Amir Khan

The latest World Bank Enterprise Surveys reveal that a staggering 40.9% of businesses in Pakistan are fully credit-constrained, with an additional 15.2% partially credit-constrained, reports WealthPK. These figures are significantly worse than the South Asian average of 17.1% and 17.7%, respectively. Only 2.1% of businesses in Pakistan have a bank loan or line of credit, compared to the regional average of 23.7%. In almost every aspect, Pakistan lags behind the regional standards. It means the financial institutions are not fulfilling their crucial role in supporting the Small and Medium Enterprises (SMEs), which is the most affected sector. Despite constituting 90 percent of all businesses and employing 30 percent of the labour force, the SMEs have failed to reach their full potential. One of the primary reasons for this is their limited access to credit. SME financing through financial institutions in Pakistan declined by 5.7% year-over-year and 4.6% quarter-over-quarter, to Rs457.1 billion as of June 30, 2023, Ms. Neelofur Hafeez, Joint Secretary at the Ministry of Industries and Production, told WealthPK.

She said the number of SME borrowers fell to its lowest level since June 2015, with just 154,229 individuals and businesses seeking financial support. "However, the share of SMEs in private sector credit has already pressed an issue, falling to 5.22 percent by FY23. While the recent economic and political environment may explain some of these declines, it is essential to recognize that this problem has deeper roots, and little has been done to address it," Neelofur pointed out. In Pakistan, a mere 2.1 percent of businesses have access to a bank loan or a line of credit, in stark contrast to the 23.7 percent average in the region. Numerous efforts have been made over the years to address this issue, with regulators discussing it more frequently than there are actual SME borrowers. In a recent report by the Better than Cash Alliance, it was revealed that as of December 2021, the total outstanding SME credit stood at Rs460 billion, falling short of the Rs800 billion target set by the National Financial Inclusion Strategy in 2015 by a significant margin. The goal of achieving 17 percent of overall private sector financing was missed by 11.6 percentage points.

In a bid to alleviate the situation, the regulator introduced the SME Asaan Finance (SAAF) Scheme  when the government was still touting a growth narrative. She highlighted that "under this program, small businesses were to receive uncollateralized loans with capped interest rates, with the federal government guaranteeing a portion of the credit risk." She added that as of June end, the total bank borrowings under this scheme amounted to a mere Rs7.8 billion, representing only 0.44 percent of the industry's borrowings under all refinancing facilities. Subsequent shifts in macroeconomic indicators and changes in government have predictably affected the uptake of the SAAF scheme, a recurring theme in Pakistan's policy landscape. For SMEs, this issue is exemplified by the ever-changing entrepreneurship initiatives introduced by Pakistani prime ministers. Unless concrete steps are taken to address these challenges, the SME sector in Pakistan will continue to lag behind its regional counterparts. This will hurt the country's economic growth and development.

Credit: INP-WealthPk