KARACHI: Banks lending to Small and Medium Enterprises (SMEs) has been falling despite all efforts made by the State Bank, while its' role is shrinking instead of growth in the economy.

SBP Governor Shahid Kardar, while delivering his keynote address at a conference on “SME Banking in Pakistan: Global/local trends and role of value-added services,” said the banks need to develop new products for SMEs.

The conference was jointly organised by the SBP and International Finance Corporation (IFC).

The governor expressed concern that the banks' lending to SMEs had declined in the last three years. He said that bank credit to SMEs had declined from Rs437 billion in 2007 (16 per cent of bank advances) to Rs334 billion in Dec 2010 (10 per cent of advances) showing a huge decline in real terms at a time when input prices had risen sharply pushing up demand for working capital credit.

Most of the developing economies consider SMEs as the backbone for the growth. Pakistani economic managers including the central bank have the same perception but the growth in SME sector has been in reverse direction at least for last three years.

The future of banking industry in Pakistan was critically dependent on the strength and performance of the economy in which SME sector had attained a crucial role in terms of its growth potential and greater employment opportunities.

“Most particularly and especially when you consider that almost 99 per cent of all business establishments are services, providing employment to 77 per cent of the non-farm workforce – contributing 30 per cent to the GDP, no one can deny a key role of this sector in overall economy,” said the governor.

The prevailing profitable risk-free situation does not move banks to take pain for the development of SMEs despite the fact that these are essential for long-term growth of economy as well as banks.

He said that SBP had been trying to develop financial institutions to support SME's sector growth. “We issued specific prudential regulations in 2003 to facilitate banks in financing SMEs in an effective manner and more recently credit guarantee schemes were launched.

The SBP is presently conducting cluster surveys on SMEs in collaboration with IFC and LUMS.

The governor said that the importance of this sector was widely acknowledged all over the world in view of its success in sustaining high growth in countries like Korea, Taiwan, China, Vietnam and Thailand.

Emphasising that financial industry lacks skills to develop innovative products for SME, he said the tradability of services across space, the reduced attraction of large markets and shrinking of economies of scale are all combining to provide developing countries the opportunity to sell their labour-intensive services and manufactures.

He said the Chinese development experience demonstrates how each enterprise can grow at a faster pace by basing focus on its own competency and subcontracting other work.

This is in contrast with the Pakistani model of doing everything in-house through vertical integration of production structures within an organisation.