January 21, 2002	Monday	Ziqa’ad 6, 1422

Small and medium enterprises (SMEs) form 90 per cent of businesses in the country, comprising heterogeneous activities with active presence in services and manufacturing sectors.

These represent a significant component of Pakistan’s economy in terms of value-addition by providing 80 per cent of industrial employment, contributing 30 per cent to the GDP and generating one-fourth of the sector’s export earnings. Its contribution to value-added in the manufacturing sector has risen from 27 per cent to 83 per cent, meaning productivity improvements in the last two decades. It provides employment at lesser cost and its capital requirement is also low.

The growth of small-scale industry is mainly hampered by the non-availability of credit facility. The SMEs also face difficulties in coping with the skilled-worker requirement, regulation and business environment issues, infrastructure problems like poor electricity supply, poor technology, access to raw material, especially imported material, and inadequate marketing.

The SMEs have been getting immense recognition the world over due to their pivotal role in economic development. Frequently quoted as the backbone of an economy, these contribute towards employment opportunities and revenue generation, promotion of craftsmanship, equitable wealth distribution, resource mobilization and development of an entrepreneurial culture. The SMEs are considered hub of innovation and as the only hope for the survival of local artisans who have been carrying unique skills over generations. The SME clusters have provided good sources for sustainable income generation to local residents while meeting the demands of national and international buyers.

This sector also provides rural and urban women an opportunity to utilize their vocational skills while staying within their residential premises. In urban areas, many female entrepreneurs have introduced product lines whose uniqueness and novelty have created a strong demand in the market.

Research reveals that despite lack of collateral the SMEs are a better credit risk, as the default rate of this sector is much below that of large enterprises. Throughout the world the SMEs have provided tremendous opportunities to financial institutions to design various tools for the sector’s development. The information technology sector is doing wonders through venture capital financing. Then there are clusters, technology parks and industrial estates, all being fuelled by the dynamism and vibrancy of small and medium enterprises.

Despite their significant contributions to Pakistan’s GDP and export revenues, the SMEs are still unable to achieve their maximum potential. They need support services. The SMEe have braved the downward trends in economy over the last few years, but these have always been short of business support, regulatory and financial assistance, mainly due to the absence of a conducive legal, social, economic and institutional framework, resulting in their lack of access to formal financing sources.

Recently the government has made efforts to create a conducive operating environment for the SMEs and provide them access to the formal banking sector. As part of the financial sector restructuring, an SME Bank has been established under the Companies Ordinance 1984 as a public limited company, with an initial paid-up capital of Rs1 billion. The operations of the bank commenced from 1st January 2002.

The bank came into being after 20 months of hard work that involved major revamping of the Small Business Finance Corporation (SBFC) and finally its amalgamation with the RDFC (Regional Development Finance Corporation). Its advent is a part of government’s efforts for economic reforms and restructuring of the country’s financial sector. The bank is here to address the financial and business support requirements of Pakistan’s small and medium enterprises. Its network comprises of 59 branches, 6 regional offices, 4 area offices, 3 provincial offices and 4 audit offices with a total strength of 1090 personnel.

In the past, institutions like the SBFC have lacked in performance and efficient client handling. At the start of 2000, the SBFC presented itself as a bad case of inefficient management. The non-performing loans, exorbitant expenditures, lack of credit appraisal skills, overstaffing and the lack of institutional integrity were some of the issues affecting the organization’s productivity and ability to function. Since then, a great deal of effort has been made for turning around the institution and putting it back on track.

The new SME Bank inherits only the best practices. An institutional integrity division has been established, a unique to addition the corporate sector in Pakistan. This division would be part of the new bank’s structure to ensure that employees perform their duties with integrity and devotion.

The SME bank will reach its target market through programme lending schemes through customized financial packages for various sectors such as marbles, gems and jewellery, autoparts, carpet, educational institutions, marine fisheries, date processing, information technology, etc.

The schemes have been designed on the needs of the target market to enable fast processing of loan applications. The bank also aims at encouraging the nation’s enterprising females and would have special services in place for business owned and managed by women.

The bank will also serve as a catalyst in the financial sector through co-financing and syndication activities. It will be able to attract additional private sector funding to the SMEs.

The SME bank will not only cater to the financial needs of the sector, but would also provide business support services. Studies have shown and the bank strongly believes that the SMEs have benefited from support services in marketing, human resource training, technological up-gradation, product development and innovation, management and quality control.

To provide financial institutions catering to the SME sector with the necessary incentive and comfort of lending to small enterprises, a proposal for a credit enhancement facility for the SMEs is also on the cards. This would be a fund established either by the government or a consortium of banks, which would provide guarantees to financial institutions on behalf of the SMEs.

Such structures have been successfully operating in most developed and developing countries where the SMEs have had access to formal financing sources for a long period.

Such support provides the SMEs and financial institutions a better understanding in dealing with each other, which in turn should lead to a healthier borrowing and lending environment.