Financial Quota of Loans for the SME Sector in Pakistan: A ... · ‘State Bank’s regulation’...

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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2012 Institute of Interdisciplinary Business Research

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Financial Quota of Loans for the SME Sector in Pakistan: A Survey in

Karachi

Jawed Ahmed Qureshi

PhD Scholar SZABIST, Karachi

Adjunct faculty member SZABIST, Iqra University

Indus University Karachi, Pakistan.

Abstract

The fruits and gains of sustainable development of the SME sector in an economy have been evidenced by improved

socio-economic indicators, prosperity and stability of a nation. SMEs make a considerable assistance in the direction

of GDP, income generation, fostering entrepreneurship heritage, paid work possibilities, earnings for lifetime,

abilities‟ development of human assets, hunger and poverty alleviation, and advancing the benchmark of dwelling

and value of life. One of the biggest barriers in the way of thriving SMEs to their full potential is their limited ability

to acquire finance, while allocation of appropriate funds from lending institutions is another issue. The aim of this

study is to investigate the modality of implementing financial quota of loans for the SME sector in Pakistan, as such

a policy is also executed in India and all the banks and lending institutes are in full compliance of the policy. The

methodology included qualitative and quantitative research approaches. This research is a multi-stage research. In

the primary data collection method, at the first stage, one-on-one interviews were taken from the SME owners, at the

second stage, focus group session was undertaken involving SMEs, SBP, SMEDA, and other financial institutes,

and at the third stage, a survey was conducted from the members of Pakistan Chemists‟ and Druggists‟ Association

in Karachi, who were selected randomly on the basis of probability sampling method. A comprehensive literature

review was made to study financial policies of South Asian countries with regard to quota of loans for the SME

sector. The findings of this research will provide the ground reality for the financial supply to SMEs and its

availability will become an intellectual support to the decision makers in making financial policies for the promotion

of SMEs for the economic well being of the nation.

Key Words: Quota of Loans; SMEs; SMEs in Pakistan

.

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1. INTRODUCTION

The fruits and gains of sustainable development of the SME sector in an economy have been evidenced by improved

socio-economic indicators, prosperity and stability of a nation. It is envisaged that large-scale companies including

the corporate sector tremendously contribute in mass production, gross domestic product (GDP), employment and

income generation and other economic indicators used to measure prosperity, however SMEs are much greater in

size than the large-scale sector, thus have been recognized around the globe as economic fuel. SMEs make a

considerable assistance in the direction of GDP, income generation, fostering entrepreneurship heritage, paid work

possibilities, earnings for lifetime, abilities‟ development of human assets, hunger and poverty alleviation, and

advancing the benchmark of dwelling and value of life. Above all the major financial advantages of SMEs

development encompass thriving economic units, and equitable circulation of wealth. SMEs are recognized as the

fuel for economic and financial development in both evolved and evolving nations, as they develop more

employment possibilities than the large-scale companies with relatively low investment; supply goods and services

at reduced cost because SMEs incur less overall operating outlays and pay less salaries when matched with large

scale businesses; and they are more work intensive when compared with large-scale enterprises, since production

work methods are either manual, or semi self-acting, and seldom completely self-acting methods of production.

It has been estimated that the SME sector in Pakistan contributes 30% in the GDP, along with agriculture sector

provides 90% jobs, 80% of the non-agricultural workforce; makes 35% value addition in the manufacturing

industry; and adds 25% exports earnings in the national exchequer [up to US$ 2.5 billion], (State Bank of Pakistan,

2009; Economic Survey of Pakistan, 2009-10).

It is realized that the problems of small-scale enterprises are different than that of medium-scale and large-scale

enterprises. As stated by West (2010), SMEs have the major menace of finance and they are unable to even envisage

of availing bonds or releasing capital stock to equity markets. Access to finance is one of the major threats for the

survival and sustained growth and expansion of SMEs.

