Close collaboration among the key stakeholders is likely to help in creating synergies for growth of SMEs in Pakistan. SMEs enjoy the potential to serve as a growth engine of the economy by providing economic linkages/services to the corporate sector, generating employment and alleviating poverty.
At present SME sector contributes 30 per cent towards Pakistan’s GDP, employs more than 78 per cent of the non-agricultural workforce, accounts for 35 per cent of the value added in the manufacturing industry, and generates 25 per cent in export earnings.
Despite its strong potential, the SME sector is vulnerable to economic shocks and hence is perceived as a highly risky sector by the banks. The key reason for the low level of exposure in the SME sector is the banks’ shyness in extending funds to this market segment.
High risk perception, high transaction costs of lending and increasing NPLs, lack of proper accounting records and financial literacy are some of the problems contributing to this shyness. Prevailing state of affairs demands a robust strategy for the development of the SME sector.
The stakeholders appeared to be operating in their silos. There is need for forging close collaboration among the key stakeholders like State Bank of Pakistan (SBP), Pakistan Banks Association (PBA), Small and Medium Enterprise Development Authority (SMEDA), Business Support Fund (BSF), SME Associations and the Chambers of Commerce & Industry.
All institutions responsible for SME sector uplift are required to strengthen their ties and work together for achieving the objective of SMEs enhanced access to credit.
SBP’s role in the promotion of SME Financing is the key to the success. The financial inclusion is an integral part of SBP’s financial sector development strategy, and SME Finance is one of the key components of financial inclusion.
The SME Consultative Group established by SBP has been working on developing a long term SME Sector Strategy for improving SMEs access to finance. To further improve the SME finance regulatory environment, SBP has issued revised Prudential Regulations for SME Financing in May 2013.
The SBP launched a Credit Guarantee Scheme (CGS), under which SBP shares 40 per cent of credit losses of lending banks on their loans to Small and Rural Enterprises. The scheme is a great success in meeting the credit needs of collateral deficient but credit worthy micro, small and rural enterprises from short to medium term loans of 3 to 5 years.
The SBP arranges primary surveys of important SME Clusters in collaboration with International Finance Corporation (IFC) and Lahore University of management Sciences (LUMS) and so far Cluster Surveys of 21 SME sub-sectors have been completed. The SBP is also facilitating capacity building of commercial banks in SME banking with the support of IFC.
The SBP and SMEDA are also working on signing a Memorandum of Understanding (MoU) to further strengthen institutional ties between the two organizations towards uplifting the SME sector. The SMEs are likely to play a very important and vital role in Pakistan economy where the twin problems of unemployment and poverty constitute major development challenges.