EDITORIAL: The Finance Minister, Mohammad Aurangzeb, while speaking at a summit hosted by the Pakistan Banks Association, announced the establishment of a dedicated ‘Finance Task Force’ to expand access to finance for small and medium enterprises (SMEs). It is heartening to see the Finance Minister, who has spent almost his entire career in banking, talking about boosting SME finance, which is supposed to be the backbone of the economy.
The issue is that the bottlenecks to SME growth go well beyond the single roadblock of access to finance. However, there is no mention of those problems, and things have worsened in the last three years due to excessive taxation and other regulatory bottlenecks. Without addressing the core issues, a little nudge on financing would be insufficient to change gears.
First and foremost, the problem is taxation: not only are rates higher, but compliance is even more cumbersome. As a result, many businesses prefer to remain in the shadows and not grow, fearing that growth or expansion will bring more harm than good. They prefer to operate as Associations of Persons (AOPs) and are reluctant to form private limited companies due to taxation and compliance complications.
That hinders them from gaining scale and thinking big. Many prefer to operate informally as the taxation system is unfair. For example, in the service sector, which includes toll manufacturing too, there is a mind-boggling withholding tax of 15 percent on turnover, and that too is the minimum tax, while net margins are not very high. Many SMEs are service-oriented businesses, working on thin margins.
When the government applies higher taxation, they opt to underreport, and that limits their documentation and becomes a roadblock to gaining size. They also tend not to fully document their employees, as if they become larger, they have to comply with costs that come with compliance with the industrial relations ordinance, social security, EOBI and a plethora of other legal requirements. Incidentally, everyone in the government agrees that these should not be there in the first place, but these are cemented.
The point to stress here is that addressing the financing problem through some concessionary mechanism or pushing banks to have a higher share in the portfolio would not be enough for SMEs to become an engine of growth. Credit to the private sector is low anyway, as the government’s growing domestic debt is crowding out private lending. And, whatever is available, banks are keen to lend to a few trusted family names, as foreclosure and bankruptcy laws are weak and enforcement is even weaker.
The central bank and the Finance Ministry push banks to lend to SMEs, and they try to lend more to medium-sized and even bigger businesses under the disguise of SMEs. If there are any concessionary schemes, banks may take exposure, but against guarantees where risk exposure is transferred. These schemes may look good in headlines and PowerPoint presentations, but their impact on the larger economy remains limited.
If the Finance Minister is really serious about solving the SME growth puzzle, he must look inward in Islamabad to incentivize businesses to become formal and documented. It should be a joint effort of various ministries, including finance, revenue, commerce, industries, labour and law, to iron out legal and compliance issues. This would require the provincial regulatory bodies to be brought on board to lower the compliance costs, which would necessitate enabling amendments to the thresholds for applying laws within the provincial domain.
Once these are settled and the mistrust between tax authorities and taxpayers is reduced, the banking system’s nudge to enhance financing can work. Otherwise, financing and the formal economic contribution of SMEs will remain low.
Copyright Business Recorder, 2026