The State Bank of Pakistan (SBP) report uncovers that an overall decline in SME financing was observed, which fall

20% to Rs348 billion in 2009 from Rs437 billion in 2007, as a consequence of loan defaults and slowing economy

(Dawn: May 17, 2010). It was revealed that the share of SME financing in total lending portfolio in Pakistan stands

only 10% (Daily Times: May 6, 2010). In 2009, 89% of the SME financing was obtained to fulfill working capital

requirement, which clearly exhibits banks‟ reluctance to finance and invest in the long-run projects initiated by

SMEs (State Bank of Pakistan, 2010).

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1.1 SME Defined

Generally, SME means small and medium enterprise and it is a general perception that small businesses are shops

and other small enterprises, medium enterprises are medium scale businesses in terms of size and sales turnover, and

large enterprises are factories or other large-size establishments with turnover in millions. One definition lodged by

State Bank of Pakistan (SBP) refers SME sector as, the SME sector can be categorized into three classes, micro,

small, and medium enterprises (State Bank of Pakistan, 2010). As characterized by SBP, small and medium

enterprise (SME) means any private economic establishment engaged in manufacturing, trading, or service business

with net annual turnover or sales up to Rs300 million in the current fiscal year; or any manufacturing entity having

total assets up to Rs100 million excluding land and buildings and with maximum 250 employees or any trading or

service concern having total assets up to Rs50 million excluding land and buildings and with maximum 50

employees.

1.2 Problem Statement

A proper amount of loan made available to the SME sector by the lending institutions is important to ensure the

survival and sustained growth of the SME sector. The emerging economies and developed countries have proper

allocation of financial resources for the SME sector such as, India has 40% financial quota for the small scale

industries with investment up to Rs0.5 million. In Pakistan, there is no concept of financial quota for the SME

sector. Due to non-availability of sufficient funds to the SME sector on priority basis, the survival and sustainable

growth of the sector has been endangered. If the trend continues, there is a threat that the sector which provides

most of the employment to the people will deteriorate day by day. Hence, the financial quota for the SME sector is a

potential research problem for investigation.

1.3 Research Objective

The core aim of this research is to extensively investigate the modality of implementing financial allocation or quota

of loans for the SME sector in Pakistan, as such a policy is also executed in India and all the banks and lending

institutes are in full compliance of the policy.

1.4 Research Questions

The research investigates the core research problem, quota of finance to the SMEs. Hence the key research questions

of this research are:

Q1. Is there any fixed allocation of loans to SMEs in Pakistan?

Q2. How far the allocation of proper quota of loans is helpful for the SME sector?

1.5 Research Hypothesis

The hypotheses include the following; although they look simpler but the empirical inquiry intends to test them in

the context of Pakistan.

H1: Loans on priority basis from financial institutions help SMEs to grow.

H2: The uninterrupted financial supply helps SMEs to become more competitive.

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1.6 The Rationale of the Study

This study will investigate and find out the financial supply to the SME sector for their growth and development.

Moreover, the findings of this research will provide the ground reality for the financial supply to SMEs and its

availability will become an intellectual support to the decision makers in making financial policies for the promotion

of SMEs and for the economic well-being of the nation.

1.7 Scope of the Study

The thematic scope of the study is finance as well as economics and social sciences. The geographical coverage or

scope of this study is Karachi and Karachi-based SMEs while thematic scope is the availability of finances to the

trading SMEs through some formal arrangement by the State Bank of Pakistan, such as, quota allocation or setting

priority of loans to these SMEs.

1.8 Conceptual Framework

The conceptual framework portrayed below exhibits the interaction of various factors affecting the financial quota of

loans to the SME sector in Pakistan.

