“IT’S all about contacts,” says JS, a small manufacturer/importer. “Without collateral, you cannot get a loan. But if you are big enough, you can get a loan at extremely low rates,” he said, narrating how he was able to secure running finance only because of his father’s bank account.

Every small business knows that private banks will not give a loan without hefty collateral the way every woman in Pakistan knows it is not safe to walk on the streets alone. It is an accepted practice for banks and a reality all small businesses live with. While there is a plethora of literature available filled with platitudes such as ‘small businesses are engines of growth,’ there is no incentive for private banks to change.

“I kept my factory, valued at Rs250 million, as collateral against a Rs50m loan,” says Syed Shujaat Ali, former chairman of Pakistan Leather Garment Manufacturers and Exporters Association. Associated with the leather industry for 30 years, he said that about 80 per cent of the sector in Pakistan consists of small and medium enterprises (SME).

While his company, The Designer, had not faced difficulties in the initial months of Covid-19, the end of 2020 brought hard times for them. The usual credit facility available in the market had dried up, especially for SMEs.

‘Large exporters show an SME as a sister concern and access funds earmarked for the small players’

“We applied for a loan in January 2021, which was approved in March for Rs30m. However, it was only by using my contacts and sources that I was able to receive Rs20m of it,” he narrates, explaining the hardships of SMEs.

While the government directs banks to facilitate SMEs and give cheap loans, the bulk of them land in the accounts of big players. “Large exporters show an SME as a sister concern and access funds earmarked for the small players. If the State Bank allocates, say, Rs100 for us, SMEs only get Rs25 of it while the rest go to the big clients of the banks,” alleges Mr Ali.

The high infection rates that banks face are because of lending to players with sources which then later default, he adds.

According to the Small and Medium Enterprises Development Authority of Pakistan (Smeda), SMEs constitute nearly 90pc of all ventures in the country. They employ 80pc of the non-agricultural labour and their share in GDP is about 40pc. Despite their importance, which cannot be ‘overemphasised’ according to Smeda, their access to finance is highly constrained, especially given anecdotal evidence.

Advances to SMEs were 8pc of total outstanding loans at the end of June 2021, according to SBP data. However, the figure itself may be suspect given the stories narrated by various businessmen. While a comparable regional economy like Bangladesh faces its own challenges of financial inclusion, about 60pc of its SMEs have access to some form of formal credit, says a report by Asian Development Bank.

It is a catch-22 situation. Pakistan’s SMEs need to grow for the country to develop but they can’t without access to finance. According to businessmen, banks don’t trust the financial statements of SMEs and are highly hesitant to take on the risk. As they can’t access credit, businesses aren’t able to grow to the size where they can easily obtain financing at favourable rates and so the cycle of cash-strapped businesses barely surviving continues.

Published in Dawn, The Business and Finance Weekly, August 1st, 2021