Where is the financing of SMEs in Pakistan? Here are the numbers – Business
Any discussion of the lack of corporatization in Pakistan results in the lack of capital pathways for entrepreneurs. With banks on the one hand unwilling to look beyond everything that involves taking risks and microfinance institutions on the other charging exorbitant interest rates, companies find themselves between a rock and a hard place.
It’s a chicken-and-egg problem: without prior funding, it is difficult to grow when funds are often channeled to companies above a certain size.
Considering the importance of small and medium-sized enterprises (SMEs) to Pakistan’s GDP – around 40 percent – and their share of the non-farm labor force of over 80%, this is not a segment which can be constantly ignored if large scale development is desired.
But this tone has already been heard far too many times.
Just a few days ago, Finance Minister Shaukat Tarin, who promises to bring back growth, said the government is focusing on SMEs and discussing the possibility of giving them unsecured loans for a term of up to at three years.
It will obviously take its own course to materialize, but what about the current status?
For this, data from the State Bank of Pakistan (SBP) on SME financing showed that the outstanding amount reached 481.78 billion rupees between October and December 2020, increasing by 24.8 pc or 95, 81 billion rupees in July-September.
However, given the cyclical nature of this borrowing, it is more appropriate to look at year-over-year values that show a paltry increase of less than 1pc or Rs4.55bn from the same quarter of 2019 (October- December).
What is remarkable is that the share of SME loans in overall private sector financing continues to hover around 6-9%, reaching 7.27% in the last quarter. Since 2016, this percentage reached the highest level of 9.2% in October-December 2016 and has not reached the 8% mark in the last two years.
This is a good indicator that little progress has been made despite the usual demands of policy makers to pay particular attention to this segment.
Regarding the number of borrowers, there has actually been a decrease as they have dropped from 185,010 in October-December 2019 to 179,934 in the corresponding period of 2020. From a financial institutions perspective, there is obviously a much higher risk associated with SMEs. reflected by their infection rate of 15.62 pc during the period.
The overall infection rate for the business sector stood at 9.91% in July-September 2020, while the corresponding figure for SMEs was 22.45% during the same period.
However, it is also relevant to be aware of the impact of Covid-19 last year, which disrupted businesses of all sizes and was particularly difficult for small businesses. In fact, the NPL to gross loans ratio has generally been on a downward trajectory since 2016, when it stood at 30%, leaving out the first three quarters of 2020.
Another persistent trend in the dataset is the overwhelming share of working capital in overall funding, which suggests that funds are deployed to meet day-to-day needs instead of being invested for more sustainable purposes. The share of loans to SMEs classified as working capital stood at 68%, that of fixed investments at 24%, while the rest was for trade finance.
However, according to people involved in this SME finance space, the numbers don’t tell the whole story.
A few months ago, the CEO of Karandaaz in an interview with Mettis Global spoke of an asset-liability mismatch where companies often borrowed for working capital, but used the funds to make capital investments. Part of the reason is also the lower interest that is charged on the former.
One area that policymakers could focus on is the financing of Islamic SMEs – which is made up of fully-fledged Islamic banks and Islamic branches of conventional banks – whose share in the total increased to 12% in October-December 2020. , compared to 6% in March 2016.
With the growing popularity of Sharia-compliant banking services, this is one avenue that should be exploited. However, the current figures do not present an encouraging picture. According to the SBP bulletin, SMEs occupy only 3% of the customer financing portfolio of Islamic banks, against 5.3% for the entire banking sector.
Despite superior performance in terms of asset quality indicators, with an NPS / funding ratio of only 3.2% against 9.2% for all banks, Islamic banks have not shown too much appetite for risk taking.
In fact, they also seem to want a bigger share of risk-free securities and have actively called on the government to issue more Sukuks. Unfortunately, this mindset of placing money in the safest instrument available while ignoring the asset training needs of small-scale finance misses the key objective of financial markets.
And unless it is corrected, corporatization and sustainable growth will only be projects.