1- CHAPTER-1

1.1 Introduction
The topic of my thesis is Performance of Small & Medium Enterprises on Pakistan’s
Economy.
Small and Medium Enterprises (SMEs) are present in majority in all economies of the
world and playing a significant role world over in the economic development of various
countries. SMEs are dynamic, innovative and most importantly, significant contributor of
employment generation, and output of their economies. SMEs can be very helpful in
employing the ever-growing workforce of an economy that cannot find employment in
Government or in large-scale industry. The sector is a breeding ground for
entrepreneurship. Developing as well as developed economies have spent large amounts
of money for the promotion of SMEs.
Small and Medium Enterprises play an important role in the development of the country.
However, these industries face difficulty in accessing adequate finance for their
businesses. Apart from the traditional modes of financing like banks and money lenders,
newer sources of financing such as venture capital investment, can take care of their
financing requirements. In the case of Pakistan, the government has taken several
initiatives both at the national and the international levels to improve the availability of
finance. But there are still certain impediments that the SMEs face that are required to be
addressed by the government.

SMEs encourage entrepreneurial development and dispersal of the industries throughout

the length and breadth of the country. It also generates a lot of employment opportunities
and the capital cost per employee is very low. With the service sector contributing a
major share to the GDP and as this sector relies on the SMEs, the scope for SME finance
by the commercial banks has increased tremendously. The government is also committed
to give a fillip to the sector through infrastructural development, skill developmental
effort, technological up gradation and by expanding the role of Small and Medium
Enterprises Development Authority in SME development.
1.2 Statement of the problem
SMEs are suffering from several problems which hamper their growth. Lack of
availability of credit to the entrepreneurs is the single most important impediment to the
growth of SMEs. This study will mainly reveal the contribution of SME sector in
achieving various socio-economic objectives: access to finance, employment generation,
contribution to national output and exports, fostering new entrepreneurship & to provide
depth to the industrial base of the economy.
1.3 Significance of the study
The SME sector has become very important for many economic activities in developing
countries because of its special features of capital sparing and labor intensiveness. Govt.
took several measures for the promotion and smooth functioning of this sector. Besides
these, Government carefully planned the development of small and tiny industrial sectors
in the country. It was spent millions of rupees for their development during the plan
periods. But to the dissatisfaction of many, including Government agencies, the sector
has not been working well owing to different problems faced by them both at the
promotional and operating stages.

They are generally seen as labor intensive capital saving and capable of helping to create
most of the on billion new jobs, the world will need in the neat future. Their adoptability
and flexibility are considered desirable attributed in adjusting to a fast changing
technological landscape.

My study specifically focuses on the performance of small and medium enterprises in

Pakistan, the factors which are hampering and facilitating the growth of SME and why
people in Pakistan are reluctant to establish their own SME’s. It is a descriptive type of
research.
1.4 Objectives
The objective of this research study is to assess the overall SME sector of Pakistan in an
attempt to identify the shortcomings and weaknesses of this sector and thereby to suggest
such measures that would resolve the problems. The performance of various Government
agencies like SMEDA etc will be analyzed. Particular emphasis will be laid on the
performance of SME Bank in particular and an in-depth analysis will be carried out.
The objectives of this research work are:
• To check the performance of SMEs on the economy of Pakistan.
• To discuss the credit facilities offered to the SMEs
• To analyze government’s support in obtaining credit facilities
• To find out the reasons why people feel reluctant in Pakistan to establish their
own SMEs.
• Finally, to suggest suitable measures based on the identified gaps in the problem
areas to resolve the major financial problems of the small and medium industrial
units.
1.5 Methodology

Information will be congregate for the research purposes from the following mediums:

 Libraries
 Articles
 Research material
 Internet
 Financial Magazines

2- CHAPTER-2
2.1 Review of literature

Small and medium enterprises have been a subject of interest for the past many years.
The reality is that “small business” plays an important role in the economies of many
nations has also been recognized. Moreover, the ability of small and medium enterprises
(SMEs) to participate in international trade has also been the subject of interest to
researchers in recent years.
 Small and medium enterprises

There is no single, uniformly acceptable definition of a small firm. Firms differ in their
levels of capitalization, sales and employment. Hence, definitions that employ measures
of size (number of employees, turnover, profitability, net worth etc) when applied to one
sector could lead to all firms being classified as small, while the same size definition
when applied to a different sector would lead to a different results. The first attempt to
overcome this definition problem was by Bolton Committee (1971) when they
formulated “economic” and “statistical” definition. Presented in the following table is a
summary of alternative definitions.

