Trade finance has received an amount of Rs 61.6 billion showing 9.2 percent of growth followed by fixed investment of Rs 47.9 billion at the end of March, 2008.
According to official sources, the nature of financing facilities displays that major part of advances is utilised for working capital finance, followed by trade finance, and fixed investment, respectively.
Working capital finance accounts for 72.8 percent, trade finance 15.3 percent and fixed investment 11.9 percent of financing to SMEs.
The basic factor for the predominant portion of working capital finance is the SMEs' lack of capital for inventory and day-to-day operations. Most of the SMEs do not have objectively defined plans for the expansion of capacity, which is the main cause of meagre share of long-term finance as well.
The absolute amount for working capital finance stood at Rs 293.9 billion at end of March 2008, recording a growth of 4.9 percent for the first quarter of 2008. Trade finance received an amount of Rs 61.6 billion showing 9.2 percent growth, followed by fixed investment of Rs 47.9 billion. The banking industry's exposure towards the SME sector is the second largest, after corporate finance. In Pakistan, corporate sector takes away the major chunk of credit extended by the banking system. while SME finance follows by grabbing second biggest share of total credit. At the end of first quarter of the current year the SME sector's outstanding credit stood at Rs 403.4 billion, in absolute terms. This constituted about 14.5 percent of total credit of banking industry.
During the first quarter of current year a reduced growth of 7.7 percent has been recorded in SME advances. The relative decrease in growth of the SME finance in first quarter of 2008 may be attributed to seasonal variations and cyclic nature of businesses which receive the bulk of SME finance. At the same time, a considerable portion of loans also matured in the first quarter of the year. However, in absolute terms the advance in first quarter of the year 2008 stood at Rs403.4 billion compared to March 2007 position of Rs 387.1.
Official statistics show that, in absolute terms, SME finance portfolio increased during one-year time at the end of March of 2008. For the last two years, the SME sector has been witnessing a consistent low growth in SME finance due to a variety of factors such as higher inflation, economic instability, low level of banking industry eagerness to penetrate in the market, capacity constraints of banks to tap the potential market, and major demand side obstacles which are hindering the growth of SME sector in Pakistan.
Like many developing countries, official sources said, in Pakistan there are 3.2 million economic establishments--44 percent in rural areas and 56 percent in urban areas.
Out of these, 99.06 percent employ 1-10 persons, clearly indicating that these establishments fall under the definition of SMEs. Similarly, individuals own about 97 percent of such establishments where 53 percent of the establishments belong to wholesale and retail trade and restaurant and hotel sectors, 20 percent are part of the manufacturing sector and 22 percent fall in community, social and personnel services sector.
In Pakistan, the SME sector is confronted with a number of demand and supply side constraints, blocking the way for smooth growth of this sector. The SME sector issues, pertinent to demand side, comprise of lLack of book keeping at SMEs, missing succession planning, rare strategic objective or business planning, low level of financial literacy, unskilled human resource, etc, while supply side obstacles constitute non-aggressive lending strategies by banks, absence of specific products offered for SMEs, and are perceived to be high risk area by banks etc.
According to official sources, the outreach of banking industry has increased incredibly in the SME sector. The number of borrowers has shown promising momentum in thr past few years. At the end of December 2007, the number of SME borrowers was 185,039, recorded from March 2006 to December 2007. However, as is evident, during the first quarter, due to seasonal variations and specific business cycles, not only the maturity of loans becomes much faster but the number of borrowers also comes down to some extent. This trend has been witnessed over the past few years due to concentration of credit sector which are seasonal in nature. The negative trend in growth for first quarters of previous and current years can be witnessed in the figure too, as mentioned above.