Financing options for SMEs in the age of COVID-19

With the coronavirus pandemic creating ripples across the global economy, the small and medium-sized enterprises (SMEs), could become the worst hit in the long term.

As per details, globally, SMEs create 50% of employment opportunities and represent 90pc of businesses. In Pakistan, there are around 3.6 million SMEs accounting to 90pc of private business entities, and 80pc of non-agriculture employment, contributing to 40pc GDP in the country.

While SMEs are responsible for productivity enhancements and poverty alleviation, the fate and future of SMEs depend on the initiatives launched for them. COVID19 has not only created health issues, but the economic earthquake unleashed by this pandemic has rendered many economically unstable, including SMEs and MSMEs in Pakistan.

According to SMEDA’s survey “The impact of COVID-19 on SMEs”, 95pc of SMEs reported that COVID-19 and lockdown had caused a reduction of their operations, 92pc reported disruption in their supply chain and 23pc revealed a 100pc loss in their exports. If these small enterprises are not provided support, they will ultimately have to leave their rented premises, lay off workers, and sell their machinery due to cash flow issues. Having said this; it is important than ever before to immediately formulate strategies to minimize the negative impact while supporting small businesses and startups during these crises.

To help SMEs and MSMEs sail through the situation, the Pakistani government decided to provide a number of services such as cash flow assistance to Micro, Small & Medium Enterprises (MSMEs) in three types of areas – loss of investment, fixed assets, and clearance of pending payments to restart businesses. The State Bank of Pakistan (SBP) had priced refinancing base rate at 1 percent for SME lending, whereas banks were allowed to charge up to 4pc from small businesses.

To make the pricing structure less complicated during the ongoing crises, this base rate is reduced to nil. SECP has also launched an electronic registry allowing SMEs to Use moveable assets as loan collateral.

Furthermore, private companies too have also joined to provide financial support to small companies. Easypaisa, a digital payments platform recently launched a customized web portal to raise awareness regarding the host of services being provided to SMEs. The platform also serves as a database generation tool that highlights the requirements of different organizations and enables the provision of tailor-made solutions to them.

Meanwhile, Jazz cash has launched a digital merchant onboarding portal, which helps businesses to register their company accounts online and receive digital payments via QR codes. Karandaaz is also financing SMEs for commercial investments, sustainable investments in areas of innovation, and for digital solutions that make a social impact.

As the global pandemic poses challenges for SMEs in Pakistan, most of the economy is off the books since few businesses are registered while mostly remain unregistered. Out of a total of six million MSMEs, only 350,000 take formal credit from banks while the remaining 5.6 million will be greatly affected having no access to contingency funding mentioned above.

In such a scenario, the mobile wallets including Easypaisa, Keenu, JazzCash, and others can help these businesses come under formal economies by helping the government document them into the systems so that the documented data can help SMEs in future when it comes to finances.