Figure 1.1: Conceptual Framework on Quota of Loans for SME Sector

Financial Quota Allocation

Here the conceptual framework is explored for qualitative study through literature or textual analysis, while

quantitative tools are capitalized to test the hypotheses. The conceptual framework in figure 1.1 exhibits that

financial quota to the SME sector appears dependent on various factors mainly State Bank‟s regulations and banks‟

and lending institutions‟ policies. ‘Financial Quota to the SME Sector’ seems a novel notion in Pakistan, but it has

been applied in India and all the Indian banks seem to be in full cooperation with the policy guidelines set by the

Reserve Bank of India. It is envisaged that if it is applied appropriately in Pakistan, it will lead to SME sector‟s

SME Sector’s

Growth &

Development

Economic Growth &

Stability

Employment

Income

Generation

Industrialization

Trade and Exports - E

m

p

l

o

y

m

e

n

t

- I

n

c

o

m

e

G

e

n

e

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a

Banks’ & Lending

Institutions’

Policies

Financial Quota to

the

SME Sector

State Bank’s

Regulations

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growth and development and overall economic growth and stability including employment and income generation,

nourishment of industrialization, trade and export, and improvement of other socio-economic indicators.

‘State Bank’s regulation’ regarding fixing of quota of SME lending is quite vital because SBP is the only authority

to fix such a quota. SBP is the ultimate regulator and policy making body for the banking and financial sector in

Pakistan. SME financing is also the domain of the SBP.

‘Banks’ and lending institutions’ policies’ with respect to SME lending and fixing of quota of loans for SMEs play

a crucial role because without their understanding and cooperation towards fixing of SME financing or removal of

collateral barriers through alternative measures like information-based lending (as discussed in the 2nd section of

this study), the policy for fixing of quota of loans for SMEs isn‟t pragmatic.

1.9 Research Limitations

The key limitations of the research are portrayed hereunder:

The time frame, geographic scope, and sample size to conduct this study appear small.

In data collection some of the respondents showed reluctance to express their opinions and considered it as

leakage of their business secrets.

The research questions under qualitative part of the study address the problem about fixing a quota of loan,

while the research hypotheses under qualitative part of the study address another key dimension, the growth and

competitiveness of SMEs through loans.

Only the trade sector SMEs were surveyed from a small portion of only one trade association, so the

quantitative results of the study can not be generalized.

1.10 Research Methodology

The methodology included qualitative and quantitative research approaches. This research is a multi-stage research.

In the primary data collection method, at the first stage, one-on-one interviews were taken from 8 SME owners, at

the second stage, focus group session was undertaken involving 12 participants from SMEs, SBP, Small and

Medium Enterprises Development Authority (SMEDA), and other financial institutes, and at the third stage, a

survey was conducted from 30 members of Pakistan Chemists‟ and Druggists‟ Association in Karachi, out of its

total population of 200 members in Karachi. For the survey, samples were selected randomly on the basis of

probability sampling method, while samples were selected on convenience method of non-probability sampling

method for one-on-one interviews and focus group session.

2. SMEs IN PAKISTAN AND THEIR ROLE

Since independence, SMEs have made substantial growth in Pakistan, while banks and other financial institutes have

been playing central role in financing those entities. The first ever initiative that the Government of Pakistan took for

the promotion and facilitation of small-scale manufacturing was through the establishment of „West Pakistan Small

Industries Corporation‟. The Corporation could not fulfill its objectives of developing small industries and

substantially accomplishing employment growth and suffered from loan defaults as a consequence of political

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manipulation cum interference, and institutional malpractices. Later on, the notion of SMEs properly emerged in

Pakistan in 1972, as Small Business Finance Corporation (SBFC) was created through an Act of Parliament in

1972. The basic target of SBFC was to assist entrepreneurs for self-employment and setting up cottage industries all

over Pakistan. SBFC facilitated the small enterprises (SEs) to meet their financial needs on easy terms with

reasonable mark-up/interest charges and without collateral. Although to some extent SBFC accomplished its

objectives of initiating self-employment schemes to generate maximum employment but the loan portfolio mostly

comprised unsecured loans or with inadequate collateral, which eventually caused great troubles for the Corporation.

