Syed Muhammad Ahmed Final Report Final Review After Viva Print

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Syed Muhammad Ahmed Final Report (Final Review after

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PROJECT REPORT
PROBLEMS OF FINANCING SMALL-SCALE

ENTERPRISES AND POSSIBLE SOLUTIONS TO
IT
By
SYED MUHAMMAD AHMED
CIIT/FA17-BAF-040/LHR
Submitted to
Ms. Marrium Hurr
Department of Management Sciences
COMSATS University Islamabad, Lahore Campus
In Partial Fulfillment of the Requirements for

the Degree of
BACHELOR OF SCIENCES IN ACCOUNTING AND FINANCE (BSAF)
Submission Date: November 20, 2020

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Abstract
SMEs are the backbone of any economy as they create most jobs but still, they are ignored in
terms of finances in most developing countries as Pakistan. SMEs create almost 60% of jobs
worldwide but still lack in finances. Main issues which arise in financing SMEs are kind of
issues which can be resolved if focused on. Most of issues are at the end of government and
banks. Mostly government do not focus on well-being of SMEs, so they do not focus on making
any new policy which can help SMEs. Due to less control’s banks do not always follow rules
and they reject the applications of SMEs without any explanation. The main issue which arises
on government end is that excessive paperwork is required for any opportunity and SME have
to bear that cost by itself even after completing the paperwork SMEs are rejected for so many
other reasons. To analyze the actual problems which arise in financing of SME I chose
questionnaire and interviews as my primary and secondary research methods and results were
same as thought. In suggestions I suggest that governments should increase the control which
will make sure that banks have genuine reason to reject the loan of SME. Government should
also launch schemes time to time which will encourage SME to expand and let youth start their
own small company as this will flourish the economy.

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Declaration
I, hereby, declare that the project work entitled PROBLEMS OF FINANCING SMALL SCALE
ENTERPRISES AND POSSIBLE SOLUTIONS TO IT submitted to the Department of
Management, CUI, Lahore Campus, is an original piece of work under the supervision of Ms.
Marrium Hurr and is submitted in partial fulfillment of the requirements for the degree of
Bachelor of Sciences in Accounting and Finance (BSAF). This project work report has not been
submitted to any other university or institution for the award of degree.
Signature:
Name of Student: Syed Muhammad Ahmed
Date: November 20, 2020
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Supervisor’s Recommendation
The project work report entitled PROBLEMS OF FINANCING SMALL SCALE

ENTERPRISES AND POSSIBLE SOLUTIONS TO IT submitted by SYED MUHAMMAD
AHMED of CUI, Lahore Campus, has prepared under my supervision as per the procedure and
format requirements laid by the Department of Management Sciences, CUI, Lahore Campus, in
partial fulfillment of the requirements for the degree of Bachelor of Sciences in Accounting and
Finance (BSAF). I, therefore, recommend the project work report for evaluation.
Signature
Name of Supervisor: Ms. Marrium Hurr
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Feed Back Sheet (Supervisor)

Undergraduate Summer Industrial/Organizational Project (BSAF)
Name of Student: Syed Muhammad Ahmed
Registration Number: CIIT/FA17-BAF-040/LHR
Context/ background &

purpose of the project
Creativity and Originality
Ability to Plan & Use of

Methodology
appropriateness
Ability to Evaluate
Literature
Data Analysis
Levels of Accuracy,
Technical Competence,
Organisation, Expression.
Level of Writing Skill (Use

of Functional English and
Referencing)
Impact on Selected
Industry on the Basis of
Results
Internal Supervisor
Total Marks (60) Obtained Marks ( )
External Supervisor
Total Marks (40) Obtained Marks ( )
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Endorsement by Head of Department
I, hereby, endorse the project work report entitled PROBLEMS OF FINANCING SMALL
SCALE ENTERPRISES AND POSSIBLE SOLUTIONS TO IT submitted by SYED
MUHAMMAD AHMED of, CUI, Lahore Campus, in partial fulfillment of the requirements for
the degree of the Bachelor of Sciences in Accounting and Finance (BSAF) for external
evaluation.
Signature:
Name of Head of Department: Dr. Rana Nadir Idrees

