EDITORIAL

Small and Medium Enterprises make a significant contribution in the economy of developed and developing countries. SMEs increase output and generate employment in the economy. Developed and developing countries are concentrating, in the preview of WTO's regime being implemented by 2005, on the promotion of SMEs in their countries. In case of Pakistan, SMEs are involved in carpet industry, poultry farming, rice husking, gur and sugar making, bee keeping, small repairing workshops, hand and power loom industries, manufacturing of sports and leather goods, embroidery and tailoring work, making of silver and gold ornaments, furniture making, ivory works, handicraft, carpet weaving, spices industry, wood works etc.
The countries, which desire industrialization, need to develop SMEs because it is a starting point of industrialization. The most of the today's large industries have their origin in small and medium enterprises. In Pakistan in contrast to other countries SMEs lack the research capacity, the ability to take substantial risks, or any other advantage of expansion. SMEs have their effect on the GDP, income distribution, tax revenue, employment, and efficient utilization of resources and stability of family income.
In Pakistan, SME provide employment to 65% of the work force in industrial sector. They contribute to gross domestic product (GDP) around four times as much as the large scale industries.
According to the Economic survey of Pakistan, SME with a mere 20% investment and resources to less than 10% of the total formal credit, generated 80% of the country's total employment.
However, SMEs could not flourish because of the several reasons the most important is that they do not have access to financing from the financial or formal sector. This is not only the case of Pakistan but also in other developing countries they are undeserved to get credit. If we trace out the causes, one might come across that it is a classic case of market failure in Pakistan and other countries. SME sector is characterized by information asymmetries as the financing institution looks into costs, information acquisition and processing cost and screening cost exceeds the return. Therefore, the financial institution has risk aversion in extending credit to SMEs. These institutions easily finance large corporate business bodies where the economies of scale, financial information, collaterals and creditworthiness parameters of these firms favour the lending.
Unlike Pakistan, in the developed world, SMEs are successful in securing credit from financial institutions. Pakistan should follow the lesson and modify if needed and apply to our own situations.
This demand also gets credence from the fact that the banking sector in Pakistan today has the capacity to finance such projects. Furthermore if the alleviation of poverty and employment generation remain the government objective as also demanded by international donors, it must come out with a proactive strategy to finance the small and medium enterprises. Though the government has been quite vocal for support to SME, there is hardly anything on the ground to substantiate the government claims in this regard.