Financing the SMEs

The importance of small and medium enterprises (SMEs) in economic growth and job-creation is now being recognised by the multilateral organisations who have started publishing global SME database. The IMF included SMEs in its recent Financial Access Survey (2012), while CGAP and IFC did the same in their Financial Access Report (2012) this month.
The SME dataset will develop over years and will hopefully provide meaningful insights. The main thrust of this data capture is to highlight financial access issues, in areas like cash flow management, financing investment projects, and risk insurance.
The CGAP report highlights a positive correlation between SME finance volume-to-GDP ratio with a countrys income level. It maintains that higher-income countries also have higher ratio of SME loan accounts to total firm loans. In low-income countries, SMEs hold a small percentage of enterprise loan accounts.
However, despite hurdles in formal financial access, SMEs are the largest employment source in low-income economies compared to high-income countries. But there is tremendous room for improvement in SMEs access to banking facilities like loans and guarantees. CGAP, and by extension the World Bank, is recommending to enhance the SME access to commercial banking system to fill this void.
There are reasons why. According to a recent IFC study, there are about 25-30 million formal SMEs in developing economies, of which about 55-68 percent are either unserved or underserved vis-à-vis their financial needs. This translates into an unmet SME credit demand of $0.9 trillion to $1.1 trillion, which only commercial banks have the capacity to pick up, though not the appetite.
CGAP has presented Bangladesh as a model in SME financial access, crediting its policymakers for promoting SMEs, especially women-owned businesses. SME borrowers in Bangladesh constituted 50 percent of non-financial corporate borrowers in 2011 (27 percent in 2011). Employing 31 million people, SMEs constitute 90 percent of all industrial firms in Bangladesh and account for 25 percent of its GDP.
Bangladesh offers some parallels with Pakistan. Both countries have SMEs majority of which should classify as micro-enterprises (employ 10 people or less). This has been done in the IFCs recent assortment of SMEs as micro, small and medium enterprises (MSMEs).
IFCs recent data shows that Bangladesh and Pakistan both had nearly three million MSMEs, of which micro-enterprises were 97 percent in Bangladesh and 99 percent in Pakistan. Unlike SMEs which operate mostly in manufacturing and services sectors, micro-enterprises are involved primarily in trade-related businesses. A detailed study on Pakistani micro-enterprises is required to assess their economic impact.
IFC data shows only 27,600 entities in Pakistan that classify as SMEs, while over 2.8 million are micro-enterprises. With micro-enterprises residing at the pyramids base, microfinance providers are well placed to meet their funding needs. Therefore, government must work, in partnership with commercial banks, towards developing a vibrant SME base, one that has failed to establish so far due to multitudes of crises and limited financial access.