weak areas. Therefore, no avenue has been left to provide services to the SMEs with the
sole objective to convert the sick units into profit generating components and to switch
declining SMEs to prosperity. Attempts have been and are being made to provide wide
range of value added services under one umbrella, from commercial banking to leasing,
financing to advisory services etc.
The SME Bank started its function in Dec. 2001 with the slogan of support and
promotion of SME with concentration of its export oriented objective to enable the sector
in instigating the growth of GDP, Jobs employment opportunity and reduction of poverty.
The bank has done a lot in export oriented objective of SME Fulfillment in the area of
Sialkot, Daska, Gujranwala, Gujrat, Faisalabad and Multan.
Now, in every district headquarter, SME Bank have started its functions for SME
development. The bank has developed special financial package area under the name of
Hunermond Pakistan to over come the credit problems of SME. At the end 2002 SME
bank start landing scheme for doctors and dentists clinics, fans, cutlery, women
entrepreneur’s surgical instruments, and CNG stations.
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In 2002, the SME Bank loan disbursement target of Rs 800 million was utilized up to
Rs712 million among 1008 customers. In the coming 6 month the bank has increased the
limit of financing up to Rs 3,146 million among the 2,213 participants.
The bank future plane for lending, customized in the form special financial packages for
various sector of the economy, which include marble, auto parts venders, gems &
jewellery, educational institutions, carpet manufacturers, information technology marine
fisheries, date processors, , etc. The lending schemes were design on bases of target
market need for fast processing of demand for loan. The bank special aim was to in
charge the nation woman by participating in the service industry to enhance the growth of
SME. The bank further provides the services of catalyst in the financial sector through
syndication activities and co financing activities to attract the private sector for funding to
SME. SME bank is not only the cattle to the financial need, but also provides facilitation
service to customers. The banks study reveal that SME are direct facilitator in the area of
marketing HR, training, technological know/how, innovation and development of product
and quality management control. Bank financial assistance without the above support
services has no meaning and the bank has focus on the capacity building of SME for
surplus production.
2.6.6. Others Commercial Banks
SME bank is not only the financial supporter of SME but the schedule banks are also
playing important role in the development of SME. All schedule banks in Pakistan like
NBP, HBL, and MCB also look after the need and requirement SME. 36 branches of
NBP all over Pakistan are looking after the needs of by offering one window operation.
All banks concentrate on SME export oriented approach and help to develop lending
support system to industrialist. Bank grants loan on the bases of priority area selected by
government in SME sector. SME due to lake of accounting records and financial
statement feels the problems with bank and processing and assessing their credit
worthiness of potential proposal recognize by the banking forum. Most of the commercial
are biased toward corporate borrower by providing better planning of their industrial
concern with high profitable margins in the future. Now a day’s bank is introducing
standardizing services in the name of cash flow earning capacity of the borrower. Bank
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73
support those company, which are working in the SME sector. The credit to SME by
banks namely SME Bank, Rs. 1600 million to 13 groups of SME’s in the area in the year
of 2005-20061.
2.6.7. SME Cluster Development in Pakistan
Whether it is developed economy or a developing one, SMEs are the backbone of the
economy. In Pakistan, SMEs constitute more than 80%2 of the economy and contribute
significantly to the employment, exports and GDP of the country. However, as is their
general nature, SMEs in Pakistan also have similar problems of technological
backwardness, financial constraints, unskilled human resource, poor quality of products,
poor market access, environment-unfriendly production techniques, etc.
Cluster Concept: Considering the importance of SMEs in the economy of Pakistan,
United Nations Industrial Development Organization (UNIDO) too the initiative to
develop the SMEs on a cluster basis (number of small businesses in the same industry) in
Pakistan, similar to its plan in India. UNIDO has the expertise to train Cluster
Development Agents (CDA) and other experts, available from the other implemented
cluster development programs. Under this program, a CDA is selected from within the
cluster, it is considered that a person working within the particular sector is more aware
of the strengths and weaknesses of the business, is well-acquainted with the entrepreneurs
in that business and can thus interact and bring change easily. This CDA is then
responsible to evaluate the various strengths and weaknesses of the cluster and then
submits a diagnostic study within one month. Subsequently, an Action Plan for the uplift
of the cluster is devised and an implementation phase is chalked out. The Action Plan is
based on different areas and hence action in the specific areas is design to be undertaken
by the implementing agencies.
1&2 Industrialization and its Importance to the Economic Development of Pakistan by Masood Khan. Pp.
1-114.
Chapter # 2
74
Memorandum of Understanding: A Memorandum of Understanding (MoU) was
signed between three implementing agencies, namely UNIDO, National Productivity
Organization (NPO) and SME Bank in the year 2002.. The MoU specifically indicates
the areas in which each implementing agency will play its due role. Under the MoU,
NPO is responsible for:
Providing help to the cluster manager for the benefit and increasing learning
capabilities by new technology and good experience importing from other Asian
countries. Human resource development through workshops on TQM.
Information technology, marketing, and management systems. The performance
of clusters will be closely monitored.
Undertaking productivity measurement of the SMEs.
Conducting benchmarking exercises in the cluster.
Forming tripartite partnership with academia and the cluster in order to conduct
research and development on a continuous basis for the cluster actors.
Facilitating and assisting, in the introduction of new brand name for specialized
export oriented sector.
2.7. STRUCTURE OF SME SECTOR
SME contribute over 90%1 of business (by number) in economy where all these function
lies in the private sector. Most of SME operate in the informal sector which having no
registration with government department.
Table-2K: Contribution of SMEs in Manufacturing Sector of Pakistan.
Categary
Year 1980-81
1997-98
Value Added
27%
35%
Employment
85%
83%
1Source: Economic Survey of Pakistan 2002-2003. 2. Annual report of Banks/DFIs, 2002, p. 47.
Chapter # 2
75
SMEs contribute significantly to exports within the manufacturing sector, as evident from
Table-2K. in the recent past 3 decades showing the greatest development in the export
industry dominated by SME. For the past three decades, the fastest-growing export
industries have been dominated by SMEs. Out of the largest five SME sub-sectors, cotton
weaving and other textiles rank among the top two exporting sectors. Other exporting
sub-sectors such as sports goods and surgical equipments are less significant in terms of
their share within the SME sector.
Table-2L: SME Sector Contribution to Manufacturing Exports Sub Sector Contribution (%) Cotton Weaving 21.0 Other Textile 24.0 Sports Goods 6.3 Leather Goods 3.4 Carpets 3.3 Surgical Goods 2.0 Footwear 0.7 Source: Directory of Industrial Establishment, Government of NWFP, 2003-04.
SME exports have largely indicated to dominate low value added area which relies on old
technology unlike other countries, such as Taiwan, China; they have not been the driving
forces for the growth of high value-added and skill intensive exports.
SMEs having the difficulties in stream lining with worker skilled requirement revolution
system (revolution means to change the Government policy from agriculture to industrial
development by introducing labor training agencies) infra structure problem, and
conducive business environment and no market access. The following government
system is subject to the promotion of SME in their respective area of the country.
1. Punjab Small Industries Corporation.
2. Sindh Small Industries Corporation.
3. NWFP Small Industries Development Board.
4. The Directorate of Small Industries, Baluchistan.
The above organization having infrastructure facility in the name of developed industrial
state and vocational training institutes, for the up left of SME in their respective region. It
Chapter # 2
76
is amazing that these provincial organizations have not done any thing for the promotion
of SME. THE available infrastructure facilities in the industrial state area are not
sufficient for the promotion of SME. Now the government has introduced a professional
body in the name of SMEDA to work for the development of SME. SMEDA have
completed their study on various sector of Pakistan economy and have recommended
working paper for the development of SME in the light of new regulatory and fiscal
option to support the sector. No doubt the role SMEDA in the development of SME IS
clear by preparing pre-feasibility study of 8 projects and is working on extra 38 more
projects. SMEDA is not only working in the country boundary but also cooperate and
share with the outside donors countries for the support of SME development. Pakistan
has been able to achieve an average 5% growth rate over the past four decades. However,
since the early 1990s there are indications that the economy has slowed down
considerably. Not only has the average GDP growth declined during 1990s but the
variance in growth has also been significant (see the following table). Focusing on the
manufacturing sector, the result of LSM is relatively then the performance of SME in the
Pakistan. LSM grew at an average of 4.7% during the first half of the 1990s, and then
declined to an average of 2.5% during the second half. In comparison, the SME sector
grew at 8.4% in 1990s, declining to 5.3% during the last three years. More recently, while
the LSM sector has had negative growth rate of 0.7% (FY00), the growth rate of SME
sector has remained more or less stagnant.
Table-2H: Growth Rate of Small Industries Years 1991-
1992 1992-1993
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999- 2000
Overall 7.71 2.27 4.51 5.26 6.77 1.93 4.30 3.15 4.46
Agriculture 9.50 -5.29 5.23 6.57 11.72 .12 3.82 1.95 5.54
Manufacturing 8.05 5.35 5.39 3.69 4.80 1.29 7.88 4.18 1.57
Large Scale 7.91 4.14 4.14 1.68 3.14 -2.14 7.60 3.72 0.04
Small Scale 8.40 8.40 8.4o 8.40 8.40 8.40 5.3* 5.3 5.3
Commodity 8.61 0.09 4.84 5.69 8.45 0.37 5.34 2.23 4.45
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Producing Services 6.76 4.63 4.18 4.82 4.99 3.61 3.2 4.12 4.48
Note: * the growth rate of small scale manufacturing was adjusted downward on the basis of a new survey conducted by the federal Bureau of Statistics (FBS) in 1996-97. Source: Economic Survey, 1999-2000. The growth and health of the SME sector is, to a considerable extent, linked to the state
of the LSM sector. Given the sub-contracting linkage between the two sectors is
necessary to develop the harmony in their industrial setup to promote the stages of
development through the process of supporting one another demand for the future
challenges of the national and international markets. It is difficult to conceive of a
situation where the informal or SME sector can continue to grow on a sustained and long-
term basis in the presence of a stagnant or declining formal or LSM sector. Same is the
case with provinces as the pace of industrialization in the NWFP has not been very
encouraging. Except for few brief periods during which industrial activity slightly picked
up, mainly due to presence of incentives, (likely in the name of Gadoon Amazi Free Tax
Industrial Zone for Ten years, all other district industrial estate having financial
package/infrastructure facilities/state taxes reform facilities offered by the Provincial
Government) the province has been lagging behind other regions of the country in terms
of industrial growth. The province, like most other areas of Pakistan, started with
virtually no industry in 1947.
Main factors affecting the pace of industrialization in the province are long distances
from the sea-port as well as major consumption centers, lack of infrastructure facilities
and financial institutions, lack of entrepreneurial know-how, and scarcity of skilled
manpower. Illegal import of consumer goods through Bara market, Ghulam Khan and
Khusut Gate way to Marinshah North Waristan Agency (NWA), Teri Mangal Gateway to
Kurrum Agency from Afghanistan, and Thurhum Landikotal Gateway to Peshawar, and
Sahhakot Agency entrance, all these have been affecting industrialization in the province.
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Table-2I: Existing Status of Industries, Employment & Investment in N.W.F.P.
S.No. Industrial sector Units Employment Investment Nos.
%age
Nos.
%age
Rs. (Million)
%age
1.
Food, Beverage, Flour Mills, Tobacco
567
31
15413
27
7256
12
2.
Textile, Apparel & Leather
265
14
16280
28
19551
32
3.
Wood & its Products
85
5
1395
2
667
1
4.
Paper & Its Products
54
3
1561
3
1190
2
5.
Chemical, Rubber, and Plastic
335
18
8649
15
8054
13
6.
Mineral Products
312
17
6687
12
17698
29
7.
Metal & Its Products
207
11
7085
12
6026
10
8.
Other Industries
23
1
220
1
363
1
Total
1848
100
57290
100
60805
100
Source: Directory of Industrial Establishment, Government of NWFP, 2002. On the basis of survey conducted during 2001-2002, 741 units are reportedly closed. This
figure has far exceeded and conservatively 50% of the established units are closed for one
reason or the other, making an investment of Rs. 24322.694 million redundant and loss of
22916 jobs. For detailed view of employment opportunities created in each sector see
annexure III.page No. 280-282.
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Table-2J: Loan Distribution to Provinces by Major Banks/DFI’s (Million Rs.)
S.No.
Banks/ DFI
Punjab Sindh N.W.F.P. Baluchistan A.J.K Total N.W.F.PShare
1.
IDBP
2401
967
487
430
-----
4286
11.36%
2.
Bankers Equity Ltd.
4967
7547
268
475
226
13483
1.99%
3.
P.I.C.I.C.
9144
3755
1413
505
380
15197
9.29%
4.
N.D.F.C
19027
12040
453
610
289
32419
1.39%
5.
Total
35539
24309
2621
2021
895
65384
4.01%
6.
Distrib- ution
55%
37%
4%
3%
1%
100%
------
Period: - 1988 to 1991 for IDBP. BEL, PICIC 1985 to 1988 for DFC Source: Annual report of Banks/DFIs. Table-2J shows that on the average the total disbursement for NWFP is 4.01% against its
population of 13.81% while Punjab and Sindh have obtained higher ratio, compared to
their population. In order to bring this at par with percentage population of Punjab and
Sindh, massive investment is considered necessary in the industrial and other economic
sector of NWFP.
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Profile of SMEs in the Area (N.W.F.P)
3.1. HISTORICAL PERSPECTIVE Pakistan northern and western borders with China and Afghanistan are marked out by
rugged hills and mountains in height from 2,000 feet (609 meters) in the south-west to
over 28,000 feet (8,535 meters) in the far north. The gateways through this otherwise
unbroken barrier are occasional natural passes. By far the best-known of these is the
Khyber Pass, which is 56 kilometers long, 40 kilometers being in Pakistan and the
remainder in Afghanistan. From the Khyber border post at Torkham, where an old sign
warns hitch-hikers that under no circumstances should they spend the night in the open in
the Pass, it is a 55 kilometers journey to the city of Peshawar. Pakistan’s Capital,
Islamabad, is 227 kilometers away, Lahore 497 kilometers, and the Port of Karachi is
1782 kilometersvi.
Since ancient times the Khyber has formed a vital route for overland trade between
Pakistan and Afghanistan, and a point of entry to the subcontinent for invading armies. Its
military importance is easily explained. It is wide enough to allow troops and cavalry to
march through it is disciplined ranks and its highest point, Landi Kotal, is only 3,500 feet
(1067meters) above sea-level. Beyond the Pass, beckoning enticingly to the greedy and
the bold lies the lush Vale of Peshawar at the head of the rich and fertile Indus Valley. In
the fourth century BCvii, when Alexander the Great of Macedon invaded the Punjab, one
of his divisions came through the Khyber. In the tenth century AD Sabuktigin, who
founded the Ghaznivid dynasty, and his more famous son Mahumd, brought their armies
through the Pass on their way to the conquest of much of Pakistan and northern India.
There is evidence that Genghis Khan and Timurlange made use of the Pass in the thirteen
and fourteen centuries. Babur, the first of the Mughals, also took this route on his march
down into the Subcontinent from Afghanistan in 1525. Rather more than 200 years later
the Turkish Nadir Shah came the same way during the sunset of Mughal ruleviii.
The British left behind a number of mementos of their long stay in the Khyber. The road
itself is the most enduring, while the weathered and faded insignia and crests of famous
regiments carved into the glowering slate walls of the Pass are the most evocative. There
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is a railway too, dating back to the mid 1920six. The sight of the steam train which, once a
week on Fridays, runs up from Peshawar to Landi Kotal, reinforces the sense that one has
of the Khyber Pass being outside the normal processes of time. The train has an engine at
either end-both were made in England in 1931x. Clouds of steam belch forth as it chugs
up and down the gradients of the Pass and in and out of the tunnels. As it pulls into the
shelter of the massive red-brick walls of Shagai Fort, built in the center of the Khyber at
around the same time as the railway, a passenger could be given for thinking that the
price of his ticket had taken him not on a journey from place to place but on a journey
back into another era.
A stiff climb above Shagai stands an empty picket-fort that commands a sniper’s-eye
view. The wind blows through its rifle slits and machine-gun turrets and whips under the
sill of its heavily-armored iron door, sadly recalling battles of long ago and the lonely
soldiers far from home who fought them.
The British first arrived on the Frontier in 1849, but did not get any real control of the
Passes until the Second Afghan War, which was fought between 1878 and 1880. Through
there was a curious kind of mutual respect between the British and the Tribesmen, real
peace was never established in the region. History records that more than forty military
expeditions were obliged to take the field between 1858 and 1902xi.
3.1.1 History of Peshawar, the Capital of N.W.F.P. Peshawar derives its name from a Sanskrit word “Pushpapura”7 meaning the city of
flowers. Peshawar’s flowers were mentioned in Mughal Emperor Babur’s memoirs.8
Peshawar is now, as always, very much a frontier town. The formalities of dress and
manner give way here to a free and easy style, as men encounter men with a firm hand-
clasp and a straight but friendly look. Hefty handsome men in baggy trousers and long
loose shirts, wear bullet studded bandoleers across their chests or pistols at their sides as a
normal part of their dress. There is just that little touch of excitement and drama in the air
that makes for a frontier land, an occasional salvo of gun fire, not a tribal raid or a
skirmish in the streets but a lively part of wedding celebrations.
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The land of the Pathans is a completely male-dominated society. North and south of
Peshawar spreads the vast tribal area where lives the largest tribal society in the world,
and the most well-known, though much misrepresented. Pathans are faithful muslims.
Their typical material and religious character has been molded by their heroes, like
Khushal Khan Khattak, the warrier-poet and Rehman Baba, a preacher and also a peot of
Pashto language.
Peshawar is the great Pathan City, Hoary with age and the passage of twenty-five
centuries, redolent with the smell of luscious fruit and roasted meat and tobacco smoke,
placid and relaxed but pulsating with the rhythmic sound of craftsmen’s hammers and
horses’ hooves, unhurried in its pedestrian pace and horse-carriage traffic, darkened with
tall houses, narrow lanes and overhanging balconies, intimate, with its freely
intermingling crowd of townsmen, tribal, traders and tourists – this is old Peshawar, the
journey’s end or at least a long halt, for those traveling up north or coming down from the
Middle East or Central Asia, now as centuries before when caravans unloaded in the
many caravan serais now lying deserted outside the dismantled city walls or used as
garages by the modern caravans of far-ranging buses. Following are the famous places of
Peshawar city:
3.1.1. Historical Perspective Of Bannu
3.1.2. Mosque of Mahabat Khan
3.1.3. Balahisaar Fort
3.1.4. The Old City
3.1.5. Peshawar Museum
3.1.6. Qissa Khawani Bazaar
3.1.7. Other Bazaars
3.1.8. Chowk Yadgaar
3.1.9. New Peshawar
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3.1.2. Historical Perspective Of Bannu Bannu is one of the most important Southern District of North West Frontier Province. It
is located 143 km (89 miles) in the South from Peshawar the capital city of NWFP. It is
located near the “AKRA MOUNDS” of 300 B.C.
It was founded by Letinent (Late Sir) Herbert Edward as a military base in 1848. Its
geographical location is of great importance, as it is the central district in the southern
districts of NWFP. It provides link between the southern districts. Due to its central
location it was & it is one of important commercial district of NWFP.
Bannu old city is covered by a protection wall having 8 main enterence. At that time
Bannu was a military base for the remaining adjusting part of the Province because,
Peshawar was far away from Bannu that was impossible for that time Government to
control the area from Peshawar, which was headquarter for this region. Secondly, Bannu
along with the North Waristan Agency was the trouble creating area for that time
government from political point of view, so it was the dire need of that time to have a
military base in the area.
