TWO related but apparently contradictory developments took place in early June 2008. There were reports of an Italian government offer of soft loan to SME Bank Ltd.

Simultaneously, there were reports on 19 Pakistani and international investors’ expressions of interest (EOIs) for acquisition of the SME Bank Ltd.

Privatisation has to be seen in light of some basic facts. SME Bank is a badly needed development finance institution (DFI) which also happens to possess a commercial banking licence. The bank’s charter is to promote small and medium enterprises which has now become an imperative for creating more jobs and reducing poverty.

Italy will provide an interest-free loan of euro 7.75 million for developing SMEs. The loan payable in 39 years carries zero per cent interest rate. The SME Bank would advance this amount to enterprises at a maximum mark-up of four per cent on loans in euro and eight per cent on loans in rupee. The credit facility will be available only to private enterprises or enterprises with a public participation up to 20 per cent. The funding for individual projects, even if split into more than one contract, will not exceed euro550,000 and not be less than euro30,000.

The loan is proposed to be disbursed through a Smeda-Unido investment promotion unit (IPU), to be set up in the Smeda premises, through an Italian grant of euro 1,418,200 (already released in favour of Unido). The financial and technical feasibility of each project loan is to be undertaken by the IPU and loans will be managed through the network of the SME Bank.

The last date for receiving EOIs for divesture of nearly 94 per cent shares of SME Bank was May 31, 2008. At present, SME Bank has 630 permanent and contract employees and is operating through a diverse network of 27 branches, which include 13 active commercial branches. The potential buyer will have to retain the name ‘SME Bank Limited’ for one year after privatisation.

The charter of the bank will be maintained for at least three years post- privatisation. All permanent employees will be offered a severance package. The government will have the right to appoint at least one director on the board of directors of the bank post- privatisation.

Notwithstanding the condition for maintaining its charter for at least three years post-privatisation, the bank for all practical purposes from day one is likely to become and operate as a commercial bank. There will be no specialised institution left to fully look after and finance SMEs, a priority sector all these small and medium enterprises will be forced to finance their funding needs including long-term loans through commercial banks.

The opening paragraph of the Executive Summary of SME Policy 2007, highlights the importance of the SMEs in the following words: “SME sector is the backbone of Pakistan’s economy. The significance of their role is clearly indicated by various statistics.”

According to more recent estimates, there are approximately 3.2 million business enterprises. Enterprises employing up to 99 persons constitute over 90 per cent of private enterprises in the industrial sector and employ nearly 78 per cent of the non-agriculture labour force. They contribute over 30 per cent to the GDP and account 25 per cent of exports of manufactured goods besides sharing 35 per cent in manufacturing value added”.

Many DFIs including SBFC ran into problems stemming basically from excessive bad loans and poor management practices. Unlike injection of fresh equity into certain commercial banks facing problems of excessive bad loans, no fresh equity or soft loan support was injected into the DFIs for rehabilitation. Instead, the concerned DFIs, under presumably a faulty approach, were merged into other DFIs / banks or were liquidated.

The framework for promoting SMEs largely comprises the SME Bank, SMEDA and SME Business Support Fund. The roles of SMEDA and the Fund are described hereunder:

a) SMEDA was set up in October 1998 to take on the challenge of developing SMEs. With a futuristic approach and professional management, it has focused on providing an enabling environment and business development services to small and medium enterprises. SMEDA is not only an SME policy-advisory body for the government but also facilitates other stakeholders in addressing their SME development agendas.

b) The SME Business Support Fund is a not-for-profit company. As an integral part of the overall programme, and in support of other components, it is as an integral part of a major SME sector development programme.

It is a financial support scheme, established for small and medium sized companies (SMEs) to enhance their competitiveness and profitability, through the increased use of business development services (BDS). BSF can pay a grant equivalent to 50 per cent of the costs incurred by the SME client for the purchase of business development services (BDS). There is no loan financing to the SMEs.

The SME Policy 2007 says: “Creation of the SME Bank also marks the government’s commitment towards SME development agenda. The bank, however, is in its early days of a major restructuring exercise and focuses on a single issue faced by SMEs, i.e., access to finance, and that too on a very limited scale”. There is thus need to address the difficulties faced by the SMEs as well as the measures to strengthen the SME Bank for the financing and allied services to it in a big way.

Creation of jobs is essential for elimination of poverty and reduction of migration of the people from interior to the cities. More jobs will be created through promotion of economic activities particularly in less-developed areas of Balochistan; FATA, Wazirastan; NWFP, Sindh and the Southern Punjab. Promotion of agro-based industries, export-oriented handicrafts, construction of health and education infrastructure, development of mining and mineral based industries, etc are needed to be taken up for bringing improvement in import-exports balance and also creation of jobs in far flung areas.

These vital economic development programmes have better chances of success if these are handled through active involvement of the DFIs particularly the state-run SME Bank which has had its presence in under-developed regions for a number of years in the past.

The existing situation demands that the privatisation of SME Bank may be reconsidered and it may be allowed to continue playing its role for the promotion and financing of SMEs for many more years to come.