The major issues of SBFC were lack of transparency, corruption, and malpractices by both SBFC employees and

borrowers. Above all, the interference of political parties resulted in assent of loans to most of the borrowers without

meeting sufficient requirements. Due to continuous failures and financial disasters, eventually, SBFC could not

sustain and it was merged into SME Bank Limited from January 1, 2002. In 1998, the government of Pakistan

established Small and Medium Enterprises Development Authority (SMEDA) with the broad objectives to uphold,

facilitate, and promote small and medium scale companies, particularly through consultation and capacity building

programs. SMEDA is the premium institute in Pakistan for the SME development. The business development

services offered to SMEs through a nation-wide network of help desks includes:

Project identification; business plan development; prefeasibility studies for various businesses; assistance in

raising finance; company registration; incorporation, taxation, customs duty, etc.; accounting and book-

keeping services; capacity building; marketing and export; and regulations for export (Small & Medium

Enterprises Development Authority, 2012).

In recent two decades, both government and private sector have undergone remarkable work and progress in the

SME sector. With the broad objective to develop the SME sector, the SME bank was launched in Pakistan in the

year 2001. However, in a bid to restructure the banking and financial sector, the Government of Pakistan decided to

amalgamate „Regional Development Finance Corporation (RDFC)‟ and „Small Business Finance Corporation

(SBFC)‟ into SME Bank Limited effective January 1, 2002. SME bank Limited was established to exclusively cater

to the needs of the SME sector and offer financial support to artisans, cottage industries, and niche markets with

tailor-made specialized financial products and services. The ultimate aim was to stimulate SME development,

enhance gross domestic products, exports, and especially pro poor growth in the country. In accordance with the

report published by Economic Survey of Pakistan (ESP), (2008-09), up to 28th

February 2009, SME Bank provided

loans to 7,814 SMEs and financed Rs7,936 million to 54,698 beneficiaries in the country.

Recently, financial banks have opened SME departments in their branches to support and encourage SMEs.

Similarly, micro investment banks have expanded their amenities to enhance economic leverage of micro

enterprises. Leasing businesses and other economic organizations have commenced financial services to reinforce

the SME sector. Islamic banking furthermore assists in hand-holding and support to SME part by supplying

economic devices like Mudarabah, Murabaha, Ijarah, etc.

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It has been estimated that the SME sector in Pakistan contributes 30% in the GDP, along with agriculture sector

provides 90% jobs, 80% of the non-agricultural workforce; makes 35% value addition in the manufacturing

industry; and adds 25% exports earnings in the national exchequer [up to US$2.5 billion], (State Bank of Pakistan,

2009; Economic Survey of Pakistan, 2009-10). One notable features of SME sector in Pakistan is the majority of

sole proprietorship observed in small firms, keeping in view the simplicity in opening such organizations and

minimum regulatory requirements and there is an involvement of entire individual families in running the affairs of

private limited companies. It is also observed that despite the presence of SMEs in rural areas, the concentration of

most of the Pakistani industries is in some big cities, such as Karachi, Lahore, Faisalabad, Sialkot, Multan,

Hyderabad, Gujranwala, Peshawar, Quetta, Rawalpindi/ Islamabad, Sheikhupura, and Sukkur. Along with men,

women entrepreneurship has also been active in SME business. As reported in the Economic Survey of Pakistan

(2008-09), the SME sector has become a lifeline of Pakistan‟s economy, virtually constituting approximately 99.06

per cent of all profit-oriented establishments, out of which 53 per hundred are wholesale organizations retailers,

hotels and restaurants, while 20 per hundred are in manufacturing industry sector, and finally 22 per hundred pertain

to community and social sector, and personnel services.

