All over the world, SMEs drive economic growth by creating jobs, stimulating innovation, and contributing to exports. They are considered to be agile and adaptable, able to respond swiftly to market changes and customers’ preferences. This flexibility allows them to drive competition and efficiency in the economy. Beyond their macroeconomic role, SMEs are a key aspect of poverty alleviation in many “Asian Tiger” economies, as they provide livelihoods to millions.
But SMEs in Pakistan face severe problems, with a lack of access to credit being one of the most crippling. Traditional banks are often reluctant to lend to small enterprises due to higher risks, lack of collateral and poor financial records. This credit gap ties down SMEs. And when credit is available to them, it often comes with high-interest rates and tough requirements. The high cost of borrowing discourages many small business owners from seeking loans. Pakistan has seen high interest rates in efforts to get inflation back under control.
In any case, many small business owners lack financial literacy and are unaware of the various financial products and services available to them. Without adequate financing, SMEs struggle to expand their operations, upgrade technology, and increase production capacity. This limitation stifles growth and prevents them from scaling up to meet market demands. Innovation is crucial for maintaining competitiveness. However, financial constraints hinder SMEs from investing in research and development, adopting new technologies, and implementing innovative practices. As a result, they risk falling behind larger, better-financed competitors.
The deregulation of the General Zia-ul-Haq period and onwards did not deliver on the promise of a new era of opportunities for small and medium enterprises
In the early decades, which politicians and generals like to talk about, Pakistani governments were well aware of the importance of SMEs for economic growth and employment. This attitude led to the establishment of various institutions and policies aimed at promoting small businesses. During the 1950s and 1960s, Pakistan’s industrial policy focused on import substitution, which encouraged the growth of local manufacturing industries. Many of these were small and medium enterprises. The establishment of the Pakistan Industrial Credit and Investment Corporation (PICIC) and the Small Industries Corporations (SICs) provided financial and technical support to SMEs, helping them to establish and expand their operations.
The deregulation of the General Zia-ul-Haq period and onwards did not deliver on the promise of a new era of opportunities for small and medium enterprises. In fact, despite setting up institutions like the Small and Medium Enterprises Development Authority (SMEDA), successive governments have not been able to fulfil promises to small entrepreneurs.
Pakistani policy-makers have to understand that SMEs are big job creators. Financial limitations cut their ability to hire and train new employees, which affects overall employment levels in the economy. A flourishing SME sector is essential for absorbing the growing labour force and reducing unemployment rates. Access to credit is vital for penetrating new markets and boosting exports. SMEs with limited financial resources find it challenging to explore international markets, comply with export regulations, and meet the requirements of foreign business partners.
The government can play a key role in enhancing access to credit through policy reforms. Establishing credit guarantee schemes can reduce the risk for banks and encourage lending to SMEs. Moreover, subsidised loan programs and grants can provide much-needed financial support.
Non-bank financial institutions, such as microfinance institutions and fintech companies, can bridge the credit gap by offering tailored financial products to SMEs. These institutions often have more flexible lending criteria and can provide smaller, short-term loans that are more suitable for small businesses.
Improving financial literacy among small business owners is crucial. Training programs and workshops on financial management, accounting, and loan application processes can empower SMEs to make informed financial decisions and maintain proper records, making them more attractive to lenders.
Financial institutions should streamline loan application processes to make them more accessible to SMEs. Reducing bureaucratic red tape, offering online application platforms, and providing dedicated support to small business applicants can significantly ease the process. Encouraging the growth of venture capital and equity financing can provide alternative funding sources for SMEs. These forms of financing do not require collateral, and they can support innovative enterprises. Technology can play a transformative role in enhancing access to credit. Fintech solutions, such as peer-to-peer lending platforms and digital wallets, can provide SMEs with alternative financing options. Data analytics and credit scoring models can help assess the creditworthiness of SMEs more accurately.
Governments have to understand that ensuring SMEs have access to financial resources will not only strengthen the entrepreneurs’ position but also contribute significantly to the overall development of the country.