KARACHI: Bank financing to small and medium enterprises (SMEs), dubbed as an engine of economic growth, jumped by 20 per cent quarter-on-quarter in October-December 2021.

The State Bank of Pakistan (SBP) Quarterly SME Finance Review issued on Friday showed that the bank advances to SMEs rose by Rs86.3bn to Rs524bn in Q2FY22 from Rs437.7bn in Q1FY22.

However, during the year from December 2020 to December 2021, the bank financing increased by Rs42.2bn or 8.7pc.

The government has been giving special attention to boosting financing to this crucial sector to expand the country’s industrial and manufacturing base and to achieve this goal Prime Minister Imran Khan has formally launched an SME Policy in January this year.

The government claims that the policy is aimed at extending facilitation and incentives to promote the growth of small and medium enterprises.

The government believes that SMEs can significantly help in boosting the country’s industrial base as well.

However, the SBP quarterly report shows that SME financing as percentage of domestic private sector financing slipped to 6.15pc in December 2021 from 7.27 in September 2021.

The number of SME borrowers during the year to Dec 2021 dropped to 164,752 from 179,934 a year ago. The SME non-performing loans (NPLs) ratio remained almost static during the year to 15.85pc till Dec 2021. However, the NPLs ratio in Sept 2021 was on the higher side with 19.1pc.

A further detail showed the biggest financiers of SMEs were domestic private banks.

The share of domestic banks in SME financing was Rs344.8bn compared to Rs128.4bn of public sector banks and Rs38.2bn of Islamic banks.

The highest amount was borrowed for working capital which rose to Rs351.6bn in Dec 2021. Sector-wise data shows the highest amount was borrowed by the manufacturing sector as it reached Rs225.6bn in Dec 2021. Borrowing for trading by SMEs was also significant as it rose Rs181bn in Dec 2021 from Rs160.3b in Dec 2020.

The government claims that Pakistan has the second-highest young population globally which can spur growth through the development of the SME sector. However, the banks are usually reluctant to finance SMEs due to the high default ratio which not only blocked their liquidity but also reduces the expected profits.

The banks have made record profits in the calendar year 2021 which may change their financing behaviour towards the SME sector.

Under the new SME policy, the requirement of NOC for the establishment or expansion of certain industries has been abolished.

The policy also targets increasing average SME sector employment to 5pc per annum from 2.43pc during the last three years.

Published in Dawn, March 5th, 2022