Financial industry urged to take steps to promote SMEs

KARACHI: Kazi Abdul Muktadir, deputy governor of the State Bank of Pakistan (SBP), has urged the financial industry to take steps for promoting Small and Medium Enterprises (SMEs) through prudent and more innovative banking solutions, according to a statement on Monday.

Inaugurating a three-day training programme on “Scaling up SME banking business”, arranged by the central bank in collaboration with the International Finance Corporation (IFC), at a local hotel, Muktadir said that the banks should formulate strategies to overcome the challenges faced by the SME sector.

“The banks need to shift from traditional banking approach towards SMEs to the provision of more customised and differentiated financial products and services to suit various SME segments,” he said, adding that they also need to develop and implement appropriate credit evaluation techniques used globally such as credit scoring, cash flow-based lending and programme-based lending.

He said that the SME sector contributes 30 percent towards GDP, employs more than 70 percent of the non-agricultural workforce and generates 25 percent in the export earnings of the country. “However, despite its significance, the growth of SME sector in Pakistan remains constrained by a number of factors on both the demand and supply side,” he added.

Lending figures of the SMEs are not encouraging in recent years, he said, adding that the bank’s credit to the SMEs has declined over the last four years from Rs437 billion in 2007 to Rs248 billion in June 2012. With this decline, the SMEs’ loan proportion to the total advances of banks has also decreased from 16 percent in 2007 to less than eight percent in 2012, he said.

This decline can partly be attributed to adverse economic conditions during the period and growing non-performing loans (NPLs), said deputy governor. However, he said that a more risk-averse posture of banks remains a major factor responsible for their low exposure to the SMEs. “Banks in recent years have increasingly invested in safer havens - opting for government papers and increased financing for commodity operations, rather than supporting the private sector, which is the main driver of the economic activity,” he said.

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