Table 2: Alternative Definitions of SMEs

World Bank since 1996 Firms with fixed assets (excluding land) less than
US$ 250,000 in value is a small scale enterprise.

Grinde et al. (1989:9-10) Small scale enterprises are firms with less than or
equal to 25 permenant members and with fixed
assets (excluding land) worth upto US$ 50,000.
USAID in the 1990s Firms with less than 50 employees and atleast
half the output is sold.

UNIDOs definition for Developing Large Firms with 100+ workers.

countries
Medium Firms with 20-99 workers

Small Firms with 5-19 workers

Micro Firms with less than 5 workers

UNIDOs definition for Industrialized Large Firms with 500+ workers
countries
Medium Firms with 100-499 workers

Small Firms with < 9 workers

From the various definitions above, it can be said that there is no unique definition for a
Small and medium scale enterprise. In a study carried out by International Labor
Organization (ILO), more than 50 definitions were identified in 75 different countries,
with considerable ambiguity in the terminology used. The enormous variety of criteria
applied includes size of workforce or capital, form of management or ownership,
production techniques, volume of sales, client numbers, levels of energy consumption
etc.
 Definition of SMEs in some Asian Countries

SMEs play a key role for economic development of any country, be it a developed or a
developing country because of the fact that they provide most of the employment
opportunities for the general public of the country and as a result, they prosper in these
conditions. SMEs have wide ranging definitions, varying from country to country. Some
employ net assets, some turnover and some the number of employees. The general
definitions of small, medium and large enterprises in non-Asian countries are given
below:

Table 3: Definitions of SMEs in non-Asian countries

Country Number of Revenues Asset Base

Employees
United States < 500 < USD 5 MM
European Union 10 < X < 250 < USD 50MM < USD 34 MM
Canada < 500 < USD 4 MM
manufacturing

< 50 services
Mexico 10 < X < 500
South Africa > 10-20 > US$ 0.05 MM
> USD 0.07 MM
< 100-200 < USD 1 - 8
MM < USD 0.3 – 3
MM
Pakistan < 250 <USD 4 MM < USD 1.35 MM
manufacturing manufacturing

< 50 services <USD 0.7 MM

services
Turkey 10 < X < 200

50-199 staff
0-14 staff 15-49 staff > 200 staff
MEDIUM
LARGE
MICRO SMALL

Countries do not use the same definition for classifying their SME sector. Nor does
universal appear to be necessary. The definition in use depends on the purposes. These
definitions are required to serve and the policies, which govern the SME sector thus
defined. The three parameters can generally be applied by most countries, singly or in
combination are:

 Capital investment in plant and machinery

  Number of workers employed
 Volume of production or turnover of business

Despite the lack of universal quantitative norms, the SMEs as a class are clearly
distinguishable in any country, developed or developing. The factors that set them apart
are essentially qualitative and comparative.

On the qualitative side are their internal management structures, decision making process,
financial practices, trading styles, attendant risks factors etc. Most SMEs are 1 person
shows or are run by 2-3 individuals, usually relatives, friends or business partners, who
take most of the decisions. There is no distinction between private and business assets
and subjective and personal factors play a large role in decision making. The personal
stakes SMEs have in their businesses are much higher than those of corporate executives
in their companies. This enhances the attendant risk and commits entrepreneurs more
strongly with a success of their ventures.

A comparative factors have to do with a way SMEs are situated vis a vis large enterprises
in the corporate sector. They are small and medium sized in comparison with the large
entities with which they share a given economic space. SMEs therefore in come in
varying sizes and SMEs in one country may well be larger than the “BIG” companies in
another. The interesting feature is that, not withstanding their absolute sizes, the problems
confronting SMEs appear to be similar to most countries – whether developing or
developed. It is these features, which set them apart as a distinct group and it is these
factors and not the quantitative definition which are common and have universal
applicability.

