Banks’ financing of small and medium enterprises (SMEs) rose to 513 billion rupees by the end of fiscal year 2017-18 in comparison to 450 billion rupees in the comparable period of the year before. Between July-December 2018, the growth in financing for the SME sector rose further which is being attributed to the State Bank of Pakistan’s (SBP’s) targeted SME growth policy of December 2017 which includes: (i) sensitizing banks to support SME financing as a viable business proposition through training more than 2,500 bankers to date; (ii) creating awareness in 20,000 stakeholders, including SMEs through special programmes held by SBP throughout the country; (iii) advising banks to provide non-financial advisory services to ensure bankability of SMEs; (iv) simplifying procedures for SME financing; (v) prescribing SME financing targets for banks; and (vi) introducing new SME refinance schemes for SMEs through banks/development finance institutions. This process would receive a fillip once the reduction in income tax on the amount that the banks would lend to SMEs kicks in after the passage of the Finance Bill second amendment by parliament.
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Data uploaded on the website of Small & Medium Enterprise Development Authority (SMEDA) suggests that SMEs constitute nearly 90 percent of all enterprises in Pakistan, employ 80 percent of non-agricultural labour force and contribute 40 percent to the country’s GDP. SMEDA claims to assist SMEs through financial analysis, pre-feasibility studies, business plans, accounting software, facilitation through private equity and venture capital funds, loan facilitation and financial literacy. It acknowledges that an SME is constrained by financial and other resources and urges the government to develop a mechanism through which SMEs get support in different functions of business, including technical upgradation, marketing, financial and human resource training and development.
The SECP facilitates SMEs through regulatory framework for non-banking finance companies, companies regularization scheme which allows defaulting companies to avail of concessional additional filing fee and exonerates them from penal proceedings under provision of Companies Ordinance, 1984 resulting from such non-compliance, setting up facilitation centres for SMEs in chambers of commerce and industry and promulgation of single member companies rule 2003.
Thus SBP, SMEDA and SECP have formulated policies targeted to improving the performance of the SME sector. Pakistan Tehreek-e-Insaaf government, as already stated, has provided an additional incentive to SMEs in its second amendment Finance Bill 2019, expected to be passed by the National Assembly anytime soon, by announcing that the tax payable by banks on lending to the SMEs would be reduced from 35 percent to 20 percent which, no doubt, would further encourage lending to this sector. However, so far there has been no attempt to tailor the country’s laws to meet a typical SME needs. For example, the withholding regime requires an SME to hire a dedicated staff member to ensure compliance; however, few SMEs have the wherewithal to employ this expertise. Additionally, the threshold of the number employed for mandatory payment of EOBI, social security contribution, etc., needs to be amended.
The Planning Commission undertook comprehensive studies in the past to promote the SME sector, studies that are simply gathering dust. The Khan administration would do well to task someone or agency, be it SMEDA or be it the Planning Commission, to look into the identified lacunae in the development of the SME sector and recommend appropriate mitigating measures.
(This news/article originally appeared in Business Recorder on February 27th, 2019)