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ACCESS TO FINANCE:PRACTICAL ISSUES FOR SMEs IN PAKISTAN

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Access to Finance

• Longstanding Constraint in the growth of SMEs

• Innovative Products being introduced in Developed Countries

• SMEs in Pakistan are still struggling to access finance

• Lack of access to finance hampers the growth of the SMEs

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Access to Finance

• Multi faceted Issue

• No simple solution

• Integrated approach is required

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SME LEVEL

Informal Economy

The Banks

Accounting Practices

Banking Sector Issues

ACCESS TO FINANCEMultifaceted Problem

Governments

Tax Issues

Collateral

Infrastructure Legal Framework

Human Resources

Interest Rates

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FFTTII

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What is the real problem behind this issue?

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LACK OF ACCESS TO FINANCE

Combination of factors are responsible:

• Financial Institution Level• Government Level• SME Level

All are inter linked...

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THE CURRENT SITUATION

• Most SMEs do not utilise Banks

• Self financing of new ventures

• Retained earnings used to fund growth

• Larger Firms rely much more on Banks

• Use of informal credit market

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The Real Dilemma…

Some of the issues arise from

with IN the SMEs.

Some of the issues reside OUTside of

SMEs

ACCESS TO FINANCE

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The Banking Sector

• Reluctance to provide funding to SMEs

– Prefer to deal with larger and well established businesses

– Collateral requirements – Property etc required

– Lack of relationships with SMEs

– High lending costs

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The Banking Sector• Reluctant to provide funding to SMEs

– Difficulties in enforcing legal rights– Lack of SME specialists– Weak financial systems in SMEs– Higher interest rates for consumer lending

Even opening a bank account can be a challenging task!!!

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THE SME BANK

• Deals with established businesses

• Not able to assist new start ups

• Similar collateral requirements as other banks

• Bureaucratic issues delay simple transactions

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THE SMEs

• Overwhelming majority of SMEs are sole proprietorships and partnerships

• Small number of companies• Majority of SMEs operating in the informal

sector• Existence of a well established informal

finance sector

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THE SMEs• The informal finance sector

highlights the opportunity that exists for Banks to generate business from SMEs

• Family Businesses and Succession Planning Issues

• Lack of Accounting Systems and procedures

• Shortage of management expertise to expand the business

No real incentive to be part of the formal economy!!!

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THE GOVERNMENT• Legal Framework exists but

implementation is difficult• Bureaucracy • The Fiscal and administrative burden

of taxation• Large number of taxes and regulations

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THE GOVERNMENT• Intellectual Property Rights protection• On the ground reality often different from the

government policies• The Implementation of SME policy• Improvement in

Infrastructure(Transport,Electricity)

A change is needed in the Culture of Government Organisations!!!

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THE REAL CHALLENGE!!!

HOW CAN WE IMPROVE ACCESS TO FINANCE FOR

SMEs?

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RECOMMENDATIONS• The Informal economy – encourage businesses to

enter the formal economy• Improvement in legal enforcement of creditors

rights is critical• Shift repossession and selling of collateral out of

the court system• Encourage the Banks to develop new and

innovative products• Receivables Based lending• Goodwill financing• Islamic Banking

• Dispute resolution processes should be developed

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RECOMMENDATIONS

• SME Experts – Training and development

• Implementation of SME Policy

• Facilitation of the emerging Venture Capital Industry

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RECOMMENDATIONS

• Adopt an Integrated approach to the problem

• Reduce the administrative burden of SMEs

• Work on changing the culture of Government Organisations

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RECOMMENDATIONS

Recognize that SMEs are the best way to achieve

economic growth for Pakistan

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Government support

Supportive Legal

framework

Venture Capital Industry

Suitable Banking products and

services

Healthy SMEs

The SME Growth Pyramid