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Acknowledgement
At start I would like to thank Allah Almighty for giving me the perfect health and sound mind
to complete this piece of work properly. Then, I would like to present my gratitude and thank
my Parents for inspiring me throughout this amazing journey of my academic life. I am deeply
in debt to MS. Marrium Hurr for her much-needed guidance and supervision and I am deeply
honored to have MS. Marrium Hurr as my supervisor as her comments and suggestion made it
possible for me to complete this report in required time and manner. At the end I would like to
thank all my fellows and everyone who gave me the right advice and helped me to choose the
right path and made this amazing journey easy for me.
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CONTENTS
PROJECT REPORT ..................................................................................................................
ABSTRACT ................................................................................................................................ I
DECLARATION ..................................................................................................................... II
SUPERVISOR’S RECOMMENDATION ........................................................................... III
FEED BACK SHEET (SUPERVISOR) ............................................................................... IV
ENDORSEMENT BY HEAD OF DEPARTMENT ..............................................................V
ACKNOWLEDGEMENT...................................................................................................... VI
CHAPTER 1- INTRODUCTION............................................................................................ 1
PROBLEM STATEMENT AND RESEARCH QUESTIONS ................................................................. 1
SCOPE AND SIGNIFICANCE ........................................................................................................ 1
STRUCTURE .............................................................................................................................. 1
LIMITATIONS OF STUDY ........................................................................................................... 2
CHAPTER 2 - LITERATURE REVIEW .............................................................................. 3
FINANCIAL HIERARCHY AND FINANCIAL GROWTH CYCLE OF SMES ....................................... 4
CHAPTER 3 – PROJECT METHODOLOGY ..................................................................... 8
QUALITATIVE RESEARCH ......................................................................................................... 8
CHOSEN METHODOLOGY ......................................................................................................... 8
PROFILE OF RESPONDENTS ....................................................................................................... 9
CHAPTER 4 - DATA PRESENTATION & DISCUSSION ............................................... 10
INTERVIEW BASED QUESTIONNAIRE – PRIMARY DATA.......................................................... 10
Closed Question Data........................................................................................................ 11
Open Question Data .......................................................................................................... 17
REGRESSION ANALYSIS .......................................................................................................... 21
CHAPTER 5 – RECOMMENDATIONS AND CONCLUSIONS ..................................... 23
CONCLUSIONS ........................................................................................................................ 23
RECOMMENDATIONS .............................................................................................................. 24
REFERENCES .............................................................................................................. 27
APPENDIX .............................................................................................................................. 29
QUESTIONNAIRE ..................................................................................................................... 29
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CHAPTER 1- INTRODUCTION
Exposed to the whirlwind of economic revolution, small industries form the backbone of the
Pakistani economy. Employing much of the workforce and the aims of this project is to analyze
how in Pakistan small and micro scale ûrms are able to ûnance themselves.
Problem statement and Research Questions

The primary aim of the study is to deal with the question of whether any obstacle exists getting
funding from banks and other institutions in Pakistan. In order to find the answers to this
question further questions arise in relation to availability of credit, demand of credit and banking
willingness to give credit. Secondly the goal is going to be to analyze the what financing
preferences and finally aiming to explore opinion of small scale industries on how they evaluate
the sources of finance also what different obstacles they usually face in gaining some sort of
financing from these sources.
Scope and significance

In this research we will study how small-scale industries shall aim to ûnance their need for
investments and managing of day-to-day operations if there was no barrier in accessing various
financial resources. Such kind of comparison that these preferences possess to their current
ûnancial sources provides a deep knowhow of what the ûnance gap looks like. Therefore, this
research provides insight into how the businessmen in Pakistan form evaluation criteria for their
financial needs and the challenges they face in this regard.
Structure
This report is structured into five chapters. Chapter two consists of a review of literature related
to the broad area of interest including contribution of SMEs to the economy and challenges in
gaining external funds in Pakistan.
Chapter 3 provides an overview of the research method. It was decided to employ qualitative
research strategies and document review as secondary analysis. Amid Covid pandemic it was

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difficult to completely conduct primary research. The areas of research matched the areas of the
literature review and the chapter explains the rationale behind the choice of methods.
Chapter 4 presents the analysis of the data collected on selected areas above. Results from the
documents review and secondary analysis of an existing survey are presented and evaluated in
conjunction with data gathered from the qualitative interview questions.
Chapter 5 presents the conclusion to the project where the research findings are presented and
discussed. In addition, recommendation is made while noting the limitations of the research.
Limitations of Study
The results provided through this particular research need to be understood in the context of the
given set of limitations:
1. This particular research gives the consolidated opinions of people belonging to the
small-scale industry of this country but does not intend to be of the entire SME sector in
Pakistan
2. The overall demand for the financing needs and approvals of the lending sector are
subject to different complexities and differs to each person’s business. Each variable that
contributes to the decisions made by the lending agencies cannot be evaluated in the
interview and comprehensively captured in such a timeframe.
3. Only documents review of official reports to support the research objective in the
research gives one sided opinion.

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CHAPTER 2 - LITERATURE REVIEW
Taking a look at the Pakistan’s and the World economy the chapter emphasizes the importance
of SMEs and how by facilitating those in acquiring external finance can help the economy as a
whole as well as the SMEs to establish themselves as key players in the economy.
The overall theme and point of view can be simply viewed as the importance of finance to SMEs
and how does it impact their performance and their operations and how it could be made more
beneficial for the SMEs and the economy of the country.
When we look at the world globally or we look at the economic aspects of a particular country
we come to realize that small and mediums size enterprises are the backbones of the economy.
According to the information provided by Organization for Economic Cooperation and
Development (OECD), the SMEs for any state represent an important part of growing economy,
provide dynamism and flexibility in first world nations, just like they do in emergent economies
and in developing nations. It is proven that SMEs account for more than 95% of the enterprises
globally which account for around 60% of the jobs globally.
SMEs are responsible for bringing competitiveness along with the new jobs and products in the
global workplace. In order to increase their productivity they mostly require finance, the sources
of finance and good financial management provides them access to modern technology and also
helps in the expansion of the particular business. This ensures the competitiveness of the
particular enterprise and overall this phenomenon applies to the whole economy. It won’t be
wrong in assessing that these performances of SMEs and the development of a particular country
economy is highly dependent on the ability to generate a well and feasible work atmosphere for
the SME’s, as it will provide products to the market in good quantity and at a very low cost.