2.1 Challenges to SMEs in Pakistan

SME sector in Pakistan has amazing potential of development but the key problems or challenges include various

factors as depicted below:

Till late 90s, the focus of the government, banks, and financial institutes remained mainly on the corporate sector,

particularly large-scale industries and manufacturing concerns, while the SME sector was neglected. Usually,

getting access to finance is the biggest challenge of SMEs and a major portion of SMEs do not have the security

needed for collateral, without which the sanction of a loan from banks and lending institutes appears very difficult.

Most of the SMEs appear deficient in accounting and financial information that hinders them to avail information-

based or financial statement-based lending and respective credit scoring. It all results in SME- finance gap,

particularly in emerging economies. Other obstacles include lack of business plans or viability reports that are useful

in assessing the cash flows of business and expected return on investment; lack of accounting and other information;

lack of managerial skills; lack of marketing; focus on quality; and particularly adoption of standardized processes

and procedures in compliance with standard operating procedures (SOPs), or obtaining standardization certificates.

Moreover, other constraints include scarcity of capital goods, lack of data on the sector, and resistance to change.

One of the problems being faced by this sector is that it does not have access to formal sources of financing

(including banks and lending institutions) and when SMEs are compared with the large-scale enterprises, the high

loan default rate among large concerns is 65%, while SMEs‟ loan default rate is only 15%. As per the fact and

figures cited by SBP, one of the biggest problems of SMEs in Pakistan was: 90% of the total SME lending portfolio

is intensified in Punjab and Sindh, 64.22% in Punjab and 25.93% in Sindh, while only 10% share goes to rest of the

country including Khyber Pakhtunkhwa, Balochistan, Gligit-Baltistan, and Azad Jammu and Kashmir. The SBP

report uncovers that an overall decline in SME financing was observed, which fall 20% to Rs348 billion in 2009

from Rs437 billion in 2007, as a consequence of loan defaults and slowing economy (State Bank of Pakistan, 2010).

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It was also reported that 89% of the loan disbursements by SMEs were for working capital requirements, which

reflects banks‟ reluctance for supplying long-run financing and project financing particularly for start-up SMEs.

According to a recent article on the same issue, the three big cities in Pakistan, Karachi, Lahore, and Faisalabad

avail more than 50% of total SME financing in the country and top 20 cities together able to avail 85% of total SME

lending (Dawn: May 17, 2010). The total share of financing to the SME sector in total lending portfolio in Pakistan

accounts for only 10% (Daily Times: May 6, 2010).

2.2 Financial Quota for SMEs and Its Advantages

Financial quota for the SME sector appears a novel notion in Pakistan but the similar paradigm has been executed in

India by the Reserve Bank of India (RBI) or the Central Bank of India, which limits the quota of financing/ advances

for small enterprises particularly micro enterprises engaged in the manufacturing, trade, and service business in a bid

to extend the fruits of financing to all sectors of the economy with an emphasis on the rural development. The other

Indian banks have also collaborated with the Reserve Bank of India (RBI) in furtherance of this strategic objective.

In this study, the same paradigm with some modifications will be ascertained. The Indian paradigm highlights that in

terms of the guidelines of Reserve Bank of India (RBI) also called India‟s central bank, the borrowing is made

accessible to all segments of the small scale industry (SSI), as portrayed hereunder (Reserve Bank of India, 2010;

Bank of India, 2010):

40% of the total lending to micro or small-scale industry goes to village-based industries, artisans/trades-

people, and tiny or cottage industries with investment in plant and machinery up to Rs5 lakhs;

20% of the total lending is earmarked to SSI units with investment in plant and machinery between Rs5

lakhs and Rs25 lakhs; and

The residual 40% credit is allocated to SSI units with investments in Plant and Machinery exceeding Rs25

lakhs.

Some of the relative advantages of Financial Quota for SMEs are: SMEs are considered as the engine of financial

development and economic growth in both evolved and evolving nations, as they develop more paid work

possibilities than large-scale companies with relatively little investment; generate employment opportunities with

low cost/investment since the unit cost of persons employed is lower for SMEs than for large-size units; they require

more labor than large-scale enterprises, since labor uses either manual, or semi-automatic, and seldom uses

automatic processes of production; and generate income at a wide-scale.

