ISLAMABAD: A recent study conducted by the Competition Commission of Pakistan (CCP) sheds light on the limited growth of small and medium enterprises (SMEs) in the country, identifying access to finance as a significant barrier hindering their development.
Titled ‘Enhancing Economic Efficiency of SMEs in Pakistan,’ the study examines barriers to competition and provides recommendations to improve the economic efficiency of SMEs. The research draws on data from 50 financial institutions, 18 focused group discussions, 362 SMEs across 11 cities, and a seminar conducted by CCP focusing on women entrepreneurs.
Despite policy measures aimed at increasing financing for the SME sector to 17 percent, Pakistan’s SMEs only receive 6-7 percent of private sector financing. In contrast, SMEs in Bangladesh receive 25 percent financing, while in India, it is 18 percent.
Findings from CCP’s questionnaire indicate that 93 percent of SMEs find it cumbersome to avail financing facilities from banks, with 80 percent having never utilized bank financing at all.
The study recommends that the State Bank of Pakistan (SBP) consider allocating separate lending targets for financial institutions, establish sector-specific targets, introduce separate financing facilities for economically disadvantaged districts, and standardize pricing for insurance and evaluation reports. Public sector commercial banks should also be encouraged to take the lead in SME financing, aligning with international practices.
The CCP study suggests that non-bank financial institutions (NBFCs), leasing companies, crowd-funding, and equity financing can play vital roles in providing credit to startups and SMEs. However, regulatory improvements are necessary to enhance the environment for these alternate financing channels.
The study also highlights the complex regulatory landscape faced by businesses in Pakistan, with at least 12 different categories of general regulatory layers applicable to all firms. Simplifying the licensing and registration system and establishing one-stop portals for SME licensing, permits, and registration are proposed to alleviate these challenges.
The data further indicates that excessive regulatory duties on imported raw materials make downstream businesses costly. Consequently, a critical review of import duties is recommended. The study also highlights the need to address the complex and non-conducive tax structure, which poses difficulties for SMEs in compliance. It suggests developing a fair, efficient, convenient, and certain tax system.
To support SMEs, their interests should be safeguarded in existing Special Economic Zones (SEZs) and industrial parks. The study proposes engaging small chambers on the board of SEZs and providing affordable land rates for SMEs. Learning from international jurisdictions, the study underscores the importance of having legislation or master plans to foster growth in the MSME sector.
Skills and training gaps were identified among SMEs, prompting recommendations for increased funding for Technical and Vocational Education and Training institutions. It further suggests fast-tracking non-operational training institutes and focusing on higher education institutions and business incubation centers.
While SMEDA (Small and Medium Enterprises Development Authority) is part of the National Coordination Committee (NCC) for reviewing SME policies and the regulatory framework, the study recommends the inclusion of women departments and women-led SMEs in the NCC to propose concrete measures in policy and legislation for women’s inclusion.
