Many economic experts mention that the Small and Medium Enterprises (SME) sector is contributing 30 percent towards Pakistan’s GDP, employ greater than 80 percent of non-agricultural workforce and generate 25 percent in export earnings. Thus, SME sector has huge potential for employment generation and poverty alleviation. However, unlike large enterprises in the formal sector, a SME is constrained by financial and other resources. This inherent characteristic of an SME makes it imperative that there should be a procedure by which it may get support in dissimilar functions of business counting technical upgradation, marketing, financial and human resource training & development.
Present statistics showed that SME financing through banks in the country has first time crossed the milestone of Rs 500 billion. SME financing was registered at Rs 513 billion at the end of 2018 as against to Rs 450 billion in the same period last year, showing a growth of 14 percent. According to the State Bank of Pakistan (SBP) statement, the growth in SME financing was even more prominent in the previous 6-month of 2018 (July-December, 2018) wherein it posted a rise of 25 percent. This rise in SME financing attracts greater significance keeping in view the fact that SBP policy rate during 2018 recorded a growing trend. Because of continued focus of SBP for facilitating SMEs access to formal sources of finance, SME financing rose considerably during FY2018. The substantial rise in SME financing is chiefly attributable to implementation of the policy for promotion of SME finance released through SBP in December 2017. Experts also recorded that SME are the companies that have limited businesses activity.
Structure Of Interest Rates In Pakistan (As on Feb 1, 2019 (%) | |||
---|---|---|---|
w.e.f | SBP Reverse Repo Rate | SBP Repo Rate | SBP Policy (Target) Rate |
18-Nov-13 | 10.00 | 7.50 | – |
17-Nov-14 | 9.50 | 7.00 | – |
26-Jan-15 | 8.50 | 6.00 | – |
24-Mar-15 | 8.00 | 5.50 | – |
25-May-15 | 7.00 | 5.00 | 6.50 |
14-Sep-15 | 6.50 | 4.50 | 6.00 |
23-May-16 | 6.25 | 4.25 | 5.75 |
29-Jan-18 | 6.50 | 4.50 | 6.00 |
28-May-18 | 7.00 | 5.00 | 6.50 |
16-Jul-18 | 8.00 | 6.00 | 7.50 |
1-Oct-18 | 9.00 | 7.00 | 8.50 |
3-Dec-18 | 10.50 | 8.50 | 10.00 |
1-Feb-19 | 10.75 | 8.75 | 10.25 |
Commonly, SMEs are the startup firms or already operating companies with limited financing. By a standard textbook definition; SME is characterized by the company having a number of employees and various amounts of financial assets. According to OECD, SMEs are non-subsidiary, independent companies which employ less than a given number of employees. This number varies across states. The most frequent upper limit designating an SME is 250 employees, as in the European Union. However, some states set the limit at 200 employees, while US considers SMEs to include companies with fewer than 500 employees.
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In Pakistan, SMEDA is the flagship organization which is offering the necessary services to help SMEs overcome the weaknesses that are endogenous to their very nature. It is an autonomous body working under the umbrella of the Ministry of Industries & Production and contributes towards the growth and development of SMEs in the country. It is also said that the SME policy ensured provision of enabling regulatory environment for SME finance, prescribing SME financing targets for banks/DFIs, sensitizing banks to adopt SME financing as a viable business proposition, advising banks to provide non-financial advisory services for making SMEs bankable, simplifying mechanisms for SME financing and introduction of new SBP refinance schemes for SMEs through banks/DFIs.
Under the policy so far greater than 2,500 bankers have been trained by focused trainings by the training institute of the central bank. Similarly, awareness has also been created among greater than 20,000 stakeholders counting SMEs by special programs held by SBP and SBP BSC in the entire country. Furthermore, the impact of SBP interventions resulted into significant increase in outstanding SME finance through banks/DFIs coupled with 2.3 percent fall in non-performing SME portfolio of banks over last year. Different sources also recorded that with small size of SME there are a number of challenges in getting the proper financing for the firms because of new entry, credit worthiness, risks of venture failure and the ability to service their loans properly. Now, that China Pakistan Economic Corridor (CPEC) is near its completion of early harvest stage, a number of bottlenecks that had previously retarded the industrial growth in the country are also being removed one by one e.g. energy projects, law and order conditions and new network of communication.
In this situation, it is predicted that SME would be the main beneficiaries of the opportunities produced under the CPEC. Also a number of other states like China, European Union countries and USA have shown interest in investing in the country. With predicted growth, the need for financing is also intensely felt. It is important to mention that the Government of Pakistan is also offering all out support to promote SME sector. The substantial tax incentives to the banks on their incremental financing to SMEs proclaimed in present economic reforms bill is in line with measures identified in government’s 100-day agenda for development of SME sector. This will continue to encourage banks to complete the financing needs of SMEs.