sme issues in pakistan
TRANSCRIPT
12/29/14 1
ACCESS TO FINANCE:PRACTICAL ISSUES FOR SMEs IN PAKISTAN
12/29/14 2
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
12/29/14 3
Access to Finance
• Multi faceted Issue
• No simple solution
• Integrated approach is required
12/29/14 4
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
12/29/14 5
FFTTII
ailureailureoomplementmplementFTIFTI
What is the real problem behind this issue?
12/29/14 6
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