The State Bank governor recently said that the share of small and medium enterprises in business establishments in Pakistan is 98 per cent, and it employs over 78 per cent of the non-agricultural manpower in the country. That makes it the largest private segment of economy. He further added that the share of total lending portfolio of banks to finance SMEs dropped from 16.2 per cent in 2007, to 7.7 per cent in 2011. That is extremely disproportionate to its contribution to the economy.
It is not surprising that the biggest contribution to the economy in terms of activity and employment generation is coming from its least demanding sector. The kind of bank financing used by, sectors like sugar or textiles as their backbone, does not feature as the highest priority for SMEs. For one, SMEs do not have the collateral to even consider bank financing as an option. However, they have other critical challenges, which the bureaucratic government machinery and the fixed salaried bankers are simply unable to comprehend. This lack of understanding is also the main reason that Smeda, the Small and Medium Enterprises Development Authority established in 1998, is almost irrelevant as far as the real SME businesses are concerned.
The reality is that big businesses, like banks, insurance, auto-industry, large textile mills, sugar mills and tanneries on the one hand; and the small stitching unit, an export company, a shop, a home based business, a school, are parts of two different universes.
Let us take a look at a typical entrepreneur. Jumma Khan tried selling and transporting various products on his pushcart until he settled with supplying cans of drinking water door to door. One day he noticed, there were many small shops and apartments, which needed water delivered to their overhead water storage tanks. Water tankers were too big and too expensive for such customers. After thinking and getting advice from family and friends he sold his pushcart and confided in a friend who owned a donkey cart. With the help of his brother he fixed a fiberglass water tank on the donkey cart, a small pump, and a generator. Now Jumma Khan supplies water to up to fourth floor apartments, faster and more profitably. But he is not one to rest on his laurels so he is now planning to configure another such donkey cart. He is not the complaining type either, but it does upset him when the policemen on his various beats demand money for - what?? He does not know. Or, when his water source goes dry, or when the price of petrol, which he uses in his generator, goes up. Jumma Khan is a typical entrepreneur, innovative and full of the spirit of enterprise, the most undervalued asset in our country. He identified a need in his society, went about arranging to fulfill that need through his personal resources, and, luckily, succeeded. He could have failed and lost his pushcart.
Jumma Khan has a cell phone to get his ‘orders’. He pays all the indirect taxes included in the cell bill/card, those included in the petrol, tax on his donkey cart etc. plus the direct ‘tax’ to the policemen. He now hopes to be able to send his son to school, a privilege his father could not afford to give him. He is diabetic and pays for his own treatment. Oh yes, he has also created a job for the neighbour’s son, as his helper. How many of those paid out of taxes collected from Jumma Khan, can claim to contribute even half as much to the economy and society?
Because of limited reserves, coupled with low capacity to borrow, the small enterprise is particularly vulnerable to economic downturn, recession, and riots. The manager is often unable to understand and interpret government regulations, actions, concessions and so on, to best advantage.
In Pakistan if basic infrastructure like; power, water, and roads are ensured, and the entrepreneur is protected from the extortionists, government and private, and red tape; the small enterprises sector can change the destiny of the country more rapidly than the fancy propaganda and publicity stunts orchestrated by the government with the taxpayer’s money.
The contributor writes on socioeconomics and has a background in trading and exports in the private sector.
Published in The Express Tribune, January 16th, 2012.
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