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BR Research

Ants, elephants, and SME finance

Access to affordable finance has long been labelled as one of the key obstacles to SME growth in Pakistan. But is that n

Updated 23 Oct 2019

Access to affordable finance has long been labelled as one of the key obstacles to SME growth in Pakistan. But is that necessarily so, and will new strategies work?

The scale of SME finance in the country is small, very small. There are no more 0.18 million SME borrowers in the country with combined loan book equalling no more than 8.7 percent of total bank credit to private sector. That’s according to Dec-2018 statistics released by the central bank. In its new promised vision, the central bank wants to take those numbers to 0.7 million and 17 percent respectively by 2023.

The operative words here are ‘new’ and ‘promised’. Such visions and targets have been sold before, and never really met because of one reason or another; the last one being the unexpected global financial crises and its aftermath here at home. But why should this time be different? Apparently, or at least the narrative so goes, the new SME revival plan is being backed, nay driven, by the PM Khan’s keen interest in the issue.

One action plan under the new SME revival strategy is to conduct the long pending Census of Economic Establishments. Speaking at an event on SME finance organised by the IBA’s Center for Business and Economic Research, central bank’s director G.M. Abbasi said that the Federal Bureau of Statistics has given a timeline of one year to complete the census.

“It’s an agenda from the PM’s office; work under this new initiative has already begun,” he added. Those words are music to the ears of researchers, and policymakers alike. If completed, again ‘if’ is the operative word here, the census would significantly help towards better diagnoses of Pakistan’s economic problems, including the estimates of SME GDP and its contribution to employment. (For more on the facts & myths of SME’s contribution to GDP, read BR Research’s analysis titled Is SME finance really at historic high?  Feb 22, 2019)

Another pleasing melody was Abbasi’s statement that the “first comprehensive demand and supply side survey is being conducted with the help of the World Bank”, for which the initial paperwork has already begun. For the time being let’s ignore the question why does one need World Bank funding to conduct a survey, a deeper understanding from the lens of demand side was indeed needed a long time ago, since, as flagged earlier in this space, the supply of credit doesn’t always create its own demand. (Read SME finance: getting the basics right Jan 16, 2018)

Is it not strange that business chambers and associations, which are dominated by SMEs, have hardly ever included SME finance in their top agenda items demanded from the government? Taxation, utility prices, law and order, and taxation again pretty much define the limits of chambers’ rally points. While the World Bank’s Enterprise Survey (see graph) sheds some light on that question, practical insights recently shared by Mehboob ul-Haq, MD of Sindh Enterprise Development Fund warrants attention.

In his interview with BR Research, Haq said “cheaper access to credit alone cannot fix the mindset of quick fix and short cuts, inability to make feasibility, fear of documentation, and other perception issues.” What’s needed instead is handholding of a few initial clients, market the success stories, and making champions out of those early converts. (Read Haq’s interview in Brief Recording section: Agri finance: cheaper access to credit isn’t the panacea, Oct 21, 2019)

Another step in the right direction is that finally the central bank has tweaked its refinancing schemes available to SMEs such that they are now available in Shariah complaint mode, which means that Islamic banks are finally able to offer those schemes to their SME clients. This is also one of the reasons why new promised vision for SME finance may be different this time.

It is unimaginable why it took so long to bring about this change. Throughout the last decade and more, Islamic banking/financing has been being touted as the key driver of financial inclusion, on the idea that one of the key reasons why Pakistanis are unbanked and uninsured is because of religious religions. Which also begs the question why aren’t there any estimates of growth trends in various categories of bank account holders who only bank with Islamic banks. This kind of data is important to separate fact from the possible myth that Islamic banks have significantly contributed to growth in financial inclusion.

Behind all this geeky stuff, however, is the elephant in the room is the government that crowds-out by excessive borrowing. In the African savannah, ants are trampled by the elephants. But if ants organise themselves, they become the bane of elephants’ lives.