Time and again reports on small and medium enterprises (SMEs) bring home the point that SMEs are the backbone of the economy. The central banks latest report on SME financing is no different.
It starts off by saying that SMEs significantly contribute to GDP growth, exports and employment generation. Yet the share of SMEs in total financing remained at a dismal 5.8 percent in March 2015. In fact, it fell from 6.3 percent in December 2014 and 6.5 percent in December 2013.
According to various estimates, SMEs contribute about 40 percent of the countrys GDP. Thats about Rs10,953 billion in the just ended fiscal year (FY15 total GDP: Rs27,383 billion). With about Rs261 billion in gross outstanding SME financing as of March 2015, SME financing is therefore only about 2.5 percent of SME GDP. And then the government and the central bank talk about engines of growth and other such lofty slogans!
The last available World Bank Enterprise Survey revealed that only 6.7 percent of SMEs had a bank loan or a line of credit in Pakistan, as against an average of 28.7 percent in South Asia, 21.3 percent in India, and 34 percent in Bangladesh.
One reason behind such a poor show, however, is high non-performing loans, which makes banks wary of lending to the small players, if and when they stop suckling on the lollipop of government bonds. According to the State Banks recently released SME review, NPLs as percentage of SME financing stood at 31 percent in March 2015. Thats down from 35 percent in March 2014, but is still more than double the economy-wide infection ratio of 12.8 percent.
Another reason why SMEs are left out of the system is informality. The World Banks survey reveals that most SMEs are unregistered, and prefer to remain that way to avoid registration procedures, costs, documentation, and unnecessarily complicated burden of taxes. On that account the Daronomics of advance taxes and gimmicks like 0.6 percent on banking transactions aren making matters any better.
While we let you mull on that, it is strange to see that Islamic banks whose lending is more securitized than others lag far behind their conventional peers in SME financing. According to the latest
SME Finance Review, Islamic banks share in SME financing was only 2.1 percent as of March 2015, which is little changed from 2 percent in March 2014. Need one say more!
Source: BR research