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Small Business Finance Corporation — the SME vision

One can expect lot of challenges in the future yet there has been a movement in the right direction

By Haider Tanveer
Jan 29 - Feb 04, 2001

A lot has been said and written about the importance of Small & Medium Enterprises (SMEs). We all know that SMEs form the backbone of any economy. This is not only evident from the developed world i.e. Japan, USA and Germany, but also from the developing countries like Malaysia, Thailand & India. Concrete steps for this purpose have been taken in recent times by the government to give SMEs their due importance and a more coherent and effective approach has been initiated. The Government's economic agenda attaches high importance to the development of Small & Medium Enterprises. Small & Medium Enterprise Development Authority (SMEDA), a federal body for SME support services & policy implementation is being strengthened. Moreover, the government entrusted Small Business Finance Corporation (SBFC) the challenging task of becoming the premier financing institution of the country for boosting SMEs. This responsibility makes SBFC the most important Development Finance Institution (DFI) catering to an important sector fundamental for the revival of the economy. SBFC took this challenge and with its new vision, is poised to play the role for the economic revival of our beloved homeland.

Inception: Small Business Finance Corporation (SBFC) was established by the Government of Pakistan through an Act of Parliament in 1972. The objective was to assist small entrepreneurs for self-employment and for setting up cottage industry. Since its inception, SBFC has been used as a platform for disbursing funds to the masses on relatively easy terms. The emphasis remained on self-employment schemes. Although the concept wasn't bad, but it fell victim to corruption and malpractices at both the borrowers and lenders end. The lending was exceptionally tilted towards the employment schemes leaving only around 2% for the Small Scale Industries (SSIs)/projects.

Failures: SBFC over a period of time has failed to deliver what it actually was supposed to do i.e. help small businesses. On the other hand it did not produce sustainable employment opportunities. The loan portfolio (mostly unsecured/with inadequate collateral) remained micro in nature with no commercial orientation. Also the SBFC act restricted diversification of loan portfolio, especially in SME businesses. Furthermore, mismanagement and corruption played a big role in taking the corporation to its current situation.

Smes the new task for sbfc: it is encouraging to note that the government is now seriously making efforts to develop the SME sector. The economic agenda, pointed out SMEs as one of the four target sectors of government (the other three being Agriculture, IT and Oil & Gas). It was decided that SBFC will be geared to cater to the needs of SME sector and the portfolio was transferred to the new management, which has considerable experience in SMEs, institutional building and restructuring. It is definitely a step in right direction and in the interest of our country.

SME scenario in Pakistan: SMEs in Pakistan provide employment to over 75% of the labour force; contribute 40% towards GDP and more than 50% towards export earnings. Despite the role that SMEs play in economic development and growth, they have not been given due importance. One of the problems being faced by this sector is that it does not have access to formal sources of financing (their formal credit usage is around 12%). Interestingly enough, compared to the high default rate of 65% among large concerns, SMEs default rate is only 15%. As such, SMEs are still dependent on the more expensive informal financing avenues. Realizing this dilemma, SBFC is gearing itself to focus on the financing needs of the small and medium enterprises.

Management with a new vision: The current management took over the affairs of the corporation about ten months ago and undertook an exercise to assess the situation, identify problems & devise remedial measures for an institutional turnaround. In the last ten months, the management has been trying to steer the corporation away from troubled waters and has been able to bring SBFC to a level where its better equipped to serve the SME sector of the country.

Findings/defficiencies: The management carried out an exercise to identify the deficiencies in the existing setup. A quick assessment revealed the following:

  • Deviation from original line of business (project financing only 2% of the loan portfolio)

  • Poor financial health with weak balance sheet

  • Poor loan portfolio quality (around 70% infected)

  • Unreliable portfolio information

  • MIS/IT — Virtually non-existent (manual record keeping)

  • Ineffective organization/management structure (1400 employees at 96 branches)

  • Ineffective internal control & procedures

  • No Risk Management function (lending was done without proper due diligence)

  • Poor quality of Human Resources

  • Poor work ethics

  • No training & development culture

  • Poor infrastructure

  • Limitations due to legal framework

In a nutshell it was a daunting task ahead to revamp the institution.

Mission statement: The first step taken was, to be very clear about the business of SBFC. The new mission is:

"To be a premiere financial institution providing medium & long-term, assistance (financial & technical) for the development of SMEs in Pakistan. Thus contributing to the growth of local entrepreneurs, developing export markets and providing employment opportunities".

Reorganization of SBFC
Strengthening recoveries:
Recovery effort has been strengthened by offering remission packages to the borrowers and better incentive packages for the recovery teams. The results have shown much improvement. Focused efforts on recovery of stuck up loans, has been made a priority feature in the corporation.

Rationalization of human resources/branch network: The total number of branches has been reduced from 96 to 63. Some branches were mere cost centers burdening SBFC. While rationalizing the branch network, it was made sure to have branches in areas having concentration of SMEs. Modern SME branches will be well equipped to serve the SME sector. In the new setup, there is head office, provincial offices and the branches. Effort has been made to cut the overheads and have the facilities to the minimum.

