SME FINANCING POLICY AND ITS COMPARISION WITH

OTHER ASIAN COUNTRIES

Introduction:
Small and Medium Enterprises (SMEs) are one of the largest and the most important sector of
Pakistan's economy. SMEs play a key role in shaping national growth strategies, employment
generation and social cohesion by improving standard of living of vulnerable segments of
society. In most countries, SMEs constitute more than 90% of all enterprises and significantly
contribute towards inclusive economic growth. To further fortify the efforts in strengthening
SMEs sector, the government enacted the SMEs Policy. The policy aimed at providing a long-
term framework for the advancement of SMEs sector and a sound implementation mechanism
which could provide an environment conducive to the economic growth of the whole country.
The scope of the policy covered areas pertaining to ease of financial accessibility, spurred human
development, technological up-gradation and a healthy business environment. All these facets of
the policy are directly intertwined with a thriving SMEs sector which has unlimited potential to
turn around the economy of Pakistan. SMEs contribute to development in multiple ways;
creating employment for an expanding labor force, providing much needed flexibility and
innovation in the economy, enhancing exports and contributing to increased value addition in
GDP.

Brief History:

Small and Medium Enterprises (SMEs) played a very vital role in the economic development of
the underdeveloped as well as developed countries. The abbreviation SME is commonly used in
the European Union countries and also in international organizations, such as the World Bank,
the United Nations and the World Trade Organization (WTO). The term Small and Medium
Business (SMB) is also prevailing in a few other countries of the world. Small and Medium
Enterprises (SMEs) are known as the solution of economic progress, modernization and the
development of employment, employment potential, creation of income and scientific
progression in most advanced economies.
The SMEs subsidy can help to reduce poverty. But it could not be diminished the value that large
enterprises have in the economic growth.

Impact on Economy:

SMEs are main indicators of a Pakistan’s economic development. They have a significant impact
on the social development of a country. SMEs create jobs, compete with big enterprises, become
part of the global market, contribute to poverty alleviation in developing countries, boost exports
and reduce imports. An important objective of this study is to analyze the impact of SMEs on
economic growth in Pakistan.

The employment growth leads to the development of innovation and increasing the production.
The business expands contributing in the reduction of imports and increasing the exports and
domestic production. The business expansion leads to increased investment. Employment growth
leads to increased social standards. The consumption increases, contributing to the growth of
national income.

State Bank of Pakistan Initiative for Promotion of SME Finance:

SBP initiatives to support SME financing mainly include i) improving regulatory framework
through revising prudential regulations, strengthening secured transactions framework and
introduction of SME targets, ii) market development through SME supportive subsidized
refinance schemes, risk coverage scheme, Islamic SME financing, cluster surveys and non-
financial advisory service and iii) improving capacity building and awareness creation of bankers
and SMEs.

Why we need to emphasize the SME division in Pakistan

Currently Pakistan is facing a lot of problem like poverty, illiteracy, energy crisis, corruption,
political instability, international interference, terrorism, overpopulation, inflation,
unemployment and economy crisis. Recently, Pakistan drops value of money due to high
inflation. So in order to overcome these deficiencies, we need to develop our SME division that
result deduce the unemployment, increases the GDP of Pakistan and overall growth in Pakistan.
Small and Medium Enterprises Development Authority - SMEDA,

Premier institution of the Government of Pakistan under Ministry of Industries & Production.
SMEDA was established in October 1998 to take on the challenge of developing Small &
Medium Enterprises (SMEs) in Pakistan. With a futuristic approach and professional
management structure it has focus on providing an enabling environment and business
development services to small and medium enterprises. SMEDA is not only an SME policy-
advisory body for the government of Pakistan but also facilitates other stakeholders in addressing
their SME development agendas.

Vision

"Growth of globally competitive SME sector, through a conducive environment and support
services, serving as an engine of sustainable growth for national economy"

Mission Statement

"To assist in Employment Generation and Value Addition to the National Income, through
Development of the SME Sector, by helping Increase the Number, Scale and Competitiveness of
SMEs"

SBP’s Interventions for Promotion of SME Finance

Given the importance of SMEs in economic development, SBP has adopted a facilitative role, to
encourage smooth flow of financing to SMEs. In this regard, SBP has taken following initiatives:

 A separate set of prudential regulations specifically for SME sector was issued by SBP in
2003 with a revision in 2013 wherein small enterprises (SEs) and medium enterprises
(MEs) were separately defined and more specific and simpler regulations for SEs and
MEs were prescribed.
 SBP facilitated approval of “The Financial Institutions (Secured Transactions) Act,
20163 ” from the Parliament to facilitate SMEs and agri borrowers to access credit from
banking sector by using their movable assets as collateral.
 SBP assigned SME financing targets to banks and DFIs for the first time in 2016 in order
to enhance access to credit to this sector. To cater to Islamic financing needs of SMEs,
SBP is persuading Islamic Banking Institutions (IBIs) to extend financing by assigning
them SME financing targets. SBP has also advised banks and DFIs to put in place proper
structures with regards to SME financing.
 SBP is offering different risk coverage and refinance schemes for SMEs,
 ‘Refinance and Credit Guarantee Scheme for Women Entrepreneurs in Underserved
Areas’ has been offered by SBP under which financing at subsidized rate (upto 5 percent)
alongwith risk coverage is available for setting up of new businesses or expansion of
existing ones.
 SBP has introduced SME-related refinance facilities for purchase of new imported/ local
plant/ machinery and new generators, for adopting renewable energy projects using solar,
wind, bio gas and other renewable energy sources and for storage of agricultural produce.
 SBP is facilitating federal government to promote SME financing in the country through
mark-up subsidy and risk coverage schemes. Prime Minister Youth Business Loan
Scheme is one of such schemes.
 SBP is also collaborating with provincial governments to facilitate in developing
customized refinance and credit guarantee schemes in their respective provinces. SBP, in
collaboration with Sindh Enterprise Development Fund (SEDF), has launched a ‘Mark-
up Subsidy and Guarantee Facility for Rice Husking Mills’ in Sindh under which SBP
provides the refinancing facility and SEDF provides mark up subsidy and risk coverage.
 SBP is supporting Government of Punjab in designing subsidized refinance scheme for
BMR of SMEs in Punjab and credit guarantee scheme for small enterprises in Punjab.
Moreover, capacity building and awareness creation of bankers and SMEs are one of the
key areas focused by SBP. Though above mentioned efforts have brought improvement
in SME financing portfolio of banks, however, a large number of SMEs are still
financially excluded. In order to address this issue and enhance access to credit to SME
sector, SBP has prepared a policy for promotion of SME finance.