SME sec­tor prob­lems

The Pak Banker - - FRONT PAGE -

The ma­jor prob­lem faced by the SME sec­tor is ac­cess to cap­i­tal. A small or medium busi­ness can meet its fi­nanc­ing needs through a com­bi­na­tion of debt, pri­mar­ily bank loans, and cash in­vest­ment ( busi­ness eq­uity). It is im­por­tant for a modern busi­ness to keep its cost of cap­i­tal low in the scheme of its over­all eco­nom­ics. Pak­istani en­trepreneurs have no com­fort in ei­ther of the modes of fi­nanc­ing. The bank­ing sys­tem is averse to lend­ing to SME's, due to a pedan­tic risk- averse ap­proach that does not ad­e­quately weigh in the ta­lent in an en­ter­prise or vi­a­bil­ity of the busi­ness idea or an en­tre­pre­neur's in­di­vid­ual credit his­tory.

In Pak­istan an es­ti­mated 8 mil­lion SME's are cur­rently el­i­gi­ble for credit while only 0.5 mil­lion of them ( 6 per­cent) have any credit fa­cil­ity. As a re­sult, de­spite the SBP's poli­cies' hav­ing strug­gled to as­sist SME fi­nanc­ing since 2002, the bank credit to SME's is only 7- 8 per­cent of banks' to­tal lend­ing port­fo­lio to pri­vate sec­tor against SBP's tar­get of 20 per­cent, which is the stan­dard in emerg­ing mar­kets. The mea­ger na­ture of credit by in­ter­na­tional stan­dards is fur­ther ex­plained by the fact that the to­tal share of bank credit in the econ­omy in terms of ' credit to GDP ra­tio' is 16 in Pak­istan ( 2011- 2015), com­pared to 52 in In­dia and 122 in Sin­ga­pore. Data sug­gests that even that pal­try SME fi­nanc­ing is dis­pro­por­tion­ately chan­nelled to medium rather than small en­ter­prises.

The ob­vi­ous in­fer­ence from th­ese sta­tis­tics is that the over­all en­vi­ron­ment for pri­vate credit is un­favourable and that too goes to medium and large en­ter­prises. The banks in the coun­try are not ef­fec­tively per­form­ing their core func­tion, i. e. chan­nelling de­pos­i­tors' sav­ings into loans for cred­it­wor­thy busi­nesses and in­di­vid­u­als. De­spite ex­tract­ing a widely known boon from the dis­pro­por­tion­ate bank­ing spreads- the dif­fer­en­tial be­tween the bor­row­ing and lend­ing rates- Pak­istani banks are un­will­ing to sup­port the very econ­omy that feeds them. The Mushar­raf gov­ern­ment cre­ated a SME Bank in 2004 but the bank has been un­able to come into proper op­er­a­tion due to mea­ger fi­nan­cial as­sets, tech­ni­cal ca­pac­ity, and small loan amounts ( about Rs. 0.8 mil­lion on av­er­age). Dur­ing the same pe­riod an US­AID- sup­ported tech­ni­cal as­sis­tance project was launched in­volv­ing Na­tional Bank of Pak­istan ( NBP) but did not go far in ad­dress­ing the prob­lem.

Al­though the reg­u­la­tory frame­work for pri­vate eq­uity and ven­ture cap­i­tal was first in­tro­duced by the Se­cu­ri­ties and Ex­change Com­mis­sion of Pak­istan ( SECP) in 1995 and has been re­vised thrice in 2001, 2008, and most re­cently in 2015, the in­dus­try is yet to make its mark in any sig­nif­i­cant man­ner. As of now there is vir­tu­ally no pri­vate eq­uity firm in op­er­a­tion sig­nal­ing a lack of con­fi­dence of in­vestors in reg­u­la­tory prac­tices and the over­all busi­ness en­vi­ron­ment. It is well known that in­vestors­both lo­cal and for­eign- take a lead from the bank lend­ing in de­cid­ing to in­vest apart from the fi­nan­cial space that the credit pro­vides in struc­tur­ing busi­ness fi­nance. The afore­men­tioned low share of Pak­istan's bank credit in the econ­omy par­tially ex­plains the re­luc­tance of in­vestors to in­vest.

A vi­able way to mit­i­gate SMEs' fi­nance prob­lem would be to form a busi­ness part­ner­ship which is an ex­cel­lent mech­a­nism to raise or en­hance early and mid- stage cap­i­tal, dis­trib­ute fail­ure risk, and add to man­age­ment ca­pac­ity when right part­ner­ships are forged. How­ever, there are pe­cu­liar in­hibit­ing fac­tors that dis­cour­age such al­liances in Pak­istan, which mostly lead to busi­ness fail­ures when forged. The fore­most bar­rier is a high risk of busi­ness fail­ure cre­at­ing a stress­ful en­vi­ron­ment in the busi­ness op­er­a­tions and cash flows. The other is pro­hib­i­tive busi­ness dis­pute cost which stems from the ab­sence of vi­able dis­pute res­o­lu­tion mech­a­nisms. The third is the lack of an en­trepreneurial cul­ture that could pro­mote part­ner­ships through tak­ing risk and en­trust­ing re­sources.

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