Banks’ lending to small and medium enterprises constitute only 8.7 per cent of their total lending to private sector businesses, data till the end of June 2021 of the State Bank of Pakistan reveals.

This betrays all the tall claims that successive governments and the central bank have been making for well over a decade about their ‘innovative efforts’ to promote small and medium enterprises (SMEs).

The SBP has now introduced a new innovative SME Asaan (easy) Finance Scheme (Saaf) to improve access to finance for SMEs in collaboration with the Government of Pakistan.

The government and the SBP keep rolling out new schemes after schemes to help ease the financial hardships of the SME sector without telling the nation what happened with the previous schemes. People’s expectations from the central bank are limited. They expect that SBP will ensure easier access to finance for SMEs and will tell the nation occasionally what went wrong with the implementation of its previous schemes.

They expect the government should play a much larger role. It is the government’s responsibility to help organise the entire SME sector, address their structural issues and make them creditworthy for banks. Besides, the government is also expected to implement its pro-SMEs policies, just like any other policy, transparently with accountability.

Expansion in e-commerce and IT-ES can only prove conducive towards economic growth if the manufacturing sector continues to grow simultaneously

Small and Medium Enterprises Development Authority (Smeda) was established in 1998 and Pakistan announced its first comprehensive SME policy in Jan 2007. Since then the country has witnessed the introduction of several initiatives for promoting SMEs and for ensuring their easier access to bank finance. Then why it is so that SMEs’ share in bank lending remains at a humiliating low of 8.7pc of their total lending to all private sector businesses. The share of SMEs in banks’ total lending to private sector businesses (PSBs) (on the basis of stock of loans) stood at 7.3pc back in June 2016. With their share now at 8.7pc, we see an increase of only 1.4 percentage points in five years.

This pace of improvement is too slow — rather alarming because Smeda estimates that SMEs contribute 40pc to GDP and 25pc to export earnings.

While announcing the SME Asaan Finance Scheme, the SBP told the nation that the reasons for low credit penetration in SMEs included (1) relatively higher loan losses (2) high-cost bank finance models (3) low usage of appropriate technology needed for SME finance and (4) the lack of acceptable security.

These are very obvious reasons and taking care of even one or two of them can help improve SME financing. But it would be too naïve to expect that the latest financing scheme (which is basically a refinance and credit guarantee facility) alone can help address all structural issues of SMEs. Under the latest scheme “the SBP will provide refinance to banks while the government of Pakistan will support via partial credit guarantees to the participating banks.” The SBP says “this support is being provided initially for three years to facilitate investment by banks in technology, infrastructure and team building specialised in SME lending.”

The SBP says in its press release that after three years “SME financing by banks is expected to be sustainable without the SBP or government support.” One hopes that the central bank will ensure it. Banks must invest on their own to reach out to the least served classes of borrowers like SMEs.

The latest SME Asaan Finance Scheme is expected to help an important segment of the SME sector ie e-commerce and IT-Enabled Services (IT-ES) because the scheme is designed to provide SMEs collateral-free loans. This is encouraging. One of the main impediments to the growth of e-commerce and IT-ES in Pakistan has been the lack of local funding. In eight months of this year, tech startups have attracted more than $228 million investment against only $77m in the entire 2020, according to local media reports. This means in a few years’ time e-commerce and IT-ES companies will hopefully be doing roaring business — and will, therefore, need frequent and big bank financing.

But this prospect should not make policymakers complacent and take their eyes away from the financing requirements of traditional SMEs particularly those in the manufacturing sector. Expansion in e-commerce and IT-ES can only prove qualitative for economic growth if the manufacturing sector continues to grow simultaneously. And for facilitating the growth of the overall manufacturing sector, promoting manufacturing-based SMEs is a must. These SMEs play an important role as they form an integral part of the supply chain of our key export industries including textiles, food processing and engineering etc.

The share of manufacturing-based SMEs in banks’ lending to the entire manufacturing sector is only 5.3pc, according to July 2021 stats released by the SBP. There is an urgent need to boost this percentage. If that is not done, manufacturing-based SMEs will opt for trading, leaving a vacuum in the supply chain of our key manufacturing industries.

Notwithstanding the much talked about role of the SMEs in the construction sector, the share of banks’ financing to construction-based SMEs constitutes just 11.5pc of the total bank lending to this sector. This percentage must also be increased. Manufacturing and construction are the two largest job providing sectors in Pakistan. Keeping SMEs linked to these two vital sectors deprived of due bank financing may aggravate the problem of unemployment.

Published in Dawn, The Business and Finance Weekly, August 30th, 2021