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Financial Hierarchy and Financial Growth Cycle of SMEs

Zoppa and McMahon (2002) give an argument about financial hierarchy theory. This theory
about the small and medium enterprises includes the following things:
• The reinvestment of profits, these also include mean and additional amount of time that is
invested by the owner in the business at less rate than market wage;
• Some sort of small term financing, which could mean personal credit cards and trade credit
• Some sort of long term financing, that will start from debt from owners of the business or
people close to the person
• Some form of capital investments that are provided by the owner or people that are close to
him or her
• Third party capital investments
However, Holmes and Kent (1991) have excluded the last part, stating their opinion that this
option is hardly ever utilized by such businesses.
In such cases the financial development cycle (Berger and Udell, 1998) depends on the
possibility that data deviations have a powerful character over the life expectancy of
organizations. These creators recommend that SMEs have a monetary development cycle,
during which their necessities and accessible wellsprings of acknowledge can change for the
mood of business development, which brings about expanded insight and data
straightforwardness. Accordingly these organizations are hazier in the beginning up stage. In
this stage, organizations must rely to a great extent upon ventures made by the business person,
family, and companions, just as business credits and heavenly attendant financial specialists.
Funding generally shows up later, in the fast development stage. Credit from budgetary
foundations, first as present moment and later long haul advances, opens up when the
organization arrives at a size and age where its history mirrors a specific degree of unmistakable
resources. It is essential to manage as a primary concern that this is anything but an overall
hypothesis for every single independent venture, given that there is no ideal relationship
between the age, size, and development of such organizations.

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Gaining external finance by local enterprises remains a challenge in this country. Though Banks
insist they are lending financial resources to the SMEs, surveys have lead us to believe that
every forth SME faces difficulty in acquiring debt from financial institutions. It is evident that
having credit access is very important for a sustainable recovery of the economy. Economic
survey of Pakistan by the State Bank also highlights the fact that firms which face problems in
financing are less likely to engage in the acts the account for the growth of the economy
including investment, marketing, hiring, exporting and importing.
Research has led us to believe that gaining ability to gain credit is one of the important factors
that contributes to the growth of SMEs (Brown et al., 2003). Also, a huge number of such
enterprises are said to be relying on debt provided to them by various banking institutions from
their particular economic growth (Norton, 2003; Group of Ten, 2001) including the Pakistani
small-scale industries.
An analysis between various types of financing acquired by such enterprises and their choices
has been found in another research. The topic however is eventually dealt by the head <capital
structure theory=. In this research there is a lot of focus on the term that <capital structure theory=
of big companies has very limited application for medium size enterprises, thus it is not
applicable for SMEs (Michaellas et al., 1999). It was concluded by Beck et al. (2006) that the
new and small companies tend to face higher ûnancial problems, and further provided in a
different paper Beck et al. (2008) concluded that such small companies often are less dependent
on external ûnancial sources, including the banking sector. Another big issue has also been
indicated in the report that the government is responsible for this and many of SMEs reported
the biggest obstacles they are facing while they are performing their businesses are the
regulations that have been made in this regard by the government. Another issue that needs to
be highlighted is the Red tapism that tends to stop any form of growth faced by the SMEs.
Recently increase in the basic rates will effect SMEs which are still struggling since the
recession.

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There is a lot of evidence available where it is quite evident that SMEs have fairly little access
to any different sources of external financing (e.g., Beck and Demirgu c¸-Kunt, 2006, Kuntchev.
89et al., 2012) in the developing economic nations.
Financial institutions such as Banks have failed in their part to fund SME development in
Pakistan during the past many years. There comes the conclusion that there is a lack of credit
available to the sector. It has been fairly indicated in the study that under no scenario could
anyone claim that credit for the SMEs was easily available for the expansion or other purposes.
It is a general perception that most of the owners of businesses try to adopt a <pecking order= of
preferences of financing. There is a lot of use of personal funding and financing of business
from the close circle of the business owner, before approaching any other source that provides
financial assistance (Howorth, 2001).
Owners of these businesses are already familiar with the risk assessment procedures of their
particular business and how they are able to take financing decision for themselves and the way
the credit rating operates. In general it is noticed that, most studies have been focused upon less
reliable information and the sources of information in the markets and devastating impact of
less information upon small business borrowing procedures (Binks et al., 1992; Deakins and
Hussain, 1993), this might be the reason to impediments to ûrm performance and growth for the
businesses and the economy. The established facts and the commonly known established studies
have failed to investigate the reason for the inüuence of personal characteristics upon access to
ûnance, but some of the evidence that has been provided was reviewed. Alongside the operating
ûrms in this particular intensely competitive environment, ethnicities in minority may
experience certain issues with gaining access to ûnancial resources, especially during the time
of start-up. (David Irwin Jonathan M. Scott, (2010)."
Financial position data on SMEs is not currently available in Pakistan, thus so such of the
quantitative methods and techniques are currently not a possible option for the data. The
quantitative methods generally rely on the quality of the empirical model which can vary greatly
depending on the information available to the researcher.
Small businesses, and particularly young small businesses, have little internal cash üow to
ûnance their operations. Lending to these types of ûrms often requires banks to demand

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collateral. Hence, insufûcient collateral is a major reason for banks refusing to grant additional
loans to such companies. This constitutes another strong factor to explain liquidity constraint
for SMEs. Canales and Nanda (2012) show that branch managers in decentralized banks are
more sensitive to the local environment than their counterparts in centralized banks. The former
provide more attractive ûnancing terms to ûrms in competitive banking markets and only
provide credit to areas where they have market power