The people of Bannu are Pathan by tribe, and hospitality is the identity of this area.
Further, these people are very tough and stick in dealing with others. The people of
Bannu are famous for their religious approach in the country.
Currently, Bannu are having very good profile in every phase of life. Even SMEs are
having good response in the national development. Education-wise, the soil of Bannu,
having one University of Science and Technology, one medical college, one faculty of
Engineering branch of Peshawar University of Engineering and Technology, and the
Board of Intermediate and Secondary Education, Bannue. Bannu Industrial Estate is
having great improvement from the last five years, regarding re-opening of Bannu
Leather Goods industry along with other new units in the region.
3.1.1. Historical Perspective of Dera Ismail Khan
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Dera Ismail Khan is a historical city and is one of the oldest Districts situated at the
southern end of NWFP. Geographically it can be called as heart of Pakistan, because
distance-wise Dera Ismail khan lies in the middle of the country. In the south, D.G.Khan
district of Punjab, in the west high mountains of FATA flank these districts while river
Indus flows in the east all along the city.
Most of the district is composed of Barren lands where peasants sow the crops in hope of
rainfall, which is only “10”mm per annum. While evapotranspiration is “100”, however
the area that comes under C.R.B. Canal is fertile and generates the main revenue for the
District/Province. All type of crops grows, but wheat and sugarcane are the most
probable choice of the land owners/peasants. Agro-based industries i.e. sugar, flour, ghee,
rice, and grain mills have been established since C.R.B. Canal Phase-1 was put into
operation in 1987.
People of District D.I.Khan are generally poor, less educated, engaged in cultivation,
business especially Agro-business and Agro-Trade. However, handsome people are
serving in Govt. Department, Education facilities up to PhD level exists in the Gomal
University, D.I.Khan. Telephones, Electricity, Health facilities of International standard
are also provided to the inhabitants of D.I.Khan city. Agriculture Research Institute,
Medical College, Veterinary College, Intermediate & Secondary Education Board also
exist here. D.I.Khan is linked with all the Provincial and Federal Capitals with Highways
i.e. Indus Highway from Peshawar to Karachi crosses through D.I.khan city, while N-55
D.I.Khan- Quetta that will ultimately will be connected to Bhakkar- Lahore Highways is
yet another Highway that passes through D.I.Khan city. D.I.Khan- Chashma Road is
connected with MM Road and further Mianwali-Rawalpinidi Road.
3.2. ASSESSMENT OF SMEs IN THE AREA
The area of SMEs development in N.W.F.P. is here by divided into three main division
for assessment Purpose:
1. Peshawar 2. Bannu 3. Dera Ismail Khan
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83
3.2.1. Assessment of SMEs in Peshawar
In order to carryout overall assessment of the SME operating in Peshawar, the enterprises
can be bifurcated in seven main sectors of economy. These sectors have wide
implications as they do cover all the economic activities being carried out in true sense.
This classification is with respect to the end product being marketed by the enterprises as
well as based on the nature of business activities.
The study focuses on the assessment of the manufacturing units in Peshawar. The
manufacturing is mainly concerned with the value addition or transformation of material
from one shape to another. The processing units operating in the province have been
counted as the manufacturing units. The city has diversified manufacturing activities
which are mostly documented as these facilities are located within the small industrial
estates, being established by the government. These industrial estates are managed and
looked after by Sarhad Development Authority and the data, as long as the number of
employees, initial investment and installed capacity are concerned, can be relied upon.
Some of the manufacturing activities also take place in unorganized sector. Excluding the
micro businesses and cottage industry, the remaining manufacturing establishments
constitute less than 10 percent of total manufacturing activities is take place in Peshawar.
The manufacturing facilities established in the small industrial estates of Peshawar are
categorized in the following sectors:
Table-3A: List of Sub-Sectors of SMEs Sector Sub-Sector Food and Beverages Distillery, Vegetable and Cooking Oil, Flour mills, Biscuit &
Sweets, Bread Processing, Beverages and mineral water, Cold Storage, Ice factories, Processing Canning and Preservation of Fruits, Vegetables, Cigarette industries.
Textile, Wearing, Apparel and Leather Products
Textile mills sector, Woolen mills, Silk mills, Carpet industries, Hosiery, Embroidery, Garments, Leather products manufacturing.
Wood and Wood Products
Furniture and wood products.
Paper and Paper Products
Paper and Packages, Printing Press.
Chemicals, Rubber Chemicals, Pharmacy, matchers, Soap Paints and Varnishes,
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and Plastic Products. Rubber and Plastic Goods, Adhesive Tapes, Fiber Glass and Formica.
Mineral Products Cement base industries, Marbles and Cressing Stone industries. Other Manufacturing Industries.
Lamps, Metal products, Arms and Ammunitions industries.
Source: Directory of Industrial Establishment, Government of NFWP, 2002. These areas are enlisted after uniting the various manufacturing activities under one
heading. For example, the food and beverages includes distillery, vegetable and cooking
oil, flour mills, biscuit & sweets, bread, meat processing, beverage and mineral water,
cold storage, ice factories, processing canning & preservation of fruits, vegetables,
cigarette industries. Similarly the other sectors also contain a list of sub sectors. This
classification has been done for the sake of simplicity, however, needs some elaboration
for comprehension purpose.
3.2.2. SMEs-Area Wise The total area of the N.W.F.P. has been divided in five zones for compiling the data of
the manufacturing units. These Zones are as under:
Zone I Peshawar, Charsadda, Nowshera
Zone II Abbotabad, Mansehara, Batagrame, Balakot, and Shankyari
(Districts of Hazara)
Zone III Kohat, Hungo, Karak, Bannu, Laki Marwat, Tank and D.I.Khan
Zone IV Swat, Bunair, Dir, Malakand, and Chitral
Zone V Mardan and Swabi
The division is not based on some criteria rather emphasis was to enlist the SMEs
operating in the Province. The emphasis here is on Zone-1 and Zone-3 and specifically
Peshawar, Bannu and Dera Ismail Khan are the main focus of the study. The total units
located in different areas of the province as per zone classification made above are given
in the following table.
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Table-3B: Classification of SMEs on Zone Bases
Sector
Zone-I
Zone-II
Zone-III
Zone-IV
Zone-V
Total
Food and Beverages 284 49 24 17 43 417 Textile, Wearing, Apparel and Leather Products
157
54
07
205
19
424
Wood and Wood Products
76
28
14
32
39
189
Paper and Paper Products
10
08
04
--
12
34
Chemicals, Rubber and Plastic Products
49
34
18
53
70
224
Mineral Products 69 31 09 58 46 213 Metal and Metal Products
46 19 08 25 58 156
Source: Industrial Directory, 1998 and Micro Financing Unit, BOK. These sub sectors still need further classification as numbers of activities have been
clubbed in one sector. For example, leather products include leather shoe manufacturing,
leather decoration pieces, leather tanning, leather preservation etc. Like wise the metal,
textile sectors have various off shoots.
Besides the manufacturing industries located in organized industrial estates located in
different parts of NWFP, there is some manufacturing taking place inurn-organized
sector. These enterprises in individual capacity are of no significance. However, the
cumulative influence of all the enterprises operating in a particular area carries a high
weight. (See annexure No-III Page No. 280-282)
In this context it can be quoted that every Khaddar weavers of Charssadda might not be
documented with the concerned authorities or the exact statistics about the Chatrali Patti
manufacturers might be known to the concerned authorities, but, the fact is well known
that a significant amount of economic activity takes place in Khaddar weaving and
Chatrali Patti manufacturing. The data regarding renowned manufacturing concerns are
those who could be accessed in such sector have been collected and the small
manufacturers have been ignored.
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Total units reported in the Directory of Industrial Establishment Published by Industries
Department amount to 1377 and enterprises operating in un-organized sector are
estimated to be more than 2000. The units identified for the purpose of this study are 280
from the un-organized sector which are mainly in textile, marble and metal products i.e.
light engineering.
The 2000 units operating in the un-organized sector includes micro enterprises which
further bifurcated in small scale enterprises. These micro units are excluded from this
study.
3.2.2 Trading
Trading is the traditional form of business being known to the inhabitants of this part of
the country. History tells about the caravans of merchants crossing the terrain of
Peshawar while carrying merchandise from lower parts of the sub-continent to Central
Asia and back. The inhabitants of Peshawar are more prone to trading than manufacturing
and service sectors.
This sector has developed very much in the sense that approximately 50-55% of the total
economic activities comprises of trading business. Work force of more than 50,000 is
thought to be engaged in trading business in the organized manner.
Almost 90%1 trading is carried out in un-organized sector and collection of data in this
respect is smoothing near to impossible. The job opportunities being provided by trading
in un-organized sector is considered to be more than one millionxii. These businesses are
however, excluded from the purview of this study.
However, some of the trading activities are well documented. These are mainly engaged
in wholesale business in particular sector like pharmaceutical, food grain import and
exports. There are 482 trading firms registered with Security and Exchange Commission
of Pakistan under the status of Private Ltd.
1 Sick Industrial Unit in the NWFP: An Analytical Perspective, by Muhammad Irshad, 1998.
Chapter # 3
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Companies having their registered offices in NWFP, The total paid-up capital of these
firms are Rs. 40 million which is apparently deflated figure because of the tax purpose or
might be for some other purposes. However, keeping in view the status of their
operations, it can be said with confidence that the figure shown under the heading of
paid-up capital is much less than the real investment is made in the business.
This sector has immense potential in NWFP because of two reasons; the Province is
located at shortest rout to Central Asia and can be developed as a heaven to the local and
foreign traders. The Second reason for flourishing the trading business is the Province is
that the inhabitants of this part of the country are psychologically risk averters as far as
business transactions are concerned. The trading activity provides the safest mode of
business.
Most of the data regarding the traders has been collected from the Security and Exchange
Commission of Pakistan. However, some primary survey has also been conducted and
enterprises coming in the purview of small and medium enterprises are also included in
the study. The fact remains that a significant amount of trading business is being
conducted in the micro businesses has not been done owing to financial, human and time
constraints.
3.3 SMALL INDUSTRIAL ESTATE IN THE AREA
3.3.1 SMALL INDUSTRIAL ESTATE PESHAWAR Small Industrial Estate Peshawar consists of the following:
1. Small Industrial Estate, Jamrud Road, Hayatabad, Peshawar.
2. Small Industrial Estate, Kohat Road (Ring road), Peshawar.
3.3.1.1 Small Industrial Estate, Hayatabad, Peshawar. It consists of total 227 units, out of which 59 are closed and 168 are in operating
condition. (Annexure 1V Page No. 283)
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Table-3C: Profile of SIE, Jamrud Road, Hayatabad, Peshawar Total Area 54.14 Acres Total Number of Plots 292 Size of Plots A/10000, B/5000, C/3000 Number of Plots Allotted 292 Number of Units in Operation 53 Number of Units Closed 19
Source: Directory of Industrial Establishment, Government of NWFP, 2002.
3.3.1.2.Small Industrial Estate, Kohat Road (Ring Road ), Peshawar
There are 63 units in SIE, Kohat Road out of which 44 are reported to be in operating
condition and remaining units are closed (Annexure 1V). These industrial estates include
manufacturing units, which are classified as SMEs, according to SME definition of
SMEDA. The details are given in the following table.
Table-3D: Profile of SIE, Kohat Road, (Ring road), Peshawar Total Area 50 Acres Total Number of Plots 168 Size of Plots (square feets) A/12000, B/6000, C/64000 Number of Plots Allotted 168 Number of Units in Operation 7 Number of Units Closed 5 Source: Directory of Industrial Establishment, Government of NWFP, 2002. Under the umbrella of Industrial Estates, Peshawar utilizes total area of 104.14, total plots
of 460 (all allotted), break up of which is shown in above tables. Total units in operation
are 60 out of which 7 are in SIE, Jamrud Road and 53 are in SIE, Kohat Road.
Furthermore, total closed units in industrial estate are 23, of which 19 lie in SIE, Kohat
and 5 in SIE, Jamrud Road.
3.3.2 ASSESSMENT OF SMEs IN BANNU
Prior to highlighting the role of SMEs in Promoting employment in District Bannu, it
seems proper to cast a casual glance on the socio economic profile of district Bannu, like
total land area of the district, the mode of irrigation, status of business and commerce and
literacy level etc.
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The total land area of district Bannu is 4, 97,382 acres. More than ¾ of this area is under
cultivation. In this cultivable area, the mode of irrigation is canals and tube wells. In the
irrigated area the status of the agriculture is normal and in the rainfall area, the agriculture
is below normal. The main crops of the district are wheat, rice, sugar cane, maize, barley,
dates, garlic, and gram. Sugar cane is cultivated in irrigated area of the district and it is
supplied to Bannu Sugar Mills. Similarly most of the gram is supplied to dal mills
situated in the district.
The main occupation of the people of the district is government jobs, farming, business,
gardening, pick up body making, retail shop keeping etc. The people of the district are
very poor and do not have sufficient resources to invest in business, therefore, a very
small number of people are engaged in business activities. Most of the people re engaged
in agriculture sector. That is why a very minor and negligible number of people have got
employment in the industrial sector of the district.
The status of Commerce and trade is not satisfactory in the district. The volume and
value of imports is greater than that of exports. The main export of the district is textile,
leather goods, rice, some fruits and vegetables (which are grown in the district), garlic,
raw leather, dal etc. The exports mainly consist of wheat grains, machineries & electronic
instruments etc. The SMEs un-organized structures are as under:
Table: 3E Un-Organization SME Sector. Sector Units Flour Mills 7 Ice Factories 8 Printing Press 7 Naswar Industries 10 Bricks Killens 47 Saw Machines 12 The organized SMEs are available in the Industrial Estates, Bannu. It was started in 1974-75, having the following structure:
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Table-3F: Profile of SIE, Bannu
Name Establi shed
Area (Acres)
Number of Plots
Empty Plots
Running Units
Near to Completion units
In process units
Unused plots
SIE Bannu
1974-75
60 241 157 8 5 3 68
Source: KDA, Bannu Office, 17th April, 2005. 3.3.3 ASSESSMENT OF SMEs IN DERA ISMAIL KHAN
In D. I. Khan, the SME sector has emerged as a major supplier of mass consumption
items like plastic, rubber goods, ready made garments, sheet metal goods, soaps and
detergents etc.
This study is mainly based on field research---- questionnaires is developed and data is
collected by taking personal interviews from investors/owners/present Financial
Institutions, like SME Bank, Khusalli Bank, Industrial Development banks and other
Commercial Banks working in this region.
From the field study the following information/data giving the present assessment of the
SMEs structure in the region of D.I.Khan are as under:
In order to carry out the overall assessment of SMEs in the D.I.Khan region can be bi-
furcated in seven main sectors of the economy. These sectors have wide implications as
they do cover all the economic activities being carried out in real picture. This type of
products with respect to its end is being marketed by the enterprises in the local and
abroad markets.
This chapter focuses on the assessment of the manufacturing units in the region. The
manufacturing is mainly concerned with the value addition or transformation of material
from one shape to another. The processing units operating in the Province have been
counted as the manufacturing units. The Region has diversified manufacturing activities
which are mostly documented as the local facilities provided within the industrial estates,
being regulated by the government. These industrial estates are managed and looked after
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by the Sarhad Development Authority, and the data. As long as, the number of employees
and initial investment and installation capacity is provide by the government.
Some of the manufacturing activities also take place in unorganized sector. The details of
these manufacturing facilities established in the region are categorized in annexure no. X
Page No. 292.
Table-3G: Profile of SIE, D.I.Khan. Name Establis
hment Area (Acres)
Total Plots
Empty Plots
RunningUnits
Near to Completion Units
In Process units
Unused Plots
SIE Dera Ismail Khan
1973-74
30
135
20
20
8
7
80
Source: DDA, Office Report, 16th April, 2005. 3.4 SWOT ANALYSIS OF PAKISTAN INDUSTRIAL SECTOR (WITH
REFERENCE TO N.W.F.P) SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of Pakistan
Industrial Sector represents the real views of the stakeholders in the SMEs sector. These
views are generally applicable to the whole of the Pakistan. The SMEs of the specific
area like Peshawar, Bannu and Dera Ismail Khan, are also having the same problems.
3.4.1 Weaknesses
1. Lack of Coordination among the Private and Public Sector Trade Bodies:
In Pakistan, due to non-availability of proper trade policy, the industrial sector is facing
numerous problems, while the private sector are totally on the mercy of the prevailing
situation in the markets. To date, we are not having any meeting point for joint
coordination for the uplift of the industrial sector. Every organization is flying in their
individual capacity, which cannot compete well in the national as well as in the
International markets.
The only representative and effective trade organization is All Pakistan Traders and
Manufacturers Association (APTMA) that deals with the competitor and with the state on
behalf of all industrial sectors that is not free from problems among themselves. Since
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recent past APTMA was inject with the new mission to call the shots with CBR and other
Government Agencies. On the other side, all other trade associations have weak capacity
or having no existence in this area.
Some organizations in both sector having proper association/unions for developing
supportive coordination for future problems/ challenges that are either banned or
paralyzed by the Govt. intervention e.g. PIA, PTCL, PTV, etc.
These trade associations need to be built and nurtured by SMEDA and brought to a level
where they can advocate and put forward their point of view to government of Pakistan
and are capable of representing their sector internationally. The association should
provide international market intelligence reports to their members for not only marketing
their products but also developing new products as per the international market demands.
Export Promotion Bureau or Ministry of Commerce does not have the Terms of
Reference for such market intelligence activity, nor do they have the capability. SMEDA
is doing well but due to financial constraints, it has the only human resource to develop
such association but do not have the required financial allocations for doing this activity.
Financial support for the development of these trade associations would require to be
financially supported for at least three years till the time its members realize its utility and
are willing to finance themselves for their own betterment and promotion of their
activities in the larger interest of the sector and individual owner of the enterprise.
2. Lack of Activities on the part of Chambers of Commerce and Industries.
Chambers of Commerce and Industries are present in the only in the structural
development of industries, but its practical role is not available on the screen of
development of industries. C.C.I. is paralyzed by the number of factors (Finance, Expert
Personnel, Govt. Support, Proper Marketing, and infrastructure availability), which
creates un-conducive environment for the SMEs development.
Now the C.C.I. must take action upon its own self added role of influencing the thought
and deals of the individual member to provide a forum for social searching and serve as
an agency for projecting business reform and moral courage to the industrialist to come
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forward the development of the sector without any hesitation. The C.C.I. of the N.W.F.P
is loosing their game in the competition of SMEs with the other provinces of the country.
While C.C.I. of this studies area, like Peshawar, Bannu, and Dera Ismail Khan, are
having no remarkable projection in the development of the industrial sectors. Most of the
industrial units of these industrial estates are either sick or closed or limited to the local
markets.
C.C.I. can now established a consortium for the development of SMEs in the area to
change the future of the industrial sector with new modern approach of industrialization
of global nature. The government (Federal as well as Provincial) has to take cognizance
of the facts that the meaning and concept of private enterprise and market economy have
changed in the context of welfare of the state and society all over the world. Public
interest and business consideration are loudly pushed. Policy guidelines are made to
specify priorities and to steer the path of effective utilization in the SMEs. While
interviewing and regulating the market mechanism and functioning of SMEs, the
Government authorities should arrange local and international exhibition to give the
opportunities to the local and foreign investors that enhance healthy competition among
them.