Cases against corrupt people were moved and bold decisions were taken to suspend them without getting influenced by external pressures. Stern actions were taken to check irregularities that became norm in the past. All this sifted out most of the bad elements in the corporation. Moreover, an attractive Voluntary Self-separation Scheme (VSS) was offered to all the employees of the corporation. In the first phase, around 271 people opted for it. The second VSS is expected soon. This is being done to rationalize the manpower, which will not be required in the future role of corporation. It is worth mentioning that a very small number of people were hired (around 20) on professional ground from the private sector. The emphasis is on training existing people and utilizing the HR resources to the max.

Human resources/training: Separate HR department was setup with a mission to upgrade the existing skills of employees and induce modern HR concepts into SBFC. Training workshop for SBFC Branch Managers, a seminar on 'Change Management' and two workshops on 'SME Financing' have so far been arranged in which SBFC employees were instructed about SMEs. These training programs have been well received by the existing employees and will alleviate their capabilities. In addition an SBFC newsletter has also been started. This has just been another way of providing an open culture and challenging the status quo.

Information technology/MIS: A separate IT department has been set up with a view to disseminate IT knowledge/support services to SBFC employees. As a first step, data-capturing exercise was organized to capture all the borrowers data and bring it online. This was successfully completed recently. Now it will be easy to analyze the data and generate required reports for the management, thus giving the real picture of portfolio. Loan software has also been developed for the branches. The IT department was also instrumental in developing the SBFC web site, which will be launched soon.

To introduce automation, a plan was made to procure the computers well in advance. As of now, the hardware has been installed at the SBFC head office/provincial offices and the networking will be in place shortly. The vision is to have all the offices online.

Corporate image building: In order to build the corporate image of SBFC it was decided to shift the offices to decent facilities, as the condition of the current facilities do not relate to the new vision of SBFC. In this regard, Head Office, Karachi and Lahore Provincial offices have already been shifted. The movement of other provincial offices will be in the near future. The new facilities are provided with the state of the art equipment and layout and effort is being done to provide a conducive and worker friendly environment. From workstations to Pentium III machines, all is done to raise the standard of SBFC.

Furthermore, the management is trying its best to have a progressive and positive attitude towards the employees and clients of SBFC. This attitude is being transferred to grass root level and is producing good results while developing the image of SBFC in the eyes of general public.

Strategic alliances are another way, which the management choose to upgrade SBFCs image. One such alliance was done with Askari Leasing (country's largest leasing company) to jointly make efforts for the development and support of Small & Medium Enterprisers. Talks are underway to form more alliances with other institutions for co-financing activities.

Introduction of treasury function: A treasury division of SBFC has been set up in Karachi which is responsible for the management of cash and surplus funds. It is being operated as a profit center. The division is investing funds in government securities and placing funds with other financial institutions. It is also responsible to structure non-funded transactions and manage the liquidity of the corporation. By introducing the treasury function, SBFC is emerging as a major player in the interbank money market.

Legal department: An in house legal consultant was hired from a reputed firm. This not only helped in speeding the inquiries against corrupt officials, but also in taking concrete steps against the limitations in the Act. As SBFC has outlined an aggressive strategy for itself to finance SMEs in the country, certain amendments in its original act are required. It is felt that the limitation imposed by the Act in 1975, is not conducive to the market demands. Under its new mandate, SBFC will extend financial assistance to projects up to a cost of Rs.100 million.

Establishment of risk Management Division: Establishment of Risk Management Division (RMD) was yet another step to revitalize SBFC operations. RMD was made responsible for developing prudent lending practices for SBFC's future lending. This new division tackles issues like a comprehensive credit manual, SME specific application forms and the requisite documentation. Hiring for RMD/Credit was done on professional grounds. The emphasis has been mainly on internal hiring and training. The RMD took SBFC to a level where now it's ready for fresh lending. Multiple lending programmes have already been developed and individual loan proposals from all over the country are being entertained.

Financial products:
SBFC is a pioneer among DFIs to provide financial assistance to this sector in recent times. Since the exports of Pakistani fish to European countries declined after restrictions by the EU due to un-hygienic preservation and handling methods, the Karachi Fisheries Harbor Authority strictly enforced regulations to modify the fish holds of the traditional trawlers. After a detailed study, SBFC has already announced a package for the fishermen to:

a) Modify fish holds
b) Meet working capital needs

The financing package has been formally announced and published in the newspapers. SBFC's objective is to assist the sector through providing loans to poor fishermen. The loan for modification of boats is up to Rs. 400,000/-. To facilitate the fishermen, revolving credit limits are allowed to meet working capital needs.

