A study conducted by the Competition Commission of Pakistan (CCP) has identified the lack of access to financing as the main barrier impeding the growth of small and medium enterprises (SMEs).
The study, titled ‘Enhancing Economic Efficiency of SMEs in Pakistan,’ highlights that despite policy efforts to increase financing to 17 percent, the SME sector only receives around 6-7 percent of private sector financing. In comparison, SMEs in Bangladesh receive 25 percent financing, while those in India receive 18 percent.
The study draws on data from 50 financial institutions, 18 focused group discussions, and 362 SMEs across 11 cities, as well as insights gathered from a seminar conducted by the CCP specifically focused on women entrepreneurs.
The findings indicate that 93 percent of SMEs find it challenging to access financing from banks, and 80 percent have not utilized bank financing at all.
To address this issue, the study recommends that the State Bank of Pakistan consider allocating separate lending targets for small enterprises (SE) and medium enterprises (ME) to financial institutions. It suggests setting sector-specific targets, establishing separate financing facilities for underprivileged districts, and introducing standardized pricing for insurance and evaluation reports.
Furthermore, the study suggests that non-bank financial institutions (NBFCs), leasing companies, crowd-funding, and equity financing can play a significant role in providing credit to startups and SMEs, diversifying the financing options available to them.
The study also highlights the presence of multiple regulatory layers that apply to all businesses operating in Pakistan, encompassing at least 12 different categories of general regulations. Streamlining and simplifying these regulatory frameworks could further facilitate business operations and foster an environment conducive to SME growth.
Addressing the financing barriers faced by SMEs is essential to unleash their potential as engines of economic growth and employment generation in Pakistan. By implementing the recommendations put forth by the CCP study, policymakers and financial institutions can contribute to unlocking the full potential of SMEs, fostering entrepreneurship, and driving economic development.