SMEs are the small informal business ventures with low levels of employment and the capital. Most of these family businesses are run by untrained workers, also members of the family. However, their growth rates are high and their potential for expansion is tremendous.

According to the official definition, all private business ventures employing up to 250 persons, with a paid-up capital not exceeding Rs25 million and sales up to Rs250 million fall under the umbrella of small and medium enterprises (SMEs).

As per the latest annual report of the State Bank of Pakistan. there are about 3.2 million business enterprises of which small and medium units represent around 90 per cent of all private enterprises and provide employment to 78 per cent of non-agriculture labour force. SMEs contribute more than 30 per cent to GDP, 25 per cent in export receipts and 35 per cent in value addition in the manufacturing sector.

One of the interesting findings of the research on the SMEs has been its close links with the large scale manufacturing sector. Though SME sector has its own dynamics and parameter which may be different from that of large scale manufacturing sector, it must be kept in mind that both sectors are interdependent on one and other..

According to a study, if SME sector has to be strengthened, the LSM sector must flourish side by side. Analysts have found that one of the reasons for the success of the Punjab firms was the overall environment of economic expansion along with the small firms’ proximity to large enterprises. For the individual small producers, the external economies generated by the large enterprises were as important as those it obtained through the evolution of vertical specialisation within small scale sector.

Larger scale capital goods sector can create the appropriate linkages for the embodiment of technical change in equipment, which can then enhance the productivity of the small scale sector, accordingly. Second, because of economies of scale the large scale sector can contribute towards the reducing the cost of intermediate and capital goods for the small scale. Third, with large firms sub-contracting to the small, productivity enhancement and technical up gradation is further encouraged through user-producer interactions, quality standard, specification requirements.

The availability of credit is considered as the single most important hurdle faced by the SMEs. All surveys consistently come up with this finding. According to a recent market survey conduced by an international firm, 30.7 per cent of SMEs do not have bank account at all, 85 per cent do not take any loan from banks, and 50.5 consider it very difficult to get loans from banks. Lack of collateral, time and cost involved in the process of preparing financials, time consuming disbursement process at banks, lack of innovative products and bureaucracy in banks are the main obstacles in the way of SMEs to access formal financial intermediation channels.

Along side the daunting procedures, the respondents stated that the banking bureaucracy was unhelpful to SMEs. Many respondents felt that the level of bribes which they alleged had to be paid to bank officials in order to access formal bank loans were prohibitively high for informal small scale units.

The SMEs therefore look for other sources of the credit to fill the gap. These other sources of credit are mostly informal loans with very high mark-up. Most such loans are in the form of advance given by the wholesalers, capitalists, arhtis, landlords. The terms and conditions of these loans are such that the borrower finds himself bound to bring his produce/commodity to the lender on the rate determined by the lender. Whereas some other types/sources of loans like borrowing from relatives and operating committees is too meagre in size to appropriately cater for the capital need.

Therefore, the government and the State Bank must endeavour to boost the net work of SME financing both vertically as well as horizontally. In place of consumer loans that have seen an unprecedented boom in the last few years, focus should be diverted to SME financing. This will not only trigger the economic growth but it will also secure the credits as it is used in income generating rather than unproductive and conspicuous consumption.

An entrepreneur had very sarcastically said in a seminar jointly conduced by SMEDA and SBP in Karachi that that a person could borrow for a car, a home, a bike, a TV and even VCD Player through a formal banking institution but he could not borrow for a machine, for shop or for a capital equipment. It is the need of the day that this perception should be vice versa .

Like the scarcity of financial capital, there is lack of skilled, trained and human capital. Pakistan has vast potential to build on this sector given its huge young population. The major focus has been on traditional education in the colleges and the universities with not much room for vocational and marketable skills and trainings. The result is before us with the educated armies of jobless youth around. They are neither able to hunt a white collar job nor are willing to start a business for self-employment.

Thus there is need to re-design our educational policies with special focus on the commercial and vocational trainings. New technical institutions should be established and the capacity of the existing ones be enhanced. The traditional professions and arts like carpentry, pot making, weaving should be patronised and the artistes of these professions should be trained and exposed to the international trends and tastes.