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An interview with Kaiser H. Naseem, President SME Bank

Feb-04 - Feb-10, 2002

The most significant initiative taken by the government for the development of the SMEs is the establishment of Small and Medium Enterprise (SME) Bank to arrange speedy financial assistance for them. It was felt that the growth of SMEs was mainly hampered by non-availability of credit facilities. In the past, two financial institutions, namely the Small Business Finance Corporation (SBFC) and Regional Development Finance Corporation (RDFC) were set up by the government of Pakistan to specially cater to the needs of small business. Like many other institutions in the public sector, these two institutions, conceptually very sound, fell prey to political interference, bureaucratic rigmarole, non-professional management and consequent corruption. Loans were granted to non-deserving persons to appease the political supporters without any consideration of merit. These malpractices at the top led to both corruption and inefficiency at the lower level. Soon, both the organizations became a liability in the form of huge non-performing loans; they ceased to be of any help to SMEs.

For ensuring speedy financial support to the approved project, SME Bank has been established under the Companies Ordinance, 1984, as a public limited company with initial paid-up capital of Rs. 1 billion. The operations of the bank commenced from January 1st, 2002. The bank came into being after 20 months of hard work that involved major revamping of the Small Business Finance Corporation (SBFC) and finally its amalgamation with the RDFC (Regional Development Finance Corporation).

Mr. Kaiser Naseem, a dynamic professional banker has been appointed President and Chief Executive of the new bank in view of his outstanding performance as Head of Small Business Finance Corporation (SBFC). During his 20 months as SBFC Chief, Mr. Naseem concentrated on the recovery of outstanding loans, particularly non-performing loans. Through his tireless efforts, he was able to bring down the infected portfolio from Rs. 13 billion to Rs. 8 billion. He also successfully carried out restructuring of SBFC and cut down its administrative expenses considerably. This, coupled with other radical and non-traditional initiatives, provided the institutional capacity to deliver financial services more effectively.

Lots of hopes are pinned on the SMEs Bank which is now all set to play a pivotal role in the much needed development of small and medium enterprises in the country. SME Bank, which has been established as a result of merger of SBFC and RDFC, is being described as a revolutionary idea. The bank has started functioning with the missionary zeal to support and develop SME sector in Pakistan by providing financial and technical assistance on sustainable basis.

Talking to this correspondent, the Chief of SME Bank, Mr. Kaiser Naseem sounded very optimistic about the success of this new enterprise. He said that the bank is free from political and bureaucratic interference. Decisions are now taken purely on merit, within the shortest possible time. In order to ensure proper and productive utilization of the Banks financing, Business Support Services will also be provided to eligible SMEs. This is also a new concept but something which is practiced successfully for the development of SMEs in several developed and developing countries. The credit appraisal process is also being shortened keeping in view the requirements of SMEs. A Go or No-go decision can now be obtained within a week and the entire processing is completed within a couple of months. However, the target is to complete the entire cycle within 15 days.

Following are the eight specific questions asked by PAGE and the answers from President of SME Bank, Mr. Kaiser Naseem.

Q: Small Business Finance Corporation (SBFC) and Regional Development Finance Corporation (RDFC) were set up by the Government in the past more or less for the same purpose for which the present Government has set up SME Bank after merging SBFC and RDFC. Both these organizations failed to achieve their objective and later became a liability for the Government.

What were the reasons for their failure and what are the grounds for being so optimistic about the future performance of SME Bank especially when it is carrying the dead wood of the two defunct organizations?

What plan of action have you chalked out to avoid the pitfalls which ultimately caused the demise of the two organizations?

Ans: Although the Small Business Finance Corporation (SBFC) and Regional Development Finance Corporation (RDFC) were established with the purpose of assisting small and medium enterprises in the country, both institutions failed to do so and actually ended up as being liabilities on the nation's exchequer. The reasons for this state of affairs are many but can be summarized as follows:

i. Government and political interference.
ii. Lack of adequate skills in these institutions.
iii. Weak internal controls and procedures.
iv. Rampant corruption and other integrity issues.

SME Bank has been established with the primary focus on assisting SMEs in Pakistan. Although the institution has been established on the foundations of the SBFC and RDFC through a merger process, measures have been taken to address all the above issues in order to build strong institutional capacities for delivering services effectively, efficiently and honestly. It is through these measures that a strong institution can be built, which would not be vulnerable to outside interference or to corrupt practices from within. Only such an institution can deliver the services required by the SME sector.

Q: All over the world, there seems to be a consensus that state owned financial institutions can not deliver quality financial services. Most policy makers in the present government seem to share this view. Why this venture again in the public sector?

Ans: It is true that Government owned and managed financial institutions in Pakistan, as indeed in other parts of the world, have not been able to deliver services efficiently. It is with this understanding that the Government of Pakistan has now decided to reduce the number of Government owned institutions and to exit from their ownership. However, it must also be remembered that the role of Government is to regulate and monitor a uniform growth for all sectors of the economy. In this context, the SMEs in Pakistan have lacked access to financial assistance from formal financing sources. Private sector financial institutions have failed to deliver effective financing to SMEs. As such, there is a role for the Government to intervene for a short period of time to ensure that SMEs can access credit. Hence, the SME Bank has been formed with Government ownership. However, the Government is conscious of the fact that this intervention would be for a short period of time and a plan has already been chalked out for the Government to exit from the SME Bank and privatize it within the next three years.

