SMEs potential yet be explored

KARACHI: Small and medium enterprises (SMEs) are considered the engine of economic growth in both developed and developing countries, as they provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units.

“Pakistan’s economy has an amazing potential for development but sadly we haven’t been able to derive optimal benefits despite a series of efforts launched by various policymakers at different times,” said Majyd Aziz, chairman of SME Bank Ltd.

However, Pakistan’s SMEs are still unable to achieve their maximum potential and in dire need of ‘hand-holding’ and business support services. Research reveals that despite the lack of collateral, SMEs pose better credit risk, as the default rate of this sector is much below that of large enterprises.

Despite that the default rate is low bank financing to the SMEs continued to decline during last calendar year (2012), owing to adverse economic conditions, energy shortages and rising non-performing loans, according a report by the State Bank of Pakistan. The SME’s financing by banks and development finance institutions (DFIs), which have been witnessing a declining trend since 2008, continued to maintain it slower pace in as the share of SMEs.

SME Bank Ltd is the only scheduled bank that is primarily focused on lending to SMEs.

However, when the government decided to privatise it, it reduced the number of branches from 74 to 13. Moreover, it has a capital base of only Rs2 billion, which is abysmally very low.

Majyd Aziz said that “we have talked with prime minister Raja Pervez Ashraf, finance minister Hafeez Sheikh, Governor State Bank Yasin Anwer, Shahid Kardar, finance secretary Wajid Rana etc. Although positive responses are given, still we are not able to get Rs2 billion released from the finance ministry.

Most of the banks have reduced their exposure to SMEs from as high a figure as Rs475 billion to less than Rs225 billion at present. This, unfortunately, is the sad case of support for SMEs.

He added that throughout the world, SMEs have provided tremendous opportunities to financial institutions to design various tools for the sector’s development (e.g. program lending schemes, credit scoring, venture capital financing, etc.).

Then, there are clusters, technology parks and industrial estates, all being fuelled by the dynamism and vibrancy of small and medium enterprises.

However, the SME’s issues are not addressed yet.

He said that the industrialisation of Pakistan should now not be a victim of experiments and oscillating policies. Sustainable growth requires dedication and action. Small enterprise development is of great significance to Pakistan. Government should take some major steps to strengthen the sector.

Government should adopt and declare a comprehensive policy in support of small enterprise development.

Coordinated efforts of the employers’ organisations, the government, and the technocrats would diagnose the present policy and suggest proposals to remove bottlenecks and difficulties.

Promulgation of practical measures at both the political and legislative level and inducement of budgetary support would bring forth the desired change: overhaul of the administrative system and removal of all procedures such as red-tape, bureaucratic inertia, and unwarranted governmental impediments.

There is dire need of in-depth study of the industrialisation process of the existing Asian Tigers with special reference to the growth of small enterprises in these countries.

These steps are all the more essential if the network of a large number of industrial units is established all over the country and especially in the rural and least developed areas of Pakistan.

Posted in: Business news