Role of banks in the development of SMEs in Pakistan.

Byline: Zuhaib Khokhar

Small and Medium Enterprises (SMEs) are the important components of economic development. This sector can generate increased productivity and new investment. SMEs have the ability to grow the industrial and commercial tax base. Therefore, its value cannot be ignored and it is the yardstick of most of the economic issues like revenue generation, poverty, unemployment and a slow growth rate.

It can generate opportunities for a very heterogeneous group concerning size, age, types of businesses, and the expectations of entrepreneurs. Every sector has its undeniable uniqueness and features in its performance, which in turn, triggers all the economic activities and removes the deregulations from market forces that show no respect for unemployed individuals.

The cost of unemployment has no positive impact on society needs to be analyzed and addressed. To resolve unemployment is not an easy way to handle, but it can be mitigated only if sound policies are formulated that ought to escalate the jobs at the micro-level and ease the difference between the ratio of employment and the labor force availability in the economy.

Nearly, 78% of the non agricultural labor force (industrial employment), the participation of 30% in GDP and 25% to export proceedings and 90% of total enterprises are the key performances of the SMEs in Pakistan. Moreover, more than 53% of SMEs account for wholesale trade, retail trade, restaurants and hotels, which servers the low-income population of the society and works as an incubator for the ailing economy, and is the prosperity engine for a disadvantageous segment of the society.

Despite the above facts, Pakistan is still striving to achieve the status of economic development for numerous reasons including regulatory framework, meager emphasis on Research and Development (RandD) Support, technological barriers, human resource problems, technical assistance and lack of training facilities, market constraints, law and order situation and national economic issues are considered as critical limitations in the development of SMEs.

Besides, other issues include shortages of electricity supply, meager access to the public utility network, acute shortages of water and gas have a significant impact on the SMEs' growth and its prospects.

Knowingly, the failure in the development of this sector was the initial policies, after the independence, was mainly focused on the large enterprises and continued till the 1980s. This paradigm was considered as the backbone of industrialization strategy. However, later on, the policy rationales and parameters were gradually shifted to the enrichment of SMEs since the late 1990s, but yet the huge amount of chunk is skewed towards large manufacturing sectors.

The role of government specifically federal credit policies pervasively influence the circular flow of the economy and accordingly, they have an impact on private credit and its spending. The borrowing of the government from the banking system for the retirement of loans may hamper or disrupt the private credit markets. The borrowed funds are usually used for running the affairs of the state and subsidize the government-owned enterprises.

So, to understand the significance of Small and Medium Enterprises, perceptibly, different institutions and policies were developed like the Small Medium Enterprises Development Authority (SMEDA) and SME Banks were established in the years 1998 and 2002 respectively. The SME policy 2007 was also introduced. The purpose was to enhance and identify areas for improvement.

Amongst the numerous hurdles, as discussed here in above, the most challenging task for the growth of SME is the access to finance their economic activities.

In the past, various studies like the survey of Gallup Pakistan, accompanied by the World Bank and Government of Pakistan, and SME Survey 2009, conducted by Small and Medium Enterprises Development Authority (SMEDA) and SME Policy 2007 emphasized and endorsed that the failure of utilizing SMEs' potential is the lack of access to finance to SMEs.

To improve the capitalization and performance ratio of this sector, effective strategies are needed to be exercised by the concerned authorities. Effective strategic management will support you in accomplishing where you want to stand in the future by knowing the market and paying the attention to the factors, say, for instance, social, legal, economic, political, and technological (SLEPT) that greatly influence these small and medium nature of businesses. It will allow the policymakers to control the issues relating to production, distribution, unemployment, growth rate, and financial management. It will support you to assess the...