Q: What are the liabilities and assets of SBFC and RDFC which SME Bank has inherited?

Ans: Both SBFC and RDFC had accumulated a large portfolio of non-performing debt amounting to approximately Rs. 16 billion. These liabilities now form part of the SME Bank but are being focused on for fast recovery. It is worthwhile mentioning that the entire restructuring of SBFC and RDFC and the ultimate merger of the two institutions has taken place without any additional injection of funds by the Government of Pakistan. This was made possible by management through focused and effective recovery efforts. It may also be mentioned that the restructuring of the organization entailed VSS payments, hiring of additional staff at market salaries, purchase of computers, hardware and software and putting in place internal controls and procedures.

Q: You were the Chief Executive of SBFC for over 20 months. What was its state of financial affairs when you took over and the day it was no more because of merger in SME Bank? Were any fresh loans sanctioned by SBFC during your stewardship?

Ans: As already mentioned by me, the financial state of affairs of SBFC, 20 months ago, was pathetic. However, because of the actions taken by management, as already outlined by me, the institution was able to commence lending operations in August, 2001. Today, an amount of approximately Rs. 120 million has been disbursed to more than 300 SMEs. This provides employment to more than 1500 persons.

Q: SME Bank has a paid up capital of Rs. 1 billion and an authorized capital of Rs. 10 billion. How it compares with SBFC and RDFC? Is that capital injected? Who are the sponsors?

Ans: The SME Bank will have a paid-up capital of Rs. 1 billion and will be owned by the Government of Pakistan.

Q: Don't you think the capital base is too narrow for the task assigned to you especially in view of the claims recently made by MD HBL and Leasing Companies that they had provided credit facilities to SMEs to the tune of Rs. 12 billion and Rs. 25 billion respectively?

Ans: It is correct to say that the SME Bank alone will not be able to cater to the entire financing requirements of Pakistan's SMEs. It is one of the objectives of the SME Bank to act as a catalyst in encouraging and attracting other private sector financing institutions to lend to SMEs. According to the State Bank of Pakistan, the total annual credit needs of Pakistan's SMEs is estimated at Rs. 20 billion. We would, at best, be targeting not more than 20 to 25% of this market over the next 3-5 years. It is, therefore, necessary that other financial institutions also start lending to the SMEs, at the soonest.

Q: Will SME bank provide credit facilities to only those enterprises which have been identified by SMEDA or new projects approved by your experts. A large number of viable industrial units are lying closed because of shortage of working capital. Will SME Bank come to their rescue?

Ans: The role of SMEDA is to provide business development services to SMEs in order to make them bankable and also able to use any financial assistance productively. We work closely with SMEDA in order to identify SMEs eligible for our financing. However, we ourselves will also be providing business support services to enhance the capacities of SMEs to borrow from us. Similarly, there are several SMEs who are already exporting and they require financial assistance for further development. All these will be focused by us for providing financial and technical assistance.

Q: How do you view your assignment?

Ans: I view this assignment as more than a restructuring of a financial institution. We are involved in restructuring the moral fibre and professionalism of our employees. I found these issues to be the main ones for the collapse of most institutions in this country (integrity issues). Strengthening our human resources will go a long way in strengthening our institutions. It is a mission which I have set out to accomplish.

A banker with a mission

After completing his intermediate education (FSc pre-engineering) in Pakistan, Mr. Kaiser Haneef Naseem studied at the Moscow Institute of Steel and Alloys in Russia from September, 1971 to June, 1978 from where he obtained an MS degree in Metallurgical Engineering. During this period he also completed a one- year course in the Russian Language which he understands, speaks and writes fluently. He later undertook business studies at the Asian Institute of Management in Manila from where he obtained a Masters degree in Management in May, 1984.

Mr. Naseem started his career in July, 1978 at the Pakistan Steel Mills in Karachi where he worked as an Executive Engineer upto July, 1982 and as a Superintending Engineer from July 1982 till June, 1984.

From July 1984 till December 1989 Mr. Naseem worked in the projects division of the National Development Finance Corporation (NDFC) in Karachi, initially as an Assistant Vice President (upto May, 1987) and later as a Vice President.

In January, 1990 Mr. Naseem commenced work for the Bank of Oman in Dubai from where he returned to Pakistan in August, 1991 to establish two financial institutions an investment bank and a leasing company in the private sector for a group of investors. He later headed the leasing company as its first Managing Director till joining the International Finance Corporation in October, 1992.

Mr. Naseem was a member of the first IFC delegation to visit the newly independent states of Central Asia in October, 1992. Since then he has been instrumental in facilitating IFC investments in that region, especially in the capital markets sector and in developing and supporting Small and Medium Enterprises. Mr. Naseem has played a very important developmental role in these countries in terms of educating the private sector on the principals of a free-market economy.

As Managing Director of SBFC, an assignment which he has undertaken as a challenge and as an opportunity to serve his country at a time when his services are much needed, Mr. Naseem brings with him a wide spectrum of international experience. Under his leadership we all look forward to SBFC becoming a vibrant and dynamic organisation.

Mr. Naseem is a member of the Pakistan Engineering Council, Institute of Bankers in Pakistan and the American Society of Metallurgical Engineers.

Mr. Naseem was born in Lahore on March 05, 1956. He is married and has three children.