3. Lack of Trade Center
In the developed countries, the trade responsibilities are the sole job of the state to give
protection from all market forces locally and internationally, while that is totally different
in Pakistan in general and particularly in the province of N.W.F.P. is having no sign of
involvement in the industrial sector. The example of this low profile contribution on the
part of the state is evident from illegal market establishment, like Bara market, and
Karkhano markets. While the products manufactured in the developed state like Japan
and China, are marketed internationally through its trade centre or trade houses. The
Province of N.W.F.P. has no trade houses, so the extra liquid cash is invested in the real
estates which bubble up the price of real estate. It is the time for the Government to
deflate this artificially ballooned real estates speculative business must be charged by
taxing its output. This would result in diverting the investment towards manufacturing
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and service sector which would be specially skewed towards export oriented, labour
intensive organization.
4. Lack of Relationship among the Academic institutions and the Industry
In Pakistan, most the institutions are producing simple graduate with out having no
rationale with the sector in which he has got degree. So on this pattern these institutions
are called academic only, but they are not properly recognized by the practical
field/industrial sector. For example, most of the engineering graduates, law graduates,
business graduates and so on, are unaware of the practical realities that they face after
graduating from their respective university. The lack of practical training during the
degree awarding course is due to the poor syllabus and courses, low standard lectures in
various faculties who themselves do not have any practical exposure. The linkage of
academic institutions with the industrial sector is non-existent. Both operate in isolation
from each other. The lack of relationship among the academic institutions and industries
owners creates a big problem for each others.
Now this gap needs to be bridged immediately, because WTO challenges will widen this
gap, which will never be overcome by this simple form of business transactions. Now all
the academic institutions must be users oriented to produce graduates according to
demand of the sectors. Today, we are having expansion in the academic institutions
profile according to the needs and demand of the practical fields.
5. Low level of Technology and Lack of Innovation
Being structurally small in term of size and age, SMEs are relatively slow in their
utilization and attainment of technology. Moreover, financial constraints restrict them
from attracting skilled and trained workers as the costs incurred are beyond sustainable
limits. Product or process improvements were largely geared towards marginal
adaptations to meet local needs while original design and development of new products
were limited. As such, it hinders their performance and efficiency, thus, restricting
innovations to take place.
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6. Lack of Access to Long-Term Finance
Traditionally, SMEs concentrate in areas more amenable to small scale production
requiring less capital and catering to the domestic demand. Due to its size, SMEs are
relatively less efficient than larger industries. SMEs in their pursuit to be more
competitive in terms of efficiency and productivity need to acquire up-to-date technology
to facilitate smoother processes and to upgrade the skills of the workforce in order to
grow. However, difficulties in obtaining financial assistance and services because of stiff
requirements and extensive paperwork constrain the overall expansion plans of SMEs.
In the 1980’s and 90’s there were many of DFI’s and commercial banks willing to
provide long term loans for setting up an industrial undertaking. In the recent few years
these DFI’s have been disbanded. The remaining commercial banks are hesitant to long-
term financing of SMEs, especially the new entrants. As a result long-term finance is
almost non-existent in the SME sector. This vacuum is because of the inertia set up
during the 1980’s and 90’s which may not be felt now but in the years to come a
tremendous vacuum would be predominant. On the other hand these commercial banks
have resorted to consumer financing, working capital financing, and house building
financing and other such activity, which do not generate employment directly.
Government of Pakistan should set a minimum limit for all commercial banks to have at
least 20% exposure to long-term finances for the industrial sector.
7. Lack of International Exposure and Experience
Most of the SMEs are still very dependent on the domestic market for their business. The
tendency towards domestic market is a culmination of all structural weakness
encountered. However, the dominant cause is mainly due to financial constraints because
of small capital structure and limited access to funds.
Lack of funds and difficulties in obtaining credit restricted them from further develop
their research and development capabilities. Therefore, these SMEs are unable to keep
track with the changes in technology to enable them to diversify into new product or
production techniques.
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In addition, the SMEs are at the disadvantage as they lack information on international
trade and banking practices and the demand pattern of the foreign markets. As a result,
this deters them from commencing export activities and confines them to remain heavily
dependent on the export market.
8. Lack of Management Experience
Pakistani SMEs are still in the initial stage of establishment as 40% of them are
established between 5-14 years. SMEs, which are generally dominated by domestic
investors, continue to be plagued with problems such as low technology and poor
production techniques and process. With regard to manufacturing management
techniques, most SMEs do not use statistical quality control. Inspections are usually
carried out at an ad-hoc basis or by sampling.
Inadequate research on export market hinders these SMEs to understand and exploit their
product potential. This is because sections of the international markets differ greatly in
taste, income and lifestyle. Inability to distinguish different marketing opportunities and
conditions that exist in a particular country render the SMEs companies at a
disadvantage.
9. Lack of Advance Countries Manufacturing Process Technology East countries of the world having advance projection of manufacturing process
technology, which are above the access of developing countries, like Pakistan. In today
era of modernization, the Western Countries manufacturing technology has tremendous
impact on the developing countries in the form of replicating their cultural style of
manufacturing. In most of the countries this style of western manufacturing technology
not suit the local SMEs in the area like N.W.F.P. India and China had success in the
SMEs sector by adopting appropriate technology, which evolved over the years1.
1 World Bank Report on Developing/Asian Countries SME Response Presentation. SME and Development
Process in Four Asian Countries by Dr. Richard Hooley and Dr. Muzaffer Ahmed. Pp. 5-64.
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Undoubtedly the technology is labor oriented; but that is precisely what the vision for
N.W.F.P. SMEs should be, labor oriented, appropriate technology with emphasis on
SMEs sector and Vender development. Interaction of businessmen and technical human
resources of Pakistan mutually with the Indian SMEs would surely provide the most
economical and appropriate guidelines/road map for upgrading the technological culture
and the engineering capabilities in both the countries1.
The realities are that all policies regarding the development of SMEs in the region as well
as in the country must be culturally oriented and suit for the economic environment of the
country. So, all SMEs policies in the form of SMEDA are not fitted with local
environment. These can obstruct the SMEs development.
10. High Tax Burden on Private Profit Organizations
Taxation is the largest source of income for every country, while in Pakistan; Taxation is
the second major source of revenue for the state. The Government of Pakistan, Taxation
policy is not showing coordination with SMEs sectors, because most of the units are
closed due to high tax burden on the profit of the organization.
Activities like providing employment, revenues to Government etc are the mainstay of
this profit taking exercise. The two major levies in the manufacturing and service sector
are income tax and sale tax. The burden of the sale tax is conveniently passed on to the
consumers by the private organization. However, the high income tax rate prevalent in
Pakistan adversely affects the profit of the industrial investor. This results less return in
the form of disposable investment as compared to other countries of the world. The
income tax rates should be lowered so that it is known and accepted by the society that
the industrial sector is making good returns on their investments which in turn would lead
to be more investment by the people of Pakistan in the manufacturing sector, this would
then only lead to foreign direct investment (FDI) in our country.
1 Economic Environment Comparisons made by the International Trade Center Title,”The SME and the
Global Market Place Compares the Attirbuties of Asian Countries” Islamic Development Bank, Jaddah,
Sept. 1999, & ILO & Pakistan, 2000.
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11. Selection of Investment in Weak Sector Products Generally, in Pakistan the investment selection criteria sector wise or Product-wise are
accurately made on the bases of ground reality, but it is made on the bases of personal
preference of the individual investors. This problem creates and paralyzed the other
related field of investment, e.g. banking sector, quality of products, etc. We are having
different example that can quoted here, are the sugar industries, which give very low
yields in Pakistan (9% in NWFP, 10.5% in Punjab and 12% in Sind, 13% in India and
17% in Brazil). It is not considered the sign of strength, but per acre yield is one of the
lowest in the world. With the implementation of WTO in 2005, it would be cheaper to
import sugar than to process in Pakistan. Alternately the sugar growing area should resort
t other value added, labor intensity, export driven products like floriculture, horticulture,
fruits and industries based on these agro products should be encouraged1.
12. Lack of Consultancy base SMEs Cluster
According to research data collected, the main problem faced by SMEs in NWFP, is mis-
management or lack of management. The state role playing promotional, and
establishment of institutional networking for the formation of developmental policies and
managerial planning in the form of government agencies, NGO’s, Trade Union, Private
and public sector partnership, workers associations and all sort of volunteer
organizations. No doubt SME cluster development strategy is one of the best and most
suitable arrangements for development. But on the other side, Common Facility Centers
need to be developed in these clusters for both to improve the products quality and
reducing their production costs. The Government will play record keeping role in the
name of encouragement of private sector and large no of institutions to feel their
responsibility of community’s development activities, particularly to transfer managerial
skill, marketing, technology, training and skill development.
1 Industrialization and its Importance to the Economic Development of Pakistan,by Masood Khan. 2004-
2005. Pp. 1-114.
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3.4.2 Strengths
On the bases of research data, the following plus points can be added / credited to the
SMEs sector in NWFP:
1. Potential SMEs Structure Pakistan is an agricultural country, having rich contribution to the SMEs in the form of
agro-base industries. Thus, realizing the importance of SMEs as the main driving force in
increasing the industrial expansion process, in 1999-2000, the Government of NWFP has
introduced various technical assistance programme to encourage SMEs to capture the
international market. Furthermore, a specialized government agency is established to
further promote the development of and providing assistance to SMEs known as
SMEDA, SMEs Banks, and Khusali Bank, local arbitration agencies, SMEs workshop
and Business clinics etc.
Pakistan SMEs base is very strong but it not properly utilized. The research data shows
that 70% or more of the SME base is not properly registered the remaining balance of
305 or less is under report. In the past, the SMEs were catering for import substitution but
now they have the capability to encourage export oriented products like SMEs of China
and India.
SMEDA in collaboration with the private sector is developing an SME policy for the
coming WTO challenges. Policy Formulation and Implementation both are needed for the
SME development, but documentation about SME production capabilities are needed for
projecting ground realities to the investors. SMEDA cluster development strategies along
with the Common Facility Centre are a highly recommended step in the right direction.
2. Availability of Economical Labor Force Pakistan is an agricultural country, major portion of the labor force are engaged in agro-
based industries. This provides a large base to the SME in availability of economical
labor force with in the country. Mostly the labor is of unskilled/semi skilled, which meet
the requirement of SME with out any delay. Human capital available in large number that
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gives the impression of low-priced package, this facility is a plus point to the SME for its
development. But only in manufacturing/service sector where contract piece meal labor is
employed.
Large scale availability of human capital is the sign of strength for SME in utilization of
labor force properly that may a problem in advanced countries. While in NWFP, this
sector is very strong due to low education profile. Most of SME in the province are labor
intensive and have export potential in both the manufacturing/service.
With the range of tough competition in the sector, and with WTO challenges enforceable
from 2005 onward, also enhance the development of SME. Now the quota system
application comes to an end in 2005, by WTO, which also prove a good sign for SME
development. The Sub-Continent share in the international market will increase from the
present level of 4% to 15% (Source WTO).
3. Low-Priced Gas, Transportation and Living Cost in the World
Recently, the exploration capabilities of the country have been increased due to non-
access to the low price gas and other facility for the industrial development. Today
Pakistan’s profile in natural gas is low as compared to the others at the rate of Rs.172k,
while the cost in Europe is Rs. 221k, Rs. 230 in USA, and Rs. 411k in China.
Transportation is more economical in the country, which can increase the out-put of
SME. Transportation freight is low as compared to the developed countries, because, the
transportation engagement is short and easily available for transporting raw material from
one area to another.
Most of the population are living in rural area, where the cost of living in the country for
industrial worker is Rs 30 per day as compared to in Europe where the most economical
food like McDonald burger would cost Rs 250/- in the early, 1970 onwards. The cost of
living of an industrial worker in Europe would be at least Rs. 550/- per day which is 17
times more then that in Pakistan. We must take into consideration the Purchasing Power
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Capability (PPC), while comparing industrial manufacturing parameters with other
countries.
4. Import of Second Hand Machinery from Developed Countries
In the advanced countries machinery utilization based on labor intensity, where
machinery are very rapidly changed without any further changed in the labor efficiency.
This changed increased the cost per unit in the developed countries, while this rapid
changed of technology are a supplement for the developing countries like, Pakistan that
having rich resources of human capital. This discarded machinery is imported by the
developing countries for running their industrial set up with low price cost of machinery.
Import of second hand machinery, which has become redundant in the West because of
being labor intensive, can be very effectively reconditioned in Pakistan by low-priced
skilled labor availability. Introducing these over-hauled machines with reliable and cost-
effective Programming of Logical Controls (PLC) from East would subsequently reduce
the capital cost of installing an industrial unit in Pakistan. This would lower the financial
cost and subsequently the production of unit cost. This practice/opportunity is not only
viable from market point of view, but also nationally effective from the cut-thought
competition of products from China and India in the local market through illegal
marketing/smuggling.
5. Potential Labor Availability on Low Price Rate Today, most of the developed and advanced countries are facing the shortage problem of
human capital. In this regard, they are using free visa lottery system to import human
capital from under developed countries of the world. Pakistani people are also availing
this facility, but this practice is creating problem of dual nature, First, on the bases of
creating shortage of labor force, the second, on the bases of extracting talent from the
under developed and developing countries.
It rightly claimed that Pakistani labor productivity margin is one of the lowest in the
world. However, labor productivity on piece rate or contract labor is probably one of the
best in the world. Piece rate and contract labor need to be properly incorporated in the
labor laws and labor policy.
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6. Easy Access to the Labor Market
Pakistan has rich potential of human capital. While SMEs growth rotate around the
human capital. Labor turn over rates in the industrial sector is very high, because, most of
the worker facing the problem of home sickness and joint family system. So most the
workers leave the job with out intimating to the authority, immediately, this create
problem. But this is immediately responded by the number of individuals waiting for
some facility through personal contact or through employment exchange and through
society elders or political influence.
Excess labor force is the sign of development in today complex marketable challenges
faced by the number of advance countries. In every phase of life, we have achieved the
saturation point, while the only sector that need the attention of the expert to properly
utilize the under developed sector of human capital. In Pakistan, SME are not having
problem in actuate form, but this is highly facilitated by rich tribute of human capital.
Today, most of the Pakistani industries conducting employment interview on the industry
gate, without advertising the daily newspaper or other employment agencies. This
approach shows the easy access to the labor markets in the country.
3.4.3. Threats
1. Un-favorable Economic Policies
Economic policies are considered the back-bone of the country development and a road
towards democratic stability. While this practice is in reverse in Pakistan, due to non-
stability of economic policies of the government. Here in Pakistan, Economic policies are
rotating around the individual in spite of institutional concept. Most of the economic
policies are imported that having no rationality with local environment, that create hurdle
for other policies going to be implemented.
Economic stability can only be achieved through the present form of controlled
democracy. The road to democracy of any country is through economic revival and
stability. After achieving the economic stability the society should go ahead towards the
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real democracy. For example, USA, and UK, where the government process are not
threats for the business community but giving motivation with extra facilities for
industrial development.
In Pakistan, the economic policies are rotating around the mega project, in spite of SMEs,
that is bad luck of this country, if you see the profile of advance countries on the map of
the world indicate that every country development rotate around the SMEs. While in
Pakistan, we are following the reverse trend of this practice. That is a big threat/hurdle
for the development of SMEs.
2. Day-Night Change of Government This is another bad impression/name on the SMEs culture, because, in Pakistan, we are
facing the problem of day-night change of government. This problem is not only
damaging the country stability but directly hating the growth rate of the country, that are
based on the industrial revolution, which are disturbed by the overnight change of
government.
Here in Pakistan, with the change of government, all policies and overall system of the
state are to be changed. Every government brings their own planning and policies for
implementation, and to stop the policies and planning of the previous government. This
practice of change, give the impression of training institute, not more than that. While in
advance/developed countries, personalities are changed, but system remains the same.
This practice of day-night change paralyzed the economy of the country.
3. Subsidies are the solution of Problem in most of the sector Subsidies availability in most the sector shows inefficiency of the state machinery in
regulating their affairs on ground realities. The sector offering subsidies for the solution
of the problem arising over there is not the real solution but it is pushing the problem into
the future. This pushing paralyzed the growth rate of the sector not giving relief nor
showing good sign for the future.
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In Pakistan, every sector are regulated by the subsidies from the state side, this give the
immediate relief/solution of the problem, but having the negative impact on the growth of
the same sector and also prove negative for the overall economic development. The next
impact of subsidies in the sector is to stop the investment by the local and international
investors. Secondly, it increases the number of sick units in the sector, which can not
continue its functioning with prevailing price rate in the market. Specially, in SMEs
sector this problem having double impact on the growth of the sector. On one side, it
paralyzed the agriculture based industries raw materials, on the other side, this problem
stop the growth of the sector.
4. Non-Availability of Infrastructures to the SMEs Most of Pakistani Industrial sector facing the problems of infrastructure that includes,
water, electricity, Natural Gas, communication and transportation. In case of natural gas,
Pakistan has one of the economical natural gas of the world. Today this facility has been
shifted to every industrial estate in every Province of the country. The Government of
Pakistan offering an artificial subsidy on natural gas no doubt it has resulted in lower
production costs with specific reference to production of urea.
All sources of infrastructure/energy should be priced on their calorific value. Before too
much investments takes place on products based natural gas the government should
increase the gas rates and have the price of energy based on energy values. On the same
line, other infrastructures must be valued properly and make them conducive for the
required purpose in the beginning of the industrial establishment. This non-availability of
infrastructure is a big hurdle for the SMEs development. For example Gadoon Amazai
industrial estate.
5. High Tax Burden on Private Profit Organization
In Pakistan, every industrial estate receiving a tax rebate time of 5 years to 10 years from
the state regarding the industrial establishment in the same area. While the private sector
having no chance of this opportunity to compete them under this un-even system of
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taxation. This is a great hurdle for the promotion of SMEs on equal footing in the same
area.
The high rate of income tax on industrial/service sector also termed as Private Profit
Organization are not rendering high return on their investments. This high income tax
tariffs need to be reduced so that the existing entrepreneurs get good return on the
investments and these high returns are visible to the society so as to attract local
investors/entrepreneurs in the manufacturing sectors.
3.4.4. Opportunities In the light of the above discussion, the opportunities in SMEs sector are not appreciating
one, but still we are going to highlight the plus point introduced by the government for
the development of this sector on equal footing. The SME structure is very large but un-
fortunately, we have not done justice with this sector.
The opportunities for SMEs in Pakistan are great, but the ground reality is not properly
evaluated by the government and also by the investors. In the prevailing circumstances
although opportunities are present but they are passive that demand active participation
from both the stakeholders. The points are as under:
3.4.4.1. Introduction of SMEDA For the development of the SMEs sector, the government has introduced separate
authority in the name of SMEDA. It can facilitate SMEs on the following aspects of
Services:http://www.smeda.org.pk/fagsl.htm (19-3-2004).
1. Helping in Raising Finance.
2. Advice in financial matters
3. Feasibility of Projects
4. Developmental plan for Business ventures
5. Assistance in technological funds
6. Techniques in the area of Marketing (Branding, Labeling, Packaging,
Distribution, Promotion etc.)
7. Registration of Company, export promotion and regulatory information
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8. Generation of revenue through assessment in the name of Sales Tax,
Custom Duty, Excise Duty etc.
9. introduction of Research and development
10. MIS (Library, Databases, Project briefs, Pre-feasibility studies).
11. SMEDA legal services.
3.4.4.2. Strategic Coalitions of SME Bank With the Following:
1. NPO 2. PTCL 3. USC 4. Women Entrepreneurs.
It is recommended that the bank established on large scale bases the needs of SME
sectors by providing specialized financial services to motivate SME development. The
special was introduced in Dec, 2001 in the name of SME bank to promote and support
the objectives of SME development, and also highlight the value added export SME to
play a positive role in the growth of GDP, employment opportunity and reduction of
poverty. The bank having identity in extending credit to export oriented SME in the area
Sialkot, Daska, Gujranwala, Gujrat, Faisalabad, Peshawar, Karachi, and Multan. Shortly,
in all four Provinces, the SME Banks are operating well in accordance with the needs of
the SMEs sector. SME has established special financial counter for the specialized
product, and lending program under the Hunermond Pakistan to overcome the credit need
of SME. At the end of 2002 the bank having special lending program in the area of fans,
cutlery, surgical instruments, doctors, and dentist’s clinics, Women entrepreneurs and
CNG stations.
