According to State Bank of Pakistan lending to small and medium enterprises (SMEs) by banks in Pakistan was for the first time recorded at Rs513 billion for CY18 as compared to Rs450 billion for CY 17, registering growth of 14 percent. The growth was even more prominent in the last six months of CY18, registered at 25 percent. The growth in lending to SMEs becomes more significant because the policy rate witnessed an increase by 425bps during the year under review.
Increase in lending to SMEs can be attributed to continued focus of State Bank for of Pakistan (SBP) on offering them access to formal banking system. The lending policy of the central bank to SMEs remained focused on creating conducive regulatory environment, prescribing SME lending targets for banks/DFIs, sensitizing banks to adopt SME financing as a viable business proposition, advising banks to provide non-financial advisory services for making SMEs bankable, simplifying procedures for SME financing and introducing new refinancing schemes for SMEs through banks/DFIs.
Lately, SBP has also issued three Shariah Compliant Refinance Schemes that are expected to provide level playing field to the Islamic banking industry. Addition of Shariah compliant financing facility for Renewable Energy, financing facility for storage of agricultural produce and Refinance facility for modernization of SMEs will meet the long awaited demand of the industry, especially for the Agriculture and SME sectors.
Mudarabah based facilities will ensure long term liquidity at competitive rates to the end users. The financing under Islamic financing facility for Renewable Energy will be available in two categories: 1) prospective sponsors desirous of setting up renewable energy power projects with capacity ranging between one to 50 MW and 2) consumers willing to install facility using renewable energy source for generation of electricity ranging from 4 KW to one MW for own use and/or for supplying to the national grid.
It is worth mentioning that SME sector is contributing 30 percent towards country’s GDP, employ more than 80 percent of non-agricultural workforce and generate 25 percent in export earnings. SMEs offer huge potential for employment and poverty alleviation, but lending to SMEs has remained paltry. Those representing SMEs in the manufacturing as well as agriculture sectors have certain reservation and want the government to review its policy to strengthen SMEs.
According to the CEO of a vendor industry, who wishes to keep his name anonymous, “The Government of Pakistan (GoP) is willing to conceivable incentives to automobile assemblers numbering less than two dozen. As against this, vendor units numbering more than 3,000 and employing around 250,000 people are penalized. Often the duties on CKD kits are lower or around the same level as that of raw material and electricity tariff is too high. Ever since, Pakistan Steel has stopped production, vendor units are dependent of imported sheet on which duty rate if high. Ships bringing steel sheets/coils have to wait for very long time before berthing. On top of all, vendor units, mostly falling under SME classification suffer from serious liquidity crunch. Not only banks are reluctant in lending to SMEs, but the interest rate charged is also exorbitant. While exporting units get funds at concessional rates, those working on import substation are charged exorbitant interest rate. There is an urgent need to redefine SMEs and ensure lending to them on concessional rate.”
Zulfiqar Thaver, President, Union of Small and Medium Enterprises (UNISAME) said, “It is nice to see that the present government is focusing on mega projects to create new job opportunities and accelerate GDP growth rate. However, these projects have long gestation period and achieving quick results may not be possible. As against this, a large number of SMEs are already working in the country and playing the role of the driving engine of the economy of the country. Spinning units involve high capital expenditure, but produce an intermediate product yarn which is low in value addition. Bulk of the proceeds is generated from export of value added products of textiles and clothing manufactured by units falling in the category of SMEs. Therefore, SMEs should be provided level playing field so that they can play their due role.
Interestingly there is a lot of talk about SMEs involved in manufacturing and trading, but little is talked and done for the SMEs involved in agriculture. Their perspective can be best understood by reading the statement of Haji Muhammad Saeed, Chairman, SM Farmers Association (SMEFA), saying, “It may not be wrong to say that the beneficiaries of lending to farmers are the holders of ‘passbook’, whereas most of the growers don’t have land ownership and are excluded from the banking system. It is necessary to reiterate that nearly 20% of food grains and 40% of fruits go stale before reaching the market. This causes huge losses to growers as well as the country. Containing these losses does not require any rocket science but construction of warehouses. The owners should not be asked to furnish additional collateral because the warehouse itself being the collateral.