There lies a great potential not only for local banks, but also for international players to explore cross-border opportunities to invest in the MSME sector. While the market potential is large, it requires specialised institutions to be able to work successfully and serve clients sustainably.
Based on global experience, some of the key elements identified for a financial institution to succeed in these markets are: developing a good understanding of the dynamics of these markets; business models to operate efficiently offering innovation in products and services as well as ensuring efficient distribution channels; risk assessment methodologies to underwrite large volumes of relatively small ticket items efficiently and cost-effectively; and ensuring financial literacy for clients and existence of appropriate government policies/financial infrastructure.
Pakistan can be classified in the emerging markets category, but it is yet to actualise its potential. The micro-finance banks' framework in Pakistan provides the foundation to the country to leverage the opportunity represented by the MSME market.
The Economist Intelligence Unit Report 2011 ranks Pakistan amongst the top three countries in terms of business environment for micro-finance and the policies and regulatory frameworks are ranked as the best. Today, there are nine private sector micro-finance banks operating in Pakistan under the framework, with on ground presence across the rural and urban areas of the country with strong ownership structures and a good insight into sector dynamics to serve these markets.
The growing confidence of the central bank in these institutions has enabled them to raise the maximum loan ceiling from 150,000 to 500,000 to be able to serve the low-end micro enterprise market besides investing in financial literacy programmes to educate the clients. The branchless banking regulations allow financial institutions to reach their scale and outreach through technology-based distribution channels thereby reducing the cost of delivery.
Khushhalibank being the largest micro-finance institution, demonstrates the strength of the framework in terms of the large presence across the rural and urban areas of the country and is well poised to leverage this opportunity to expand its product and services to the micro enterprise segment of the market through experience of a decade, progressive regulatory environment and an emerging ownership structure that brings the best in the world of micro-finance.
While the issues highlighted above have just one but important element of ensuring financial access that will generate growth in the sector; institutions such as Business Support Funds and organisations can play an important role in bringing together the remaining elements of the MSME ecosystem in the country that can serve as an agent for Pakistan's economic revival.
(PAPER PRESENTED AT THE SME CONFERENCE 2012, LAHORE)
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