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MGT601 - SME Management - Lecture Handout 11

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We are dealing with the short and medium term issues for SME policy formulation. In fact this whole issue is inter-related in lessons No 10,11,12,13 and14.

Labor Issues

Likewise, the intensity of the regulations is the second most important reason for firms to drift into the informal economy all over the world. Labour Laws and regulations in Pakistan14 are considered to be one of the most complicated areas with which any business enterprise deals. The present set of the labor laws was the result of checkered initiative of various governments to create a healthy business environment for the labor. Consequently, enterprises have to deal with fifty six (56) labor laws with some of them being industry specific. The existing plethora of labor laws has made compliance impossible for the enterprises due to their inherent inconsistencies. Numerous labor inspections under these laws are yet another impediment that retards the growth of SME.

The labor market dynamics have changed considerably over the years, a higher degree of adaptability and flexibility along with Labor market security, including protection against arbitrary loss of employment, reductions in income and healthy work practices are essential requirements of new environment. Besides, the condition for compliance for international labor standards under the global economic system is another issue.

Taking into account the need of labor market and employers, the Ministry of Labor and Manpower introduced an employment security regime. The new labor policy initiatives is aimed at creating a favorable environment for facilitating industrial promotion and revival along with legislative and structural changes to bring in an environment to devoid of restrictive labor practices, but protecting the rights and interest of the workers.

It was proposed that existing labor legislation be simplified and rationalized into six basic laws. In addition, for promoting bilateralism among government employer and employees, government established a forum Workers Employers Bilateral Council of Pakistan (WEBCOP). The government is also working in the development of Labor Inspection Policy under the SME Sector Development Program to reduce the interface of government officials with businesses without compromising on the unhealthy work practices. The only issue highlighted thus far through direct interaction with SME is that of co-ordination. The business and labor community at large has been supporting the reforms.

Delivery of Assistance and Access to Resources

Competitive advantage is determined by the productivity with which a country, region or cluster uses its human, capital and natural resources. Pakistan’s international competitiveness markedly declined over past few years15. Part of the blame is shared by lower productivity of the workers. The evidence reveals that median labor productivity, as measured by annual value added per worker, is 25 percent lower in Pakistan than in India and 35 percent lower than in china16.

Trade liberalization at the global and regional levels and the new information and communication technologies have entwined to create rich opportunities as well as formidable challenges to all independent countries and enterprises. Competition has become increasingly fierce among the global and regional economies and enterprises. The structure of markets and their demand17 is increasingly complex.

Despite operating locally, Pakistan’s SME need to be increasingly aware of the world market. They cannot escape it even in their local economy. To meet this challenge, there is growing need for information on global technology trends, rules and compliance cost including facilitation services regarding global issues.
An integrated program for improving competitiveness, promoting trade, and developing workforce can help18. Training, research and development, labor productivity enhancement, technology transfer and up-gradation and support to business startup through business incubation and various other business support services, including finance, are issues that need to be addressed separately by the SME policy. What is important is that access to resources and services necessary to compete in this global environment are being provided to SME because their size poses an effective limit on their capacity to assess world market conditions and tap appropriate resources. Old policy tools of protection now require replacement with promotional and facilitation functions. The roles of business development services, hence, become imperative.

The capacity to deliver such services by the public or private sector led institution is a major topic for debate but also relates to the specifics of the service in question. However, market-driven support programs are a cornerstone in any SME support system which strives for sustainability. This also maximizes the potential for cooperation with private sector organizations and minimizes the distortions in the market economy. Yet the structures for such a system still need to be mutually agreed and implemented in Pakistan. Below we flag the important issues.


Access to equity and formal debt financing has repeatedly been identified as recurring constraint to SME growth and development. Commercial banks apply conservative policies in lending to SME. More, importantly the existing structure of financial sector was developed to serve medium to large enterprises which are organized as a formal business. Most banks prefer to hold risk free-income generating assets and lending to SME is unattractive due to a range of objective and subjective factors. These include high transaction cost, inability to do away with tangible collateral requirement, no linkage of financial products with sector needs and the inability to structure/ offer and manage risk-prone SME specific medium to long term financing options.

It has been observed that 57% of new investment for small and Medium Enterprises and 67% of working capital finance come from internal finance or retained earnings; only about 7% of funds for investment or working capital come from banks or other financial institutions. Even suppliers’ credit rivals the contribution of the banks as a source of working capital (4.5%)19. Another survey20 concludes that SME are indeed being rationed out of the credit market, rather than merely exhibiting a lower demand for credit.21

However, financing SME is one of the key pre-requisites for the future development of the national economy and the achievement of economic growth. The government of Pakistan had originally responded to the growing needs of the sector by introducing a Self Employment Scheme through Small Business Finance Corporation (SBFC) in 1992. SBFC continued to grant loans to small business and disbursed 12 million by June 1998, catering to the needs of 157,162 unemployed persons. Other schemes for SME development or employment generation included the Youth Investment Promotion Society, and Yellow Cab scheme. But all of these efforts lacked coherence across institutions, and, in the absence of any national policy, resulted in disjointed efforts and even corruption

Previous efforts have therefore had limited results and were highly inefficient because the financial sector accumulated a huge portfolio of non-recoverable loans under these schemes. The SME Bank will need to undergo restructuring for next three years. Furthermore, severe damage has been done because the financial sector has developed disinterest for any such initiatives in future, and we need to basically start from a scratch. The banking industry in general is also not venturing into the areas where new processes and procedures with a view to improve SME’s access to credit are required. It is likely that market-led mechanisms will take some time to improve the access of smaller firms to formal credit. In particular, outreach shall remain to be a problem for the due to the limited presence especially in the rural SME market.

The government is seeking to facilitate the participation of commercial banks in SME leading by training with the assistance of the ADB. The sooner commercial banks obtain the know-how how to successfully engage in cash-flow based lending to small business enterprises, the better. Finally, new prudential regulations increase the likelihood of viability and sustainability in the financial sector. However, the broad definition of SME also bears a risk of upward filtering of the loan portfolio towards the higher-end medium enterprises unless targeted programs for micro and small enterprises exist. The creation of SME credit endowment fund may be one way of mitigating the effect.


  1. Gallup/BRB world bank survey
  2. Policy issues papers by SMEDA
  3. 3-50 years of Pakistan’s economy by Shahrukh Rafi Khan
  4. Research cell LCCI

Book Recommended

Small entrepreneurs in developing countries by DR Asghar S. Nasir

Key Terms

  1. Productivity (The rate amount produced by a worker)
  2. Tangible asset (An asset that has physical existence and value at least equal to liability)

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