Need for Definition:

The countries with such definitions are also the countries that have seen a faster growth
of the SME sector. It appears the more precise the definition, the more effective has been
the transaction of policies intended to benefit the sector into actual results. In countries
where no definition exists, the enterprises feel they are in a disadvantageous position and
empathetic in their demand for such a definition. In some cases, the definition seems to
lend itself to differing interpretations, thus opening up the scene for disputes and
dissatisfaction.

Given below are SME definitions in use by some Asian Countries:

Bangladesh

The government’s industrial policy of 1991 defines “cottage” and “small”-enterprises.

While large scale enterprises are also defined, there is official classification for medium
sized enterprises. This can however be inferred. The Bangladeshi authorities use amount
of fixed investment including initial working capital but excluding the cost of land,
expenses on inland transportation, commissioning of machinery, and duties and taxes, as
a classifying criteria. For cottage and small scale businesses an informal definition based
on number of employees also exits.

A “small enterprise” is defined as an industrial undertaking engaged either in

manufacturing or in service activity and whose total fixed investment including initial
working capital but excluding the cost of land, expenses on inland transportation,
commissioning of machinery, and duties and taxes (does no exceed takka 30m). An
investment for “balancing modernization, replacement and expansion” (BMRE) would
not entail a change in category. However, the investment on BMRE should not be more
than the 50 percent of the total investment limit.

The term “cottage enterprise” is used for an industrial unit engaged in manufacturing or
servicing that is essentially run by family members, on a full time or part time basis, and
whose total investment does not exceed Takka 500,000.

Under the aforementioned policy, any enterprise whose fixed investment exceeds takka
30m is classified as a large scale enterprise. However, it is fairly common to consider
those with a fixed investment not exceeding Takka 100 million as a medium scale
enterprise.

Small units and cottage industries had originally been defined in terms of the number of
workers employed, though this definition is not in vogue. But still it provides readily
accepted criteria for purposes of comparison. According to this definition a small scale
unit is on with between 10 and 20 workers, if it uses mechanical power and between 20
and 150 workers if it does not. Along the same lines, a cottage industry is allowed upto
10 workers if it uses mechanical owe, and upto 20 workers if it does not.

China

Following the planned economic system over a relatively long period, China has
classified enterprises into large, medium and small enterprises based on production
capacity and size of fixed assets. Different criteria have been set in accordance with the
characteristics of different sectors, whereas there is no strict requirement regarding the
employment and sales volume of each enterprise. Those factors constitute the major
difference between China and western countries, at present China is still using the criteria
set by their State Economic and Trade Commission in 1998 to classify enterprises and
there are no clear and unified criteria for enterprises of other types.

Table 4: Sector-specific SME definitions in China

Industrial Sector : 300 - 2000 30 -300 M Yuan 40-400 M Yuan

Small Enterprises employees in sales Asset size
>300 M Yuan in >400 M Yuan Asset
Medium Enterprises >2000 employees
sales size
Construction : 600 - 3000 30 -300 M Yuan 40-400 M Yuan
Small Enterprises employees in sales Asset size
 >300 M Yuan in >400 M Yuan Asset
Medium Enterprises >3000 employees
sales size
Wholesale : 100 - 200 30 -300 M Yuan
Small Enterprises employees in sales
>300 M Yuan in
Medium Enterprises >200 employees
sales
Retail : 100 - 500 10 -150 M Yuan
Small Enterprises employees in sales
>150 M Yuan in
Medium Enterprises >500 employees
sales
Transportation :
>30 M Yuan in
Small and Medium >500 employees
sales
Enterprises
Posts :
>30 M Yuan in
Small and Medium >400 employees
sales
Enterprises
Hotels and restaurants :
>30 M Yuan in
Small and Medium >400 employees
sales
Enterprises

1.0.1 India

The definition used by the Indian authorities is based on the level of investment in plant,
machinery or other fixed assets whether held on an ownership, lease or hire purchase
basis. It seeks to keep in view the socio economic environment in India, where capital is
scarce and labor is abundant. However, a definition exist only for tiny and small units,
medium sized enterprises are not defined either technically or legally.

