Financial inclusion of SMEs: Karandaaz envisages three major investment programmes

Karandaaz Pakistan envisaged three major investment programs for financial inclusion of small medium enterprises (SMEs) that would result in crowding of private sector investment and employment generation, said Navid Goraya, Chief Investment Officer Karandaaz Pakistan.

The recent wave of inflation and increased input costs in terms of utilities prices including gas and power as well as the going down of purchasing power have impacted the SMEs growth, said Goraya who is also the head of corporate investment and credit at Karandaaz Pakistan while talking to the media.

The SMEs are perceived to be risky for lenders to extend financial support, but this perception could be addressed by identifying the correct ones, he added. The company is supporting micro, small and medium entrepreneurs by increasing access to finance for un-banked populations through leveraging digital technologies, developing and disseminating evidence-based insights, and encouraging innovation in financial space, said Goraya, adding that for this purpose DFID has agreed a seven years plan with a total funding of 187 million pounds where the invest-able amount is 164 million pounds.

The company envisaged three major investment programs for financial inclusion of SMEs that would result in crowding of private sector investment, employment generation through women and youth, he added.

"We have designed different innovative programs to improve this funding and further provide it to various institutions for financial inclusions. We divide it in three areas, i.e, setting up new financial institutions to bridge missing infrastructure required for financial inclusion," said Goraya, adding that the first strategic project is setting up Pakistan Microfinance Investment Company (PMIC), the first wholesale microfinance platform targeting 1.2 million clients by 2020.

He said the second objective is as PMIC grows, it would further diversify the borrowing sources to play a market developer role. For that purpose Karandaaz partnered with Pakistan Poverty Alleviation Fund (PPAF) and KfW and with current investment portfolio of more than Rs 22 billion, they are financing top microfinance institutions.

Goraya further said that Karandaaz is at the last stage of establishing infrastructure loan/credit Guarantee Company in partnership with multilateral and local institutions. This entity will extend support to large-scale project like hospital or educational institutions. This entity will have the risk expertise to underwrite the loan and will also benefit those under the SMEs.

The Karandaaz official said that crowded lending to government is very attractive with zero risks through PPIBs. Further large corporate take away large chunk of credit available in the market and the remaining goes to consumers, but the actual life blood of economy - SMEs - gets little share. He said the number of SMEs in the country is estimated at 4.5 million, but financing from the financial sector is highly skewed towards working capital.

Financial institutions have around 4 percent SME borrowers. Commercial banks are reluctant to lend to SMEs for various challenges, including relationship-based and heavily collateralized lending, lack of strategic focus and information asymmetry. Cost per relation for SME is much high compared to corporate sector.

He said these reasons are also the major constraints to the SMEs as perceived risky lending. "One needs to understand the sector and being expert. SMEs are reprieved to be high risked and there are alternative attractive investment opportunities as well. Karandaaz is of the view that SMEs are not risky if identify the correct ones," he added.

He further said that Karandaaz has partnered with five banks and have asked them for their capacity enhancement by giving them technology, system, product development and through consultancy as well. In exchange for technical assistance Karandaaz has asked for longer-term financing in Gilgit-Baltistan and Balochistan which is not being extended to SMEs and it is a bigger intervention.

He further said that Karandaaz has launched two pilot projects including truck industry and feed -- aimed at going to demonstrate that projects perceived risky are viable and profitable and banks should adopt those projects for replication. He further said that Karandaaz has capital risk sharing mechanism available for feed manufacturing.

Goraya said the loan for feeds will cater to the financing needs of its farmers in the supply chain who don't have the means and the resources to obtain financing from the commercial banks due to their stringent financing requirements and collateral based lending models. He said bulk of economy is indirectly or directly linked to agriculture value chain and that is a lesson learnt that it is profitable.