2.3 World Bank on Access to Finance for SMEs in Pakistan

According to a report of World Bank released in Islamabad on May 19, 2009, titled as, “Bringing Finance to

Pakistani Poor: A Study on Access to Finance for the Underserved and Small Enterprises”, the average Pakistani

persons remains outside the formal financial system that means banking and financial services, while they save at

home and borrow from friends and family members in cases of severe need and to finance their businesses. In fact,

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only, 14 percent of adults have access to a formal financial institution including banks and about 40 percent have no

financial access to formal financial institutions. It adds that there is a splendid potential of growth for financial

services in Pakistan, especially in upcountry, because around one-third of the population takes loans, but only three

percent uses formal services, particularly banking channel, which means that there is a marvelous scope in financial

services for SMEs that is yet under-utilized and untapped.

2.4 Institutional Development and Support to SMEs

Some of the key policies of the Government of Pakistan that support the nurture of SMEs in Pakistan are briefed in

this study.

2.4.1 Financial Policy for SMEs in Pakistan

The Government of Pakistan has taken some initiatives to uphold and nourish the SME sector in Pakistan. Over the

time, various policies and institutions have been launched to support the nurture of SMEs in Pakistan. SBP

possesses a separate department for SMEs; under the directives of SBP, all the branches of commercial banks have

SME departments; SMEs can avail a loan up to Rs3 million without collateral, but unfortunately this policy is

executed at the least level; the banks set a separate financing rate for SMEs. But unfortunately, the mark up charged

by the banks from SMEs appears higher than that of corporate sector, which enjoys a preferential rate of Karachi

Inter Bank Offered Rate (KIBOR) plus 0.5% to 1% or slightly greater than that, while SMEs avail a loan on a

markup ranging from KIBOR plus 3 to 6%.

2.4.2 SME Policy

The SME Policy 2006 (which is the latest one available and also called as SME Policy 2007) is designed by the

Government of Pakistan, which has taken input from various government departments and sources. The Government

of Pakistan (GoP) recognized the potential and ever-increasing importance of SMEs and considered them as one of

the foremost significant pillar for economic revival plan, which was devised in 1999-2000. For sustainable

nourishment and uplifting the SMEs, the Government of Pakistan formed a board, called Task Force to take care the

affairs of the SME Policy Development. The task force was established in January 2004 the secretary of ministry of

industries, production and special initiatives was appointed as its chairman. The board or task force was established

to accomplish some core objectives, as delineated hereunder:

To improve regulatory framework for SMEs; to set priorities and programs to uphold SMEs; to establish an

authority at national level to take over the affairs of SME development programs; to establish linkages

among the public and private sector for sharing relevant information and sustained coordination; and to set

a mechanism for monitoring and evaluation (M&E) of SME Policy.

The board/task force comprised of four working groups or committees to deliberate the core areas of business

environment (internal and external); access to formal sources of finance and related financial services; availability of

material resources and services including entrepreneurial grooming and development, mentoring and up-grading

skills of human resources, technology enhancement, and improved marketing; and deciding an appropriate

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definition for SME and regularly getting feedback on the developments on SME initiatives (Small & Medium

Enterprises Development Authority, 2009). The process of SME Policy formulation involved a participatory process

among all stakeholders for healthy and productive deliberations. As a consequence, the relevant authorities

encouraged the private sector bodies to express their problems and ways for better solutions. The private sector

organizations included various chapters of chambers of commerce and industry, some of the trade associations of

national level, public sector organizations, and particularly more than 1000 SMEs were consulted all over the

country.

SME development initiative – one of the biggest initiatives by the Government of Pakistan for the promotion of

SMEs in the country was the establishment of Small and Medium Enterprises Development Authority (SMEDA).