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CHAPTER 3 – PROJECT METHODOLOGY
This chapter begins with an overview of qualitative research strategies it includes an outline of
different methods that were considered in seeking an answer to the question of how SMEs are
dealing with challenges of securing secondary funding from banking or other finance schemes
available.
Qualitative Research
Qualitative research technique implies that interviews and questionnaires were used to know the
basic problems which arise in financing of SME’s. This research method is also used to then
drive out the recommendations.
Chosen Methodology
The already done survey on the on SMEs have been taken as proxy. Research conducted on
<Effects of financing on SMEs= and the interviews done in the paper were taken as proxies
except that some interviews were conducted with managers and experts. In the paper for primary
data collection qualitative method selected through structured interviews/ questionnaire.
Respondents were chosen for their expertise in the areas relevant to the research topic. Experts
from SMEs were interviewed in order to gather opinions using a questionnaire which contained
both closed and also open-ended questions. Interviews were conducted through digital mediums
as well as personal meetings.
In the survey, the use of closed questions allowed the number and range of questions to be
relatively large while reducing the volume of data analysis to a scale of this research project. On
the other hand the use of three open questions allowed respondents the freedom to raise other
issues and prospective that were potentially relevant to the research. Twelve closed questions
were used to measure the attitudes and opinions of the respondents. Accordingly, the items were
generally presented in the form of a statement to which answers could be chosen from a Likert
scale which has options Strongly Agree, Agree, Undecided, Disagree and Strongly Disagree.

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For secondary data collection the researcher will use document review to gather data to support
the primary data, documents review of official reports, combined with the secondary analysis
of national statistical database were employed. This provided access to high quality data,
collected and collated by expert researchers on large samples. This increases the strength of the
qualities of reliability and validity. Access to the reports also allowed for longitudinal research
rather than research tied to a single point in time. This was considered important in attempting
to determine credit issues to the micro-SMEs as well as in examining financial institutions role
in facilitating them.
Primary and secondary research was used to fill the gaps that would have been left with only
interviews. Both interviews and document reviews made this research valid.
Profile of Respondents
Primary data was gathered from both structured interviews (already conducted) and anonymous
questionnaires.
In the paper questioner and interview request was sent to fifteen different SMEs which resulted
in six interviews being conducted. Three SMEs replied via email answering closed question
only with limited answers to the open questions. Some questioners were left in the accounts
office where I am currently interning, and eleven SMEs agreed to complete the questioner and
answered closed questions. Twenty different SMEs from different sectors replied to the survey
in total.
Interviews were carried out in person with Mr. Aazaz Ahmed, Mr. Farhan, Mr. Ali, Mr. Wajid
and Mr. Arslan Questioner were sent to Mr Arslan and he completed closed questions remotely
and open questions to Mr. Sajid were addressed in further details by the way of a telephone
Interview.

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CHAPTER 4 - DATA PRESENTATION & DISCUSSION
Interview Based Questionnaire – Primary Data