Dates: Dates are grown in over 40 countries of the world and Pakistan now ranks as the fifth largest exporter. Its forex earnings have been US$ 25-30 million annually, while currently exporting approx. 65,000 tons or 11% of total annual production of 600,000 tons. Since there is ample scope of boosting the exports of dates, SBFC has identified this sector to earn valuable foreign exchange. In recent years, value has been added through packaging, processing, preservatives paste syrup, chocolate etc. Currently we have been facing losses in the quality of our dates. Its packaging too, does not meet international standards. Thus to assist the sector, SBFC targeted the area where the losses can significantly be reduced, and foreign exchange earnings are increased. Two areas have been identified.

a) The stage when unripened date is ripened through costly acid unhygienic/traditional methods which should be replaced by simplified, hygienic and efficient procedures.

b) Processing and packaging of dates attracting the hygienic customers in international markets.

The date growers, growers-cum processors, contractors and the processors would be eligible for SBFC loan up to Rs. 1,500,000/-. The loan would be utilized either to purchase machinery/equipment for washing/drying, processing & packaging of dates or to meet working capital requirements, constructing storage facilities and developing new date palm orchids through pollination and propagation will also receive SBFC assistance.

Information Technology: I.T. is one of those sectors that have tremendous potential and commercial viability for investment opportunities. Realizing the importance of this sector, SBFC has launched a plan to provide financial assistance to those professionals who want to establish I.T. educational institutions, software development houses, Internet service providers, cyber cafes and IT hardware manufacturing activities.

Other sectors: SBFC financing programmes for other sectors like CNG, gems and precious stones, cotton ginning, and textile apparel, marble processing, etc. are in the process of study and preparation and shall be announced shortly. Besides programme lending, SBFC is ready to finance any viable/profitable project. Currently SBFC can lend upto Rs. 1.5 million for a project whose project cost excluding the value of land does not exceed Rs. 5.0 million.

Future vision: Small Business Finance Corporation is working to be the SME friendly institution of the future. Acting on its mission statement, SBFC in future will not only provide financial assistance but also technical assistance to its clients. The specialists for providing various technical services have already been placed on SBFC panel.

Client friendly attitude: The future SBFC will be a client friendly lending institution. Every thing from minimum loan documentation to the in house sector specialists and to a range of service providers will be geared to meet/satisfy the client. The emphasis will not only be to meet the financial needs of the clients, but actually to become part of his/her business in solving the problems and making it profitable.

Financial assistance:
Individual projects: 
For financial assistance to individual projects, SBFC will finance:

1) Up to 50% of the total project cost (TPC) of small businesses, defined as businesses with TPC of up to Rs. 20 million; and

2) Up to 30% of the total project cost (TPC) of the medium sized businesses, with TPC of up to Rs. 100 million.

Syndicate financing: SBFC is envisaging cooperation and strategic alliances with other financial institutions to co-finance SME projects. The objective for these arrangements are:

a) To act as a catalyst to attract other financiers to promote and support the SME sector for the economic revival of the country;

b) To bring SME projects into the arena of formal financial sector and economic systems;

c) To increase the credibility of SMEs for future bank borrowings;

d) To enable SBFC to share and disseminate resources and information for the mutual benefit and growth of the organization;

e) To diversify financing risks;

f) To diversify and increase credit portfolio.

Sectoral lending: In a new role of SBFC, Sectoral Lending will be done based on 'Program Lending' approach. Emphasis is being given to those sectors that boost the country's exports. The sectors identified for SBFC's financial assistance are textile apparels, cotton ginning, oil & gas, information technology, fisheries, dates, light engineering etc. After a detailed study of each sector, financial packages are being prepared. Also, an 'IT specific Venture Capital Fund' will be formed, proposals for which have already been received.

Technical assistance: SBFC is targeting its policies at improving the structure and international competitiveness of SMEs so as to keep ahead of changes and challenges in the new era in which they are expected to play a leading role. Efforts are being made to strengthen the management of the existing SMEs and to promote the start-up of new, technologically viable SMEs to tackle the ever-intensifying international pressure.

SBFC recognizes the fact that providing financial assistance alone to the SME sector is meaningless, as a large number of SMEs require considerable hand holding before they can develop the capacity to borrow. Such hand holding ranges from SMEs having the ability to access information on markets and acquire technology to upgrade their processes to preparing a bankable business proposal. SBFC has now on its panel, specialists in the fields of Product Identification/Innovation, Product Positioning, Human Resources, Engineering, Training, Quality Assurance, Production Processes, Procurement, Accounting/Auditing, Information Systems, Marketing/Research, and General Management. It is this hand holding, which will be available to the SBFC clients on a very nominal fees on need basis. Thus well be offering 'Packaged Solutions' to our clients.

It is truly believed that the management has come a long way in less than a year, and although one can expect lot of challenges in the future yet there has been a movement in the right direction. Once a platform for SME financing is in place, this will make the credit available to SMEs, which have been the victim of borrowing from informal sector at exorbitant rates.

A massive restructuring exercise, carried out during the last few months in the organizational structure and human resource development, internal controls and procedures, process re-engineering and financial product development and accounting has resulted in a complete turn-around in the institution, which would hopefully be reflected in its future performance.

The author is Financial Analyst and S. A. To MD Small Business Finance Corporation