A detail analysis on SME issues in Pakistan and recommendations on how to resolve financial issues. Understand how financial independence can be achieved through strategic financial planning. amerq.com

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ACCESS TO FINANCE:
PRACTICAL ISSUES FOR SMEs IN PAKISTAN

2. 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

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Access to Finance
• Multi faceted Issue
• No simple solution
• Integrated approach is
required

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SME LEVEL
Informal
Economy
The Banks
Accounting Practices
Banking Sector Issues
ACCESS TO FINANCE
Multifaceted Problem
Governments
Tax Issues
Collateral
Infrastructure
Legal
Framework
Human
Resources
Interest
Rates

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What is the real problem behind this
issue?

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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