Invigorating SMEs

Speaking at a meeting the other day of the Small and Medium Enterprises (SMEs) Credit Advisory Committee, State Bank Governor Yaseen Anwar had good news to give the sector which has been struggling hard against exceptionally harsh conditions in the recent years. Stressing the need for a sustainable approach on the part of all stakeholders, especially the banks, in improving availability of finance and other banking services for SMEs he said that the SBP "stands ready to support banks wishing to increase lending to this important sector with appropriate policy interventions." Hopefully, the support will come in the form of active encouragement, especially in view of the fact that during the recent years the banks have been more reluctant than ever to lend loans to SMEs. As the SBP Governor noted bank financing to the sector came down from Rs 437 billion in December 2007 to Rs 268 billion in September 2011. In percentage terms the share of SME financing in total lending portfolio of banks fell from 16.2 percent to 7.7 percent during the same period. He mentioned some of the reasons for low SME lending, such as adverse macroeconomic conditions as well as the banks' excessively cautious approach towards SMEs. However an equally, if not more, important reason is the low priority that the sector has always received in our planning and policy-making circles. There seems to be little appreciation for the fact that small businesses are known to have played an important role in the progress and development of the world's major economies. Also, innovation driven start-ups have brought about a spectacular electronic age information revolution. In the case of Pakistan, SMEs are making a large contribution to the economy. They comprise over 98 percent of all business establishments, and are a major source of employment in the non-agricultural economic activity. They provide job opportunities to semi-skilled as well as unskilled labour. Which is no small thing considering that a vast majority of our population is poor and illiterate. Invigorating the sector can go a long way in countering the problem of pervasive poverty. It is also worthwhile to note that as long as such businesses are on their own, most tend to operate within the informal sector, and hence outside the purview of the revenue department. The lure of easier and greater access to bank loans will incentivize them to get duly registered, giving a boost to business activity and also helping the government increase its revenue. So far the SMEs have been having problems not only in getting bank loans, the obsolete labour laws often times become a bane. Companies as small as having ten-employees attract a plethora of burdensome labour laws as soon as they become operational. Having to payback loans, meet operational costs, and also comply with onerous labour laws many feel pressured either to go out of business or work quietly in the informal sector. In the case of the second option neither the workers get due benefits or the government its revenue. Therefore, as we have been saying in these columns before, it would be advisable for the government to review the threshold number of employees for applying the labour laws, raising the limit from ten to above 100 employees. The emphasis has to be on undertaking necessary measures to invigorate the SME sector to increase economic activity. Copyright Business Recorder, 2012