18 April 2004	Sunday	27 Safar 1425

KARACHI, April 17: The development of small and medium enterprises (SMEs) has been on the official agenda since 1959. But only an estimated 40 per cent of the SMEs borrow money from banks , though these constitute about 80 per cent of the country's businesses. The rest do not.

Operating in the informal sector, small businessmen are shy to approach a banker-bureaucrat sitting in his office in a three-piece suit, with whom they find it extremely difficult to communicate on the same wave length. And if they seek access to bank credit, the loan approval takes an average 6-7 months in case of successful applicants.

When SMEs need money, it is not available. They are forced to borrow from the informal market. The banks invest their excess money in the T-bills and in share markets. On the other hand, there is no employment generation. Capital-intensive investments by big companies do not create jobs. In case of high-tech, much less jobs are needed and redundancies occur.

Addressing a seminar at the Institute of Bankers Pakistan, Managing Director of the SBP Banking Services Corporation, Liaquat Durrani lamented the fact that loan application forms are not available at many branches of the banks dedicated to SMEs.

Mr Durrani recalled that in 1959 a high-powered Credit Enquiry Commission had recommended: "Credit must percolate to primary productive sector of the economy so as to increase the production and credit policy must work in the direction of promotion of SMEs in every sector of the economy."

So far, he said, there has been "just talking" on lending to the SME sector. The issue has become critical because there is no generation of employment. He warned that there was going to be chaos in 4-5 years if jobs are not created. He advised the bankers to "wake up" and face the challenges of SME lending.

The core issue in financing of SMEs is the mindset of bankers and SME managers and lack of mutual confidence between them. It is only bankers focused on SMEs with dedicated approach and dedicated resources (and not bureaucrats) who can speak the same language and provide comfort to the borrower, says John P. Khoury, senior partner of Boston Global Partners.

In his comprehensive and eloquent presentation Mr John said the credit delivery period was too long, averaging 6-7 months, while in the United States, approvals of housing finance, credit card, etc., took less than three minutes.

Participating in the discussions Rahim Khanani, chief executive, New Horizon Management Consultants (Canada Inc), said the banker has to "walk an extra mile to get information and trust" of the borrower. He was responding to the problem of information gathering and documentation needed to assess and approve loans.

While the commercial banks are skewed towards big corporates, the SMEs are primarily in the informal sector of the economy. In big companies, there is documentation and in informal sector, the facts and figures are stored in the minds of small businessmen. The documentation is vital for bank lending.

Yet the informal sector is highly efficient. SMEs are wrongly perceived as risky business. "The losses of banks in SMEs is one per cent," says John Khoury and adds: "It is not risky." The SME lending is profitable. The margins in corporate financing are less than two per cent whereas lending to SMEs could improve the margins to 5-6 per cent.

Bankers with a frozen mindset are not looking at a better option. "The banks can earn more profit from the SME sector than from investing in T-bills or lending to big name corporates," says Liaquat Durrani.

To succeed, banks have to move out of big cities and set up their branches and offices in small towns and clusters where SMEs are located.

They have to diversify their products and get out of the mindset of looking at glossy balance-sheets, financial statements or collaterals that can help SMEs take off.