Digitising SMEs in Pakistan

As the world paces towards adopting digital technologies, Pakistan is making efforts to achieve parity. There are around 3 million Small and Medium Enterprises (SMEs) in Pakistan, contributing to over 40 percent to the Gross Domestic Product (GDP) and 78 percent of all employment.[1] There are no estimates available on what impact digitisation will have on SMEs in Pakistan but a study on digital finance by the McKinsey Global Institute estimates that digitisation of processes and payments will add $36 billion to Pakistan's GDP and will lead to the creation of four million jobs by 2025. Similarly, a recent study on the Impact of Internet and digitisation on Small and Medium Businesses in India estimates that increasing adoption of digital technologies by SMEs in India could raise GDP by as much as 10 percent by 2020. The report also finds that SMEs in India that have leveraged digital technologies achieve almost double the growth trajectory as compared to those that have not employed digital technologies. Digitally enabled SMEs reported a year-on-year (YoY) growth of 19 percent, compared to 10 percent for offline SMEs.
Through digital technologies, SMEs can positively impact their everyday processes, reduce lead times, conduct more efficient management of human resource, and attract better talent. Also employing digital technologies can lead to entrepreneurs having enhanced access to resources; international best practices; and improved internal and external communication. SMEs have the opportunity to reach a wider customer base through employing digital technologies. In this context, SMEs, being a critical element of any economy, can benefit greatly from digitising their processes and payments. A major advantage of digitally enabled operation of an SME is [2] economies of scale. With a larger customer base and enhanced revenues, SMEs are likely to reap the benefits of increased production and therefore higher profits. With growing mobile internet penetration, currently at 29 percent, and increasing smartphone adoption, currently at 51 percent, consumers are more able to interact with businesses online[3].
Digitisation provides opportunity to solving various issues faced by SMEs. Non-digitized SMEs typically incur high cash management costs, struggle with managing their cash flows in real time and are prone to increased risk of theft and leakages. By employing digital payment systems and undertaking digital transactions, SMEs are likely to significantly reduce leakages and better manage their cash flows.[4] Also, these SMEs will automatically be included in the formal financial economy, which in addition to aiding the financial inclusion target of 50 percent individuals financially included by 2020, will enable SMEs to access credit from formal financial institutions[5]. This will contribute towards reducing the credit demand gap of Rs 277 billion in Pakistan.
There are however some critical factors which hinder SME digitisation. Constraints to digitisation of SMEs [6] include lack of knowledge regarding the potential of digitisation. Similarly, SMEs find it difficult to adopt digital techniques as a result of insufficient digital skills. The cost of digitization and the lack of supporting infrastructure are also major deterrents in bringing SMEs online [7].
Digital and financial players, like Karandaaz Pakistan are making immense contributions to create an enabling environment for SMEs to help them undergo digitization. Basically a not-for-profit organization, Karandaaz not only takes measures to address the primary hindrances but also lends its digital assets and expertise in digital innovation to help SMEs embrace technology for modernization.
Government institutions such as the Trade Development Authority of Pakistan (TDAP) and the Ministry of Information Technology (IT) have also undertaken efforts to modernise and digitize SMEs in the country. One such example is the recent initiative by TDAP, which has signed a Memorandum of Understanding (MoU) with Alibaba, a global giant in e-commerce, for promoting exports by SMEs in Pakistan through their e-commerce channel. Alibaba, as part of the MoU will provide online and offline training programmes to SMEs, imparting skills to allow for SME digitisation.[8] Similarly, the ministry of IT, in its Digital Pakistan Policy 2017, has placed substantial emphasis on creating an enabling infrastructure for SMEs, which includes development of additional technology parks in federal and provincial capitals that provide world class data and network facilities to SMEs.
Karandaaz Pakistan, a DFID and Bill & Melinda Gates Foundation funded company is also actively engaging SMEs. In addition to providing access to finance for SMEs in Pakistan, it is also working on digital initiatives in the financial sector throughout the country and exploring how to facilitate SME digitization.
Hussam is working as an Analyst in the Knowledge Management Department at Karandaaz Pakistan, looking after Karandaaz's research interests within the Digital Financial Services and the SME domain.