The paper used a Likert scale which has options Strongly Agree, Agree, Undecided, Disagree
and Strongly Disagree. This was used to gather raw data from closed statements for ease of
analysis. The questions asked / statements discussed were:-
• Closed Questions
1. SMEs use less external ûnance, especially bank ûnance.
2. Most frequent funding used by SMEs is Overdraft.
3. SMEs used personal loans in their Business.
4. Refusal rate of credit to SMEs is very high.
5. Lack of bank credit had major devastating impact on the businesses.
6. Many SMEs do not apply for a loan despite requiring credit.
7. Bank branch office always hesitate in giving out loans to SMEs.
8. In many cases a personnel guarantee is required for any amount of loan.
9. To secure a business loan in the first two years of business is not easy.
10. SMEs can expand their business and number of employees if lending is more available
11. Borrowing rates in Pakistan are very high.
12. SMEs knowledge about Governments Funds for SMEs is very limited
In order to enrich the data further some open questions were used:-
Open Questions
1- What is your perception on Banks willingness to provide credit to SMEs especially for
the startup?
2- If you have been given easy access to finance what improvements, you can see in
business and how it contributes to national economy?
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3- What level of satisfaction you get from government policies and schemes to helping out
SMEs and what improvements you want to see?
Closed Question Data
Q1. SMEs use less external ûnance, especially bank ûnance.
Fig 4.1 below shows that more than 70% of the respondents agree that SMEs use less
external finance.
Figure 4.1 - SMEs use less external finance especially Bank finance.
Q2. Most frequent funding used by SMEs is Overdraft.
Figure 4.2 below shows more than 35% strongly agree that overdraft is the main source
of secondary funding for the SMEs, and same 35% also agree with this.
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Figure
4.2 -
most
funding
option
used by SMEs is overdraft.
Q3. SMEs used personal loans in their Business.
Figure 4.3 shows almost 80% agrees that SMEs use their personal loan in the businesses
as it’s not simple for SMEs to secure. Only 10% disagree with this statement that SMEs
uses personal loans in their businesses.
Figure 4.3 -
SMEs use
personal
loans in their
Business
Q4. Refusal rate of credit to SMEs is very high.
Figure 4.4 shows the response from the respondent and most agree that in Pakistan the
rate of refusal to credit application is very high. Only 10% of the respondent’s disagree
with the statement. 10% of respondents were undecided.
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Figure 4.4
Refusal rate
of Credit to
SMEs is
very high in
Pakistan
Q5. Lack of bank credit had major devastating impact on the businesses.
In figure 4.5 80% of respondents agree with the statement that lack of bank credit has a
major devastating impact on the business where 30% respondent strongly agree with it.
Whereas only 10% disagree with it. Most of the business experienced hard times
throughout corona pandemic
Figure 4.5 Lack of Bank credit has major devastating impact on the businesses.
Q6. Many SMEs do not apply for a loan despite requiring credit.
Figure 4.6 below shows 60% agree with the statement where only 20% strongly agree
that many SMEs don’t apply for credit even when they require it.
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Figure 4.6 Many SMEs don’t apply for loan despite requiring credit.
Q7. Bank branch office always hesitate in giving out loans to SMEs.
Figure 4.7 below shows more than 80% of the respondents are agreed that bank branches
always hesitate in giving loans, this shows a low confidence on the branch office which
are usually the main contact with the customers.
Figure 4.7 Bank branch office always hesitate in giving out loans to SMEs
Q8. In many cases a personnel guarantee is required for any amount of loan.
Figure 4.8 shows more than 80% of the response agree with the statement that for SMEs
there are many extra requirments like cash flows business plans and personel gurantee
are a must for any amount of loan. SME business loans taken out for the business only
is rare and where loans are approved personel gurantee was a must. Only 10% of the
response disagree with it.
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Figure 4.8 Many extra requirments and personel gurantee is required for any amount of
loan.
Q9. To secure a business loan in the first two years of business is not easy.
Figure 4.9 shows more than 50% of respondents agree out of which 20% strongly agree
with the statement that to secure loan in the initial two years is not easily approved.
Figure 4.9 to secure business loan in the 1st two years of business is not easy.
Q10. SMEs can expand their business and number of employees if lending is more available
Figure 4.10 shows 100% respondents agree with the statement that availability of loan
for SMEs bring economy activity more business expansions and more jobs. 45%
strongly agree with the statement.
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Figure 4.10 SMEs can expand their business and no of emplyee if funding is available
Q11. Lending rates in Pakistan are very high.
Figure 4.11 shows more than 85% of the respondents agree with the statement pertaining
to high lending rates in Pakistan. This can be one the reason for low credit applications
and high level of discuragement in Pakistan. Most of the loans are given at over 8%
which is very high.
Figure 4.11 Lending rates in Pakistan is very high
Q12. SMEs knowledge about Governments Funds for SMEs is very limited.
Figure 4.12 shows more than 80% respondent agree with the statement that they have
very limited informaton on the state funding and related scheams. Only 10% disagree
with the statement.
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Figure 4.12 SMEs has very limited information on state funding schemes.
Open Question Data
Answers to the open questions were less populated. Below is a summary of comments from the
participants
Q13. What is your perception on Banks willingness to provide credit to SMEs especially for
the startup?
Though banks insist they are lending, but most of the respondents said that the biggest concern
facing their company is the difficulty they have in accessing credit. Some respondents believe
any small business start-up securing a loan from financial institution is almost impossible, they
believe their requirements to secure loan is huge and waste of time., and once you complete all
requirements and your application is rejected by giving no reasons, one of the respondent from
retail applied loan for improvement in the shop and to purchase some new machinery his
application is rejected and bank didn’t have any reason. It was initial years of the business start-
up and he was facing issues with cash flow as he already had huge investment in purchase of
business. Respondents said for any loan requirement such as credit and trading history, personal
guarantee and references are required which is not possible in any start up business.
One of the respondent got short loan from the bank but he showed his concern that it was only
for very short time and many references required to secure such loan for only 20 weeks, also his
lease request to purchase of machinery which cost only few grand was rejected from leasing
company and he paid 60% upfront payment which again he borrow from his family friend and
