How prepared is Pakistan for the challenges coming its way with the deepening global recession? The sad but widely expected answer is 'not much'. We are likely to witness a steep decline in our imports and exports in the future that would leave us at the helm of the Small & Medium Enterprises (SMEs) being the primary growth driver of the economy with major focus on agro-based productivity.
Let us first take a cursory look at SME sector in Pakistan to get a grip on matters relating to the sector. SMEs constitute about 90 percent of the 3.2 million economic enterprises in the country, employing approximately 78 percent of the non-agriculture labour force. Their contribution towards our country's GDP is 30 percent, in addition to the 25 percent share in country's export earnings.
Pakistan lags way behind other comparable economies where SMEs contribution to GDP is in the range of 60-75 percent, which explains the major problems faced by this sector. An ambiguous SME definition, lack of entrepreneurial skills, inadequate technology, complex tax structure, inefficient human resource development programmes and, last but not least, limited access to finance form the bundle of problems which the SMEs have to face. Discussing each of these issues would require more than the allotted page-space, so let's stick to the finance access problem for now.
An anomaly is that the major portion of advances to SMEs is borrowed to finance working capital requirements, whereas fixed investment advances are a very small portion. This, in itself, is self explanatory of the nature of SME business in Pakistan, as they operate with minimal capital inventory and are mostly engaged in day to day operations.
The picture turns grimmer when one notes that only 5 percent of the 3.2 million SMEs have access to finance. SMEs' borrowing constitutes about 15 percent of the total credit of banking industry, but its contribution to banking industry's NPLs is 20.5 percent, this explains the reluctance of private sector banks to lend money to SMEs.
The overall picture of SME financing is grim and needs major restructuring. Traditionally, banks extend loans to SMEs against collateral or financial record keeping evidence. But most of the SMEs operate at a smaller level and do not maintain financial records due to lack of expertise and resources, which becomes a major hindrance in obtaining finance. A well established international practice of cash flow based lending to SMEs needs to be followed in Pakistan.
Another factor which adds to banks' reluctance in lending to SMEs is the absence of an independent credit rating agency. Since the SMEs businesses are mostly attached with high risk, the need for independent credit opinion is becoming increasingly unavoidable. Not only will this allow banks to disburse credit with a sense of surety and confidence, it will also reduce their burden of risk mapping SMEs.
Almost 90 percent of SMEs are self-financed because it is a highly informal and un-documented sector which makes it difficult for them to obtain formal credit. Therefore, there is a dire need to establish venture capital firms in joint collaboration with the government and regulators, as practised in many developing nations.
Given the importance of SMEs in Pakistan's economy - it is time to be proactive and not wait for the financial tsunami to hit us. This sector should be the engine of the economy during the days of depression, which are already peeping through the global doors.
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