December 3, 2018

Challenges and Prospects for SMEs in Pakistan

Naveen Shayan

LedgerMax specialist

According to the State Bank of Pakistan, small and medium sized enterprises comprise for more than 90% of the economic formations in Pakistan and also add a colossal 25% of the export incomes, 30% to the GDP and employ approximately 79% of the non-agricultural workforce. Hence, it wont be wrong if we say that Pakistan’s economy is led by these enterprises. However, still SMEs in Pakistan face a number of issues that strangle their progress and weaken the prospects of their further development in the country.

Challenges Faced by SMEs in Pakistan

  1. Majority of SMEs are unable to get loans from commercial banks as they never maintain clear and fair financial records. These enterprises use different financial statements for different entities like taxation authorities, associates, general public etc.
  2. Another major issue is the low capacity of human resource in SMEs. This low capacity leads to a disorganized bookkeeping system which further results in undefined and dubious financial statements costing the integrity of the enterprise.
  3. Shortage of storage facilities, poor transportation system, electricity, water and gas load shedding, substandard working facilities and under-developed physical markets are the prominent barriers in the way of SMEs development as they increase the production cost and lessen the production factor .
  4. Asymmetric information also halts the financing of SMEs by individual and institutional investors. The investors are always hesitant to invest in these enterprises as there are no precise formalities or rules for SMEs with respect to the proper disclosure of their business information to the investors.
  5. In Islamic countries like Pakistan, a huge diaspora does not accept the conventional banking methods which sets forth the necessity of adopting the advanced financing methods providing entrepreneurs several options to get funded. 
  6. Lack of proper infrastructure also create hurdles in the establishment of new businesses in Pakistan.
  7. Pakistan has a very poor ranking on allotting immediate and transparent licenses to businesses. The procedure of obtaining a business license is extremely complicated which discourages new businessmen to enter into the field.

Prospects of SMEs in Pakistan

The importance of SMEs with respect to the industrial development of Pakistan is undeniable. In this regard, the role of the State Bank of Pakistan should be to facilitate the banks to make the lending procedure comfortable for the SMEs and provide them easy access to avail the financial services for developing their businesses. Despite being dynamic and diverse, the SME sector is quite vulnerable too and require immense support form the regulatory bodies like government and the State Bank to grow. Another supportive organization that addresses SMEs agendas to the government, investors and banks is SMEDA (small and medium enterprises development authority) which emphasizes on providing an empowering business setting and developmental services to small and medium sized enterprises. SMEDA is working diligently for the progress of SMEs in Pakistan.

The State Bank of Pakistan is also planning to facilitate SMEs by setting up a safe transaction registry in Pakistan, signifying that each and every loan granted with a collateral assurance is recorded. This will boost the communication and transparency between the banks.

Besides these, there are several other facilitation systems in the pipeline for SMEs which will expectantly form a culture change relating to the attitude of commercial banks and SMEs towards each other. However, undoubtedly the significance and standing of SMEs in Pakistan is downplayed, and so, educating about them, encouraging them and facilitating them in their struggles are some means of supporting them as well as the economy of Pakistan.


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