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rest 40% was paid in instalment to supplier company which even charged interest on the rest of
the payment.
One of the respondent showed his concern on the huge security deposits in the start of the retail
business as he said now supplier don’t give any credit whatever credit you get on invoices is
based on your security deposit held by supplier and for his both business he paid almost 100,000
as security deposits which he considers dead money which stays in his supplier accounts who
already had millions in accounts. He applied for the bank guaranty for similar amount as supplier
accepts bank guarantee or cash deposit but bank refused any type of bank guarantee, as per him
if he get bank guarantee of the same amount he will never have any issue with cash flows and
can expand his business easily, also by having this money in account he will have better credit
rating.
Two of the respondents have overdraft facility they never applied for any loan and over draft is
approved easily as they have good bank credit history, overdraft is approved on the basis of
personnel guarantee from all partners although it is approved in company name but it helps a lot
in daily cash management.
Respondent from the IT Company said he never applied for any loan or secondary funding but
he has much requirement for that as most of his projects pays him after completion or with time.
He said we have to run after every single penny to obtain from clients, many projects are
available in the market but we can’t do because of investment required especially workforce for
IT and software development is highly expensive and without funds in hand it’s impossible
again because most of projects are paid after completion which took long time.
Respondent from a small aviation company said that in dispatch business more than 80% work
is on credit basis which most of huge companies are enjoying but for SMEs initial few years no
one will give you any credit until you have some history so it very difficult to start in this field
as all services are very expensive and to pay cash or securities to all service provider on 100s of
different locations worldwide is almost impossible. Most of agents even before flights required
cash or account with them. To open account required a huge deposits even you don’t have flights
for those locations in months’ time and without a better cash flow it’s impossible to expand
business.
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Bank never facilitate SMEs in such risky sector as most of payments were out of countries and
risk are involved.
Q14. If you have been given easy access to finance what improvements, you can see in
business and how it contributes to national economy?
The access to gaining credit is crucial to a sustainable economy, with economic survey of
Pakistan presenting an outlook that the enterprises facing credit problems in Pakistan are less
likely to somehow engage in growth-enhancing activities which could include investment in the
business, hiring staff, marketing products or services, export and importing. All SMEs require
working capital to grow their turnover respondents said all new ideas in the business are not
implementable without better credit facility, if credit is there they will implement new ideas,
expand business and hire new staff and all these factors contribute in the national economy.
Only credit facility is not enough credit facility on the discounted rate will help business to
grow, competition is very high and margins are getting very low technology has played a vital
role in competition customers know which retailer has a cheaper prices so you can’t compete
market while you have loan at high rates.
With the competition your systems and business ideas also need upgrade with time and SMEs
are not always in a better position with cash flows but if credit facility is accessible and on easy
terms some time you get very good opportunity in a short time frame to expand business and
this expansion will bring new employment and economic activity. More Jobs, more capacity to
spend, more bonuses to employees, more money in people’s pocket, bigger projects which can
return big.
Q15. What level of satisfaction you get from government policies and schemes to helping out
Most of respondents, said the Government is not doing what's needed to establish a gainful and
reasonable business climate, with the greatest issues referred to being admittance to credit.
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Regardless of weight from the Government on monetary foundations, including those ensured
by citizens during the crown emergency, and cases by budgetary organizations that the credit
crunch is adequately over for businesses, the message from SMEs is that the issue is still there.
The expense of working together in Pakistan is likewise terrible especially with regards to
inflation, which has quite recently gone up and benefits are only not there to legitimize staff cost
builds costs are rising and the public authority is looking at expanding the lowest pay permitted
by law, yet for some small businesses the benefit isn't there to legitimize wage increments or
expanded staff numbers.
Zero percent support from Government for SMEs. Government should subsidize some taxes for
new businesses or should provide loan with smaller rates, Also good checks on Banks because
bank advertise a lot for the help but one you get in touch with them you will not get support that
you need.
Government should give some compensation on the taxes especially employee taxes and on
rates paid to county councils, one of respondent said since last two years he did not make any
profit but paid a lot of taxes. He said all these rates should be calculated on profit loss basis not
on building area etc. He said he has generated 15 local jobs in his both shops, but he did not get
any support from government. If any payment for tax office is delayed for any reason your case
will be forwarded to next department which put their service charges plus interest and original
value of tax is increased by almost 20%. There are penalties not compensation.
Banks rejects some applications without having reasons is totally beyond expectation this should
be sorted out. One of the respondent said that bank give him one month notice to close his
running account and never gave any reason why it’s being closed. Because of this he credit
history was badly effected and he never get any reply to his requests why his account was closed
without any reason. Government should take notice of such actions.
Level of satisfaction from the government policies is almost null. Mostly unaware of the
government policies for SMEs. If there is any existence of any such policies those must be easily
available to SMEs. And must be publicly advertised. We have no idea about the role of credit
review office, Microfinance loans scheme, SMEs union or any government facilitation office
for SMEs.
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Regression Analysis
In our research we have considered and took into consideration 6 independent and 1 dependent
variables. We have determined the significance of each independent variable on dependent
variable by testing our hypothesis via using Regression analysis.
The below table shows the result of all the independent variables with respect to dependent
variable. The interpretation of every independent variable with respect to dependent variable is
stated below:
Table 1, Model 1: Poisson, using 6 observations