SME bank was started for the uplifting of SMEs sector in the country. In this regard the
bank practical performance for the SMEs development is highlighted shortly in the
following:
1. SME Bank, NPO & PTCL enter into a strategic alliance
SME Bank, National Productivity Organization, and PTCL have entered into a Strategic
Alliance for establishing communication network in villages and improving the level of
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productivity especially, in the Model Productivity Villages. In this connection a
Memorandum of Understanding (MoU) was signed between SME Bank, PTCL, NPO and
a representative of Kurri village.
According to this MoU:
NPO will declare Kurri Village, (Islamabad Capital Territory) a
Model Productivity village.
SME Bank will provide finances for the development work &
encourage entrepreneurs to establish Productivity Units.
PTCL will assist & cooperate in establishing telephone booths and
other communication facilities and
The resident of Kurri will work together under the leadership of
village Working Committee for enhancing the productivity level.
The partners will cooperate to achieve the objectives of this
Alliance.
2. SME Bank, NPO, Utility Stores & Women Entrepreneurs Sign a MoU
SME Bank, NPO. Utility Stores Corporation and Women Entrepreneurs Organization
have signed a MoU for providing business support services 7 financial assistance to
Women Entrepreneurs in Dera Ismail Khan.
According to this MoU:
SME Bank will extend finances to women entrepreneurs, who would
be identified & recommended by NPO in D.I.Khan & other adjacent
areas to produce various products.
The Utility Stores Corporation has agreed to put on its shelves the
products, and market and promote their sales in Pakistan.
The USC will keep the proceeds of the sales with it in a separate
account held for the women entrepreneurs and loan installments due
from the women entrepreneurs would be deducted from their account.
The details of each account shall be provided by the Bank to USC.
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NPO agreed to aggressively pursue this project and bring in sufficient
number of women entrepreneurs to make the project viable.
3.4.4.3. Introduction of Separate Prudential Regulation for SMEs Financing
The important role of SME in country economic development is having prudential
regulation specifically for SME has been introduced by the state bank of Pakistan. The
main objectives of these prudential regulation is to encourage all banks/DFI’s to
incorporate new financial techniques and new product sector to speedy the economic
cycle of SME.. Highlights of the Separate Prudential Regulations for SMEs Financing are
available in Annexure No. VII, Page No. 286-289.
3.4.4.4. The Introduction of SMEs Policy by the Government
From 1998, onward the government of Pakistan felt the importance of SMEs
development in the light of the world most developed countries like Japan. In this regard,
the Government of Pakistan arranged a seminar for “Personnel In-charge of Policy for
SMEs” organized by the SMEDA and Japan Small & Medium Enterprise Corporation
(JASMEC), on November 22, 2000 at Marriott Hotel, Islamabad. Mr. Abdul Razzaq
Dawood, Federal Minister for Commerce & Production was the chief guest. Mr. Kaisar
H. Naseem, Managing Director SBFC, being head of an institution, also participated as a
guest. Senior executives of SMEDA, JASMEC, SBFC, UNIDO and Japanese Trade
Organizations and Japan Ambassador also attended the seminar.
Basic objective of the seminar was to share the knowledge, experience & information
accumulated by the Japanese SME sector with its counterparts in Pakistan. The objective
was to develop and promote the SMEs in Pakistan and providing financial & technical
assistance through efficient & transparent policy & procedures. The seminar also focused
on how to effectively implement such policies.
There can not be two opinions with regard to the importance of the SMEs both in
developed and developing economies. A country like Pakistan, a developing economy
having tremendous potential for the growth of SMEs can obviously boost the GNP,
Create employment opportunities and eventually enhance exports to earn valuable foreign
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exchange. One can realize the importance of SMEs in Pakistan that SMEs share in
employment generation is 80%, despite the facts that SMEs share in formal credit
distribution is 10-12% only. While the Banks/DFIs have provided only 32% finances and
remaining 68% are generated by SMES themselves. On top of that, the most striking
aspect of SMEs is that their loan default rate is only 15% as compared to 65% of Large
Scale Enterprises.
Having an overview of success story of SMEs effectively & efficiently developed &
promoted in Japan, we can also benefit from their experiences, Knowledge & ground
work, while adopting their policy frame work & structure according to Pakistani
perspective.
Japanese SMEs Policy Issues are as under:
JASMEC, a government affiliated institution established on July 01, 1999, as
the institution charged with comprehensive implementation of Government
Policy for SMEs.
In November 1999, the basic concept of SME policy was revised from
“rectification of the gap between large enterprises & SMEs.”
In connection with the policy shift, the scope of SMEs to cover by SME
policy was changed from “business classes having gap with large enterprises
in Productivity & Wages”.
To adapt to recent changes in the business environment and to ensure
continued sound management with potential for growth, SMEs need to further
modernize and improve their structure.
JASMEC fosters the development of creative SMEs filled with
entrepreneurial spirit and engaged in creative activities such as the
development of new products or services. It is feasible by sponsoring the
special activity in the name of “Venture Plaza” is bench mark for meeting of
the SME and the investor by providing direct financing facility.
JASMEC also offers support for development of new products, Sales
Promotion, and restructuring the industry, in addition to support for
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information Distribution, Creation of Activity and Quick Response
management.
In order to enable SMEs to cope with various problems in terms of
information technology, JASMEC provides SMEs with information services
and support for technical up gradation.
In addition, JASMEC provides broad based support to help SMEs respond to
their globalization.
For developing SMEs in Pakistan, SMEDA is pursuing a phase-wise program. It consists
of two parts:
a). One focuses on sector specific growth, and
b). the other is generalized program for SME development.
While developing the sector strategy a customer-oriented approach is adopted. The
strategy is comprehensive & integrated. It takes into account all the factors including
marketing, technology, HR & finance. SMEDA’s organization structure broadly consists
of two divisions, Sectoral Development and Support Servicesxiii. (Workshop on SME
Financing, SBFC Newsletter, January-March, 2001, Volume 2, Issue 1V)
3.4.4.5. Low Electricity Charges
There are various sources which generate power. They, in brief are: Coal, Oil, Gas,
Waterfall or river currents, Nuclear, Solar, Biogas, Wind, Manpower and Animal. The
importance of these sources for the supply of energy has been changing with the passage
of time. Before Industrial Revolution, the energy for operating the machines was mainly
supplied by animals, human power and wind. With the scientific advancement, coal, oil,
gas and waterfalls are used as the principal sources of energy. In developed countries of
the world, nuclear power and solar energy are being increasingly used for generating
electricity.
There is no doubt that the modern sources of energy help in quickly bridging the
development gaps, providing economies of scale, ensuring high quality standard,
economizing on scarce managerial and technical skills and reducing material wastages in
all sectors of the economy. Pakistan is also obtaining and making use of modern sources
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of energy. Some of the advanced countries of the World are putting pressure on Pakistan
not to get nuclear power. The Government is, however, in disagreement with them. The
Government of Pakistan has got access to the nuclear power generation in the early,
1990, because the import of oil is very high.
With the brief introduction of the importance of power in the economic development of
the country, the Government of Pakistan in general and NWFP, in special, having
advantage of surplus electricity resources and power generation for the various sectors of
the economy. The county having the following rich resources of electricity:
1. Hydro Power Resources
2. Thermal electricity
3. Nuclear Energy.
4. Non-Conventional Sources of Energy
a. Biogas Projects
b. Solar Energy Projects
c. Wind Energy Projects.
3.4.4.6. Introduction of Creative Policies
For creative policy introduction abroad base of special incentive scheme should be
highlighted be the state to achieve the developmental target mention in the policy. In the
past such policies were not available in the SME sector, that evaluate how SME future
can be made bright by having self creativity in the policy
3.4.4.6.1. Provincial Support Institutions and Small Industrial Estates
The government of Pakistan introduced this setup in early 1970s by developing 46
industrial state in the big cities to facilitate SMEs by providing infra structure on
subsidize rate. In the light of this fact all provinces were empowered to their best for
benefit of SMEs in the light available resources. First concentration was mad on
manufacturing sector and secondly all those firms investing in the industrial undertaking
for the economic development of the province. In this regard government empowered
every province to establish their own organization for SME development. Every province
profile is under;
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PUNJAB SMALL Industries Corporation was declared automations body for the
growth and development of the SME in the province. Update PSIC has
established 14 industrial estates in different area of Punjab. PISC has also
launched another new program in the name of “rural industrialization program for
eradication of unemployment and increasing the house hold income by
stimulating industrial growth in the province.
Sindh small industry corporation was started for the promotion of industrial
culture of the province. SSIC objective was to provide financial support to small
industries owners, craft worker education in the area of designing of product,
survey of micro and small scaled industry for the procurement and supply of
material to the skilled worker. SSIC having 17 industrial estates in the whole
province of Sindh.
Sarhad small industries developmental board is performing the promotional
support to the cortège and small industries to the province. SIDB has started a no
of developmental program for woman and has started various model projects in
area wood working, leather woods, wool spinning and ceramics. SIDB has 11
industrial estates in the province.
In the province of Baluchistan the west Pakistan small industries corporation is
wind up in 1972 and the charge of SME sector was handed down to directorate of
industries department. The directorate of small industries was created in the 1997
to manage the promotional scheme for SMEs. The directorate was also involved
in providing advisories and consultancy service about SME in the province.
The policy measure about the industrial estates development was instrumental in the
establishment small scale industries cluster for sports gods and surgical instrument in
Sialkot, cutlery manufactures in Wazirabad, furniture and future in Gujrat, Peshawar and
Dera Ismail Khan. Side by side 125 training and service centre were available for skill
development and technical and marketing services for the businessman. Up to 1980 all
these centers remained effective for the development of the SME. The success of this
institution rotates around the international donors support and professional autonomy.
When the donor support was withdrawn and political interference was started in the
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sector, it bring the industrial estate is a political bribe by the ruling parting in the country.
That brings these industrial estate to the status of grave yard, and most part of province as
well as in the whole country, e.g., in the industrial estate if D.I.Khan, and in the industrial
estate of Kohat.
3.4.4.6.2. Export Processing Zones
Keeping in view the objectives of export processing zone is highlighted by the
government in the city of Karachi. All sorts of industries can be established in the zone
without any limit of investment and the only condition was forwarded to export its
production. All manufacturing concern located in the EPZs having duty free import of
their inputs and advantage of reduce interaction with government in the coddle
formalities. All labors laws in the EPZs were regulated by the EPZA in consultation with
the labor department. The social security was also the job of EPZA in consultation with
different governmental department. This approach was accepted with a view to reduce a
complicity in regulation of labor law. On the other hand this policy measure was against
yhe culture of SME producing for the local market and was unable to avail this incentive
package by the government.
3.4.4.6.3. The Technological Up-gradation Fund
The Ministry of Science and Technology has recently introduce the facilitate package for
SME IN THE NAME of technological advancement. This package was meant for
existing SME in the name of expansion and updating the project. For this scheme at least
700 applications were received by ministries but no response was forwarded up to Dec.
2001. Laterly, only 20% applications were accepted and remaining rejected by the
Government. For the encouragement of SME in the country WTO challenges were
considered a back challenges that will declare SME out of fashion. In this regard the
government introduces ISO standard certification compulsory regardless of the size of the
industry. In a country like Pakistan the past institutional system was playing the role of
nursery for SME development that was not properly documented for effective
institutional support system in Pakistan.
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3.4.4.6.4. Institutional Support Systems:
ISS is newly program initiated in 1960 0n the experiment of Indian model with infra
structure facilities availability in the required zone. Large no of other provincial
organization were also working with help of foreign assistant to provide facilitation and
soft loan. The government has some financial organization exclusively meant for
financing the requirement of SME sector. NGO are also activity participating in the
development of SME by designing various program in the name social up left and
employment generation at local level.
3.4.4.6.5. Role of Non-governmental Organizations (NGOs)
A numbers of NGOs are working in different area including economic development,
social up gradation and community development. Side by side number of projects is
control directly by providing advisory role and expert opinion to the different
governmental department and agency for the purpose of labor force development and
poverty reduction. The following objectives of NGOs are summarized as under;
The KASHAF foundation was started in 1996 with object of building micro
finance institution by having durable and effective system of providing excellent
services on ever growing client bases. Beside this financial assistance, it was also
engage in training of micro enterprises sector and carried out improvement in the
area of micro credit development in Pakistan.
PRSP was started in 1998 with the object of over coming poverty in the province
in the shortest possible time by converting potential of poor through this regional
program. This program was organized on village community bases to provide
excess in the field of skill training, and technological support in the field of
various business activities.
NRSP was started in 1991 is non profit organization to take step for development
in rural area of the country. NRSP charter was approved by the state by fostering
country wise network of gross root level of the community and to ensure
productive employment and poverty alleviation and improvement in the standard
of life.
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AKRSP was started in 1982 with a mission of improved productivity and well
fare of northern area of Pakistan. AKRSP having involvement in various area, e.g.
funding for physical infra structure, village level institution, HR and agriculture,
live stock and forestry and market development of every enterprise.
OSSP was the largest program in the city of Karachi. This pilot project has
various community programmes e.g. low cost housing and sanitation, improving
existing facility and education sector for the people of orange.
3.4.4.6.6. Additional SME support program
At the international level SME development aspect has been changed from direct support
and infra structure facilities to the aspects of investigation and regulatory environment. In
this regards USA, Japan are having leading position in the establishment of SME
regulation AND development of small Business regulation under different name. in Japan
it work under the name of SME regulation of 1962 and in USA under small business
administration (SBA). IN Pakistan up to 1990 there was no system of coordination and
SME sector. This lake of integration hampered the development of SME and having no
contribution at all. SMEDA introduction is new injection to the SME sector by
identifying the various impediments in the regulatory environment, finance, marketing
technology and HR development. SMEDA with its limited resources is focusing on the
different service of SME for extensive HR program in the country. The internal focus
relates to strategy development and support function responsibility for providing input in
the area specified for the SME. The existing feature of SMEDA exploited the potential
sectors through its research and development wing for updating the sector. SMEDA most
important role is to bridge bench mark between financial institution and the SME.
(Source SMEDA/Gallup MSE Survey, 2001)
3.4.4.7. Introduction of Business Incubators for SME Development.
The concept of Business incubators is relatively new in Pakistan and was added to SME
sector in 2001 onward for the development in the country. Business incubator is a facility
that SMEs can use on flexible rents. Support Services, financial management, technical,
and administrative services, are available and shared, depending on the size and nature of
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needs. Most incubators limit the time (usually 1 to 5 years) that the SMEs can occupy
space in the facility.
The basic purpose of an incubator is to increase the chances of survival for newly start-up
businesses by providing certain facilities to them, such as professional management,
technical, financial, or administrative services. There are four major types of incubators:
1. Publicly Sponsored Incubators.
Publicly Sponsored Incubators are working in different capacity in
different area under different names. These incubators are
organized through city economic development departments or
Development Authority, like SMEDA, Urban Renewal
Authorities, or Regional Planning and development Commissions.
Such incubators are meant for job creation in the area under
consideration.
2. Nonprofit Sponsored Incubators.
These incubators are organized and managed through industrial
development institutions of private industry, chamber of
commerce, or community based organizations with broad
community support.
3. University Related Incubators
Many of these incubator facilities are spin offs of academic
research projects. Most are considered with science & technology
incubators. The major role of university related incubators is to
digest the finding of basic experiment and improvement in new
products and technology. For example, the introduction of Bio-
technology as a new product to the academic discipline,
introduction of Telecom Engineering, etc.
4. Privately Sponsored Incubators
These types of incubators are present in the form of private
organization where its major objective is to make profit and
services contribution to the general public. For example, the
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introduction of Daewoo Transportation Services in Pakistan,
Private Haj Sponsoring Scheme, and Private Air Services etc.
Incubation Services:
Most incubators provide the following:
Below market rate rental space on flexible terms.
Elimination of building maintenance responsibilities. This allows new
entrepreneurs freedom from maintenance of furniture and equipment and
of such facilities as lunch areas, conference rooms, and reception areas.
Sharing of equipment and services that would otherwise be unavailable or
unaffordable. Such services are typically divided into three major
categories:
a. Offices and communication networking in the form of typing
facilities, photocopying, and telephone booth.
b. Consultancy service such as project planning and architecting
and designing.
c. Social and technological services in the name of conference
room’s reception counter, and computers programming.
Main Macro Level Benefits of Incubators:
1. Creation of opportunities for public/private partnerships.
2. Diversification of the local economic base, and
3. Increased employment opportunities.
A Case Study of a Business Incubator (Askari commercial Enterprises (ACE) (Annexure-
V111 Page No. 289)
Importance to SMEs:
Small Business Finance Corporation (SBFC), dedicated to supporting and developing the
Small and Medium businesses, can achieve the following by promoting and interacting
with such incubation facilities:
1. Pinpoint serious entrepreneurs who can prove to be the less risky borrowers of
SBFC funds.
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2. Provide technical assistance to its clients on need basis.
3. In partnership with the business incubators help increase the employment
levels and promote SMEs.
Source: Haider Tanveer, (2001) Head Office, SBFC Newsletter, Volume 2, Issue 1V, January-March, 2001.
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Problem Areas of SME’s
4.1 BROAD OVERVIEW OF THE PROBLEM AREAS
in the light of the contributing role of SME towards the economy GDP and generating
revenue from export is the worldwide identity but in Pakistan SME being its potentiality
and infrastructure availability have not contribute it the level requirement towards
economy. In Pakistan SME are under hardship due to different factors e.g. uneven brick
down of electricity and domestic policy integration among the different stakeholder of the
sector. Here in Pakistan SME are meant for accommodating the work force on large scale
bases and not concentrating on its out put. SME and its self relocating the resources and
trying for its own survival without any shelter SME have confined itself to the short
business activities and having no’s of problem of regulation and financial assistance. All
these problems are due to absence of socio economic infra structure, conducive legal
environment low profile of institutional framework, poor managerial networking. Formal
financial sectors are available in the country but the past experience shows that this
formal financial sector is having good response for large scale industries. Currently the
government has created a favourable operative environment for SME and provides
formal banking services to the sector. The investor increasing interest in the SME have
bring this issue in the knowledge of the state to convert the SME is a nursery for large
scale industry.
The aim of the study in hand is to examine the problems faced by SMEs in the areas,
specially, in Peshawar, Bannu and Dera Ismail Khan. The major areas under
consideration are marketing, managerial practices, human resource management, legal
procedures and obligations, and financial resources of SMEs.
Further, the study also carries some formative investigation like the following:
Is it feasible that innovative HRM and industrial relation true spirit are
available in SME, or the old stile of SME are being associated with poor
employment condition and social protection are still present in the sector.
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The implication of the growth of SMEs bears a significant relationship to
the SMEs successful marketing activities; and
The easy availability of financial resources plays a very important role in
the long term and sustainable growth of the SMEs.
4.2. BARRIERS TO THE PROGRESS
the discouraging performance of SME sector in 1990 reveal that its structural short
comings and its inability to adjust with economic civilization measures (maximum
utilization of its resources) introduced in the past by the IMF sponsored programs to help
the government of Pakistan for overcoming the chronic micro economic imbalance
equation. The domestic manufacturing industry are suffering a lot from the decrease
import tariff, low access to international market, hard exchange rate, increased domestic
rate double the domestic production cost for SME. Devaluation of PKR in 1991 up to
1999 are carrying the problem of exchange rate liberalization has resulted sharp increase
in the cost of imported material and capital goods, while interest rate liberalization having
direct impact in the cost of long term assets and working capital cycle to 22 to 24% and
28 to 35% in the coming decade. (Economic Survey 1999-2000)
From 1960, onward the policies of the then government were more in favour of large
scale than small and medium scale industries. The machinery is mostly imported from the
west, which makes the economy dependent on the west and, on the other hand, it also fail
to provide a sustainable base of economic development to the economy. In this regard,
scarce and precious foreign exchange is also spent on it.
