‘Banking cover must be extended to SMEs’

By Kazim Alam, The Express Tribune 

KARACHI: Only 7% of small and medium-sized enterprises (SMEs) borrow from banks, while 40% of them stay completely out of the banking network by choosing not to open bank accounts, JS Bank CEO Kalimur Rahman said on Wednesday.

Speaking on SME financing extended by commercial banks at the 6th Pakistan SME Conference, 2012, Rahman said 37% of the SME portfolio of all banks was currently non-performing. “But these non-performing loans do not seem like a big problem for banks because their SME exposure is too small,” he said.

Bank credit to SMEs dropped from Rs437 billion in 2007, to Rs248 billion in 2012 – a decline of 43% over four years. The share of loans extended to SMEs in total advances extended by banks has decreased from 16% in 2007 to less than 8% in 2012.

“Although the decline can partly be attributed to adverse economic conditions during the period and growth in non-performing loans, a more risk-averse posture of banks remains a major factor responsible for their low exposure to SMEs,” noted State Bank of Pakistan (SBP) Deputy Governor Kazi Abdul Muktadir, while addressing the conference.

Referring to the SBP’s Prudential Regulations for SMEs, Muktadir added that the central bank did not make it mandatory for banks to require collateral for SME financing. “SBP regulations allow banks to take cash flow generation as the basis for loan approval,” he stated.

In an apparent response to the SBP deputy governor’s reference to the idea that banks should consider approving loans for SMEs based on the latter’s cash flows, Rahman said cash flow records of most SMEs were ‘unreliable’ due to the little attention small and medium-sized businesses paid to the documentation of their operations.

“They lack the expertise to document their transactions properly. Besides, there’s a general tendency in our society not to pay taxes. People avoid documentation also to get away from paying taxes,” Rahman said.

According to the State Bank of Pakistan, the SME sector contributes 30% to the country’s GDP and employs more than 70% of the non-agricultural workforce. It also accounts for 35% of value addition in the manufacturing industry and generates 25% in export earnings.

Published in The Express Tribune, September 6, 2012.


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