The Dependent variable: LOGOFSME
QML standard errors
Coefficient. Std Error z. P value

Const. 1.19476 0.419256 2.8497 0.00438 ***
LOGOFEXTFIN. -0.0321305 0.0475119 -0.6763 0.49887
LOGOFOVERDRAFT 0.122184 0.0513841 2.3778 0.01741 **
LOGOFLOANS. 0.10367 0.0214293 4.8378 <0.00001 ***
LOGOFBORROWIN 0.328221 0.104414 3.1435 0.00167 ***
GRATES.
PERSONAL -0.0233427 0.0570101 -0.4094 0.68221
GUARANTEE.
KNOWLEDGE. 0.00764798 0.0612025 0.1250 0.90055
Mean dependent vari 10.77931 SD dependent var. 4.012946

Sum squared resid. 1877.850 SE of regression. 3.688849
McFadden R-squared. 0.045181 Adjusted Rsquared. 0.028984
Log-likelihood. -412.6477 Akaike criterion. 839.2953
Schwarz criterion. 860.1325 Hannan-Quinn. 847.7622
Over dispersion test: Chi-square (1) = 3.24045 [0.0718]
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LOGOFEXTFIN: The above tables shows that LOGOFEXTFIN has an insignificant

relationship with dependent variable which is LOGOFSME. At 5% significant level the P value
of LOGOFEXTFIN is 0.94522 which is greater than significance level. So, at the 5%
significance level we will not rejecting the Null hypothesis.
LOGOFOVERDRAFT: The case of this variable is not similar to its predecessor. The same is
not significant with respect to dependent variable which is LOGOFSME. At 5% significant level
the P value of LOGOFOVERDRAFT is 0.01741which is less than significance level. So, at 5%
significance level we will be accepting the Null hypothesis.
LOGOFLOANS: Results reveals that LOGOFLOANS has a positive and a significant
relationship with the dependent variable, at 5% significance level the P value is less than its
insignificant level so we will not reject the Null hypothesis at 5% of the significance level
provided.
LOGOFBORROWINGRATES: This variable also found significant with LOGOFSME. At 5%
significance level P value is which less than the level of significance is and hence explaining
the significance of LOGOFBORROWINGRATE to LOGOFSME therefore we don’t reject Null
hypothesis at 5% significance level.
KNOWLEDGE & PERSONAL GUARANTEE: The result of KNOWLEDGE and
PERSONAL QUARANTEE is also explaining the significance of both the variables with
respect of dependent variable. The P value of KNOWLEDGE and PERSONAL GUARANTEE
is 0.68221 and 0.90055 which is less than significant level. So, at 5% significance level we don’t
reject both the hypothesis.
R-squared: R-Square basically describes the goodness of fit and explains the % of independent
variables explaining the dependent variable. In our case the value of R-square is 0.045181 which
is revealing that independent variables are describing 4.5% of dependent variables and there are
other variables too which are the remaining 95.6%.
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CHAPTER 5 – RECOMMENDATIONS AND CONCLUSIONS
The conclusions and recommendations are written based on the already done analysis of the
research work and factors that impact the funding of SME. The implementation of the
recommendations will depend on the engagement of individual stakeholder groups involved in
supporting SMEs in securing finance or in the provision of that finance to SMEs, including
• Stakeholders of public policy
• Groups that represent businesses
• Financial advisor and intermediaries
Conclusions
The interest in credit among the SME people groups in Pakistan has been hopeless because of a
scope of variables remembering a falloff for homegrown interest, absence of customer certainty,
right data and inheritance obligation levels. Surely, the low degree of interest for credit presently
become a lot more prominent issue for SMEs than the flexibly of credit, in spite of the fact that
the nature and volume of SME-explicit plans and assets has expanded altogether in the period
since 2011.
The capital structure market and financial situation of SMEs in the state have a lopsided
dependence on banks for their subsidizing needs
An absence of speculation is conceivably harming SMEs businesses. The economy of Pakistan
is overwhelmed by SMEs. Most of these SMEs are the miniature SMEs with low degrees of
turnover and work force. A still critical extent of these SMEs are focussed on endurance or
adjustment not on development, all things considered, are not searching for development or
improvement capital from any money source. An absence of Investment in a business eventually
harms that business and consequently speaks to a fundamental and long haul danger to the
overall economy of Pakistan.
A larger part of SMEs accept that banks are not loaning to small businesses, just a small number
of SMEs accept that banks are loaning to the small businesses. Decrease in the SME credit
23

lOMoARcPSD|18115000
request is certainly not a positive sign and shows business person trust isn't building. Share of
the SMEs that didn't have any significant bearing for the banking give the purpose behind not
holding a candle to the current situation was that they needn't to be bothered with bank money.
This is a further sign of SMEs staying wary and depending on other account sources than bank
money for development.
By far most of respondents, said the Government isn't doing what's necessary to establish a
gainful and reasonable business climate, with the two greatest issues referred to being
admittance to credit and formality.
Recommendations
The suggestions in this study are that there is a requirement for specific spotlight on the most
proficient method to support these specific new organizations and new businesses to
acknowledge what they have and their maximum capacity to accomplish huge size of contrast
and become a significant global business in the market over the world.
Presentation of new guidelines about the straightforwardness of the application cycle should be
positive which furnish them with explanations behind credit decreases more explicit to their
application the same number of uses are dismissed by establishment without any reasons and
greater part of SMEs who have been declined bank account can't help contradicting the reasons
given for the refusal.
The further suggestion in this investigation are that SMEs and their separate specific delegate
organizations must be educated about the specific likely serious ramifications for bank credit
move in the specific SME area. Speciûcally, it is likewise been suggested that a more prominent
requirement for exchange and conversation between the banking and money area and the SME
agent establishments, as the most sensible data approach to scatter the significant changes in
ûnancial markets. Pakistani SMEs' delegate bodies ought to proactively create master
organizations to both disperse this imperative data and counsel their SME supporters. The
SMEs' agent bodies (Tajir Unions) likewise assume a critical function in instructing and giving
data to the SMEs about various backings accessible.
The Government ought to likewise consider a development of the Microfinance advances plot
limit as this would give simpler admittance to back. An expansion in the breaking point will
24

lOMoARcPSD|18115000
probably additionally require the term to be stretched out past the current 3-5 years to guarantee
that reimbursement levels are moderate.
An absence of information on elective financing choice is hindering the improvement of a more
different subsidizing scene and the ensuing utilization of more suitable and less expensive
financing choices. Not exclusively is there an over dependence on bank subsidizing however
nearby SMEs are additionally more dependent on momentary account, specifically overdrafts
and exchange credit.
All banks should exertion to furnish their SME clients with a composed and clear explanation
concerning why their proper application for credit has not been acknowledged. The clarification
that is given is commonly gotten from an expert framework rundown of reasons and doesn't
give satisfactory data much of the time to the SMEs. Banks ought to likewise present speedier
choice on smaller advances additionally composed clarification ought to incorporate some
component of coordinating the SME to other more conceivable elective account sources.
Work is needed to urge SMEs to proactively and officially apply for credit most importantly, it
is significant that SMEs are made mindful by banks that a dismissed application doesn't bring
about a negative FICO assessment
SMEs additionally need to secure the budgetary and improvement aptitudes appropriate to the
current financial climate. Some freely subsidized, handy instructive projects ought to be made
accessible in Pakistan to help SMEs, particularly at the miniature/smaller end. The focal point
of such projects incorporate
• The Preparation of Business Plans

