INDUSTRY

 

SMES CONTRIBUTION VITAL FOR ECONOMIC GROWTH

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Askari Leasing has rapidly achieved a unique leadership position in this area

 

By NAEEM-UD-DIN
May 30 - June 05, 2005
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Last five years policies have resulted in impressive economic growth for Pakistan. Gross domestic product (GDP) growth rate has gone up to over 6 percent and it is being predicted at around 7 percent this year. This remarkable growth is attributed to the growth of Large Scale Manufacturing (LSM), which showed an increase of 15.4% during H1-FY05. Other achievements during the year were decline of fiscal deficit to 4%, fading of current account deficit, increase in foreign direct investment from almost negative to 950 million dollars and increase in foreign exchange reserves from $1 billion to $12 billion. All is now set to make Pakistan the Asia's top ten fastest growing economies as said by the Prime Minister Shaukat Aziz.

A very impressive picture of the Pakistan has been presented now turn around the face of the picture, the Micro Economic Situation. Masses of Pakistan are still facing problems, such as lack of access to education, primary health care, basic infrastructure and employment.

Why masses have not benefited from the impressive economic growth rate? A simple answer is because the engine which is running at micro level is not being fueled the way as it required. As per data provided by SME Bank, SMEs employed 80% of Pakistan's labor force; contribute more than 50% to GDP, and 50% towards export earnings through both direct and indirect exports. This data speaks itself about the importance of SMEs in Pakistan. In contrast to this only 15% SME's, as against 65% LSEs avail credit to the tune of only 12% from the formal financial sector, which indicates the wide gap between the lenders and SMEs. There is a need to reduce this gap as most important hurdle being faced by SMEs is limited capability to generate their own financing resources.

This leads to further problems such as (1) Low technology updation; (2) No expansion and diversification; (3) Procurement of raw material at higher prices and (4) Not able to market their products.

The financial sector can play a very vital role in eliminating this problem. But most lending institutions think that lending to SMEs is risky, so they are biased in favour of large scale business. Therefore, credit entities penalise the risk of their operations through the collection of risk-premium on interest rates or directly by means of credit rationing. Thus reducing the power of the SMEs to avail loans on favourable terms.

As already mentioned SMEs in any country contribute 60% to 70% of employment. This contribution is vital for economic growth. As we know that the most important determinant of GDP is consumption. Consumption is triggered by income people earn during a particular period. This consequently depends upon the employment. If 70% employment contributor is provided with the right support from the government and financial institutions, it will create jobs and will contribute directly to overall goal of reducing poverty especially in women and youth. This will lead to increase in the consumption; which will result in increased GDP, which I think will be the real growth. This is from economic perspective, which is very important, but let me highlight the more important factor, i.e., social perspective. A very important social achievement which SME's can help the government to achieve is equal distribution of wealth, which in result will contribute to social stability. Equal distribution of wealth will result in reduction in social disparity, which is prime contributor towards dissatisfaction among the people and creates social instability. Secondly it also reduces migration from rural areas to urban areas (problem being faced by the government).

Both perspectives, i.e., economic and social have been discussed, and the role of SMEs have also been elaborated, which confirms that SMEs are essential for achieving social and economic growth.

The support which is backbone of the economy requires is not being provided due to the following reasons:

 

 

1. They do not have the right background as the young yuppies commonly found in modern banks who have no experience of industry at large, resulting communication gap between the bankers and the sector

2. Lack of financial modelling skills (primary requirement of loan sanctioning)

3. Lack of desired "polish"/market "lingo"

4. Lack of cashable collateral available to SMEs.

Askari Leasing Limited knowing the above mentioned problems came with a plan to tackle these problems. Askari Leasing Limited has trained professionals and has provided them with right background for SMEs, which enable them to talk the way, SMEs understand. This reduces the communication gap between the company and SMEs. The trained professionals can take raw inputs and details regarding the business, machinery, marketing etc., and develop financial models, which describe and predict the venture behaviour in question. This input is extremely invaluable for SMEs as they are getting guidance and help in addition to just funding.

Askari Leasing Limited team is not just trying to capture the SME customers to earn profits but their job is to identify the customer needs, which includes following:

1. Why they require funds; 2. How much funds are they in need of and 3. How best can these funds be utilized

When a customer from SME sector requests financial help, Askari Leasing's team member visits his premises and try to evaluate the production capabilities of the customer, which includes identification of number of machines installed there, and their per day production capability, and other over head requirements. Based on which, a professional model is developed, which helps in calculating the actual funds requirement, and also the projected profitability.

Based on all this information at Head Office, the team then try to evaluate the consequences of disbursement, i.e., will customer be able to repay the loan (based on the profitability calculations, and marketability of products being produced). If it is decided that financial help will increase the financial strength of the customer payment is released, otherwise the customer is informed regarding implications of the loan. This helps the client to avoid financial distress, which may lead to close down of one SME, a contributor to economy.

Being a large company, and having ready access to information, Askari Leasing is also planning to equip the staff with latest information so that they can provide SME operators with information on appropriate technology and domestic and export markets. This will be an indication of Askari Leasing Limited commitment to the development of SMEs, which will result in development of Pakistan.

With its focus on SME sector, Askari Leasing Limited has rapidly achieved a unique leadership position in this area. It has developed sizeable business in golden triangle of Pakistan, namely Faisalabad, Gujranawala, Gujrat, Sialkot and Lahore. The exposure is in variety of SME related industries including, textile, machinery, leather etc. It is hoped that these efforts will prove successful in developing both SME sector as well as the economy and GDP of the country.