Sehar Usman
A recent study conducted by the Competition Commission of Pakistan has once again shed light on the major hurdle faced by small and medium enterprises (SMEs) in the country: the lack of access to credit from the private sector. The study, titled “Boosting Efficiency of Pakistani SMEs,” emphasizes that despite policy measures implemented by the State Bank to increase the SME sector’s share of private sector financing to 17 percent, it currently only receives a meager 6-7 percent. In comparison, Bangladesh and India allocate 25 percent and 18 percent of private sector credit to SMEs, respectively. Shockingly, 93 percent of the surveyed SMEs expressed their frustration with the arduous process of obtaining credit from banks, resulting in 80 percent of them resorting to informal financing.
To address this pressing issue, the study proposes several recommendations. Firstly, it suggests that the central bank should allocate separate lending targets for small and medium enterprises, along with setting sector-specific goals. Additionally, the study calls for the introduction of separate financing facilities in underprivileged districts and the implementation of standardized pricing for insurance and evaluation reports. Furthermore, it emphasizes the pivotal role that non-bank financial institutions can play in providing credit to start-ups and SMEs, highlighting their potential as significant contributors to economic growth and development.
The findings of this study underscore the urgent need for comprehensive reforms to enhance the accessibility of credit for SMEs. Without adequate financial support, these vital economic engines are unable to unleash their full potential, hindering overall economic efficiency. While the State Bank’s efforts to increase the share of private sector financing for SMEs are commendable, they clearly fall short of the desired outcome. It is imperative for policymakers to take immediate action and create an enabling environment that promotes easy access to credit, empowering SMEs to thrive and contribute to Pakistan’s economic prosperity.
In line with the study’s recommendations, the central bank must prioritize the implementation of targeted lending measures for small and medium enterprises. By setting specific lending targets and introducing sector-specific goals, financial institutions will be compelled to allocate a fair share of their resources towards SME financing. Simultaneously, measures such as providing separate financing facilities in disadvantaged districts and implementing standardized pricing for insurance and evaluation reports will ensure a more inclusive and transparent credit ecosystem.
Additionally, non-bank financial institutions should be actively encouraged and supported in their role of extending credit to start-ups and SMEs. Their flexible lending practices and tailored financial products can address the unique challenges faced by these enterprises, fueling their growth and innovation. Collaboration between traditional banks and non-bank financial institutions can foster a more diverse and resilient financial landscape, offering a wider range of credit options to SMEs.
Ultimately, addressing the credit gap for SMEs is not just an economic imperative but also a matter of social justice. By enabling SMEs to access affordable and timely credit, we empower them to generate employment opportunities, drive innovation, and contribute to poverty reduction. The government, regulators, and financial institutions must work hand in hand to implement the necessary reforms, ensuring that the credit landscape becomes more favorable and conducive for SMEs to thrive.
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Regrettably, the core problem inhibiting the growth of small and medium enterprises (SMEs), as well as the proposed remedy to facilitate their access to legitimate credit, are nothing new. Over the past three decades, successive governments have made lofty promises to enhance SME credit and create a conducive business environment for them. In the mid-1990s, a so-called “concerted effort” was initiated with the establishment of Smeda, an organization tasked with designing and implementing policies for SME development. However, Smeda has fallen short of its intended purpose. The primary obstacle hindering the progress of SMEs lies in the country’s tax structure, which treats both large corporations and small businesses in a similar manner, burdening them with regulatory requirements that even major companies struggle to comply with.
Consequently, SMEs have little incentive to operate within the formal sector, thereby restricting their potential for growth. Moreover, the stringent prudential regulations of the State Bank and the risk aversion exhibited by commercial banks impede the provision of formal credit to SMEs, especially since these enterprises often lack the collateral necessary to secure loans. Unless the government and industry regulators implement a distinct and progressive taxation system along with a simplified regulatory framework to support the growth of SMEs, these enterprises will continue to face financial constraints, inefficiencies, and limited expansion opportunities.
The underlying issue of a skewed tax regime poses a significant barrier to the documentation and subsequent growth of SMEs. Currently, small businesses find themselves entangled within a tax framework designed for larger corporations, burdened with compliance obligations that stifle their operations. This unjust treatment discourages SMEs from joining the formal economy, as they are confronted with the same regulatory demands as their larger counterparts, despite their limited resources and capabilities. To rectify this situation, it is imperative for the government to introduce a separate and progressive taxation system tailored to the specific needs and capacities of SMEs. Such a reform would alleviate the tax burden on small enterprises, fostering an environment conducive to their growth and encouraging them to expand their operations within the formal sector.
In addition to the taxation issue, the supply of formal credit to SMEs remains a critical concern. The conservative lending practices of commercial banks, driven by risk aversion, further exacerbate the financial challenges faced by these enterprises. Unlike larger corporations, SMEs often lack substantial collateral to secure loans, making it difficult for them to access formal credit channels. This disparity in financing options leaves SMEs underfunded and unable to reach their full potential. To address this issue, it is crucial for industry regulators, in collaboration with financial institutions, to devise innovative mechanisms that mitigate risks associated with lending to SMEs. By adopting a more flexible approach and considering alternative forms of collateral or credit assessment, banks can extend financial support to small businesses without compromising their own risk management protocols.
Furthermore, the government and industry regulators must recognize the pivotal role played by SMEs in driving economic growth and job creation. These enterprises are vital contributors to the economy, fostering innovation, entrepreneurship, and social mobility. As such, it is incumbent upon policymakers to prioritize the formulation of a comprehensive and streamlined regulatory framework that simplifies bureaucratic processes and reduces administrative burdens on SMEs. By implementing business-friendly policies and establishing dedicated platforms for SME support and guidance, the government can empower these enterprises to thrive and contribute meaningfully to the nation’s economic development.
In conclusion, the findings of the Competition Commission’s study serve as a wake-up call for policymakers and financial institutions to urgently address the lack of access to credit for SMEs. The proposed recommendations, if implemented effectively, can transform the financing landscape, fostering a supportive environment for SMEs to grow and prosper. By embracing these reforms, Pakistan can unlock the immense potential of its SME sector, driving economic efficiency, job creation, and inclusive growth. It is time to prioritize the needs of SMEs and provide them with the financial tools they need to succeed in today’s competitive world.
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