M J Hayat
LAHORE: The State Bank of Pakistan (SBP) should make a framework which should allow the large and well established firms and companies to enter into subcontracting arrangements with SMEs in their own
respective areas of specialization.
This was stated Rehmatullah Javed, an expert on SMEs and a businessman and Ambassador SARCC while talking to Daily The Business here on Saturday.
As the track record, relationship and creditworthiness of these large
companies with the banks are already known to the banks, these
companies can leverage this capacity for those SMEs which are the
suppliers of goods and services to them, he said adding that the large
companies acquire adequate information about these sub-contractors
through their dealings with them and this information can then be
either shared with the banks for direct lending or guarantee or surety
or indirectly for on-lending to these sub-contractors.
Rehmatullah Javed intermediation has become an integral part of
microfinancing, there is a need for similar arrangement for SME sector
besides the intermediary which can be a public, private or
non-governmental entity can provide services such as technical
know-how, marketing, managerial skills, accounting and book keeping,
preparation of basic financial statements.
He said that the SMEs may pay for these services as it will improve
the bankability of their proposals and requests for fixed capital as
well as working capital.
Javed was of the view that SBP should incentivize the private sector
to set up SMEs Credit Information Bureau which will assemble the data
and current status of small borrowers.
The information flows to the banks based on this source will improve
their credit risk appraisal capacity and ultimately reduce the
non-performing loans in the portfolio, he highlighted.
“A specialized Credit Rating Agency should be formed for SMEs just
like the SMERA Ratings Limited in India. Credit rating agency is a
good option for small and medium enterprises (SMEs) given the problems
they face in seeking finance.
“Rating agencies assess a firm’s financial viability and capability to
honour business obligations, provide an insight into its sales,
operational and financial composition, thereby assessing the risk
element, and highlights the overall health of the enterprise. They
also benchmark its performance within the industry,” he said.
Another advantage of SMEs Credit Rating is that the highlighting of
strengths and weaknesses acts as a trigger for self-correction. A
regular renewal of ratings not only helps improve a firm’s performance
but also builds confidence within the lender fraternity and trading
channel, he stated.
• There is a need to make SMEs more aware of the Islamic
Banking Products, he said, adding that owners and managers of a large
number of SMEs have a deeper craving for Shariah-compliant financial
services than large businesses and companies.
The conventional banking system has done little to satisfy the
borrowing needs of SMEs, thereby there lies a huge potential for
Islamic banks to fill the gap.
He said the share of SMEs in overall financing portfolio of Islamic
Banks is still less than 5%. The details of Islamic Banking products
for SMEs are available in Urdu but these are full with Shariah related
jargon and owners and managers of SMEs don’t understand them.
The best way to promote Islamic financing of SMEs is to train branch
level bank staff in communicating the specifics of a financial product
in simple language with potential borrowers, Javed highlighted.
SBP should incentivize the private sector for opening SME Banks. There
is only one Bank and that too in the Government sector that is solely
for the financing needs of SMEs. The number of branches of the SME
Bank should also be increased, the expert and the businessman held.
Further, an entity has to fulfill both the criteria of number of
employees and sales turnover for categorization as small enterprise,
he underscored, saying that in cases where an entity fulfils one
parameter of SE and its second parameter falls within the range
prescribed for medium enterprise (ME) or above the upper limit
prescribed for ME, then the subject entity shall be classified as ME
or commercial/corporate entity as the case may be.
Answering to a question he said that as an engine of growth SMEs have
great potential for employment creation and are also a major source of
innovation due to their distinct flexibility characteristic.
He said that SMEs have got greater flexibility and high turnover with
an easy entry and exit characteristic leading to larger number of SMEs
in an economy. Consequently the chances of greater efficiency become
higher through competition among large number of enterprises. SMEs not
only complete the supply chain but also work as nursery for larger
firms. Moreover, these enterprises as sub-contractors of large firms
play a critical role in the efficient working of large firms.
To a query he said that SMEs are considered relatively more labour
intensive and their employment creation characteristic make them
critical for poverty reduction and equitable distribution of
resources. These enterprises are considered an important source of
employment for young, unskilled and women. Therefore SMEs can
contribute significantly towards the growth of any economy.
Collectively, SMEs in Pakistan provide about 78 percent of
nonagricultural employment he said, adding that in precise numbers,
they give employment to more than 21 million people.
“The contribution of Small and Medium Industries (SMEs) to Pakistan’s
economy, employment absorption, and poverty alleviation, can be gauged
from the fact that 90 % of all private sector manufacturing units
employ less than 99 persons,” he said.
Their impact is extremely high in the manufacturing sector, even when
most of this may be employment generation at ‘subsistence levels, he
was of the view, he highlighted.
Several issues affect the SME sector in Pakistan while some of these
are institutional and others are endemic to the manufacturing sector
as a whole and are caused by problems of transformation from a low
technology / low skill environment, personalized / inefficient
management and organization structures, out of tune with knowledge
based economies of the 21st century, Javed concluded.