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SME Sectors Brief

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What Are SMEs
As defined by State Bank of Pakistan

A small Enterprise (SE) is a business entity which does not employ (including contract employees) more than 50 persons and annual sales turnover is up to Rs.150 million.

Small Enterprises can be extended finances up to Rs.25 Million.

Medium Enterprise (ME) is a business entity, ideally not a public limited company which employs (including contract employees) more than 50 employees and less than 100 employees in case of trading establishments. In case of manufacturing & service establishments, employs more than 50 employees (including contract employees) and less than 250 employees. For all MEs annual sales turnover is over Rs.150 million and up to Rs.800 million.

Medium Enterprises can be extended finances over Rs.25 Million to Rs.200 Million.

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

  • Assist in regional and local development since SMEs accelerate rural industrialization by linking it with the more organized urban sector.
  • Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities.
  • Contribute significantly to export revenues because of the low-cost labour intensive nature of its products.
  • Have a positive effect on the trade balance since SMEs generally use indigenous raw materials.
  • Assist in fostering a self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes.
  • Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency.
Problems Faced by Pakistan’s SME Sector?

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

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

SME Financing and Hand-Holding

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

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