RELYING heavily on foreign loans to set up large industries will take many years to bear fruit. Besides, it will weaken our currency in the short term, increase the debt burden on our future generations and keep most of the economic wealth generated in the hands of a narrow elite class.

The small and medium enterprise (SME) sector in Pakistan has the potential to become the engine for growth and propel the national economy into the world’s top 25 economic powers, as envisioned by the Planning Commission.

The continued development and strengthening of a committed public-private partnership under sustained and long-term political support will be a key enabling factor for the sector if it is to unleash its economic potential and bring prosperity to a wider section of the population.

The Small Medium Enterprise Development Authority (Smeda) is positioned to play an important role in the development of this sector. Its primary role is to help SMEs overcome growth constraints by advocating for legislative reform, launching government programmes to help uplift the sector and encourage private-sector collaborations.

This includes setting up globally competitive model enterprises that can be reverse engineered by other SMEs, and supporting the development of SME clusters that collaborate with each other for mutual benefit.

The government should take the lead in facilitating sector-wide alliances and introduce incentives to pair smaller SMEs with medium and large enterprises to increase their chances for sustainability.

Smeda also needs to incubate the new breed of business development service (BDS) providers, which are basically SMEs that teach other SMEs to manage their growth according to global best practices.

Furthermore, the SME bank needs to be made into an effective model enterprise so that other banks can follow its lead and provide financing options to SME-owners. To encourage sector lending, the State Bank of Pakistan (SBP) offers credit-finance guarantees to banks that lend to SMEs.

Lessons can also be applied from the experience of the microfinance sector, where non-performing loans (NPLs) have been controlled to less than 2pc — better than even the corporate sector (greater than 10pc). In addition, Islamic banks have recently started offering products to this sector.

The SBP has issued prudential regulations and guidelines for the creation of venture capital and private equity funds and the Securities and Exchange Commission of Pakistan has created a mechanism for SMEs to access the capital markets. These catalytic measures are steps in the right direction.

Meanwhile, USAID has announced that it will seed at least three venture funds that will be focused on SMEs and an accelerator programme that will benefit over 6,000 SMEs.

The longer term success of this sector will depend on strong linkages with academia for research and global competitiveness as well as on collaborations with both domestic and international markets. A recent Oxford University survey showed that the fastest growing SMEs globally have a supply chain spread across many countries, and they use online collaboration to drive innovation and growth.

To harness the potential of the SME sector, Pakistan must lock in a comprehensive and holistic SME strategy with long-term commitments from current and future stakeholders. The pillars behind such a strategy would include the following.

Increase financial inclusion by enhancing and promoting mobile banking in areas where traditional banking has a weak presence, and by increasing the secured collateral pool. Ambitious goals must be set for SME-related bank lending, aiming to increase it to 33pc of all commercial lending initially and then to keep it above 25pc as the first batch of SMEs graduate into corporations.

The lending risk can be reduced by strengthening credit bureaus. Alternatives for credit, in the form of equity-based investments through venture capital and private equity funds, can be provided. Well-designed outreach programmes should also be run to increase awareness.

Meanwhile, unsecured lending to SMEs should be linked with skill development and their graduation from business incubators and accelerator programmes. These would cater to the deficiencies in management and introduce the firms to global best practices, markets and mentor networks. Globally competitive and certified incubator and accelerator programmes should be developed on criterion used by the HEC for universities.

There is also a need to improve tertiary training. The Technical Education and Vocational Training Authority (Tevta) and other vocational training programmes should also be reformed so that they become globally competitive.

Sector-specific research and development needs to be strengthened, and manufacturing clusters around academia and large industries should be encouraged. Subsidised market research and consultancy services, including business modelling, global benchmarking and organisational development, should be offered to start-ups and early-stage SMEs.

A new SME ministry should be created or an existing political unit should be given a specific charter to work along with Smeda, the SBP and other stakeholders to provide SMEs an enabling business environment and address the constraints in their growth.

This includes addressing issues related to ease of doing business, passing an SME Act that incorporates the updated suggestions from the SME policy published in 2007, and providing speedy justice to settle business disputes.

More importantly, the development vision of the country as well as of the SME sector must be aligned as far as infrastructure investments and governance reforms go. This view should also extend to CPEC projects and the potential for SMEs to reach out to neighbouring markets.

The writer is a management consultant, business leader, technology evangelist and a seasoned entrepreneur.

zqazilbash@gmail.com

Published in Dawn, Business & Finance weekly, December 7th, 2015