SME SMEs are not having access to credit in

SME financing


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SME or Small and Medium enterprises Financing is the act
of providing the financial resources or money to the Small and Medium
Enterprises, and it is considered to be one of the major function or role of
the general business finance market. In small and medium enterprises financing
the general business finance market supplied or provides  finance to different types of firm in the form
of bank loans, overdrafts, leasing, equity/corporate bond issue, hire-purchased
arrangements, venture capital or private equity or can supplied through assets
based financing such as factoring and invoice discounting. All these ways are
the external or commercial market supplied financing; the business can generate
finance through internally by their own earnings informally as trade credit.

Small and Medium enterprises play a key part in most
economies, remarkably in developing countries. According to the estimates the formal
SMEs contribute up to 60% of the total employment and, up to 40% of Gross
domestic products/ national income in arising economies without the inclusion
of informal SMEs.  These numbers become higher
when informal SMEs are included. According to the estimates in next 15 years
600 million jobs will be needed to absorb the extending or increasing number of
global workforce, especially in Asia and SUB-Saharan Africa. In emerging market
the great numbers of formal jobs are generated by SMEs, which creates 4 new
positions out of 5 positions. And the growth of SME is possible only through
the access of SMEs financing. SMEs are unable to acquire bank loans as compare
to large firms, they mostly depend on internal funds or informal ways of
financing to run or start their enterprises. About half number of formal SMEs
doesn’t have ingress to formal credit. The numbers increase further when
informal and Micro enterprises are taken into consideration. Overall,
Approximately 70% of Micro, SMEs are not having access to credit in emerging
markets. While the gap differs region to region it is huge in Africa and Asia.
The approximate current credit   gap for formal
SME is 1.2 trillion US$, and for informal the gap is estimated to be 1.4
trillion US$. 

A study done by the World Bank Group advocate the
numbers, that there are between 365-445 millions Micro-SMEs in emerging
markets; among them approximately 25-30 millions are formal SMEs and 55-70
million are formal micro enterprises. 
Movement of informal SMEs into the formal sectors will be advantageous
for both SMEs and overall economy, the SMEs will get better access to credit
and government services and the for economy it will be advantageous in a form
of better regulation and high tax revenue.

History of  SME  Financing in Pakistan

history of SMEs starts in 1949 with the establishment of National bank of
Pakistan.  It was the first government
bank in Pakistan. National bank takes an initiative for the progress of SMEs
after its establishment. After that the government established SMEDA ( small
and medium enterprises Development authority) In 1998 to look for the
challenges of developing SMEs.  In 2002
SME bank starts financing SMEs with the mission that the SMEs may contribute
for the development of economy of Pakistan. And after SME bank,  in 2004 the Asian Development bank take an
initiative to promotes SMEs through SME development program by providing them
loans. In March union of SMEs demanded from the government for the development
of ministry of SME in Pakistan 2004 the SME Development authority demand the
Islamic chamber of commerce for the arrangement of events for SMEs in Pakistan.
Then In 2005 the World Bank international finance corporation provide loan of
about 7 billion dollars to investment Bank limit so they should finance bank
for leasing equipment to SMEs and other sectors of Pakistan. In 2008 Pakistan
signed a contract with Italy that Italy will provide zero interest soft loans
to SMEs in Pakistan for their development. In june 1st 2011. In june
3,2011 World bank and State bank members introduce series of publications for
the purpose of helping Pakistan banking system in financing of SMEs. In 11 June
2011 state bank of Pakistan signed an agreement with five leading banks in
Pakistan and Small and Medium enterprises Development authority (SMEDA), that
these banks will provide finance to SMEs. In June 12, 2011 United Nations
development program – small development program amalgamate SME development
authority for the success and support of SMEs.

sector is the backbone of any economy. According to the estimates SMEs comprise
nearly 90% of all the enterprises in Pakistan, it employ non agricultural labor
force up to 80%, and their contribution to the annual GDP is 40% approximately.
It generates 25% of manufacturing export earnings.

History of SME bank

As a part of
financial sector reorganization program of government of Pakistan  in 1st January 2002 SME Bank Ltd
started its activities as a public limited company under the companies ordinance
1984 by combining Regional Development Finance Corporation (RDFC) and small
Business Finance Corporation (SBFC). The prime shareholder of SME bank is the
Government of Pakistan. Reason behind the formation of SME Bank Ltd was to
provide growth to Small and Medium enterprises sector in the country. And the
growth of the sector is possible only with specialized financial products and


Following is the criteria for small

Number of employees

Number of employees in small enterprise should
be maximum 50 employees.


Turnover of small enterprise should be Rs150

Per party exposure

In small enterprise loan of Rs 25 million can
be taken by single party.

Requirement of audited accounts

While giving loan to
small enterprise there is no condition of audit the financial statements if the
amount of loan is less than Rs15 million. If the amount of loan is more than Rs
15 million than it should be get audited by the practising chartered accountant
or Cost and management accountant.

Repayment capacity of borrower

Small enterprise usually have sale/purchase
books and records of cash received/paid through 
which bank can estimate their income to check repayment capacity of

Collateral Valuation

Determination of value of security for
granting loan upto Rs5 million is either done by bank own evaluating staff or
by the evaluator approved by PBA and determination of  value of security for loan more than 5
million Rs is done by evaluator which is approved by PBA

Recovery of outstanding

Bank can recover the outstanding dues from the
place rather than places at which they have authority.