Industrial undertaking in which the investment in fixed assets in plant and machinery,
excluding land and building, whether held on ownership terms or on lease or on hire
purchase, does not exceed Rs. 1 Crore.

An industrial undertaking which is engaged or is proposed to be engaged in the

manufacture or production of parts, components, sub-assemblies, tooling or
intermediates, or the rendering of services and undertaking supplies or proposes to supply
or renders not more than fifty percent of its production or services, as the case may be, to
one or more other industrial undertakings and whose investment in fixed assets in plant
and machinery, whether held on ownership terms or on lease or on hire purchase, does
not exceed rupees one crore.

All Small Scale units wherein investment on plant and machinery (excluding land and
building) upto Rs. 25 lakhs are classified as tiny industries.
All small scale units which exports more than 50 percent of their output is classified as
Export Oriented Units.

Industrial related service/business enterprises with investment on plant and machinery

upto Rs. 10 lakhs excluding land and building is registered under Small Scale Service
Business Enterprises (SSSBE).

Indonesia

According to Undang-Undang (Regulation) No 9 Tabun (year) 1995, small businesses

have a maximum net worth (excluding land and building) Rupiahs 200 million or
maximum sales of Rupiahs 1 billion, are owned by Indonesian citizens and are
independent i.e. not a subsidiary of, or owned by, or affiliated directly with, medium size
or big enterprises.

1.0.2 Japan

The Small and Medium Enterprise Basic Law (1999) of Japan qualifies small enterprises
as being enterprises with a regular workforce not in excess of 20 people (or five people
for enterprises that are principally engaged in commerce or the service industry).

Table 5: Definition of SMEs in Japan

A. Small and Medium Enterprises

Mining, manufacturing, transportation construction industries <300 or
: Employees
<300 million
Invested Capital yen
Wholesalers :Employees <100 or
<100 million
Invested Capital
yen
Retailers, Services : Employees 50 or
< 50 million
Invested Capital
yen
B. Small Scale Enterprises
Manufacturing and other Industries : Employees <20
Commerce and Services :Employees <5

Based on most recent data obtained (2002), more than 99 percent businesses in Japan are
classified as SMEs and of the total work force, 81 percent are employed by this sector. At
the same time, 51 percent of shipped manufacturing goods are produced by SMEs; in the
wholesale industry, this figure is 62 percent, while in retail, it represents 73 percent1.

Percentages/Figures have not changed very much in the past thirty five years with the
enforcement of the Small and Medium Enterprise Basic Law. SMEs assume a very
important role in the Japanese economy, comprising 98.8 percent of total establishments
in Japan and contributing 77.6 percent to total employment in 1996. In terms of market
share, the SMEs contributed 51.0 percent of total shipment value of the manufacturing
sector in 1996. In 1994, SMEs contribute 61.4 percent of the total amount of wholesale
and 76.8 percent of retail sales.

Japanese SMEs continue to perform well, demonstrating their unique flexibility and
creativity, even at time of recession experienced by the Japanese economy. The Law has
the following objectives:

• Promoting the growth and development of SMEs, and

• Enhancing the economic and social well-being of entrepreneurs and employees of
SMEs

1.0.3 Malaysia

The definition of SMEs in Malaysia is tied to Industrial Coordination Act of 1986. It

states that SMEe are those companies that employ less that 75 full time workers or with a
shareholders’ fund of less than M$ 2.5 m (US$ 1m) The small scale industries (SIs) refer
to manufacturing establishments employing between 5 and 50 workers or with
shareholder’s fund of up to M$ 500,000 (US$ 200,000). Medium Industries (MIs) are
those manufacturing establishment with a share holders fund of more than M$ 500,000
and up to M$ 2.5 million or employing 50-75 full-time staff.

1.0.4 Thailand

On September 11th 2002, the Ministry of Industry introduced the definition of Thai small
and medium-sized enterprise (SME). This definition is based on the number of salaried
workers, and fixed capitals. An enterprise is categorised as an SME since it has
employees less than 200 and fixed capital less than baht 200 million, excluding land and
properties (3). SMEs in Thailand are classified in three sections: production, service, and
trading (2).

