According to SBP’s recently released report Pakistan continues to be a country with the lowest financial penetration levels in the world, with 56 per cent of the adult population completely excluded, while another 32 per cent served informally. SME’s employ 78 per cent of the country’s non agricultural workforce, constituting according to estimates 98 per cent of the country’s total economic establishments and contributing one third towards the GDP, with a 1/4th share in the country’s total exports. Given these staggering statistics it is indeed a pity that it has a meager 10 per cent share in the country’s total bank advances. With 3.2 million business enterprises listed according to the Economic Census of Pakistan -2005 they comprise of 99 per cent of all organisations. SME’s according to research has a 78 per cent share in industrial employment with 35 per cent share in value addition.
Removing socio-economic disparities
SMEs have over the years played a pivotal role for the economy as a whole by providing employment and facilitating the transition of the lower income groups into middle and higher incomes. Thus, inherently they have the ability of bridging the financial divide by eliminating socio-economic inequalities in the country. Thus the SME sector does not only inherently tackle the problem of inequality but is also a pre-requisite to pursuing economic growth. It has been empirically proven that no country has been able to achieve economic growth without active participation from the SME sector. The State Bank Governor while presiding over the 4th meeting of the SME Credit Advisory Committee talked in detail about some alarming trends emerging in the banking front and lending to SME’s. “In percentage terms, the share of SMEs financing in the total lending portfolio of banks has also fallen from 16.2 percent in Dec-2007 to 7.7 percent by Sep-2011. Clearly, this is not a very desirable situation,” he said. Most importantly governor SBP highlighted that while Banks have been financing SME’s for working capital loans there has been a reluctance to provide long term financing to these
Shrinking
advances
Advances to the SME sector have shrunk too with total outstanding advances to SMEs standing at Rs334 billion as of December 2010, which according to estimates is the lowest in five years. The deteriorating macroeconomic conditions of the country have not helped either with SME’s struggling to cope with the power crisis that is taking a toll on their production and performance. Therefore, while banks need to encourage lending to the SME’s other stakeholders cannot be excluded from blame in suppressing the development of these enterprises. With Non Performing Loans (NPLs) going from bad to worse, and an overall economic recession, banks are choosing for more risk free options like government securities. NPLs for SMEs reached 29 per cent in December 2010, thus explaining the reluctance of banks to finance small enterprises. UBL President Atif Bokhari, in one of his latest interviews said, “SMEs can sustain a 14-18 per cent interest rate environment because of high margins. What killed them was not the banking industry but lack of power and gas. I don’t have a soft corner for the large corporations but I do with SMEs, however there has to be some incentives for a bank to lend to the SMEs.”
The Grameen bank model
Lending to SMEs picked up pace when Dr Yunus in Bangladesh started his initiative of providing soft loans Grameen bank reversed the practice of conventional banking by removing the need for collateral and created a banking system based on mutual trust, accountability, participation and creativity. It provides loans to the poorest in Bangladesh with little need of collateral. What is most impressive is that loan payback rate of Grameen Bank according to them stands at an outstanding 99 per cent. With the deteriorating macroeconomic indicators the cost of doing business in Pakistan has also been on the rise. This has been highlighted by many reports and studies recently conducted including that of the World Bank. In other parts of the globe, almost 12 per cent of SMEs have been able to evolve into Medium and eventually larger organisations. This can be attributed mainly to the conducive business environment in those countries.
Slow down in
micro credit growth
According to SBP report, the slow down in micro credit growth in the country was attributable to a number of factors that include, funding, high operating costs, credit risks, organisational development and external factors. Financing of lending operations is limited, due to which the micro finance sector faced a difficulty in accessing commercial funds from risk averse commercial banks. High operating cost to loans ratio that is presently at 22 per cent also poses a great challenge of making microfinance a viable business product, the report states. The report mentions how lack of appropriate internal controls gave rise to the phenomenon of over-borrowing by clients that created negative spill over effects. Inflation has also been highlighted as affecting the repayment capacity of micro-borrowers. Organisational development has also been highlighted that is a prerequisite for sustainable growth. The report cites how these factors limit the potential of achieving the required levels of growth.
Challenging
macro-economic variables
Finally the report states that external factors such as challenging macroeconomic variables and volatile law and order are inhibiting the growth of the microfinance sector. The Grameen bank model has been adopted successfully by institutions in other countries as well, enjoying great success. CARD for instance is one of the largest Grameen replication, currently operating in Philippines. CARD has also had a recovery of credit rate of 98 per cent. For the development of the SME sector in Pakistan a comprehensive approach would have to be adopted by all stakeholders, especially banks as also mentioned by SBP Governor, that can eventually improve the availability of finance and other relevant banking services for the SME sector. The model of success in other countries has been achieved via ensuring personal guarantees through collateral supervision, a lending approach based on cash flow, prudent lending measures, SME courts, and a relationship based on mutual trust. Segmenting and profiling of SMEs is a must that needs to be done in Pakistan.
Adopting a
multi-pronged approach
The solution to the dilemma lies in adopting a multi pronged approach to the problem at hand. Firstly there needs to be greater collaboration amongst SMEs and larger companies. Entering into sub-contracting arrangements will allow the SMEs to leverage the established track record and credit worthiness of larger companies. The dealings of SMEs with these larger companies will provide banks with ample information regarding their dealings with the larger companies and allow SMEs to grow and evolve as well. Secondly the technical know how, marketing, managerial, accounting, book keeping and preparation of financial services are often lacking in SMEs. This gap can be filled through social intermediation where intermediaries including the public, private or non government entities can step in and fill the void. Taking this step will further improve the bankability of these entities with proposals and requests for fixed and working capital. While SMEDA is already contributing in this regard we need more such organisations to facilitate the sector.
Further, provincial governments must work to improve the quality and educational standards of the large number of vocational training institutes that on the one hand claim to produce skilled labour, however with the technical and professional know how lacking, leave the graduates redundant once they enter the labour force. Managerial and entrepreneurial training also needs to be developed in government and public institutions.
SME bank and other government lending institutions must make the documentation processes for availing loans easier through standardization and creating easy to fill documentation. Finally more banks need to assign exclusive branches to deal with SMEs. This will enable these specialized bank branches to cater better to the SME clients through improving on the products and services with the constant feedback received from SME clients. Habib Bank has taken some brilliant decision in this regard by assigning branches to exclusively deal with the sector. While the lending to the SME sector has remained to be rather low with recent figures indicating a drop in lending to SMEs, however the blame does not totally lie with banking institutions as it requires collaboration from all stakeholders, including government, semi government and private entities. By doing so, we will not only be collectively working towards the benefit of the country, but will also be able to improve the socio-economic disparities that plague the nation.