Agriculture Sector and Financial Institutions of Pakistan:What is SMEs

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Management of Financial Institutions - MGT 604

Lecture # 38

Agriculture Sector and Financial Institutions of Pakistan

What types of securities/collaterals are acceptable to the banks for providing

agricultural credit to farmers/growers?

Agricultural land under the pass book system, urban/rural property, commercial property,

Defense Saving Certificates, Special Saving Certificates, Gold & Silver Ornaments,

personal surety, hypothecation of livestock and other assets e.g. motor boats / fishing

trawlers, etc. are generally accepted by banks as collateral.

Is mark-up rate fixed by SBP on agricultural loans?

SBP does not fix any maximum/minimum mark-up rate to be charged on agricultural loans.

Banks' mark-up is based on their cost structure and risk profile of the borrowers and the

sector. However, for benchmarking, Karachi inter-bank Offered Rate (KIBOR) is used by

banks for the purpose.

Revolving Credit Scheme was introduced in 2003 in consultation with banks. Under the

scheme, banks can provide finance for agricultural purposes on the basis of revolving limits

for a period of three years with one-time documentation. The borrowers are required to clear

the entire loan amount (including mark-up) once in a year at the date of their own choice.

Multiple withdrawals are allowed and the borrowers are also allowed to make partial

repayments. Only the amount utilized by the borrower will attract mark-up. This facility can

be availed by the farmers just like "running finance". The limits under this scheme are

automatically renewed on annual basis without any request or fresh application.

Is the credit facility under "Revolving Credit Scheme" available only on seasonal basis

i.e. one crop only?

The credit limits under Revolving Credit Scheme are available to the farmers for full one

year i.e. covering both the crops in a year. To save the farmers from stress sale of their

crops, they are required to clear their account only once in a year at a date indicated by the

borrower and mutually agreed with lending bank.

Is there any system/procedure under which farmers can get agricultural loans at their

doorsteps?

Mobile Credit Officers (MCOs) and Agricultural Credit Officers of banks are visiting the

farmers regularly to ascertain the credit needs of the farmers and ensure its availability at

their doorsteps and also provide technical help for different crops.

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Whether landless farmers/tenants can avail agricultural credit under Revolving Credit

Scheme?

Yes, agricultural credit under Revolving Credit Scheme can be availed against personal

surety, guarantee or any other collateral acceptable to banks.

Are farmers who had availed any concession or remission under Government relief

package announced from time to time, eligible for fresh loans?

Yes, borrowers who have availed concession under any scheme notified by the government

or concerned bank/DFI in the light of guidelines issued by SBP may be eligible for fresh

financing.

What is SMEs

As defined by State Bank of Pakistan - SME (Small and Medium Enterprise) means an

entity, ideally not a public limited company, which does not employee more than 250

persons (if it is manufacturing concern) and 50 persons (if it is trading / service concern)

and also fulfills the following criteria of either `a' and `c' or `b' and `c' as relevant:

(a) A trading / service concern with total assets at cost excluding land and buildings up to

million.

(b) A manufacturing concern with total assets at cost excluding land and building up to Rs

100

million.

million as per latest financial statements.

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.

Small and medium enterprises or SMEs, also called small and medium-sized

enterprises and small and medium-sized businesses or small and medium businesses or

SMBs are companies whose headcount or turnover falls below certain limits.

The abbreviation SME occurs commonly in the European Union and in international

organizations, such as the World Bank, the United Nations and the WTO . The term small

and medium-sized businesses or SMBs has become more standard in a few other countries.

EU Member States traditionally had their own definition of what constitutes an SME, for

example the traditional definition in Germany had a limit of 500 employees , while, for

example, in Belgium it could have been 100. But now the EU has started to standardize the

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concept. Its current definition categorizes companies with fewer than 50 employees as

"small", and those with fewer than 250 as "medium". By contrast, in the United States ,

when small business is defined by the number of employees, it often refers to those with

less than 100 employees, while medium-sized business often refers to those with less than

500 employees. However, the most widely used American definition of micro-business by

the number of employees is the same of that of European Union less than 10 employees.As

of 2005, Germany will use the definition of the European Commission .Business enterprises

of fewer than 10 employees often class as SOHO

In most economies, smaller enterprises are much greater in number. In the EU, SMEs

comprise approximately 99% of all firms and employ between them about 65 million

people. In many sectors, SMEs are also responsible for driving innovation and

competition.Providing SME finance and support is thus an important area of economic

policy.

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

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`hand-holding' and business support services.

A major challenge to economic policy in Pakistan at this time is to energise the private SME

sector of the economy. This follows in part from the fact that other sectors are unlikely,

under present circumstances, to provide the needed growth either of output or of reasonably

remunerative employment; in fact, there will be a major employment challenge over the

coming years as labour supply continues to expand rapidly and as neither the large-scale

private sector nor the public sector are poised to create significant numbers of jobs, and

though agriculture and the non-agricultural microenterprise sector can and probably will do

so the levels of productivity and hence of remuneration are likely to be unattractively low.

By contrast, the SME sector does have substantial untapped potential to contribute to those

objectives; both economic logic and the experiences of other developing countries point to

that potential, as well as providing evidence on how it may be achieved. A dynamic SME

sector is an important complement to a more open economy; in most of the countries which

appear to have reaped major benefits from export orientation the SME sector has been

importantly involved in that process. Achieving the maximum contribution from SME,

however, will require significant improvements in the support system. If achieved it will not

only constitute an important source of dynamism in and of itself, but will also complement

efficient large enterprise, strengthen the demand for agricultural products, and make it

easier for microenterprise to graduate into the SME size range.

Promotion of Small and Medium Enterprises (SMEs) entails enhancement of the

competitiveness of the economy and generation of additional employment. A thriving Small

and Medium Enterprise (SME) sector has long been recognized as one of the key

characteristics of any prosperous and growing economy.

Pakistan is an economy comprising mainly of SMEs. The significance of their role is clearly

indicated by various statistics. According to more recent estimates there are approximately

3.2 million business enterprises in Pakistan. Enterprises employing up to 99 persons

constitute over 95% of all private enterprises in the industrial sector and employ nearly 78%

of the non-agriculture labour force. They contribute over 30% to the GDP, Rs.140 billion to

exports, and account 25% of exports of manufactured goods besides sharing 35% in

manufacturing value added.

However, there has been concern that in Pakistan the SME sector has not been able to

realize its full potential. The SMEs continue to suffer from a number of weaknesses, which

hamper their ability to take full advantage of the opening of economy and the increasingly

accessible world markets. The areas of constraints are normally identified as labour,

taxation, trade capacity, finance and credit availability.

It is understood that despite previous efforts the SME sector has not received due priority on

account of segregated efforts and non-consolidation of programs to achieve well targeted

results. In order to move forward, we need to develop a common vision for SMEs to be the

real engine of growth. Our vision also needs to be achievable so we may find motivation in

implementing phase.

Implementing change requires the formulation of a Policy for SME development and

assigning specific responsibilities for its implementation and continuous improvement. The

Government of Pakistan has thus constituted the SME Task Force, by Notification

No.1(68)/2003-Inv-III of 29 January 2004 of the Ministry of Industries and Production,

which is to define the basic elements of our SME policy.

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As there are many cross-cutting issues to be addressed, the SME Task Force is composed of

diverse sectors and levels of Government and includes major stakeholders of the private

sector, and SME in particular. Where the SME Task Force deems it necessary or useful, it

may invite specific organizations or individuals to assist its work. It may also co-opt further

members.

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