As a result of the policy title towards the large scale industry, not only various internal
and external, social, political and bureaucratic problems have arisen due to concentration
of industries in few large cities, but side by side the problem of unemployment has also
become aggravated with the passage of time.
Experience from various transition economies helps put together a comprehensive list of
most common barriers hindering SME development. They could be divided into the
following groups:
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Internal barriers.
External barriers
Social barriers.
Political barriers.
Bureaucratic barriers.
4.2.1. Internal Barriers:
Internal barriers refer first of all limited own resources of entrepreneurs and limited
possibilities to identify business opportunities. They are complemented by lack of market
economy experience, understanding of modern business and ability to cope with risky
and unpredictable market environment. These barriers were found during the survey
conducted by the scholar with different sector groups variables in the population sample
study. Some barriers are summarized as under:
Lack of resource planning GIT concept.
No proper presentation of book keeping and financial control.
Loose process of streamlining and re-engineering.
Poor Management.
Low standard quality consciousness.
No criteria for selection of technology up gradation.
No product development and Innovation.
Poor presentation regarding cost reduction and development of new
product methodology.
Unskilled manpower planning.
Old marketing techniques.
No awareness about new foreign market identification, legalities and
guidance.
Lack of Entrepreneurial skills development and Team building programs.
Lack of identification of environmental and safety aspects within works
scopes.
Late introduction of Information Technology.
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4.2.2 External Barriers:
External barriers stem from the economic and business system surrounding
entrepreneurs. In the process of their decision making, entrepreneurs are not guided
directly by anyone, however, they try to optimize their criterion functions under given
constraints and (mainly financial) parameters, which are given from outside. The rules
and norms of taxation, as well as the availability and conditions of credits are usually the
two most controversial areas of SME environment, usually interpreted by the business
community as major barriers in development of the sector. Some barriers are summarized
as under:
High pressure and complication of taxation system.
Short comings in the form of getting license, permission from registrar of
firms, commencement of business and its future planning.
Direct interference in the business activities by different official,
politician has made cloudy socio-economic structure and overall SME
support system.
SME needs adequate financing for the starting developing business
activities is difficulty for the owner due to the non availability of proper
financial system regulation.
Lake of business knowledge and poor market economy regulations are the
identity of SME, which need improvement in the light of users demand
and national international market requirement. These prevailing systems
are having numbers of flaws which can divert the attention of authority.
In Pakistan business information system is not working well, that directly
having bad impression among the business community and also facing
numbers of problems at the time of entering in the international market.
Difficulties in accessing business information.
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4.2.3. Social Barriers
Business function by public consent and its underlying purpose is to serve the needs of
the society for the satisfaction of the whole society. Business concern has carried out its
basic economics responsibilities so well largely because of the dynamic performance of
the private enterprise system to cope with present market environment. But still the SMEs
are in trouble due to number of social responsibilities, which the SMEs, in individual
capacity, are unable to follow and implement regularly. Among business leaders
themselves, there is a renewed plea now-a-days for a strong emphasis on “social
responsibilities” by the Corporate Body. The fact is that the public expects more from the
business leadership that they will contribute a lot in physical form and also in functioning
a good deal toward achieving the goals of a good society but practically they fails in
achieving the following:
Conservation of environment and natural resources.
Preservation of ethical values of the society.
Quality of goods and services at fair prices to the consumers.
Fair dealing with Suppliers, Dealers and Competitors.
Honest and prompt payment of taxes to the Government.
4.2.4. Political Barriers
Realizing the importance of SMEs in the area, which are not at par with the other areas of
the country as special and abroad as a general? After comparing the real figures, it is felt
that there are some political barriers, which hurdles the development of small and
medium scale industries in Pakistan especially in NWFP are clear from the following:
Proper protection of persons and property are not present in the NWFP in
particular and generally in Pakistan due to number of issues practically
present in the country and in the surrounding area.
Equitable system of justice is rare regarding every phase of business
establishment in the country and specifically in NWFP. (Example of
Pakistan Still Miles, Gadoon Industrial Estates etc).
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No guarantee and promotion of human rights regarding their wages and
other social standard application in the country in particular and in NWFP
as a special.
Smooth promotion of general welfare is only in figure and used is political
slogan in the area.
Infrastructure availability is political issues not on the basis of area ground
reality.
Due to political un-certainty equitable system of prices and incomes
having no chance of practice. (Example of Provinces developmental
budgets at federal level).
4.2.5 Bureaucratic Barriers
It is a tragedy that majority of our policy makers are bureaucrat educated and trained in
western disciplines and their concepts of development are western in nature. I am not
against the western disciplines but in Pakistan that policies are imported from western
countries and applied in the same status quo form in Pakistan, which create a big problem
in the sense that not having coordination and adjustment culturally, financially and
environmentally. According to the management practice it is not feasible, in this regard, I
am going to highlight, the example of “Chile”. In Chile it was the opinion’s of the
management expert that if we import all the infrastructures from USA and apply in Chile,
with in ten years, we will be able to compete, the USA in every phase of business life.
But after the expiry of ten years, the experts feel and realized that development is not
only bound to the infrastructures availability but credit goes to conducive availability of
the environment and policy suitability and adjustment to the local social, political,
economic and religious environments of the area and a country (G. R. Terry 1975 ).
In Pakistan, the model which have been proposed and applied by the policy makers group
from the very beginning are mostly favoring the capital intensive techniques of
production, which are suitable only to the conditions prevailing in the western countries
and not for the Pakistani economy. Economists are of the view that one of the reasons of
increase in the poverty level in the country is the stagnation in the SMEs due to the lack
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of institutional credit and other necessary infrastructures. In this regard, the following
bureaucratic barriers are prominent in the less developed provinces like NWFP:
For industrial development in Pakistan the coddle formalities are too much
hard and time consuming without responding to the main objectives.
In Pakistan, the officials of the loan giving agencies attach more
importance to the factors other than the economics ones in granting of
loans. Among these are, the financial and social standing of the borrowers
and side by side the greasing off the hands of the most of the bank
officials. All these barriers are important, while the small investors lack
these qualities.
In view of the present economics crisis in the country, the Government’s
are giving special emphases on making credit availability to this sector. At
the beginning of every fiscal year targets are given to the country
Commercial Banks and SME Banks in special for this purpose. But in
spite of all this, the deprivation of the sector may be guessed from the fact
that in 1998-1999, out of the total credit of Rs. 33 billion to the
manufacturing sector, in term of net, the small industries are actually
receiving Rs. 0.7 billion (Economic Survey 1998-1999).
4.2.6 Summarized Projection of Barriers to Sustainable Growth of
SMEs
Following are the hurdles hindering the growth and development of SME sector:
Non-Conductive Regulatory and Legislative Framework
SME are having lengthy channel of registration, which are not feasible for SME sector.
Side by side SME facing numbers of problems of taxation which need knowledge and
documentation, identification for minimizing the pressure on the individual investor and
on the SME sector as a whole. In this regards SBP have done a lot to review and revise
the prudential regulation, and provide financial assistance from FBR at time of
formulating special taxation policy for SME sector. SMEs have to deal with 22
government regulatory departments including tax department and almost 70 various acts
which makes it very difficult for the SME to understand the whole procedure. Because
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they cannot employee staff to deal with these regulations and thus they are unable to
understand micro-environment. They are also stressed by these departments. This stress
also leads to bribes and corruptions in the SME business environment.
Finances
Lack of credit facilities are marked is the binding constraint in the growth of SMEs. The
personal savings, funds from the family and friends are the major source of financing.
The International Bank for Reconstruction and Development (IBRD) pinpointed that
banks do not play a significant role in financing Small entrepreneurs.
The banks credit barely reaches to 10% of the SMEs while 90% SMEs depend wholly on
savings from business earnings and credit purchases. It is interesting to note that the
specialized financial facilitative institutions like SME’s Bank and SMEDA have not been
performing effectively due to lack of coordination. All the Government’s Commercial
Banks (GCBs) and private banks extended more than 90% of the total bank loans to
SMEs against barely 10% provided by specialized institutions including SMEs bankxiv.
Most of the SMEs, which approached to the commercial banks for credit requirements,
reported difficulties in obtaining loans. The main difficulties hampering the flow of
finances to the SMEs are securing guarantees and completion of other formalities and
papers.
The Sarhad Chamber of Commerce and Industries (SCCI) suggested establishment of
common and joint forum of SMEDA, SME Bank and SCCI for micro level financing. It
was proposed that the SCCI and SME Bank would identify sectors/clusters for
intervention and SMEDA will carry out comprehensive analysis and technical evaluation
of projects for disbursement purposes.
Infrastructure
The poor electricity supply is the top most infrastructure problem faced by SMEs. The
frequent power breakdown and difficulties in obtaining a connection affect the growth
and development of SMEs. The power supply related problems mostly affected the
construction and manufacturing sectors.
The second most critical infrastructure problem is garbage disposal and sewage followed
by poor communication network, water supply and lack of transportation.
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Human Resource
The recruitment of work force and the provision of training is another area that creates
impediment in the growth of small scale enterprises. In some areas like IT sector it is
difficult to recruit satisfactory staff. Non-availability of skilled labor causes delay in
production, standard of output, volume of sales and customers loss.
Raw Material or Input
The SMEs are mainly concerned about the price of raw materials. Only16% SMEs is
directly involved in importing raw materialsxv. It takes these firms, on average, two
weeks to clear the goods from the port after paying around 35%, additional cost arising
from custom duties and associated expensesxvi.
Technology
SMEs gain their skill mostly from their family or from working for another employer.
Only 25% learn their professional skills from an educational institution. Books and
journals are the major source of technical know-how.
Foreign Investment
The following barriers are hindering the foreign investments in Pakistan. It may be in the
following:
a) Initially, the absence of any laudable incentives is a major drawback impeding
foreign investment. Substantive incentives should be given to foreign investors.
b) Law and order situation and relaxations in taxes attract foreign investment. The
Federal and Provincial Governments may work together to improve the law and
order situation throughout the province in general and in the industrial cities in
particular.
Federal Government Investment
Federal government investment refers to the direct investment of the Federal Government
in the province. Unfortunately, the proportionate investment of the Federal Government
in the region is very low. The NWFP share in Federal Investment should be increased
keeping in view the percentage of population.
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4.3. PROBLEMS OF SME’S IN DEVELOPING COUNTRIES
In the present complex environment, the economic challenges for the developing
countries like Pakistan, it is the dire need of the day to introduce, frame suitable policies
implementation that can counter balance the present challenges face by the domestic
economy and to play a positive role for international economic environment. The
developing countries are facing a number of problems, e.g. Wars in between the different
countries, low prices in commodity market, poor infra structure availability and lake of
leadership have bring all these difficulties is the leading agenda for the future of the low
economic countries. On the other hand, increasing intervention by the multinational
companies by getting the funds of capital in the form of net credit and shifting HR
problems towards the developing countries to hampers their growth. Pakistan is also a
developing country, experiencing the same criteria. The industrial sector of Pakistan
consists of formal and informal sector, which double the problems in nature, because, the
policies were hang to stagnation due to changes in the areas application.
Comparatively NWFP lags behind in terms of industrialization as the process of
industrialization just started in this region. The Sarhad Small Industries Development
Board was started in 1972. After that, the Small Industrial Estates are established in the
capital of the Province; however, informal sector is already operating. The SMEs in the
informal sector is represented by, carpet weaving factories, painting shops, bakeries,
groceries and service providers. While the formal sector is represented by small industrial
estates, i.e. Small Industrial Estate, Jamrud Road, Hayatabad ands Small Industrial
Estate, Kohat Road, Peshawar. Both formal and informal sector contributes in
employment generation. As against 57290 jobs created with the investment in the
informal sector, the formal sector generated more than 100,000 employments. It is
significant to note that the informal economy grew faster during the 1980s1, when the
formal economy also showed relatively rapid growth rates. During the 1990s the annual
growth rates of the informal economy fell to around 5.5 % from 7% consistent with a
sharp decline in the growth of the formal economy over 7.5 % to 3.5 %.
1 Sick industrialUnits in NWFP: An Analytical Perspective, M. Irshad Anwar, 1998.
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It is observed that direct involvement of multinational corporation are going down,
effectively slowing up the growth rate of emerging countries as the operation cost of
equity has become astronomical. The emerging market of different countries is open to
some sort of financial risk that are out of range of the developing economies.
The major SME problems relating to the areas of finance, marketing, human resource,
legal issues and management are to be discussed here in this part of the study.
4.3.1. Market Problems
Market Size and Share:
The local market size is not big enough to absorb all the goods produced in the region.
Carrying these goods to other regional markets incurs a high transportation cost. As a
result its cost of production rises and it cannot compete with the goods manufactured in
the other local markets of the country. This heavy freight charges is another problem
faced by the SMEs in NWFP.
Impact of international event
The developing country like Pakistan, some radical measures were required particularly
in the wake of September11 events, to provide some immediate feedback for survival of
the economy and especially for SMEs. Pakistan had lost many customers due to the
adverse publicity in the international media about it being in the war zone (Afghanistan
War) and being disturbed by internal political instability. Now the war in Afghanistan has
ended, but the economic environment is still confused by the terrist’s activities in the
region. No one is ready to take start in establishing the business activities on large scale
bases in the area to give employment generation. On the other hand, the large number of
migrated Afghan people is another dark sign on the economy of NWFP in particular and
on federal economy in general. Pakistan is fortunate to have received high support from
the European Union that would be a great help in our export marketing, especially in the
quota ceilings for all categories across the board. Withdrawal of EU import tariffs, except
for a small number of products, would strengthen our competitive position in the EU
markets for textiles and non-textile product. We can expect similar accommodations from
the US Administration in the near future.
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4.3.2. Legal Problems
Government Tax Policies:
SMEs sector are directly under the huge burden of federally imposed taxes of various
categories, which add to the miseries of the entrepreneurs. These difficulties in the form
of different kind of taxes discourage the future investors, not only the small investors but
also the foreign investment suffers heavily. These taxes restrict the small business to
expand and sometimes a sick unit is forced to shut down.
In Pakistan there is abundance of old and new taxes imposed without any consideration
as how would they influence the small and medium industrial units. A small business unit
has to pay many taxes in order to survive and which restrict them from growing such as:
Income Tax, Wealth Tax, Sales Tax, Property Tax, Custom Duties and a number of
Withholding Taxes.
Foreign Patent Process
In Pakistan most of the SMEs are unable to adequately protect their innovations in
overseas markets because the process of obtaining, maintaining and enforcing foreign
patents presents too many obstacles, according to a new report from the General
Accounting Office. While small businesses held about 11% of the U.S. patents granted to
U.S. entities in 2000, research shows that small businesses are less likely than large
businesses to seek foreign patents, even if their intentions are of similar value, the GAO
foundxvii.
Cost is the most significant hindrance faced by SMEs that wish to obtain a foreign patent.
It is observed that companies usually seek patents in several countries simultaneously,
and thus encounter a number of different costs. In addition, some foreign patent office
fees are much higher. At the same time, foreign patent laws and requirements are
complex, and result in companies incurring substantial legal fees, creating legal restraints
for SMEs.
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4.3.3. Skilled Labor Problems
Lack of Technical Know-how
SMEs development rotate around the skilled labor availability in the area, while that
problem is standing in the way of rapid industrialization of the country and especially
NWFP is lack of skilled persons. The capital intensive industries need highly trained
technical personnel, in which this part of the land is having great deficiency. The
vocational and other training institutes in the province are very limited and not qualifying
the demand of the available SME structure, that need development today for the world
market competition. This lack of skilled personnel causes great difficulty for the investors
of the province.
Low Quality of Industrial Labor
The industrial labor psychology of NWFP is different from other province labor in the
country. The industrial labor in the province is mostly conscious of its right but not of
duties. It may not be inferred that the labor is inherently incapable and inefficient in the
performance of duties. But the fact, however, is that they are not properly trained. The
level of commitment is low that can be polished, if, proper attention may be granted
toward its training. The lack of interest in the work seriously damages the interest of the
entrepreneur and they hesitate in making investment in the region.
Industrial Labor Relation:
For SME development, the industrial relation is important to interlink the two main
groups (Employers and Employees) which in return facilitate the ultimate consumers that
become a law for the area development. While the relation between the employees and
the employers are not good in the province and also in the country. There always remains
a gap between the workers and management. Management does not take care for their
needs; rather they are more interested in satisfying their own desires. This difference in
attitude and thinking of the two groups give rise to labor unrest and other disturbances.
4.3.4. Financial Problems of SMEs
One of the major problems faced by the Small and Medium Enterprises is obtaining the
financial help either from the donor agency or banks of the country. Developing countries
have encouraged and supported SSE development programs. Programs of financial
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assistance have been one of the principal ways in which governments of the developing
countries have tried to help SSE development. Until the mid-1980s most of this
assistance was directed at- or at least ended up with- the larger or medium scale formal
SSE units.
As an example one might see the small enterprise development projects supported by the
World Bank that have channeled during the last 15 years (1973-88); more than US$3
billion in 70 projects to help small and medium enterprises in 36 developing countries.
Probably less than 10% of this sum actually reached to the smallest SSE, that is those
with less than 10 workers and assets of less than US$10,000. To reach these borrowers
one would have to lend sums of the order of US$1,000-US$ 2,000 or at least less than
US$ 5,000. As the average loan size was US$ 24,287 in Latin America, US$ 31,811 in
Asia and a staggering US$ 83,408 in Africa, it is clear that these projects reached few of
the very smallest firms or micro enterprises.
It is decided to channalize these funds through DFIs or Commercial Banks in one form or
another. These institutions were only willing to participate in such programs or projects if
they were able to target their lending to the largest group of borrowers that conformed to
the category of formal small and medium scale enterprises.
To explore further the relationship of the banks o the small scale enterprises, it is worth
repeating again the well-known reasons why small enterprises having difficulty in
obtaining access to credit from the formal banking system. These may be categorized as
follows:
Continuous Cash Flow Obstruction
Cash flow is a measure of business operation that may be in the form of inflow and
outflow from the business. Most of the inflows of SMEs come from their own operations.
The non-availability of these cash inflow is due to many reasons; the most prominent one
is that the creditors take a considerable time in clearing their debts, which create a
shortage of Running Finance. The financing pressures of a cash flow shortage have
forced many small business owners to take unwise, illegal way, desperate measures to
salvage their businesses. For example, cash-strapped entrepreneurs may try to “borrow
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against” payments of quarterly payroll taxes, hoping to repay amounts as soon as
businesses improve.
Unfortunately, the problem is rarely resolved and the entrepreneur not only ends up with
a failed business but personal tax liability for the failure to withhold payroll taxes.
Creditworthiness of SMEs Sector
In Pakistan, it is mostly observed that lending to SMEs sector is perceived as being risky.
The uncertainties on the part of SMEs are very high that are faced by the small industry,
the high mortality rate, the susceptibility to market changes, and the economic
fluctuations, make banks reluctant to deal with these clients. Non-payment, or even
delayed payment, by a few major clients can cause the collapse of a small business. The
mortality rate of small businesses is indeed high. This was estimated in a survey in the
Philippines to be over 4% a year. In the developed countries the figures are even higher;
somewhere between 20% to 50% of new small enterprises in the united States fail within
the first one or two years of operationxviii. Various studies have shown that small
businesses are no less creditworthy than the larger enterprises, but even though small-
scale businessmen may take great pains to repay their loans in order to maintain their
creditworthiness, in expectation of increased borrowing, these enterprises usually depend
on a single-owner manager. This makes them more vulnerable to what might happen to
the manager, which would obviously not be the case in a larger industry.
