How Access to Finance Helps Small Businesses Grow in Pakistan
A small-scale pharmaceutical distributor in Peshawar got two breakthroughs2006 and 2014 acquiring distribution contracts of fast-moving consumer goods for two of country’s top FMCG firms. The fast expansion made the distributor, Makka Distribution Agency, seek financing options. One of the FMCG companies the distributor worked for facilitated in the acquisition of finance through Supply Chain Finance Program by Karandaaz and Meezan Bank. The financing helped the agency grow twice in size and offer decent employment opportunities for more people.
“When our business suddenly grew in scale, we had to seek financing from a bank,” shares Atif Shehzad, the owner and CEO of Makka Distribution Agency. “Unilever facilitated us in getting access to finance from Meezan Bank under its partnership for vendor financing with Karandaaz Pakistan. It was Karandaaz’s Supply Chain Finance Program which made it possible for my business to grow exponentially in size and profitability. The program is has been a huge contribution towards the growth of my business and can potentially help other MSMEs too, he adds.
Small and Medium Enterprises (SMEs) are critical to the social and economic uplift of developing economies. SMEs play a major role in creating jobs and generating income, fostering economic growth and social stability, and contributing to the development of a dynamic private sector. In emerging economies, SMEs contribute around 40 percent to Gross Domestic Product (GDP) while the same is nearly 51 percent for high-income countries. SMEs account for an estimated 96 percent of total enterprises in East and southeast Asian economies.
In Pakistan, the economic census conducted in 2005 placed the number of SMEs at approximately 3 million registered units, which, at the time was more than 90 percent of the country‘s economic establishments. Yet, Pakistan’s small and medium enterprises (SMEs) suffer from low access to credit against a sobering trend of low overall private sector credit. At PKR 405 billion, SME financing in Dec-16 was 6.7 percent of overall private sector credit. At its peak in Dec-07, the proportion of SME credit to overall credit was 15 percent (PKR 437 billion), lower than, but still comparable with other emerging and regional economies averaging 18 percent.
On the supply side, a contributing factor for this limited access to credit is the focus of banks on relationship lending without introducing tailored products suited to the needs of SMEs. Part of the reason for low SME financing has been low overall private credit but there are also a myriad of supply side and demand side issues that curb credit to SMEs. Lack of documentation, inadequate incentives, poor cash flow management, unawareness of banking products, and incentives are all reasons why demand from SMEs for bank lending is low.
Karandaaz Capital has a Supply Chain Finance Program with Meezan Bank focused towards SME sector of Pakistan. With the end goal of promoting access to capital for the SME sector, financing is available for vendors and distributors working closely with leading corporates within the country. Under this program, both long- and short-term loans are available for SMEs, which are unable to access loans from commercial banks.
The expansion triggered by Karandaaz’s Supply Chain Finance Program reaped great results for Makka Agency. The annual sales turnover has reached 2 billion rupees and profitability has improved significantly. Before the assistance, there were 150 employees working for Makka Agency. Today, the business has 300 employees resulting in better livelihoods for 300 homes.
“Now that our business has grown, we are able to provide stable careers with such benefits as medical insurance to all of employees in which their children, spouses, as well as parents are covered. We were also able to subsidize education of our employees’ children,” shares AtifShehzad. He also believes that in order to strengthen the SME financing landscape in Pakistan, the government and policymakers should introduce reforms and strengthen laws that provide remedies for collateral requirement, reduce information asymmetry, riskiness of SME portfolios, and harness trust between banks and SMEs.