Table 6: Definition of SMEs in Thailand

Type Small Medium

Employees Capital Employees Capital

(million baht) (million baht)

Production Not more than 50 Not more than 50 51-200 51-200
Service Not more than 50 Not more than 50 51-200 51-200
1
 Wholesale Not more than 25 Not more than 50 26-50 51-100
Retail Not more than 15 Not more than 50 16-30 31-60

In business practices, the definition of SMEs can be extended including number sharing
holdings by parent companies, enterprise structures and independence. The principle
criterion for SME is an enterprise’s independence. This characteristic indicates that not
more than 25 percent of SME capital should be owned by one large or many large
companies (1). At present, there are many multinational companies in the form of
franchise companies and joint-venture between Thai and overseas companies. Some of
these companies should not be classified as Thai SMEs. In this study, Thai SME
definitions are as follows:

1. Employee size is not more than 200.

2. Fixed capital is not more than 200 million baht.
3. Less than 25 percent owned by one or jointly several enterprise(s).
4. Less than 50 percent owned by foreigners.

1.0.5 Pakistan:

Different agencies define SMEs in their own way and there is no single nationally
accepted definition. The Punjab Directorate of Industries (PDI) defines a small unit as
one fixed assets worth Rupees 10 million of less, excluding the cost of land. The Punjab
Small Industries Corporation (PSDI) sets this limit as Rupees 10 million. According to
PDI, all enterprises with assests excluding land, valued between Rupess 10 million and
Rupees 100 million are medium scale units. PSDI defines medium scale units as
enterprises with assets excluding land valued between Rupess 20 million and Rupees 100
million. All enterprises employing less than 10 persons are categorized as small or
medium sized enterprises.

1.0.6 Philippines

In the Philippines, an SME is defined as any business activity or enterprise engaged in

industry, agri-business and/or services whether a single proprietorship, cooperative, a
partnership or a corporation with a value of total assets inclusive of those arising from
loans but exclusive of the land on which the office, plant and equipment of a particular
business entity are situated, coming under one of the following categories:

 Micro (upto P 150,000)

 Cottage (over P 150,000 to P 1.5 million)

3- CHAPTER-3
Methodology
THEORATICAL FRAMEWORK
 Theoretical framework shows the relationship between different variables. In this
research, access to finance, employment generation, contribution to national output and
exports, fostering new entrepreneurship, impact of SME entrepreneur’s education on
quality of doing business in Pakistan, to provide depth to the industrial base of the
economy are the independent variables which effects the dependent variable i.e.
performance of SME’s on economy. There can be a positive and negative relationship
between the variables. In this research there is positive relationship between the
independent and dependent variable. It means that if performance of SME’s is
outstanding which shows that finance is easily available to entrepreneurs, new jobs are
being created by SME’s, exports and output of the economy has been enhanced by
SME’s, entrepreneurship has been flourished, industry has been strengthened, then all
these factors have a positive impact on the economy.

Moderating variable which have the strong contingent effect on the relationship between
dependent and independent variable
Intervening variable of this research study is the overall economic situation of the country
which impacts the growth of SME’s. Important intervening variable is the energy crisis
and law order situation of the country.

Fostering new
entrepreneurship

Access to finance

Employment generation

Performance of the
Contribution to national Economy
output and exports

Growth of the Industry

Independent Variable Dependent Variable

Fostering new
entrepreneurship

Access to finance

Employment generation

Performance of the
Contribution to national Economy
output and exports

Growth of the Industry

Government
Facilitation
Independent Variable Recognition Dependent Variable

Moderating Variable
Fostering new
entrepreneurship

Access to finance

Employment generation

Performance of the
Contribution to national Economy
output and exports

Growth of the Industry

Energy Crises &
Poor Law and
Order Situation
SSituationnGove
rnment
Independent Variable Dependent Variable
Facilitation
Recognition

Intervening Variable

Tools for data collection

Data for literature review was collected from secondary sources.