Administrative Hurdles and Costly Formalities of Obtaining Finances
One aspect of the problem lies on the part of the bank that they are reluctant to lend to the
SMEs sector but on the other side parallel to that problems of banks to lend to small
enterprises is the reluctance of these enterprises to borrow from banks. The
administrative hurdles and costly formalities of obtaining finances from the banks,
particularly the time and paper work involved, are a formidable deterrent to smaller
businesses. Some of them lack the formal education to cope with bureaucracy and others
compounded by problems of location and time pressures have difficulty in complying
with what the institutions require before they grant a credit. In many cases, potential
borrowers have to pay for preparation of accounts or special studies on top of the cost
involved in the numerous visits to the lending institutions. The transaction costs on the
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part of a borrower in obtaining a loan from a bank may be proportionally as high as are
these costs for the lender.
There is a distinct institutional bias on the part of banks towards lending to the larger
corporate sector. In many cases there are links in directorships, joint ownerships and
various other common financial dealings between banks and the large enterprises and
automatically this induces preference for directing finance to these borrowers.
The administrative costs of lending to SMEs are high, which cut deep into the
profitability of such transactions for lending institutions. This is undoubtedly the case and
has been borne out in studies. A World Bank study (Philippines in 1978)xix showed that
whereas the administrative costs of handling large loans was in the order of 0.3% to 0.5%
of the cost of the loan, such costs rose to a range of 2.6% to 2.7% when lending to small
enterprises. Most subsequent studies have shown that most lending, even to formal
organized small businesses, requires administrative costs of closer to 4 to 5 %. One
institution in Latin America- the Corporation Financiers Popular of Colombia- which lent
exclusively to small and medium enterprises- had administrative costs of over 7% and
this institution hardly lent to all to the very smallest micro enterprisesxx. As the
transitional costs must take account also of the risk element and potential losses, these
overall costs are even higher. Despite what has been said about the credit-worthiness of
small entrepreneurs, there is no doubt that several small enterprise lending programs in
the past have suffered from a high level of arrears and defaults.
Reluctance in Disclosure of Accounting Records
Small enterprises are unable, or unwilling, to present full accounting records and other
documentation called for the banks. In most cases such records just do not exist, making
appraisal of loan applications difficult. One may quote the example of the DBP, when a
study in 1980xxi, showed that it usually took four to six weeks for a professional staff
worker to collect the necessary data to make a recommendation and to come to a decision
on a loan to small or medium enterprises, largely because of the poor records kept by the
borrower. Usually small borrowers are unable to provide the collateral and security
demanded by lending institutions before approving loans.
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All these are real problems and it would serve little purpose to ignore them and hope to
overcome these difficulties simply by pressurizing the banks to adopt a more
understanding attitude to the needs of the SMEs sector.
4.3.5. Managerial Problems
Lack of Managerial Culture
In NWFP there is a lack of management culture. Usually the industrialists are wealthy
owner, who lack formal education in management. As a result they cannot manage the
activities properly which confines their productivity. This lack of managerial knowledge
in manufacturing area, results in higher per units costs. This is a serious shortcoming for
SMEs.
Poor Economies of Scales
Economies of scale occur when mass production of goods results in lower average cost.
Economies of scale an also take place when the firm is located within a vicinity of
complementary industries. For example China, where the small industrial units are in
considerable amount and are also in close locality. This helps the Small and Medium
Industrial Units to save time and logistics costs, thus becoming more effective and
efficient.
This problem is present in developing countries as they are striving to attain this
Economies of Scale, specially the developing countries, including Pakistan. This state
cannot be perfectly achieved but one can come close to it.
4.4. FORCES RESPONSIBLE FOR SME’S BACKWARDNESS IN THE
AREA OF NWFP
Industrialization tended to concentrate in developed parts of the country reflecting the
high level of regional and urban concentration of manufacturing industry. Initial growth
in income inequalities and functional inequalities badly affected backward areas.
Uneven geographical distribution of industries in the country and imbalanced regional
industrialization, not allowing fiscal concessions and incentives to favor location in
industrial units in backward areas also contribute to the problem. These are as under:
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Day-Night Change of Government Adversely Affected Industrial Policies.
In Pakistan, we are having the problem of system instability which directly hitting the
economic policies of the country. But specially the SMEs are vulnerable to such change,
because, the large industries are having some protection in the form of political shelter,
while the SMEs are organized by the lower/middle class of society that are having no
proper shelter from the political system of the country.
Economic policy distortions including over-regulation, price interventions affecting
both outputs and inputs, high tax rates and poor tax administration, trade restrictions,
poor credit accessibility and inadequate infrastructure are adversely affecting the
industrial policies.
Unpredictable and Depressed Market Conditions
Local market are suffered from the state unpredictable policies implementation on one
side, while on the other side, the foreign goods/smuggled goods are freely coming in the
markets that dark the future of the local market. Today, market forces were allowed to
promote industrial production, commerce, banking, insurance, shipping etc. clustered in
certain localities and regions, leaving the rest of the country in a state of backwardness.
Disparities between the regions widened the capital and labor flow from the backward to
the relatively more developed regions.
Physical Hindrances to the SMEs in NWFP
Following are the primary reasons causing physical hindrances in growth of SMEs in
NWFP:
a) Private sector development in industrial and mineral sector remained minimal till
1980s.
b) NWFP suffered from location, financial, technical, skilled manpower and
infrastructure set backs.
c) Entrepreneurial culture and experience is virtually non-existent.
d) Subsistence agriculture approach could not absorb higher population growth,
which led to unemployment and poverty.
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e) NWFP is landlocked and is over a thousand miles away from Karachi sea port.
As it is highly dependent on the south for both of its inputs, raw materials and
markets, higher transportation costs make it difficult for NWFP’s industry to
compete.
Impacts of withdrawal of Incentives Packages
From time to time, the Government’s of Pakistan, announcing different packages for the
development of the area. For example, Gaddon Free Industrial Zone, for ten years tax
free zones. Such type of Fiscal and monetary incentives had been allowed to the NWFP.
Along with other backward areas of the country which included the following:
a) Income Tax holiday.
b) Exemption of custom duties on the import of machinery.
c) Sales Tax exemption.
d) Investors in Gadoon Industrial Estate had been allowed the following special
incentive by the Federal Government in the lieu of eradication of poppy
cultivation from the areas.
e) Duty free import of machinery, raw material and components.
f) 10 years income tax holiday.
g) Loans at 3% mark up for fixed investment.
h) Sales tax exemption, and
i) 50% rebate in electricity charges.
These incentives have accelerated the pace of industrialization in the N.W.F.P. which
reached to private investment level of Rs. 60804.886 million, out of which 50.43% has
been attracted in the four industrial estates established by SDA at Peshawar, Hattar,
Gadoon Amazai and Nowsheraxxii.
Premature withdrawal of these incentives resulted in the closure of industries; besides
withdrawal of incentives, other problems are:
Over capitalization
Management in-efficiency resulting in high financial cost
Absence of relevant technical know-how
Shortage of raw materials
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Depressed market
Lack of working capital
Drop in cash generation
Poor cash management
Outdated machinery, resulting in low production efficiency
Increased production cost, mainly due to high electricity charges
Increased overhead costs due to high freight charges
4.5. PROBLEMS OF INDUSTRIALIZATION IN NWFP
From the day of Independence, Pakistan is known is an agricultural country, but now the
efforts are being made towards its industrialization. It is clear from the very first day that
Pakistan is an industrially backward country. While the Province of NWFP are having no
industrial base from the day of independence, that will be discussed in detail in the
coming chapter. This backwardness of the region is due to certain problems, which
handicapped its industrial growth. The major problems faced by the industries in the
province are highlighted as under:
4.5.1. Government Policies and Regulations
For every area development some basic criteria are highlighted in advance for eliminating
the obstruction creating elements will be cleared. In this regard, the Government Policies
and Regulations are not matching with the available SME sector in the province. To
boost the process of industrialization in the area, initially a specific package of incentives
is granted to that area. However, in 1986 the government decided to establish an
industrial estate in Gadoon Amazai. In this regard the government announced certain
incentives for the investors. Here the problem is narrated in two ways cycle completion.
One on the part of the investors, was that they have collected financial assistance/loans
on the name of the said industrial estate in Gadoon Amazai, but really this financial/loans
facility was diverted to the established area of the country, namely, Karachi,Faisalabad,
and other developed area of the country. All this was done in the paper records, but
nothing was available on the ground. Another aspect of the problem was that the Federal
Government withdrew these incentives. This withdrawal of the financial packages, the
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investors of the said area becomes frastructured and they started withdrawal from the
active side of their investment. This has created an atmosphere of distrust among the
investors, which directly hate the SMEs sector in its development.
4.5.2. Political Instability
The political instability and constant changing in policies is another problem faced by the
investor of this province. Different ruling parties have different policies towards
industries and there is no consistency and continuity in the policies for the growth and
development of SMEs, such problems seriously damage the industrial activities in the
Province. For SMEs development constant policies measures are needed, which are
disturbed by the day-night change of the government. First, the province is backward due
to number of issues which is not feasible at this stage to discuss but on the other hand, the
government bias positions can double the problems, which directly hampered the growth
of SMEs in the area.
4.5.3. Locational Disadvantage
Unfortunately, the Province of NWFP is in disadvantageous position due to its
geographical location. It is 1700 kms away from the sea port, which makes the logistics
problem, that double the cost of production. Due to this for flange area position, the
products of the Province industrial estate may not be able to export to the country main
markets like Karachi and Lahore.
4.5.4. Competitive Problems
The manufacturers of NWFP cannot compete with the manufacturers of the other
provinces of the country due to certain local disadvantages and other factors. First, it is
highlighted, that the people of NWFP are not trust worthy, this information has paralyzed
the industrial environment. Secondly, the people are not socially well behaved in dealing
with the different supplier and contractor that directly damage the flow of growth of
SMEs in the area. For all these issues, the investors are hesitating from investing in that
area of the country. Usually in NWFP investments are made in small units and produce
goods at a smaller scale for the local markets. Because of these factors NWFP
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manufacturers are facing all these problems in competing with other provinces
manufacturers, which in reality slow down the industrial progress in the province.
4.5.5. Karhano Markets/Bara Market Impact
The boundaries of NWFP touch the boarders of Iran and Afghanistan. The borders trades
with these two neighboring countries are very close and impossible to stop this illegal
boarders crossing. Peshawar is situated close to these boarders, which has proved its
result in the form of new illegal markets in the area. Secondly, the misuse of Afghan Free
Trade Transit resulted in the form of different illegal markets specified for foreign goods,
which having direct affect on the local products production. In these illegal markets
prices are comparatively low (due to no payment of taxes); as a result the local
manufacturers are discouraged because people prefer to buy the imported goods at a low
cost rather than to buy the local goods at higher prices due to high cost of production.
Thus these illegal markets are a serious problem for the industries of the province.
4.5.6. Miranshah/ Zohab Markets Impact
Miranshah Bazar and Zohab market both are playing a very bad role in the progress of
the province, because, all this area is paralysis by the imported goods on low prices.
These goods are crossing the boarders illegally without any custom duty that directly
showing the effect on the overall prices of the goods available in the markets. First,
access to these areas is very simple and easy for importing these smuggled goods.
Secondly, no proper system of trade’s application is needed for maturing the transactions.
All these process are completed in vernacular methods that having no integration with the
modern business techniques application. So these two boarder trades have impaired the
local markets with the import of foreign goods. All these illegal goods are further
transported to the different part of the province and also in the whole country.
4.5.7. Infrastructure Facilities
From the time of partition, NWFP industrial sector are having no remarkable position in
the history, but still this continue in the same status quo form, no proper developments
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have been made in the industrial sector. NWFP lacks infrastructure as is evident from the
following:
Shortage of electricity and expensive electricity being 14.57% for both
FATA/NWFP against its share of 13.54% for NWFP alone and 15.54 for both
NWFP consumption of electricity is 7.1% below the national average 8.46%
below Punjab 14.89% below Sindh1.
Shortage of gas supply being 2% of the total in the country.
Inadequacy/lack of railway services in NWFP. The share of railway tracks in the
province is only 6.2% of the total.
The share of NWFP in roads is only 5.1% of the total in the country2.
On the basis of all the above statistics it is concluded that NWFP is substantially lacking
infrastructure.
4.5.8. Frequent Breakdown of Electricity
The NWFP electricity power generation capacity from hydel is 69.07% and from thermal
is 62.48% and 32.81% of the total as against NWFP and FATA consumption of 14.5%
that is 44.40% of its own generation. The average cost of fuel alone is 95.82paisas/KWH
in thermal. Moreover, whereas NWFP is made to pay the full price of generation etc, the
insufficient supply of electricity that is 8.14% against its share of 13.5% and frequent
breakdown of electricity has also slowed down the industrialization process in the
province3.
4.5.9. Lack of Capital
One of the major problems of industrialization in Pakistan and specifically in NWFP is
the lack of capital. In large scale industries like steel and iron, chemical, automobile etc,
the amount of capital required per worker is quite high. In industries like textile, carpet,
1.Report of the Task Force on Industrialization in NWFP, 1997. pp. 53.
2.ibid
3.Industrial Perspective of NWFP, Sarhad Development Authority, August, 2001. pp.45
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sugar, paper board etc, require huge amount of capital to establish and expand these
industries. On the other hand the government and financial institution allocation of funds
for the province is not sufficient to establish these capital intensive industries.
4.5.10. Lack of Financial Institutions Facility
At present the financial system of the country lacks the desired orientation regarding the
SMEs support. The problems of comparatively low allocation, delays in granting
sanctions and non availability of funds in time, keep the level of investments in industries
at minimal. The banking institutions are not sufficiently active in looking after the
financial needs of the lagging areas like NWFP.
Another serious related problem that most of the banks headquarters are located in other
provinces, therefore, provincial office should be given enhanced loan sanctioning powers.
This will facilitate speedy disposal of cases locally and would save the business
community, particularly small and medium ones from unnecessary complications and
delays. Furthermore, it has been observed that in some cases funds are not disbursed due
to lack of budget allocation for the province.
4.6. STATE OF INDUSTRIALIZATION IN NWFP
In NWFP there are three major industrial estates and 11 small industrial estates. The three
major industrial estates are as under:
1. Industrial Estate, Peshawar.
a) Industrial Estate, Jumrud Road, Peshawar.
b) Industrial Estate, Kohat Road, Peshawar.
2. Industrial Estate, Gadoon Amazai, District Swabi.
3. Industrial Estate, Hattar, District Haripur.
The other eleven small industrial estates are as under:
i. Industrial Estate, Abbottabad.
ii. Industrial Estate, Khalabat.
iii. Industrial Estate, Dera Ismail Khan.
iv. Industrial Estate, Mardan.
v. Industrial Estate, Bannu.
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vi. Industrial Estate, Kohat.
vii. Industrial Estate, Manshera.
viii. Industrial Estate, Charsadda.
ix. Industrial Estate, Chitral.
x. Industrial Estate, Swat,
xi. Industrial Estate, Nowshera.
Now, I am going to give the short detail of industrialization in NWFP. Following are the
data about the three major industrial estates in the province.
1. Industrial Estate Peshawar
This industrial estate is situated in Peshawar along with the Jumrud Road. The total
number of plots allotted is 343. The number of projects in operation is 137, while 36 units
are closed and 62 projects are under constructionxxiii. The industrial units having
dominance in the estate are:
Match factory, vegetable ghee, marble tiles, and chemical, and PVC pipes,
pharmaceutical and woolen mills. (Government of NWFP, 1996)
2. Industrial Estate, Gadoon Amazai
This is located in Gadoon Amazai, District Swabi. The total number of plots allotted in
this industrial estate is 468 while 120 plots are vacant. 148 units are in operation and 63
units are closed while 17 units are still under constructionxxiv. The major industries of this
industrial estate are: textile, vegetables ghee, steel furnaces, paper and paper products,
pharmaceutical, chemicals, electronic goods and PVC pipes.
3. Industrial Estate, Hattar
This industrial estate is located in Hattar, District Haripur. Here the total number of plots
allotted is 349 while 11 plots are vacant. Total number of units in operation are 143, 17
units are closed and 40 units are under construction1.
1.Directory of Industrial Establishment, Government of NWFP, P.45. 2003-2004.
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4. Industrial Estate, Dera Ismail Khan.
The D.I.Khan region comprising of two industrial states with total area of 236 canals,
consisting of 141 plots of following three different sizes:
Size A = 64 Plots = 10,000 square feet
Size B = 45 Plots = 5,000 square feet
Size C = 32 Plots = 2,500 square feet
The over dependence of the population on agriculture, the abundance of natural resources
and shortage of capital and skills justify industrialization of this region, through cottage,
and small scale industries.
But unfortunately D.I.Khan region has failed to develop and attract local entrepreneurs.
The traits of D.I.Khan is faced with special problems likely over production of labour,
high transportation cost, higher cost of building construction, shortage of skilled and
unskilled labour and above all lack of entrepreneurship. Two industrial estates, one each
at Tank and Draban road and prova road were setup to attract local entrepreneur. But
these sheds remained unoccupied for want of local entrepreneur. So there is a need to
educate, attract and inculcate a sense of progressiveness among the people of D.I.Khan.
5. Industrial Estates, Abbottabad
The Industrial Estates, Abbottabad was established in 1973-74. The present area of these
industrial estates is 20.00 Acres was developed at the cost of 2.599 million at the start of
Rs. 20 per sq ft. Total number of plots is 109. All of them are allotted one.
6. Industrial Estates, Khalabat.
The industrial Estates, Khalabat was started in 1973-74, with the total area of 20 acres.
This Estate was developed with a cost of Rs. 6.779 millions at the rate of Rs 15 per sq ft.
This is divided into 99 plots. Out of this total 96 plots are allotted one and 3 plots still
vacant.
7. Industrial Estates, Mardan.
The Industrial Estates, Mardan was established in 1974-75, having areas of 70 acres. This
is divided into 338 plots. All plots are allotted one. This Estate was developed at the cost
of Rs. 10.133 millions at the rate of Rs.20 per sq ft.
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8. Industrial Estates, Bannu.
This Industrial estate was established in 1974-75 comprising a total land of 59.03 acres.
This is divided into 242 plots out of which only83 plots were allotted and the remaining
are still vacant. This Estate was developed at the cost of Rs. 4.634 millions.
9. Industrial Estates, Kohat.
This Industrial Estate was developed in 1984-85 comprising a total area of 35 acres. This
Estate is divided into 148 plots out of which only 65 plots were allotted and the
remaining 83 plots are still vacant. This was developed at the cost of Rs. 7.174 millions at
the rate of Rs.20 per sq ft.
10. Industrial Estates, Mansehra.
This Industrial Estate was started in 1986-87 having a total land of 20 acres. This was
developed at the cost of Rs. 6.177 millions at the rate of Rs.20 per sq ft. This Estates was
divided into 112 plots, all of them are allotted one.
11. Industrial Estates, Charsadda.
This Industrial Estate was established in 1991-92 at the cost of Rs. 19.170 millions at the
rate of Rs. 17 per sq ft. This Estate was divided into 139 plots in which all of them are
vacant.
12. Industrial Estates, Nowshera.
- Infrastructure in SIE has been completed except H.T Line & Overhead tank.
- As per decision of the SIDB further work has been stopped.
- The Agriculture Department has shown willingness to take over the land for the
establishment of a seed farm.
