Microfinance thus far covers only less than 12 percent of the potential market in terms of outreach in the country.

May 21 - 27, 2007

Small and medium enterprises (SMEs) is a convenient term for small businesses that have outgrown their small beginnings but are not yet large organised enterprises in the formal sector. Across the world SMEs are being recognised as the breeding ground of new entrepreneurs that create self-employment opportunities and providing jobs to many others. SMEs create, encourage and promote employment opportunities. Like elsewhere in the world, including developing countries, SMEs are playing a vital role in the economy of Pakistan; they constitute around 90 percent of businesses in Pakistan. SMEs represent a significant component of Pakistan's economy in terms of value addition, employment generation and poverty reduction activities.

The important role that SMEs are playing in the national economy has necessitated the need for a separate set of regulations that are aimed at encouraging banks/DFIs to develop new financing techniques and innovative products to meet the financial requirements of the SMEs. Towards the end of 2005, a separate set of prudential Regulations were issued for agriculture financing in order to facilitate and encourage the flow of bank credit to the agriculture sector.

According to official figures, scheduled banks and Development Financial Institutions' advances to SME sector witnessed a slower growth of 12.8 percent (Rs 40.6 billion) during July 2005 to February 2006 compared to a

much higher expansion of 24.5 percent (Rs 59.9 billion) during the same period the previous year. The break up of bank credit to SMEs revealed that commerce and trade sector consumed the largest share of 54 percent (Rs 21.9 billion). It was followed by manufacturing sector (35.7 percent or Rs 14.5 billion) primarily due to higher demand from textile millers and ginners. Commerce and manufacturing sectors combined together accounted for 89.7 percent share in total advances to SMEs as compared to 77.4 percent during the same period of last year. The other notable sectors, which obtained credit, included Services 10.8 percent (Rs 4.4 billion), and Transport and Communications 3.4 percent (Rs 1.4 billion).

Like elsewhere in the world, SMEs in Pakistan too are reaching out to the majority of the population and their performance in terms of efficiency, productivity and portfolio quality also continues to improve. In the process they, like elsewhere, have somewhat revolutionalized access to financial services, making the government to take a note to extend micro-financing facilities without which SMEs could not grow.

The government initiated the Micro-finance Sector Development Program (MSDP) about six years ago has had a profound impact on the micro-finance (MF) sector in Pakistan. The new regulatory framework, aimed at establishing a pro-poor market-based formal financial sector-oriented system, resulted in the emergence of six licensed micro-finance institutions at district and national levels. With the support and guidance provided through MSDP, SBP has established a separate policy unit for microfinance and is proactively promoting a sound environment for sustainable microfinance operations within the country.

Under the MSDP framework Khushhali Bank has appeared as the leading micro-finance institution of the country. Since its establishment in August 2000, it has rapidly expanded its micro credit outreach and has well established its position as the largest MF bank in the country in terms of its clients and portfolio. By early last year the bank had nearly 250,000 clients, with cumulative disbursements of over Rs 6.0 billion through its branch network in 75 districts with high poverty incidence across the country.

The Khushhali Bank is focusing on the rural areas closely and nearly 60 per cent of its clients are located in the rural areas; the majority of them are extremely poor. It is also targeting the women that make up nearly one-third of its beneficiaries. However, despite making progress microfinance is still much in an early stage of development and the current outreach of MF services in the country is extremely low in a country where nearly a quarter of the total population of 160-plus is living below the poverty line, according to official statistics. According to official statistics, an estimated six million Pakistani households are in potential need of microfinance services while microfinance has been made available to just about 0.7 million households with just $ 100 million in loans outstanding.

Thus microfinance thus far only covers less than 12 percent of the potential market in terms of outreach in the country.

And women remain still far more disadvantaged in terms of access to microfinance. They make only about 45 percent of the total borrowers. Late last month the Ministry of Women Development said that a National Fund for the Advancement of Rural Women, called 'Jafakash Aurat' (Hardworking Women), with a seed money of Rs 100 million would specially focus on providing microfinance to women in the rural areas. The fund, set up through a number of commercial banks including Khushhali Bank and First Women Bank along with Aga Khan Fund Rural Support Programme aims to impart skills, provide employment and provide an opportunity for income generation to nearly 23,000 rural women that would benefit overall 74,000 households. Needless to say the seed money of Rs 100 million is not only too little, it comes to a meagre Rs 4,347 for each of 23,000 female beneficiary targeted, but what also remains to be seen that how efficiently the seed money of Rs 100 million would be spent.

Similarly, last month Ajmal Cheema, the Industries Minister of Punjab, announced plan to launch Rs 1 billion loan scheme for the SMEs in the province. He said that small loans of up to Rs 40,000 were being advanced for the promotion of cottage industry in the province the rate of recovery of which was 98 per cent. The survey of small, medium and cottage industry in areas had also been completed and would be published in the near future.

He also said cluster development centres and business support centres were being set up for training the people in the use of modern office equipment.

He also disclosed that a mango processing unit was being set up at Multan at a cost of Rs 350 million.

Despite teething problems the SME Bank disbursed a total credit of Rs 555 million in 2005 compared to Rs 388 million in 2004.

Though data on the SME sector, and its status, appears to be rather sketchy that in no way should undermine the important role that SMEs play in the national economies worldwide to create self-employment opportunities to reduce unemployment rate in Pakistan which houses a large population of unemployed people and over 60 per cent of whose population is under 25-year old.

The importance of SMEs in the developing economy of Pakistan could hardly be over-stated.