ISLAMABAD, Oct 20: Small and medium enterprises’ limited access to credit not only hampers their growth but also discourages them from taking risk. The Asian Development Bank’s Pakistan Resident Mission observed this in the third paper of its working paper series on the SME development in Pakistan. It suggested various measures for a robust growth and investment.
The paper, written by Dr Faisal Bari, Dr Ali Cheema and Dr Ehsan-ul-Haq, examined the key constraints faced by the SME sector in Pakistan.
According to the study released here on Thursday, the lack of access to credit for instance of the sample firms that only six per cent had access to commercial finance, was a binding constraint that hindered not only the growth potential of enterprises but also their risk taking.
It says that the threshold burden of compliance and corruption costs associated with the fiscal and regulatory framework inhibits the growth of medium enterprises in their expansion phase.
The survey estimates show that a firm management spends approximately 17pc of its working time dealing with the regulatory and administrative burden.
High market transaction costs and inefficient formal contract enforcement inhibit the development of SME clusters and sub-contracting networks, therefore imposing high inventory costs on SMEs and even forcing diversification, which is not optimal, the report added.
The report says Pakistan has committed to liberalization and structural adjustment policies in order to target sustainable, robust and widespread revival of investment in the economy, as they contribute 30 per cent in terms of value-added and account for 80 per cent of the employment in the industrial sector.
“Within the private sector, support for SMEs in crucial not only to promote growth in manufacturing but also generate more employment, which in turn can have a significant impact on poverty reduction,” said country director of the ADB Resident Mission, Mr Fedon.
The current study focuses on the role played by SMEs in stimulating structural transformation in the industrial sector and looks at why the recovery in the small and medium scale industry did not correspond to the rapid growth in the large-scale manufacturing sector.
Key recommendations in the study include measures, such as improvement in creditor rights, revisiting of collateral requirements and a reduction in the cost of finance, which would improve SMEs’ access to credit.
Other recommendations in the study include the reform of fiscal and regulatory procedures and dispute resolution mechanisms, which would also reduce constraints to the growth of the SME sector in Pakistan.
The study concludes that while the economic environment created structural problems for SMEs, this rigorous analysis of the constraints on firm level growth would help design policies and institutional interventions aimed at creating an economic environment that is conducive to the private sector enterprise growth, both at the macro and micro level.