13. Industrial Estate, Chitral
14. Industrial Estate, Swat
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Result of the Study
5.1 INTRODUCTION
This section gives the information about the outcomes of the study in the form of Tables,
which have been designed after proper analysis of the data with the help of Manual
Statistical Package for Social Sciences.
Tables 1-39 display frequency distribution of responses between and among different
response categories under each and every question. The significance of difference of
frequency distribution between and among different categories of responses has been
determined through Chi-Square. Different questions assess one of the five different
natures of problem areas faced by SMEs viz; Management, Marketing, Human Resource,
Legal, and Financial.
Table No. 40 shows Coefficient of Correlation along with values of significance among
the sources of the strength of different categories of problems perceived by the
respondents in SMEs.
Table numbers 41 to 45 show differences in perception of problem areas by 3 groups of
respondent’s viz., Successful, Partially Successful, and Break-even- business units.
Table numbers 46 to 64 show cross-tabulation between different variables that are
theoretically influencing each other in one way or another. Chi-Square values for all of
this cross-tabulation have been determined and presented along with their respective
levels of significance.
MANAGEMENT SECTOR 5.2 Table 5.1. Responses Including SMEs Contribution to Economy Condition
Frequency of Responses Chi-Square Value X2
Significance Level P
Yes No
114 6
97.2
.0001
N=120
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This table show direct evaluation of the impact of the SMEs on the economy in order to
assess respondents’ perception of the SMEs, in terms of number of responses falling in
yes-No categories, Chi-Square value, and Significance Level.
5.3 Table 5.2: Sector Wise Categories of Business Condition Frequency of
Responses Chi-Square Value X2
Significance Level P
Food Textile Wood Products Paper/Board Chemical Mineral Others
14 6 6 7 47 5 25
125.96
.0001
N=120
Table highlights the frequency of responses indicating different business falling in to
seven categories supported by the Chi-Square value and significance level. This
presentation is the classification of SMEs into a board group of businesses primarily
available in the region of Peshawar, Bannu and Dera Ismail Khan. The purpose is
identification of the prime cataloging of the SMEs in the region.
Table 5.3: Responses Showing Reasons for Business Opting Grounds Condition Frequency of
Responses Chi-Square Value X2
Significance Level P
Attractive Profit Margin Family Background Future Prospects Others
53 30 32 05
38.59
.0001
N=120
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147
This table indicates the factors that the prime rationale behind selecting the business unit
on the basis of personal choices. The options are showing to identify a suitable business
unit on the basis of the region. The frequency of responses, show inclination towards
attractive profit margin. This is the prime ground of the choice in the region. The table
results show the option for the business along with its Chi-Square value and significance
level of .0001.
5.4 Table 5.4: Responses Showing Different Forms of Business Condition Frequency of
Responses Chi-Square Value X2
Significance Level P
Sole Proprietorship Partnership Company Others
33 26 57 04
47.66
.0001
N=120
This table results give the impression that most of the responses rest on the company
style SMEs in the region that is almost 50% of the total sample size. The remaining
business structures are having equal opportunities for the respondents in the region. This
table result shows the Chi-Square value and significance level of .0001.
Table 5.5: Responses Exhibiting Manager’s Perception of Business Success Rate Condition Frequency of
Responses Chi-Square Value X2
Significance Level P
Successful Partially Successful Breakeven
64 49 07
43.66
.0001
N=120 This table indicates the rating of the business unit in term of their success in the region.
The frequency of responses shows that more than 50% businesses are running
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148
successfully, other than partially successful and even on the breakeven. The table results
further gives the Chi-Square value and significance level of .0001.
Table 5.6: Responses Showing the Prospects of Precinct Tuning Condition Frequency of
Responses Chi-Square Value X2
Significance Level P
Tax Free Zones Concessionary Formal Credit. Change in the Attitude of Regulatory Authority. All of the Above Others
40 30 26 21 03
31.10
.0001
N=120
This table explains the prospects of structural readjustments in the SMEs structure in the
region. The result response gives top priority to the tax free zones introduction in the
region. The remaining responses results take the secondary place for change in the SMEs
structure. The table shows the Chi-Square value of 31.10 and significance level of .0001.
MARKETING SECTOR 5.5 Table 5.7: Responses about Channels of Distribution
Condition
Frequency of Responses
Chi-square Value X2
Significance Level P
Producer-Distributor-Wholesaler-Retailer-Consumer. Producer-Wholesaler-Retailer-Consumer Producer-Middleman-Consumer Producer-Consumer
35 42 16 27
12.46
.007
N=120
This table highlights the channels of distribution in the region regarding SMEs that can
select the ideal channel of distribution. Table results are uneven about the distribution
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149
channels that give the impression of free choice dependence on the availability of
channels in the region. The table result of Chi-Square value is 12.46 and significance
level of .007.
Table 5.8: Responses indicating the Methods of Price setting Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
According to Quality
According to the Market Trend (Demand and Supply)
According to the Cost of Production
Some of these
Any Others
29 31
52
03
05
66.60
.0001
N=120
This table shows the prospects of price suitability to the SMEs profitability and its
success in the region. Pricing setting policy is very sensitive matter and in the table
mostly reliance is made on the cost of production. The table result gives the Chi-Square
value of 66.60 and significance level of .0001.
Table 5.9: Responses Showing the Impacts of Competitor’s Campaigns Condition Frequency of
Responses Chi-Square Value X2
Significance level P
Not Affected
Moderately Affected
Slightly Affected
Extremely affected
23
25
40
32
5.92
.103
N=120
This table results give the impression that the impact of competitor’s campaigns are
grater in the SMEs in the region due to lack of knowledge. The frequency responses
explain that the impact of competition is very slight in the region but as such no grater
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150
effects are present to create problem for the sector. The Chi-Square value is 5.92 and
significance level is .103.
Table 5.10: Responses Showing Complications in the Channel Adaptation Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Non-availability of Trained Sales-agent Risk-Adjusted-Return Characteristics Time Adjustment Factor Others Some of These
18 30 50 12 10
43.72
.0001
N=120
This table shows that all complications are arising from the time adjusted factor in the
channels of distribution in SMEs sector by the highest frequency of responses. At least
50% higher than the other responses in the market give the impression to concentrate on
the time factor that can bring more to the sector. The table result of Chi-square value is
43.72 and significance level is .0001.
5.6 Table 5.11: Responses Showing SMEs Role in Job Creation Condition
Frequency of Responses
Chi-Square value X2
Significance Level P
Agree Strongly Agree Undecided Disagree Strongly Disagree
80 22 15 02 01
169.56
.0001
N=120
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151
The table results stress on the role of SMEs in the creation of Jobs. It also shows that
more than 65% respondents believe that SMEs contribution in the economy regarding job
creation is positive. The table display Chi-Square value of 169.56 and significance level
of .0001.
Table 5.12: Responses indicating the perplexity in the Price Setting
Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Price sensitive consumers Foreign Price (Karhano/Bara Market Price) Sales Promotion Strategies of the Competitors Others Some of these
49 15 41 08 07
61.80
.0001
N=120
These table results regarding the perplexity in the price setting are very sensitive on the
part of the respondent’s response in the SMEs sector. More than 45% of the respondents
admit that the price setting must rotate around the consumer sensitivity in the market.
This table shows Chi-Square value of 61.80 and significance level of .0001.
Table 5.13: Responses of Firms Showing ISO Certification Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Yes No
90 30
40.00
.0001
N=120
This Table draws the line of demarcation between ISO certified and Non-certified firms
coming under the umbrella of SMEs in the region. This result shows the importance of
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ISO certification for the marketing and increasing the out put of the firms in turn of
profits. In the given table the Chi-Square value is 40.00 and significance level is .0001.
Table 5.14: Responses Indicating Marketing Problems Faced by SMEs in the Region Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Intense Competition Inflation Lack of Economies of Scale Poor Quality Products Bad Debts All of These Some of These
32 20 04 10 08 15 31
42.75
.0001
N=120
This table indicates the market problems associated with the SMEs in the region. In all
the problems, the market intense competition is very crucial in nature, because most of
the SMEs sector units are not well informed/motivated with the international standard.
So, this problem having its, impact on the growth and development of SMEs in the
region. The table results of Chi-Square value is 42.75 and significance level is .0001.
LEGAL SECTOR
Table 5.15: Responses Highlighting the Legal status of the SMEs in the region Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Registered Non-registered
101 019
56.04
.0001
N=120
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153
This table indicates that majority of the SMEs are registered and their legal status are
secured in the eye of law regarding the legal facilities available in the region. This table
shows the Chi-Square of 56.04 and significance level of .0001.
Table 5.16: Responses indicating the Legal Problems Associated with the Growth of SMEs Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Registration Incorporation Tax Return Quality Control Pressures Legal Penalties Others All the Above Some of These
15 03 27 08 14 07 13 33
48.68
.0001
N=120
This table shows that the legal problems are associated with the structure of SMEs in the
region. The result of the table highlight the tax return problem is the prime in this regard.
Round about 25% of the responses indicates that tax return is the major problem. All
other problems are uneven in its effects that can not create a big issues/problem for the
SMEs sector. This table displays Chi-Square value of 48.68 and the significance level of
.0001.
Table 5.17 Responses indicating the Availability of Government Incentives to the SMEs Sector Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Yes No
41 79
12.04
.002
N=120
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154
This table reveal that government role in the establishment of SMEs are very poor and
offering no incentives for the promotion of SMEs in the region. This low profile
incentives are the hurdle for the growth of SMEs in the sense that no active response are
coming for the developmental purposes that further delay the process of development.
This table result of Chi-Square is 12.o4 and significance level is .002.
Table 5.18: Responses Indicating the Major Incentives Availability to the SMEs Sector Condition
Frequency of Responses
Chi-square Value X2
Significance Level P
Nil (Without Incentives) Special Provisions Tax Relief
98 05 17
127.96
.0001
N=120
This table shows that government incentives given to SMEs sector are near to zero. The
responses indicate that some relief in the form of tax is not the proper justice with the
sector to promote the SMEs on large scale basis in the region. This table gives the value
of Chi-Square value of 127.96 and significance level of .0001.
Table 5.19: Responses indicating the Satisfaction Criteria of SMEDA for SMEs Sector Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Satisfied Dissatisfied Partially satisfied Not sure
40 15 30 35
11.66
.021
N=120
This table results give the impression on the part of SMEDA is not satisfactory in the
sense that hardly 33% responses satisfaction does not mean the whole sector satisfaction.
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The remaining part of the table results are grater in number that is discouraging one nor
encouraging. The table Chi-Square value is 11.66 and significance level is .021.
Table 5.20: Responses about the contribution of the Government Institutions in the Development of SMEs in the Region Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Corporate Bodies Financial Institutions Not Sure (Self reliance)
14 50 56
25.80
.0001
N=120
This table indicates the capacity/range of the government bodies and financial institutions
in the development of SMEs in the region. The result of the table shows that the role of
government financial institutions are not satisfactory in the sense, that are required in
today globalize environment. The financial Institutions are granting credit to the SMEs
sector but that is not justified. This table shows the Chi-Square value of 25.80 and
significance level of .0001.
Table 5.21: Responses Indicating the Impact of Smuggling on SMEs sector Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Strongly Agree Agree Undecided Disagree Strongly Disagree
17 61 26 13 03
79.56
.0001
N=120
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156
These table results indicating the impact of smuggling on the performance of the SMEs
sector in the region, due to Free Afghan Trade Transit to the local market. The responses
give the impression that smuggling has a detrimental impact on the SMEs sector. The
Table shows the Chi-Square value of 75.56 and significance level of .0001.
HUMAN RESOURCE SECTOR Table 5.22: Responses Showing the Nature of SMEs in the Region Condition
Frequency of Responses
Chi-square value X2
Significance Level P
Non (Not cleared) Capital Intensive Labor Intensive Both (Capital and Labor)
03 21 30 66
70.20
.0001
N=120
This table indicates the nature of the SMEs, whether its nature is capital intensive or labor
intensive. The frequency responses depict that most of the firms are dependent upon both
equally. While a small rationale appears in the labor intensive as compared to capital
intensive position in the region. This table gives the Chi-Square value of 70.20 and
significance level of .0001.
Table 5.23: Responses Highlighting the Magnitude of Workforce of the SMEs Sector Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Below-15 16-30 31-45 46-99 99 and above
13 28 37 26 16
15.70
.0004
N=120
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157
This table evaluates the strength of the workforce employed in a given business and the
variety gives the specific magnitude in the SMEs in the region. The responses highlights
30 to 40% peoples are employed in a business in the age of 31-45 years that is the strong
group of people showing maximum output towards SMEs. This table shows the Chi-
Square value of 15.70 and significance level of .0004.
Table 5.24: Responses Showing Percentage (%) of Skilled Labor Force in the Respective SMEs Organizations Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Non (Not Clear) Easily Available 1-25% 26-50% 51-75% 76-100% Not Available
02 17 35 34 16 05 11
58.06
.0001
N=120
This table shows the percentage of skilled labor employed in the SMEs sector in the
region. The frequency at 1-25% is the highest one showing the skilled labor is only
partially available in the respective businesses. This category is the youngest group of the
skilled labor force available in the SMEs, which directly affect the productivity of the
sector. This table gives the Chi-Square value of 58.06 and significance level of .0001.
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158
Table 5.25: Responses Showing the Deficiency of Skilled labor in the SMEs Sector
Condition
Frequency of Responses
Chi-Square value X2
Significance Level P
Non Strongly Agree Agree Undecided Disagree Strongly Disagree
02 23 60 23 09 03
117.60
.0001
N=120
This table shows the deficiency of skilled labor force in SMEs sector. The respondent’s
views showing a serious impact of deficiency of more than 55% skilled labor force in the
region. This table result of Chi-Square value is 117.60 and significance level is .0001.
Table 5.26: Responses Showing the Impact of Job Swapping in SMEs Sector Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Economic Development Economic Stagnancy Economic decline
67 18 35
30.96
.0001
N=120
This table displays the impact of job switching to all economic process in the sector.
From the available information of the table, the responses giving the impression that
economic development process are showing good results as compared to the other
economic profile. This table result of Chi-Square value is 30.96 and significance level is
.0001.
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Table 5.27: Responses indicating the Frequencies of training programs in SMEs Sector Condition
Frequency of Responses
Chi-Square value X2
Significance Level P
Monthly Quarterly Semi-annually Annually Other Not Available
20 15 15 18 26 26
6.3
.392
N=120
This table shows that the existence of training programs must occurs in SMEs sector.
While the present frequency of responses are uneven in their results, but most of the
inclination are towards monthly basis adoption of training programs in the region. The
table results of Chi-square value is 6.3 and significance level is .392.
Table 5.28: Responses Highlighting the Propensity towards Training Programs in SMEs Sector Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Yes No
78 42
10.80
.003
N=120
This table highlights the propensity towards the training programs in SMEs sector. The
table responses show that training programs may be available in the sector for the growth
and development of SMEs. While the present table indicates that more than 65%
responses are in favor of training programs and are important in this region. This table
result of Chi-Square value is 10.80 and significance level is .003.
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160
Table 5.29: Responses highlighting the Impact of Job Swapping in terms of
Turnover and Wage Expense Raise in SMEs Sector
Condition
Frequency of Responses
Chi-Square value X2
Significance Level P
Strongly Agree Agree Undecided Disagree Strongly Disagree
09 86 16 07 02
196.44
.0001
N=120
This table gives importance to the impact of job swapping in terms of turnover and wages
incentives rise positively in SMEs sector. This system introduction in SMEs will
motivate the workforce to increase their turnover at par to the increase in the wage
system of the sector in the required region. More than 70% responses shows that this
category having a great impact job swapping in terms of turnover and wage expense rise.
This table result of Chi-square value is 196.44 and significance level is .0001.
FINANCIAL SECTOR
Table 5.30: Responses Indicating Investment Profile (Amount of Investment) of the Firms in SMEs Sector. Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Below 5 Million Between 5 million-100 million Between 100 million- 1 billion Above 1 billion
30 60 16 14
45.06
.0001
N=120
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161
This table gives the details of the amount invested in SMEs sector in the region. The
investment profile of this sector is moderate in nature because most of the investors
belong to a middle class. The table results also, showing that optimum investment lies in
5 to100 million ranges. The table Chi-square value is 45.06 and significance level is
.0001.
Table 5.31: Responses Showing the Attention/Importance of Budget and its Future Prospects for SMEs in the region Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Yes No
102 018
74.47
.0001
N=120
This table shows the attention/calling importance of the budget and its future prospects
for SMEs sector development in the region. No doubt importance/allocation is not made
in the budget but it importance and realization on the part of the general experience of the
ground compels to specify some for the SMEs sector. Because more than 85% of the
responses showing the importance/attention of the budget allocation to this sector. The
table results of Chi-Square value is 74.47 and significance level is .0001.
Table 5.32: Responses Indicating the Different Sources of Capital Available to SMEs Sector in the Region. Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Bank Loan Owner’s Capital Both Other
12 46 60 02
75.46
.0001
N=120
Chapter # 5
162
This table shows the sources available to SMEs sector in the region from different
alternatives. Table responses showing that major reliance is made on the Owner’s capital
that are easily available for investment, while the other sources of capital carry number of
formalities that are beyond the investor approach. Therefore, more than 70% financial
reliance depends upon the investor’s own capital. The table results of Chi-Square value is
75.46 and significance level is .0001.
Table 5.33: Responses Showing Nature of Property Acquisition in SMEs Sector in the Region. Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Personal Property Rented Lease hold
53 06 61
44.16
.0001
N=120
This table highlights the SMEs sector property acquisition style in the region, which
rotate around the leasing nature property. This sort of arrangement is simple in nature and
also, in case of dissolution, it may not put the investor in trouble, so most of the SMEs
sector investor’s preferred to leasing property for their business unit. In this regard, the
table Chi-Square value is 44.16 and significance level is .0001.
Table 5.34: Responses Highlighting the Availability of Financial Support to SMEs in the Region. Condition
Frequency of Responses
Chi-square Value X2
Significance Level P
Strongly Agree Agree Undecided Disagree Strongly Disagree
28 74 10 05 03
146.43
.0001
N=120
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163
This table highlights the availability of financial package from various organizations and
institutions in the region. The table responses show that a high package of financial
support may be available to SMEs sector on priority bases. Because, most of the investor
belongs to a middle class of the society, so they are unable to meet the shortage of funds
for their business units. This table result of Chi-Square value is 146.43 and significance
level is .0001.
Table 5.35: Responses Indicating the Problems Attached With Credit Financing Available to SMEs Sector in the Region Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
High Markup Terms and Condition of Loan Complexity of Procedures Running Finance Other N-A Some of These
22 23 14 03 09 19 30
29.35
.0001
N=120
This table highlights the problems attached with the credit financing available in the
market to the SMEs sector in the region. The only alternatives, available to the sector, is
credit financing offered by the scheduled banks of the country and special sector bank
that is called SME Bank. Where, number of problems is faced by the investor highlighted
by the table. In this regard, the table Chi-Square value is 29.35 and significance level is
.0001.
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164
Table 5.36: Responses Showing the Effects of Different Factors on the financial position of SMEs in the Region Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Government Policy Political Environment Taxation Cost of Raw Material All of These Some of These
20 05 17 20 22 25
18.40
.004
N=120
This table indicates the number of factors that directly having effects on the financial
position of SMEs in the region. First, the cost of raw materials having the basic effects on
the growth and development of SMEs in the region, because, it includes, number of other
factors in the form of transportation, marketability, etc. The table results of Chi-Square
value is 18.40 and significance level is .004.
