Small Medium Enterprises

SMEs are small scale units, producing and distributing goods. Most of these small enterprises exist
as independent individuals or family businesses which are managed solely by the owner. All the
decision-making authority rests in the hands of owner of business. SMEs operate with very little
capital, low level of technology and skills.

SMEs include a wide range of firms e.g. leather sector, automobile vendor sector, production
houses etc. their resources are very limited.

Small & Medium Enterprises Development Authority (SMEDA) defines SME’s as:

There are three categories of enterprises

1. Micro Enterprises
They have less than 10 employees and productive assets limits of Rs. 2 Million
2. Small Enterprises
They have 10 to 35 people employed and their productive asset should not be more than of
Rs 30 Million
3. Medium Enterprises
They have 36 to 99 number of employed people and their maximum asset must not exceed
of Rs 40 Million

Although SMEs can incorporate up to 250 employees at once. SMEs are usually defined in terms
of the size of investment & labor force. They are considered as the backbone of the economy.

Role of SMEs in economy of Pakistan

SMEs plays an efficient and vital role in the economic development of the under developed
countries, like Pakistan. These small enterprises help common man to improve standards of
living. As these enterprises open employment opportunities which facilitate the jobless people
and reduces inequality in the country.

For instance, if talk about the manufacturing sector SMEs are contributing alot in handicrafts,
handlooms and coir industries. The importance of small enterprises can’t be ignored because
they are key to economic growth. The 14.5% growth in Pak Economy is due to these SMEs.
Unfortunately, our policy makers do not focus on SMEs which reduces the country progress and
due to which Pakistan ranks 135/174 on human development index.

These SMEs also provide export goods. They contribute 25% export of manufacturing goods
and these are also valued by large organizations in a sense they provide input to large exporting
organizations. So, SMEs have a momentous role to improve trade balance to grow economy of
Country.

The Pakistan economy is highly dependent on the growth and productivity of SMEs. In Pakistan
there are total 3.2 million enterprises out of which 95% hold 99 employees in private industrial
sector and hired about 78% of non-agriculture labor force. In Pakistan 30% of GDP comes from
operations of SMEs. SMEs have ability to turn potential into profits with limited resources and
that gives us a fair depiction of the role of SMEs in Pakistan.

SMEs in Pakistan require support from trade organizations, economist and government in order
run successfully. As they create opportunities for economic development as: can produce
maximum from limited resources, export goods, increase domestic employments, help in equal
distribution of income and wealth, reduce poverty level. In addition to that SMEs successfully
meet the demands of local consumers in reginal markets as they are distributed all over the
country generating different kinds of products and services. SMEs also provide rural women of
Pakistan an opportunity to generate income and personal growth as they can also work from
home. This helps in eliminating discrimination while achieving fair and equal distribution of
wealth.

Entrepreneurs in Pakistan should be supported financially, and small enterprises must be

equipped by up to date basic technology then these organization would be able support overall
economy of country at large scale.
Challenges faced by SMEs in Pakistan
Small medium enterprises are facing alot of challenges in Pakistan which restrain them to grow.
These challenges are divided into two major categories

1. Internal challenges
2. External Challenges

Internal Challenges

1. Financial Issues

In Pakistan large companies are only getting financial benefits and SME sector is totally neglected.
According to SMEDA, in Pakistan large business companies have 54% share of total financial
credit whereas SME sector get just only 19% share. In Pakistan banks are very loath to provide the
financing to small businesses. SMEs are always being ignored by Pakistan policy makers.
According to the state bank recent report the SMEs sector of Pakistan only holds 6% of banking
credit while 66% goes to big Organizations. These financial issues are a huge barrier for the
first-generation entrepreneurs. They usually have profitable vision and a brave heart to bring that
vision into reality but due to lack of financial resources they would not be able to execute their
ideas.

2. Management Issues:

SME performance is also depending upon its managerial expertise. In Pakistan majority of SMEs
doesn’t have qualified managerial staff due to which economic performance of SMEs is badly
affected. However, starting a new business in risky but good management can make it successful.
Managerial skills play an essential role for success and failure of SME. There are number factors
which leads to management issues including lack to in-depth knowledge about business, poor
planning and lacking in market research. In Pakistan mostly, the owners of SMEs are not well
educated.

3. Training Issues:

Another internal challenge for SMEs in Pakistan are training of employees. Mostly the trainings
given to SMEs employees are informal in nature because formal trainings are expensive and are
out of budget of small firms. Therefore, the informal trainings are not very effective for the growth
of SMEs. In addition to financial constraints SMEs in Pakistan are also short of other technical
resources used for trainings.

External Challenges

1. Infrastructure Issues

In any country SMEs contribute alot in economy. Infrastructure plays a vital in growth of SMEs.
Poor infrastructure cannot provision the development of small firms. Energy and power crises
hinders the expansion and development of business sector in Pakistan. Frequent load shedding and
insufficient power supply is major challenge for industries. Due to these crises price of production
is increasing. The other major problems faced by SMEs in Pakistan includes poor transport system,
lack of storage space, water and electricity issues, lack of operating setting in little firm and poorly
developed physical markets. Almost 6% of GDP is lost because of inefficient transport system in
Pakistan. In addition to that the process of getting license in Pakistan is also very difficult. This
also shows the poor material state of its basic infrastructure that interprets directly into
comparatively high prices of doing business.

2. Corruption Issues:

Extensive corruption in Pakistan gives us major understanding for the downfall of SMEs in
Pakistan. Almost 40 % businesses owner fell that corruption is major fear for their businesses. The
second common and renowned form of corruption affecting small firms is bribery. Bribery creates
a possible barrier to profitability growth of firm which are competing in industry. This affects those
businessmen who are conducting their business operations with honesty and fair means. This
situation eventually threatens growth of overall SME sector in Pakistan.

3. Economic and Technological Issues:

The inflation rate of Pakistan in increased 4.51% as compared to last year which is highest among
the Asian countries. This condition eventually effects the buying power of customers which led to
low demand of product and services and it makes an effect on small businesses in Pakistan. The
other economic problem is the high tax rate imposed by the government.

About 28% of SMEs supposed the taxes in Pakistan are very high. In addition to that SMEs in
Pakistan still operating on low and out dated technology. There is an essential role of advanced
manufacturing technologies in the growth and development of SMEs.