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Bank loans to breathe sigh of relief for ailing SMEs

Published on 26th Sep, Edition 39, 2016


One of the biggest problems facing the Small and Medium-sized Enterprises sector is the lack of financing available to these firms. There is no reason that why is lending restrained to the sector after it contributes 35 percent to national exports and is considered to be the backbone of the economic sector. Despite substantial contribution of SME sector in the country’s GDP, the sector is not getting its due share of financing from the banking system.

At present the small and medium business owners cannot modernize, cannot introduce something new and expand due to lack of funds. And as a result of this they have to depend on relatives and trade creditors for borrowing funds.

From 2008, commercial bank credit to SMEs declined from 17 percent of the commercial banking portfolio to 6 percent in 2014. This is distressing when 95 percent of enterprises in Pakistan are SME’s and in this sector almost unsubstantial percentage has access to formal credit markets.

Commercial banks lack effective credit models to finance SMEs. According to State Bank of Pakistan (SBP) figures the year-on-year change for SME lending in fiscal year 2015 recorded only a small increase of 3 percent.
Leading commercial banks balance sheet depicts that the majority of lending occurs to the corporate sector. High value of government securities lessens any credit supply to the credit starved informal sector.
Small business owners are efficient in running their business, they have proper business plans but unfortunately they are lacking in capacity. The shortage of innovative financial products is a huge obstacle with big transactional costs of serving SMEs making banks unwilling to reduce margins.
In spite of the odds mentioned above Small and Medium-sized Enterprises are at present getting new loans a small amount more easily. Net lending to the SMEs has now turned constructive after having remained more or less restricted till two years back.

The lenders see good prospects of growth in SME financing on the back of a 4 percent economic growth in the last two fiscal years and possibility of a higher growth during this year.

The expert say if the SMEs get themselves regularized as a result of the documentation drive, the bank financing to the sector would be raised more. The most glamorous performance is of Islamic banks whose SME financing has more than doubled in fiscal year 2015.

Between September 2013 and September 2015, net fresh bank financing to SMEs totaled Rs26 billion, breaking an earlier two-year spell of net negative loaning. In the comparative period of 2011 and 2013, the net fresh lending had rather contracted by Rs42 billion, weakening the outstanding stock of advances from Rs278 billion to Rs236 billion.

Bankers ascribe to a larger lending to such major factors as rise in credit demand by enterprises and upgrading of a number of SMEs from ‘not credit worthy’ to ‘credit worthy’ category. The updated SBP guidelines permitted banks to lend more with good chances of recovery in a rising economy.


Many SMEs have rectified their financial management which reduced their loan disorder and made them eligible for fresh working capital.

SMEs in food processing and packaging, dairy and milk, electrical and electronic appliances, agricultural and livestock, farming tools and machinery, construction materials, iron and steel and paper and packaging materials have increased their production operations creating demand for long-term loans.

The SMEs in service sector (account for 23 percent of total SME loaning). Banks have entertained credit requirements of a wide range of service providing SMEs, from business contractors particularly in construction industry.

The most magnificent performance is of Islamic banks whose SME financing has more than doubled in fiscal year 2015. This is because of the fact that Islamic Banking is marketing financial products quite aggressively. SMEs need more of revolving funds and Islamic banks are liquid enough to keep re-employing short-term funds particularly in the absence of a fully-fledged Islamic inter-bank money market.

The SBP and the bureau are likely to sign an agreement whereby its human resources will be used to assess credit requirements of manufacturing SMEs of the province.

State Bank of Pakistan advised banks to extend loans to the Small and Medium Enterprises (SMEs) under the Prime Minister’s Youth Business Loans scheme.

The SBP is aware of the situation and has undertaken various initiatives for increasing the size of credit by the banks to the SME sector.

A very few Small and Medium-sized Enterprises seen as eligible for credit by banks are regular borrowers of lending institutions. The majority of SMEs still gets little or no financing and rely either on their own resources or resort to expensive, informal borrowing. The State Bank’s efforts to accelerate lending to SMEs have yielded very limited results.

Bank financing to SMEs remains concentrated in the traditional and profitable sub-sectors of agriculture, services or manufacturing. The banks could have explored lending opportunities in some non-traditional areas but there are no signs to suggest they are doing this seriously.

A large number of SMEs are now operating successfully in new segments like online trading and cash-on-delivery businesses, or in the modern agricultural arena of committed crop management and marketing, or in smaller segments of manufacturing like furniture making.

But unfortunately our banks continue to ignore most of them. Banks often argue that a higher level of non-performing loans by SMEs makes them hesitant of lending.


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