Last budget, the Export Refinance Facility (ERF) brought the mark-up rate down to 3 percent (in several steps from 8 percent) in the hopes to bolster exports. But the increase in ERF to the private sector has been nominal at best (5% of all credit in FY16, 7% of all credit in April 2017). This ERF facility for SMEs has been insignificant in comparison, remaining somewhere around 2-3 percent i.e. a very tiny share of total is going to SME exporters who contribute nearly a quarter of all exports in Pakistan.

To review: total SME lending of late has remained less than 7 percent of all private credit and has increased at snail’s speed at the back of a very low base. The Long Term Financing Facility (LTFF) for long term investments and potential expansions was less than 5 percent for SMEs, which includes a share to agriculture storage firms. From a bird’s eye view, with over 3 million SMEs in Pakistan (90% of all private enterprises); SMEs virtually have no footprint in the banking sector.

The budget announced on Friday allocated Rs3.5 billion to a Risk Mitigation facility and Rs500 million to an Innovation Challenge Fund aimed at helping small businesses to invest in new technologies. This is part of some funds set up by DFID under its Financial Inclusion Program (FIP) for Pakistan where Pakistani government’s share is small.

Lastly, Finance Minister Ishaq Dar also announced that the National Assembly had passed the Financial Institutions Secure Transactions Act 2016, which would facilitate electronic registry for movable property enabling SME borrowers to take loans against movable assets.

Now here’s the good news: the secured transactions reforms is the right policy step at the right time and of utmost importance as lack of adequate collateral is the single biggest hindrance to why banks do not want to provide loans to SMEs and SMEs can’t attain financing. If the PML-N government can somehow put the show on the road and get this registry implemented, it would be a major feat.

Secondly, there has been some upward mobility in another crucial area: the Credit Guarantee Scheme (CGS) introduced sometime in 2011 also with funding from DFID under the FIP. This has raised CGS-backed loans from 16,000 to 22,000 borrowers between FY15 and FY16 with government covering 40 percent of credit losses.

One can agree that some of this spending by the government could potentially work in favour of SME development, given also that much of it is backed by external funding. On the other hand, ERF and LTFF schemes are not yielding desirable outcomes even at record-low rates. Most SMEs—unless they are part of an association—do not know of these facilities. There is visibly no work done on cluster-specific and sector-specific lending products; even the CGS is fairly arbitrary.

There are also no targeted incentives for SME exporters (such as import financing, supply chain financing, back-to-back L/Cs, performance based lending but not the way ERF does it, and etc.), which is astonishing since these are those SMEs that are formal and documented. These should be the easiest to provide different forms of lending to.

Allocating funds is all too well - they can be small and one can debate over that. The more important aspect when it comes to public programs is whether they are strategic, targeted and reinforced. For e.g. what did the government hope to achieve by lowering the ERF rates; and was it able to achieve those targets? The truth is, it remained highly underutilized.

SME development is an uphill battle. Many more rounds of different reforms are needed to document, incentivize and provide lending to the mammoth sector, so it can grow. Our recommendation is this: if this government can do one job before it leaves, it should focus on implementing the secured-transactions reforms.