• Preparation of income for practical businesses
• Restructuring of reports
• Negotiating with banks
• Matching account needs with money sources
• Analysis of their account needs
• Management of their working capital
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Banks ought to urge SMEs to officially apply for credit or, at any rate, direct them to assistance
uphold administrations inside the bank to help them with their application. This is a model that
has been received effectively in France where nearby middle people offer help to SMEs in the
culmination of their credit applications.
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REFERENCES
1- Ang, J. (1992), <On the theory of ûnance for privately held ûrms=, The Journal of Small
Business Finance, Vol. 1, pp. 185-203.
2- Financial education in small ethnic minority businesses in the UK Javed Hussain and Harry
Matlay.
3- Ang, James S. (1992) "On the Theory of Finance for Privately Held Firms, "Journal of Small
Business Finance: Vol. 1: Iss. 3, pp. 185-203. Available
at:http://digitalcommons.pepperdine.edu/jef/vol1/iss3/1.
4- David Irwin Jonathan M. Scott, (2010),"Barriers faced by SMEs in raising bank finance",
International Journal of Entrepreneurial Behavior & Research, Vol. 16 Iss 3 pp. 245 – 259.
5- Dermot Carey Antoinette Flynn, (2005),"Is bank finance the Achilles' heel of Irish SMEs?"
Journal of European Industrial Training, Vol. 29 Iss 9 pp. 712 – 729.
6- Access To Finance For Growth For SMEs On The ISLAND OF IRELAND December 2013
(Inter trade Ireland).
7- Nikolaos Daskalakis Robin Jarvis Emmanouil Schizas, (2013),"Financing practices and

preferences for micro and small firms", Journal of Small Business and Enterprise
Development, Vol. 20 Iss 1 pp. 80 – 101.
8- Anahi Briozzo Hernán Vigier, (2014),"The role of personal loans in the financing of SMEs",
Academia Revista Latinoamericana de Administración, Vol. 27 Iss 2 pp. 209 – 225.
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lOMoARcPSD|18115000
9- Regan Lam, Suzan Burton, (2006),"SME banking loyalty (and disloyalty): a qualitative
study in Hong Kong", International Journal of Bank Marketing, Vol. 24 Iss 1 pp.
10- Elisabeth Paulet Miia Parnaudeau Tamym Abdessemed, (2014),"The SME struggle for
financing: a clampdown in European banks postcrisis", Journal of Business Strategy.
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lOMoARcPSD|18115000
APPENDIX
Questionnaire
1. SMEs use less external ûnance, especially bank ûnance.

SA A U D SD
2. Most funding option used by SMEs is Over Draft.

SA A U D SD
3. SMEs Used personal Loans in their Business

SA A U D SD
4. Refusal Rate of credit to SMEs is very high

SA A U D SD
5. Lack of bank credit had major devastating impact on the businesses

SA A U D SD
6. Many SMEs do not apply for a loan despite requiring credit

SA A U D SD
7. Bank branch office always hesitate in giving out loans to SMEs

SA A U D SD
8. Many Requirements and Personnel Guarantee is required for any amount of loan
SA A U D SD
9. To secure Business loan in 1st two years of business is not easy

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lOMoARcPSD|18115000
SA A U D SD
10. SMEs can expand their Business and no of employee if availability of loan is there
SA A U D SD
11. Lending rates in Pakistan are very high.

SA A U D SD
• Open Questions
1- What is your perception on Banks willingness to provide credit to SMEs especially for
the startup?
2- If you have been given easy access to finance what improvements, you can see in
business and how it contribute in national economy?
3- What level of satisfaction you get from government policies and schemes to helping out
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PROBLEMS OF FINANCING SMALL-SCALE

SYED MUHAMMAD AHMED

Ms. Marrium Hurr

Department of Management Sciences

COMSATS University Islamabad, Lahore Campus

In Partial Fulfillment of the Requirements for

BACHELOR OF SCIENCES IN ACCOUNTING AND FINANCE (BSAF)

Submission Date: November 20, 2020

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Name of Student: Syed Muhammad Ahmed

Date: November 20, 2020

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The project work report entitled PROBLEMS OF FINANCING SMALL SCALE

Name of Supervisor: Ms. Marrium Hurr

Date: November 20, 2020

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Feed Back Sheet (Supervisor)

Context/ background &

Creativity and Originality

Ability to Plan & Use of

Level of Writing Skill (Use

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Endorsement by Head of Department

Name of Head of Department: Dr. Rana Nadir Idrees

Date: November 20, 2020

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Problem statement and Research Questions

Scope and significance

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CHAPTER 2 - LITERATURE REVIEW

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Financial Hierarchy and Financial Growth Cycle of SMEs

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CHAPTER 3 – PROJECT METHODOLOGY

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CHAPTER 4 - DATA PRESENTATION & DISCUSSION

Interview Based Questionnaire – Primary Data

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Closed Question Data

Q1. SMEs use less external ûnance, especially bank ûnance.

Q2. Most frequent funding used by SMEs is Overdraft.

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Q3. SMEs used personal loans in their Business.

Q4. Refusal rate of credit to SMEs is very high.

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Q11. Lending rates in Pakistan are very high.

Figure 4.11 Lending rates in Pakistan is very high

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