Access to foreign markets: Challenges facing MSMEs pinpointed by ADB

ISLAMABAD: The challenges faced by micro, small, and medium-sized enterprise (MSMEs) in Pakistan in accessing foreign markets include the inability to meet required labor, environmental, social, and international standards, in addition to compliance with complex trading regulations, says the Asian Development Bank (ADB).

The bank in its report, “Asia Small and Medium-Sized Enterprise Monitor 2021” stated that work is needed to strengthen the availability of bank credit, create an enabling regulatory environment, and target business development services for MSMEs to spur economic growth and job creation.

MSMEs contribute about 25 percent of export value and could expand further through trade compliance and business development, the report noted.

An estimated 5.2 million MSMEs operated in the country in 2020, contributing nearly 40 percent to GDP and 25 percent of exports by value. MSMEs are an integral part of the economy. They are therefore prioritised by the government—through its Small and Medium-Sized Enterprise (SME) Policy 2019—and the emphasis on MSMEs within pandemic recovery measures.

The report noted that MSMEs are aided by several measures, including concessional loans for exporters, the implementation of Digital Policy 2018 that supports technology and innovation, along with venture capital and “angel” funding.

Nevertheless, barriers to MSME development and growth remain, such as their largely informal status, difficulties in regulatory and trade compliance, limited government support, and access to finance, the report noted.

The number of SME borrowers remained below 200,000 from 2011 to 2020, due to supply-side challenges such as nonperforming loans (NPLs), risk averseness of lenders, and skewed commercial lending that favors the public sector. Demand-side issues include the lack of documentation and absence of collateral. This leaves many MSMEs ineligible for government refinance schemes or other formal support, it added.

It further stated that E-commerce holds much more potential for MSMEs growth, but measures such as digital literacy must spread among micro and small scale entrepreneurs to take advantage of digital platforms. Pakistan’s start-ups raised $77 million in 2020 and nearly $178 million from 2015 to 2020. Airlift ($22 million) and Bykea ($13 million)—start-ups focused on transportation/mobility— were beneficiaries, along with multi-million dollar investments in e-commerce, such as Cheetay ($9.6 million), which deals with last mile delivery and Bazaar ($7.8 million), an online marketplace linking retailers directly with manufacturers and wholesalers. Innovation (and investments) in other areas—including fintech, edtech, agritech, and healthtech—are also expanding.

The central bank has multiple refinance schemes for MSMEs, with some related to the pandemic. However, many MSMEs are ineligible for bank credit and public financing schemes due to their informal status, and inadequate registration and documentation, it added.

A Pakistan Credit Guarantee Corporation (PCGC) was established in 2019 but was not yet operational as of April 2021. Microfinance institutions play a critical role in enhancing access to finance for rural MSMEs. Yet NPLs are rising. Venture capital funds are actively providing growth capital to start-ups.

Concessionary refinancing schemes are available to encourage lending since the COVID-19 outbreak. But their effectiveness has been limited. Access to bank credit remains a challenge for MSMEs. Commercial bank lending is also skewed toward the public sector which offers healthy returns with less risk. Compounding these supply side issues, there were also demand-side challenges. Many MSMEs are informal, and therefore lack the requisite registration and documentation to apply for formal bank loans (or benefit from refinance/formal schemes). Furthermore, weaknesses in contract enforcement are an impediment to lending microenterprises. There is also no program-based lending and value-chain financing for small enterprises that lack collateral, the report noted.

The report recommended that the financial infrastructure needed to promote MSME access to finance continues to evolve. There is progress in DFS, the rise in venture capital and business angel investments. Other measures—though nascent—in capital markets such as the GEM Board and the PCGC should ease MSME access to credit.

In its 2021 outlook, SECP will further review its regulatory framework to reduce over-regulation and remove practical difficulties.

It will also leverage its digitized platform and provide new businesses a facility to open bank accounts at the time a company is registered. However, other critical areas remain weak.

They include better enforcing contracts and resolving commercial disputes in a timely manner, difficulty in obtaining credit or construction permits, and varying taxation policies and weak enforcement of intellectual property rights.

Copyright Business Recorder, 2021