Entrepreneurs occupy a central position in a market economy as it is the entrepreneurs who act as the spark plug in the economy’s engine, activating and stimulating all economic activity. The economic success of nations worldwide is the result of encouraging and rewarding the entrepreneurial instinct. A society is prosperous only to the degree to which it rewards and encourages entrepreneurial activity because it is the entrepreneurs and their activities that are critical determinant if the level of success, prosperity, growth and opportunity in the economy.
Micro, Small and Medium Enterprises (MSME’s) account for 99.7 per cent of all enterprises in the world. MSME’s have a significant role to play in boosting economic growth, poverty reduction and social inclusion across the globe. MSME’s are vital for a number of reasons. MSME’s create wealth: formal MSME’s account for 16 per cent of GDP in low income countries and 51 per cent of GDP of high income countries whereas the informal enterprises account for 47 per cent of the GDP of low income and 13 per cent of GDP of high income countries.
MSME’s are labor-intensive, generating jobs, thereby increasing the ‘‘real incomes and standards of living of many people. In this way, they can increase the social and economic participation of women, youth and minorities”. MSME’s employ 78 per cent of the labor force in low income countries and 66 per cent of the labor force in high income countries. MSME’s act as a ‘useful bridge head between the informal economy of family enterprise and the formalized corporate sector.
World over, half to two-third of all businesses are MSME’s in many regions this proportion is much higher. MSME’s are capable of creating jobs with least amount of capital and in dispersed locations which makes MSME’s attractive to policy makers. However they remain as heterogeneous group, in different organizational structure ranging from proprietorship to corporate, engages in factories to service organizational activities and with different definitions in different countries and in some countries they differ from industry to industry.
The Heterogeneous nature and small size needs adequate support from organized intermediaries. These intermediaries exist in every country in different forms.
International Finance Corporation (IFC) in 2010, revealed that an estimated 50-60 per cent of MSME’s on a global level are either under-served or completely un-served.
Financial institutions, globally, are considering MSME sector as an opportunity to capitalize and earn significant return on investment (ROI). Specifically in the emerging markets the banks/financial institutions are looking to tap the un-served needs in this sector. Banks around the world are looking to emerging markets for new growth opportunities. For example, in a recent publication, The state of global banking — in search of sustainable model, Mckinsey estimated that 60 per cent of global banking revenue growth from 2010 to 2020 will come from emerging markets. Within emerging markets, MSME is under served segment. The analysis shows that formal MSME’s are more common in high–income economies, but that in low and middle–income economies, MSME density is rising at a faster pace. The opportunity for banks to serve MSME’s in emerging markets is large. In 2010, banking revenue from MSME’s in emerging markets totaled $150 billion, or one sixth of all emerging market banking revenues. By 2015, it is estimated this figure will grow by around 20 per cent per annum to approximately $367 billion.
According to World Bank study, MSME’s in Pakistan account for 30 per cent of GDP contribute to 25 per cent of export earnings and according to Gallup survey in 2004, they employ 80 per cent of the non-agriculture labor force. As the sector moves towards achieving growth and sustainability through greater market segmentation and product diversification, enterprise lending has become an increasingly important opportunity for microfinance providers (MFP’s).
The MSME sector of Pakistan is heterogeneous, dispersed and mostly unorganized. It includes diverse types of production units ranging from traditional crafts to high–tech industries. MSME’s in Pakistan account for 98 per cent of all economic establishments. According to estimates, there are 3.8 million MSME’s in Pakistan. These MSME’s are concentrated in the trade, services and manufacturing sectors.
IFCs data shows that in Pakistan the micro-enterprises consist of 99 per cent of total MSME’s. Unlike SMEs which operates mostly in manufacturing and services sectors, micro-enterprises are involved primarily in trade-related business. With micro enterprises residing at pyramids base, microfinance providers are well placed to meet their funding needs.
While mainstreaming MSME’s to operate at optimal levels would require developing a conducing eco system but surly one of the key components remains access to finance.
Based on the new regulations by the central bank allowing us to venture into small business finance we at Khushhalibank are poised to transform the institution from microfinance to MSME bank. We have developed necessary framework, policies and procedures and encouraged by the results of a pilot last year are scaling up our operations to the first 15 branches across the country with a target of reaching out to 3,000 small businesses in 2015.
This segment of the market holds great promise for the country.