Management of Financial Institutions

Agriculture Sector and Financial Institutions of Pakistan:What is SMEs

<< Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment >>
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
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.
Management of Financial Institutions - MGT 604
Whether landless farmers/tenants can avail agricultural credit under Revolving Credit
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
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
(b) A manufacturing concern with total assets at cost excluding land and building up to Rs
(c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300
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
Management of Financial Institutions - MGT 604
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
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
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
Management of Financial Institutions - MGT 604
`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.
Management of Financial Institutions - MGT 604
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
Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday