By: Syed Asim Ali Bukhari, Associate Professor Dr. Fathyah Hashim and Prof. Dr. Azlan Amran
Small and Medium Enterprises (SMEs) play a critical role in the economic growth of every nation, such as generating work opportunities, income and wealth creation, and poverty reduction. These are very important in less developed economies.In developing nations, the SME sector plays an essential role in achieving United Nations-Sustainable Development Goals (UN-SDGs) 2030 by creating job opportunities, alleviating poverty, promoting innovation and fostering sustainable industrialization, and reducing income inequalities.According to global data, in the majority of countries, the formal and informal SMEs make up over 90 percent of all businesses, 60 percent–70 percent of total employment, and 50 percent of GDP. Despite its important economic role, the SME sector struggles to access formal financial services. According to a report, approximately 130 million, or 41 percent of formal SMEs, in low and middle-income countries faced credit constraints before the COVID-19 pandemic and the SME finance gap was estimated at $5 trillion. According to our estimates, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create seven out of 10 jobs. However, access to finance is a key constraint to SME growth: it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries.
The International Finance Corporation (IFC) estimates that 65 million firms, or 40 percent of formal Micro, Small and Medium Enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. The SMEs sector serves as the b, ackbone of various economies like Malaysia which has approximately 1.15 million SMEs making up 97.2 percent of the total number of businesses in Malaysia. In 2020, the SMEs sector contributed 38.2 percent, or 512.80 billion ringgit, to the national GDP and employed approximately 48 percent of the country’s workforce.
According to Pakistan’s Economic Survey 2020-21, approximately3.25 million SMEs account for nearly 90 percent of all the businesses operating in Pakistan. This sector holds approximately 40 percent and 25 percent of the country’s annual GDP and exports respectively. However, one of the major hindrances in the financial inclusion of the SMEs sector in Pakistan is that approximaely 97 percent of SMEs are undocumented and operating under individual ownership as an informal sector.
The SMEs sector of Pakistan needs to undergo a green transformation to achieve environmentally, socially and economically sustainable development in the future. Based upon the economic importance of this sector, the development of eco-friendly or Green SMEs is pertinent for realizing the vision of a ‘Clean and Green Pakistan’. Due to their small and flexible nature, SMEs are more suited to pioneer green innovations and contribute to green growth, especially in local and emerging markets that may be neglected by large corporations. Integrating the element of environmental sustainability in the SMEs sector can synergize this important economic sector with SBP’s Green Banking initiatives. The SBP can launch low-interest green financing schemes, under the umbrella of Green Banking, for environmentally friendly SMEs such as renewable energy production, smart-metering, building retrofitting, green supply chain activities, eco-friendly channel financing and waste recycling.
Pakistan’s SME sector can undergo green transformation under the circular economic model through green financing, re-manufacturing, repair, maintenance, recycling and eco-design businesses. Green financing can also be provided for the development of sustainable agricultural value chain activities such as the establishment of Electronic Warehouses for the storage of various commodities as collateral through which an Electronic Warehouse Receipt (EWR) system can be implemented across the SME sector. SBP can launch a low-interest financing scheme for the development of EWR and Green Warehouses to ensure economic and environmental sustainability in SMEs connected with the supply chain industry. This can play an important role in overcoming the shortage of safe storage facilities for various businesses through effective public-private partnerships.
The effective adoption of environmentally friendly business operations by the SME sector of Pakistan depends upon green capacity building within the SME sector and among the concerned stakeholders. This can be achieved by inculcating green management knowledge among students across all educational levels. The SBP can provide stakeholder training and also awareness sessions at the university level to ensure green education and the creation of green awareness. The Green SME sector can play the role of an important cog in the attainment of the United Nations–Sustainable Development Goals (UN-SDGs) 2030. An increase in employment and production of the country’s SMEs sector will lead to an increase in employment and production in the rest of the economy.
Existing SBP’s financing schemes for SMEs, such as the SME Asaan Finance (SAAF) scheme, the Kamyab Jawan programme, the Kamyab Pakistan Programme and the Housing and Construction Finance schemes can be transformed into green finance programmes. Recently, Prime Minister Imran Khan, launched interest-free financing, worth Rs 407 billion, for youth, women and farmers and the construction of low-cost houses and starting a business. If this initiative is targeted towards eco-friendly startups or Green SMEs, it can result in the robust growth of Pakistan’s green industries and environmental sustainability.
Green financing can also be extended towards the Small & Medium-sized construction industry and allied businesses under the Naya Pakistan Housing Scheme like the financing of zig-zag brick manufacturers, green cement manufacturers, green warehouses and eco-friendly logistics companies. SBP can provide green financing to Green SMEs on the same pattern as the ‘SME Asaan Finance’, not requiring any collateral and having the risk covered according to the financing amount. Similarly, government bodies like the National Energy Efficiency & Conservation Authority (NEECA) may boost the efforts of ensuring environmentally and socially sustainable economic growth for Pakistan’s SMEs sector by creating awareness and implementing energy efficiency-based projects in collaboration with SBP. The SBP can collaborate with the Small and Medium Enterprises Development Authority (SMEDA) for the development of Pakistan’s Green SME sector through Green Financing.
The effective adoption of environmentally friendly business operations by the SME sector of Pakistan depends upon green capacity building within the SME sector and among the concerned stakeholders. This can be achieved by inculcating green management knowledge among students across all educational levels. The SBP can provide stakeholder training and also awareness sessions at the university level to ensure green education and the creation of green awareness. The Green SME sector can play the role of an important cog in the attainment of the United Nations–Sustainable Development Goals (UN-SDGs) 2030. An increase in employment and production of the country’s SMEs sector will lead to an increase in employment and production in the rest of the economy.
All the authors, Syed Asim Ali Bukhari, Associate Professor Dr. Fathyah Hashim and Prof. Dr. Azlan Amran, are associated with the Graduate School of Business, Universiti Sains Malaysia, Penang, Malaysia.