GENERAL SECTOR Table 5.37: Responses highlighting the stress regarding the Lack of Infrastructure in SMEs sector in the Region. Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Strongly Agree Agree Undecided Disagree Strongly Disagree
24 80 10 04 02
155.51
.0001
N=120
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165
This table shows that major stress is found regarding the lack of infrastructure in SMEs
sector in the region, while infrastructure is a base for growth and development of SMEs
in the region. The table responses shows, that lack of infrastructure is hindering the
growth and development of the SMEs. The table results of Chi-Square value is 155.51
and significance level is .0001.
Table 5.38: Responses Highlighting the Awareness of WTO in SMEs in the Region Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Yes No Some What
75 20 25
46.26
.0001
N=120
This table highlights the importance of WTO for the SMEs sector in the region. From
today, every organization will strengthen their concern in WTO awareness, that directly
having negative impact on the growth and development of SMEs in the region and also in
the international markets. The awareness of WTO is simple regarding its application in
the general public in the form of “Yes” or “No”. More than 70% responses are in favor of
WTO introduction in SMEs sector. The table results of Chi-Square value is 46.26 and
significance level is .0001.
Table 5.39: Responses Indicating the Impact of WTO on SMEs in the Region
Condition
Frequency of Responses
Chi-Square Value X2
Significance Level P
Good Bad Good for Some Devastating for Others No effect
43 22 43 12
24.19
.0001
N=120
Chapter # 5
166
This table is showing the impact of WTO on SMEs in the region. The responses here
indicates that more than 40% are in favor of WTO, while the same number of responses
also believes that WTO is good for some others devastating nature of business. The table
results of Chi-Square value is 24.19 and significance level is .0001.
5.7 Table 5.40: Inter-correlation among the Various Categories of Problems as Measured With the Help of Questionnaire Management Marketing Legal HR Financial Problems Problems Problems Problems Problems Management Pearson 1 .522 (**) .272 (**) .271 (**) .222 (**) Problems Correlation Marketing Pearson .522 (**) 1 .467 (** ) .233 (**) .466 (**) Problems Correlation Legal Pearson .272 (**) .467 (**) 1 .204 (**) .204 (**) Problems Correlation HR Pearson .271 (**) .233 (**) .204 (**) 1 .204 (**) Problems Correlation Financial Pearson .222 (**) .466 (**) .204 (**) .204 (**) 1 Problems Correlation N=120 ** Correlation is significant at the 0.01 level (2-tailed).
** Correlation is significant at the 0.05 level (2-tailed).
From the above table, I conclude that all problems are highly inter correlated. One can
infer from the correlation table that there exists a high degree of multi-co linearity
between the given types of problems. Because, here all problems are highly interrelated
and giving the impression to the researcher to accommodate the highlighted problems in
the sector for the future development of SMEs in the region.
Chapter # 5
167
Table 5.41: Differences in Management Problems Faced by Successful, Partially Successful and Breakeven Organizations in the region
N Mean
Std Deviation
F.value
P
Management Problems
Successful Partially Successful Breakeven
64 49 7
16.00 12.25 1.75
11.165 9.535 2.062
2.234
0.05
df=2
Mean standard deviation and F. value as a measure of significant difference for
management problems faced by Successful, Partially Successful and Breakeven
Organizations. The table indicates that there exists a significant difference between
management problem faced by successful and break-even organizations. But there is no
significant difference between management problem faced by partially successful and
break-even organizations.
Table 5.42: Differences in Marketing Problems Faced by Successful, Partially Successful and Breakeven Organizations in the Region
N Mean
Std Deviation
F.Value
P
Marketing Problems
Successful Partially Successful Breakeven Total
64 49 7 120
16.00 12.25 1.75
11.165 9.535 2.062
2.234
0.05
d.f = 2 Mean Standard deviation and F. value as a measure of significant difference-Marketing
Problems faced by Successful, Partially successful and Breakeven Organizations. The
Chapter # 5
168
table indicates that there exists a significant difference between management problem
faced by successful and break-even organizations. But there is no significant difference
between management problem faced by partially successful and break-even
organizations.
Table 5.43: Differences in Legal Problems Faced by Successful, Partially Successful and Breakeven Organizations in the Region
N Mean
Std Deviation
F.Value
P
Legal Problems
Successful Partially Successful Breakeven Total
64 49 7 120
16.00 12.25 1.75
11.165 9.535 2.062
2.234
0.05
df=2
Mean, Standard deviation and F. value, as a measure of significant difference- Legal
Problems faced by Successful, Partially Successful and Breakeven organizations. The
table indicates that there exists a significant difference between management problem
faced by successful and break-even organizations. But there is no significant difference
between management problem faced by partially successful and break-even
organizations.
Table 5.44: Differences in HR Problems Faced by Successful, Partially Successful and Breakeven Organizations in the Region
N Mean
Std Deviation
F.Value
P
HR Problems
Successful
Partially Successful
Breakeven
Total
64
49 7
120
16.00
12.25
1.75
11.165
9.535
2.062
2.234
0.05
df=2
Chapter # 5
169
Mean Standard deviation and F.value as a measure of significant difference-HR Problems
faced by Successful, Partially Successful and Breakeven Organizations. The table
indicates that there exists a significant difference between management problem faced by
successful and break-even organizations. But there is no significant difference between
management problem faced by partially successful and break-even organizations.
Table 5.45: Differences in Financial problems Faced by Successful, Partially Successful and Breakeven Organizations in SMEs Area
N Mean
Std Deviation
F.Value
P
Financial Problems
Successful Partially Successful Breakeven Total
64 49 7 120
16.00 12.25 1.75
11.165 9.535 2.062
2.234
0.05
df=2
Mean Standard deviation and F.value as a measure of significant difference- financial
problems faced by Successful, Partially Successful and Breakeven Organizations in the
region. The table indicates that there exists a significant difference between management
problem faced by successful and break-even organizations. But there is no significant
difference between management problem faced by partially successful and break-even
organizations.
Chapter # 5
170
Table 5.46: Cross Tabulation Layout of Frequency Distribution for Different Categories of Form of Business vs. Business Rating Business Rating
4 Form of Business
Sole Proprietorship
Partnership Company Others Total
Successful Partially Successful Breakeven
15 17 3
14 10 4
31 22 --
4 -- --
64 49 7
Total 35 28 53 4 120 d.f =6 X2 = 12.309 P = 0.037
This Cross Tabulation shows the distribution of frequencies of different categories and
forms of business and business ratings with a Chi-Square value and level of significance.
These ratings are independent and the value is not significant at 5%.
Table 5.47: Cross Tabulation Layout of Frequency Distribution for Different Categories of Awareness of WTO Vs. WTO’s Impact on SMEs in the Region. WTO’s Impact on SMEs
Awareness of WTO
Yes No Some What Total
Good Bad Good for some devastating of Others No effect
39 9
25 5
4 4 5 4
- 9
13 3
43
22
43
12
Total 78 17 25 120 d.f = 6 X2 = 27.059 P = 0.0001
This table shows that Awareness of WTO and Impact on SMEs are independent. As the
alternative measures are that Awareness of WTO and Impact on SMEs are associated
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171
between the two criteria of classification. The value is significant. This give the
impression simply by not knowing its importance, they reject WTO application. This is
clear from the Table. 47.
Table 5.48: Cross Tabulation Layout of Frequency Distribution for Different Categories of Major incentives Vs. Government Incentives for SMEs in the Region Major Incentives
Government Incentives
Yes No Total Nil Special Provisions Tax Relief
32 2 11
66 3 6
98 5 17
Total 45 75 120 d.f = 2 X2 = 6.350 P = 0.0375
This table highlights the frequency distribution for different categories of major
incentives (budgetary incentives) from Government incentives (Non-budgetary
Incentives). The result shows that the previous has no relation at the available
significance. Hence, we conclude that there exists an association between the two criteria
of classification. The value is significant.
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Table 5.49: Cross Tabulation Layout of Frequency distribution for the Amount of
Investment vs. Sources of Capital Available to the SMEs in the Region
Amount of Investment
Sources of Capital
Bank Loans
Owner’s Capital
Both
Others
Total
Below-5 millions Between -5 million And 100 millions Between – 100 millions And 1.00 billion Above 1.00 billion
2 7 1 -
17 19 2 9
11 33 13 5
- 1 - -
30 60 16 14
Total 10 47 62 1 120 d.f = 9 X2 = 16.436 P = 0.025
This table gives the frequency distribution of the amount of investment available from
different sources of capital with its Chi-Square value and significant level. From this
result, we conclude that these two criteria are independent and showing the difference in
the form of significance level. Hence, the value is not significant.
Table 5.50: Cross Tabulation Layout of Frequency Distribution for Strength of Workers vs. Lack of Skilled Labor Availability in the Region for SMEs Strength of Workers
Lack of Skilled Labor Strongly Agree
Agree
Undecided
Disagree
Strongly Disagree
Total
Below-15 16—30 31—45 46—99 99 –and above
1 5 8 5 5
5 16 21 12 7
7 6 6 4 3
- 1 2 3 1
- - - 2 -
13 28 37 26 16
Total 24 61 26 7 2 120
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173
d.f = 16 X2 = 20.957 P = 0.0001
The result of this table indicates the frequency distribution of workers and lack of skilled
labor available in the table with the Chi-Square value and significance level. The results
indicates that the available two criteria are independent and showing the difference in the
form of significance level. Hence, the value is not significant.
Table 5.51: Cross Tabulation Layout of Frequency Distribution for the Amount of Investment vs. Budgetary Position for SMEs in the Region. Amount of Investment
Area Budgetary Position Yes No Total
Below—5 million Between – 5 million—and 100 million Between –100 million and 1.00 billion Above—1.00 billion
24 47 16 12
6 13 -- 2
30 60 16 14
Total 99 21 120 d.f = 3 X2 = 4. 727 P = 0.0001
This table shows the frequency distribution for the level of investment available in the
budgetary position (means funds available for general investment, while area budgetary
position means funds for SME in the Province) of the region with the Chi-square value
and level of significance. Here both the level are independent and showing the different
values in the form of significance level. Hence, we conclude that the value is not
significant.
Table 5.52: Cross tabulation Layout of frequency Distribution for Training Program vs. Percentage of Skilled Workers in Organization in the Region. Training Program
Percentage of Workers Easily Available
1-25%
26-50%
51-75%
76-1005
Not Available
Total
Yes No
8 10
18 19
28 6
13 4
4 -
7 3
78 42
Total 18 37 34 17 4 10 120 d.f = 5 X2 = 15.437 P = 0.0283
Chapter # 5
174
This table gives the frequency distribution for the potential of carrying out training
programs on the bases of skilled workers with the Chi-Square value and level of
significance. The table results that training program and percentage of skilled workers are
independent. From the level of significance results, we conclude, that there exist an
association between the two criteria of classification. The value is significant.
Table 5.53: Cross Tabulation Layout of Frequency Distribution for training Program vs. Dispensation of Training Program in SMEs in the Region. Frequency of Training Program
Training Program Yes No Total
Monthly Quarterly Semi-annually Annually Others Not Available
20 12 13 15 16 2
- 3 2 3 10 24
20 15 15 18 26 26
Total 78 42 120 d.f = 5 X2 = 55.674 P = 0.0001
This table shows the frequency of distribution regarding the training programs and their
frequency of execution by different business units with the Chi-Square value and level of
significance. From this results, we conclude, that training programs and their execution
are two independent criteria. Hence, we get the impression that there exist as association
between the two criteria of classification. The value is significant.
Table 5.54: Cross Tabulation Layout of Frequency Distribution for Amount of
Investment vs. Form of Business Units in SMEs in the Region.
Amount of Investment
Form of Business Units
Sole Proprietor
Partnership
Company
Others
Total
Below-5 million Between-5 million and 100 million
15 18
10 13
5 27
- 2
30 60
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175
Between-100 million and 1.00 billion Above- 1.00 billion
- -
3 -
13 12
- 2
16 14
Total 33 26 57 4 120 d.f = 9 X2 = 45.388 P = 0.0001
This table indicates the frequency distribution regarding the form of business utilizing the
different level of investment with the Chi-Square value and level of significance. Here
the amount of investment and its impact on the different form of business units are two
independent variables. Hence, we conclude, that there exist as association between the
two criteria of classification. The value is significant.
Table 5.55: Cross Tabulation Layout of Frequency Distribution for the Amount of
Investment vs. Strength of Workers in SMEs in the Region
Amount of Investment
Strength of Workers Below-15
16-30
31-45
46-99
99-Above
Total
Below-5 million Between 5million and 100 million Between 100 million and 1.00 billion Above 1.00 billion
13 2 - -
5 23 2 1
10 19 8 3
2 14 3 8
- 2 3 2
30 60 16 14
Total 15 31 40 27 7 120 d.f = 12 X2 = 59.792 P = 0.0001
This table shows the frequency distribution regarding the amount of investment and the
strength of workers in different business units with the possible Chi-Square value and
level of significance. Here, both the criteria are independent. Hence, we conclude that
there exists as association between the two criteria of classification. The value is
significant.
Chapter # 5
176
Table 5.56: Cross tabulation Layout of Frequency Distribution for Business Rating Vs. Sector-Wise Distribution of SMEs units in the Region. Business Rating
Sector of Business Units Food
Textile
Wood Product
Paper/ Board
Chem-ical
Min-eral
Other
Total
Successful Partially Successful Breakeven
1 10 3
1 5 -
3 3 -
4 3 -
36 17 4
4 1 -
15 10 -
64 49 7
Total 14 6 6 7 57 5 25 120 d.f = 12 X2 = 26.109 P = 0.030 This table gives the frequency distribution of business rating and its sector-wise
distribution with the Chi-Square value and level of significance. Here, the both the
variables are independent regarding their success level. Hence, we conclude that there
exists an association between the two criteria of classification. The value is significant.
Table 5.57: Cross Tabulation Layout of Frequency Distribution for the Type of channels of Distribution Vs. sector of Business Units of SMEs in the Region Type of Distribution Channels
Sector of Business Units
Food
Textile
Wood product
Paper/ Board
Chemi-cal
Mineral
Others
Total
Producer-Consumer Producer-Middleman-Consumer Producer-Middleman-Wholesaler-Retailer-Consumer Producer-Distributor-Wholesaler-
- 2 9 3
1 4 - 1
4 - 1 1
1 3 2 1
7 4 23 23
- 1 3 1
14 2 4 5
27 16 42 35
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177
Retailer-Consumer
Total 14 6 6 7 57 5 25 120 d.f. = 18 X2 = 60.373 P = 0.00001 This table shows the frequency distribution of type of channels of distribution and its
suitability for the sector of business units with the Chi-Square value and level of
significance. Here the channels of distribution and its suitability for the type of business
units are independent. Hence, we conclude, that there exists an association between the
two criteria of classification. The value is significant.
Table 5.58: Cross Tabulation Layout of Frequency Distribution for the Satisfaction with the Role of SMEDA vs. Business Success Rate in SMEs in the Region Satisfaction with SMEDA
Business Success Rating
Successful
Partially Successful
Breakeven
Total
Satisfied Dissatisfied Partially Satisfied Not Sure
26 6 13 19
14 6 15 14
- 3 2 2
40 15 30 35
Total 64 49 7 120 d.f = 6 X2 = 10.566 P = 0.075
This table gives the frequency distribution for the role of SMEDA in relation to the
business success rating with the Chi-Square value and level of significance. Here, these
two variables are dependent. Hence, we conclude that there exists no association among
the two criteria of classification. The value is not significant.
Chapter # 5
178
Table 5.59: Cross Tabulation Layout of frequency Distribution for Budgetary Position vs. Sector-Wise Business Units in the Region Budgetary Position
Sector-Wise Business Units
Food
Textile
Wood Products
Paper Board
Chem- ical
Mineral
Others
Total
Yes No
13 3
4 2
6 -
4 3
52 5
5 -
20 5
102 18
Total 14 6 6 7 57 5 25 120 d.f. = 6 X2 = 10.132 P = 0.075
This table shows the frequency distribution of budgetary position and sector-wise
business units with the Chi-Square value and level of significance. Here, both the
variables are dependent. Hence we, conclude that there exists no association among the
two criteria of classification. The value is not significant.
Table 5.60: Cross Tabulation Layout of Frequency Distribution for the Awareness of WTO vs. Business success Levels in SMEs in the Region Awareness of WTO
Business Success Levels
Successful
Partially Successful
Breakeven
Total
Yes No Some What
46 7 11
25 13 11
4 - 3
75 20 25
Total 64 49 7 120 d.f. = 4 X2 = 9.353 P = 0.0375 This table gives the frequency distribution of WTO awareness and its impact on the
business success level with Chi-Square value and level of significance. Here both the
variables are dependent. Hence, we conclude that there exists an association between the
two criteria of classification. The value is not significant.
Chapter # 5
179
Table 5.61: Cross Tabulation Layout of Frequency Distribution for the Satisfaction with the Role of SMEDA vs. Form of Business units in SMEs in the Region. Satisfaction with SMEDA
Form of Business Units Sole Proprietor
Partnership
Company
Others
Total
Satisfied Dissatisfied Partially Satisfied Not Sure
7 3 11 12
6 7 4 9
25 5 14 13
2 - 1 1
40 15 30 35
Total 33 26 57 4 120 d.f. = 9 X2 = 14.06 P = 0.075
This table shows the frequency distribution for the satisfaction with the role of SMEDA
and the form of business units with the Chi-Square value and the level of significance.
Here the role of SMEDA and Form of business units are dependent. Hence, we conclude
that there exists no association among the two criteria of classification. The value is not
significant.
Table 5.62: Cross Tabulation Layout of Frequency Distribution for the Awareness of WTO vs. Form of Business Units in SMEs in the Region Awareness of WTO
Form of Business units Sole Proprietor
Partnership
Company
Others
Total
Yes No Some what
12 14 7
19 - 7
41 5 11
3 1 -
75 20 25
Total 33 26 57 4 120 d.f. = 6 X2 = 26.109 P = 0.0005
Chapter # 5
180
This table gives the frequency of distribution of WTO awareness and form of business
units with the Chi-Square value and level of significance. Here the awareness of WTO
and its impact on the form of business units are independent. Hence, we conclude that
there exists an association between the two criteria of classification. The value is
significant.
Table 5.63: Cross Tabulation Layout of Frequency Distribution for the Awareness of WTO vs. Sector-Wise Business Units in SMEs in the Region Awareness of WTO
Sector-Wise Business Units Food
Textile
Wood Product
Paper Board
Chem- ical
Mineral
Others
Total
Yes No Somewhat
6 3 5
1 - 5
2 4 -
4 1 2
43 6 8
3 1 1
16 5 4
75 20 25
Total 14 6 6 7 57 5 25 120 d.f. = 12 X2 = 32.863 P = 0.0005 This table shows the frequency distribution of WTO awareness and sector-wise business
units with the Chi-Square value and level of significance. Here the awareness of WTO
and its impact on sector-wise business units are independent. Hence, we conclude the
there exists an association between the two criteria of classification. The value is
significant.
Table 5.64: Cross Tabulation Layout of Frequency Distribution for Percentage of
Worker vs. Strength of Workers in SMEs in the Region
Percentage of Workers
Strength of Workers in SMEs Sector
Below-15 16-30 31-45 46-99 99-above Total Easily Available 1-25% 26-50% 51-75% 76-100%
2 2 4 - -
10 9 4 1 2
6 8 12 7 2
- 7 10 7 -
1 9 4 1 1
19 35 34 16 5
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181
Not Available
5
2
2
2
-
11
Total 13 28 37 26 16 120 d.f. = 20 X2 = 46.689 P = 0.0001
This table shows the frequency of distribution of percentage of workers and its strength in
the in the SMEs sector with the Chi-Square value and level of significance. Here the
percentage of workers and its impact on the SMEs sector are independent. Hence, we
conclude that there exists an association in between the two criteria of classification. The
value is significant.
