SMALL enterprises remain credit constrained and outside the formal financial system in spite of significant growth of the banking industry and introduction of policies to improve their access to finance over the last one decade.
“The medium enterprises with collateral to pledge with the banks have seen some improvement. But the smaller enterprises’ access to finance has deteriorated over the years for a variety of factors – bank fees, unavailability of collateral and lack of documentation and credit history with banks,” a senior Small and Medium Enterprise Development Authority (Smeda) official told Dawn.
The lack of formal credit, he said, was forcing the smaller entrepreneurs to fund their working capital and new investment requirements from their savings, from borrowings from friends and relatives or from the informal sector at a very high price. “The credit demand gap is rising for smaller and micro enterprises, which is not met and leading to business failures and closures in the SME sector,” he said.
While the high cost of credit may be an issue with the medium sized enterprises, according to the official, it was not a problem for the small ones because they were paying more than 50 per cent interest on credit obtained from the informal sector.
“It is the problem of access to finance that is stalling the growth of smaller business in every sector of the economy,” he said.
A World Bank report in 2009 also said the micro and small enterprises had seen a worsening of access to finance, while medium-size enterprises witnessed improvements.
“Enterprises do not seem to be excluded from financial markets due to poor performance. Instead, an incomplete legal and regulatory framework and non-SME-friendly products and procedures hamper increased SME lending,” it said.
The small and medium enterprise (SME) financing peaked to nearly Rs400 billion in 2008 to drop to Rs319 billion in June last year. The total SME financing at the end of the last financial year showed a decrease of 7.5 from Rs345 billion a year earlier or 20 per cent from the peak year, according to the State Bank of Pakistan (SBP).
The bank said in its annual report for 2009/10, the major share of banks’ credit was allocated to meet the working capital requirements of Rs236 billion followed by trade financing of Rs45 billion by end of June 2010. On the other hand, a sector-wise break-up of the SME finance shows that commerce and trading sector received 44 while manufacturing sector received 39 per cent, the report said.
The bank said the economic crisis has had a significant impact on growth of SME finance for the last two years, resulting in shrinking of SME financing portfolio. “The SMEs have received a significant financial and economic hit due to power failures, economic meltdown, and poor law and order situation in recent times.
This has resulted in a lower credit provision to this sector compared to the recent past. Due to global economic crisis, the banks (also) adopted a cautious approach in lending to the SME sector since it is considered a risky sector of an economy,” it said. “Apart from adverse market conditions, excessive government borrowings for commodity operations financing is also a major reason of lesser availability of finance for the SMEs.”
The SME census shows that there are three million SMEs constituting more than 90 per cent of all private enterprises in the industrial sector, employing nearly 78 per cent of the total non-agriculture labour force and contributing over 30 per cent to GDP and 25 per cent to the export earnings.
“If appropriately supported, SMEs have the potential to be the growth engine of the economy due to their ability to create jobs, foster entrepreneurship, and to provide depth to the industrial base of the economy,” according to World Bank report. “However, SMEs get a disproportionately small share of credit relative to their economic importance. Aggressive promotion of an enabling environment for SME lending is vital to reverse this trend.”
Businessmen blame the SME-unfriendly policies and procedures of banks for impeding lending to the smaller entrepreneurs. “Hidden costs and documentation make the lending to SMEs very expensive. Additionally, a vast majority of them do not have collateral to pledge with the lending banks to secure loans. The bankers should not treat SMEs like large-scale enterprises,” says Ijaz Khokhar, an exporter from Sialkot, a major hub of SMEs in Punjab.
He underscores the need for tailoring bank policies and products according to the needs of the smaller enterprises. “The formulation of policies and improvement of legal framework is necessary to help improve access of small enterprises to finance but it is not enough.
The SBP and the government should also ensure implementation of these policies in accordance with the ground realities if they are serious about increasing the SMEs’ access to finance,” Khokhar argues.
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