A NEW study by the Competition Commission of Pakistan has once again highlighted the “lack of access” to private sector credit as the key barrier to SME growth. The study — Enhancing Economic Efficiency of SMEs in Pakistan — notes that the SME sector receives a mere 6-7pc of private sector financing despite “policy measures” — introduced mainly by the State Bank — to raise their share to 17pc of the total private sector credit. This compares with a 25pc share of SME financing from private sector credit in Bangladesh and 18pc in India. It points out that 93pc of the SMEs surveyed had complained that it was “cumbersome” to avail credit facilities from banks and that 80pc of them had not utilised formal financing. The study recommends that the central bank should consider allocating to the financial institutions separate lending targets for small enterprise and medium enterprise, set sector-specific goals, provide separate financing facilities (for poor districts) and introduce standardised pricing of insurance and evaluation reports. It says that non-bank financial institutions can play an “important role” in providing credit to start-ups and SMEs.

Sadly, neither the diagnosis of the main factor stunting SME growth, nor the treatment suggested to facilitate their access to formal credit is new. Successive governments have repeatedly pledged to increase SME credit as well as create ease of doing business for them in the last three decades. The first ‘concerted effort’ to achieve this objective was made in the mid-1990s when the government created a dedicated organisation, Smeda, to design and implement policies for the development of small to medium businesses. Ever since its inception, Smeda has done many things except that. The major reason behind the slow development of SMEs is related to the country’s tax regime that treats large corporations and small businesses alike, and carries a regulatory burden that even big companies find hard to comply with. That is good enough reason for SMEs to stay undocumented even if it means no business expansion. On top of that, the State Bank’s prudential regulations and commercial banks’ aversion to risk is hampering the supply of formal credit to SMEs that normally don’t have collateral to pledge against loans. SMEs will remain underfunded, inefficient and small unless the government and industry regulators formulate a separate, progressive taxation regime and an uncomplicated regulatory structure to support their growth.

Published in Dawn, July 15th, 2023