SMEDA has been playing a prominent role in spearheading Government‟s vision on SME development.

Some of the key Policy recommendations are highlighted below:

Policy recommendations regarding access to formal finance and related services include: considering SME

financing in the credit plan of the SBP; periodically reviewing the prudential regulations; annually estimating the

financial demand and supply of SMEs; establishment of credit insurance companies like credit guarantee and credit

insurance agencies, which will provide incentives and risk cover for banks; support programs for industry-based

credit schemes; capacity building program of the electronic credit information bureau (ECIB) to report the credit

data history on SMEs by the SBP; improvements in regulations for SMEs; incentives for venture capital companies;

introducing bankruptcy laws and respective judicial process; etc. Policy recommendations for entrepreneurship

development include: addition of „Entrepreneurship‟ courses in all professional degree awarding institutions of

higher education, technical and vocational training institutions in Pakistan; and identification of investment

opportunities to promote the spirit of young entrepreneurs to develop superior services and products. The purpose is

that the educational institutes not only develop the skills of the learners but enable them to resume their own

business and create self-employment, jobs, and income in the economy. Policy recommendations for human

resource development include: initiating capacity building programs, curriculum redesign, state-of-the-art training

programs for teachers, provision of equipments and technology, establishing technical training institutes in major

SME clusters, encouraging the private sector led business development service providers (BDSPs), and developing

liaison with SMEs. Policy recommendations for technology up-gradation include: research projects that support

research and development (R&D) of SMEs and University-Industry liaison programs initiated by Ministry of

Science and Technology (Most), Higher Education Commission (HEC), Pakistan Software Export Board (PSEB),

Ministry of Information Technology and Telecom. (MoITT) and others; and establishing common facility centers

like Technology Innovation Centers (TICs) that also offer design related services. Policy recommendations for

marketing include: to assist SMEs to develop effective marketing strategies, marketing research, product

development, branding, packaging, pricing, right promotion and distribution, participating in global trade fairs, to

avail matching grants to conduct international marketing research for accelerating exports; grants to develop „world-

class‟ trade directories especially designed for major SME clusters (for instance, Members‟ directory of

Automotive Parts and Accessories Manufacturers Association of Pakistan); and earmarking quota of SMEs in

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international trade delegations being supported by EPB (Trade Development Authority of Pakistan, formerly Export

Promotion Bureau, EPB).

3. DATA ANALYSIS AND PRESENTATION

In the data analysis, the research techniques of qualitative research as well as quantitative research are utilized. The

results of the qualitative research are discussed in the next section, while the quantitative data is analyzed and

presented herewith.

The research hypotheses are:


H2: The uninterrupted financial supply helps SMEs to become competitive

The results of the quantitative data also confirmed the relationship of the afore-cited hypotheses, the dependant

variable in the first hypothesis is the growth and development (of the SME sector) and the independent variable is

the loans; and the dependant variable in the second hypothesis is the competitiveness (of the SME businesses) and

the independent variable is the uninterrupted financial supply.

Table No. 1 Reliability

Scale: ALL VARIABLES

Table 3.1: Case Processing Summary

N %

Cases Valid 30 100.0

Excludeda 0 .0

Total 30 100.0

Table 3.2: Reliability Statistics

Cronbach's Alpha N of Items

.724 10

The reliability test as shown in table 3.1 and 3.2 points out Cronbach‟s Alpha score of .724, which means the

questionnaire and scale are reliable.

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Table No. 2 Descriptive Statistics

According to respondent‟s opinions, the rating on independent variable financial regulations (coded as FR) was the

highest with a mean of (4.83). The rating of loan quota (quota of loans, coded as LQ) was the second highest in its

category with a mean of (3.66), the rating of loans for business competitiveness (coded as LBC) was the third

highest with a mean of (3.53), and the rating of loans for business growth (coded as LBG) was the lowest with a

mean of (3.50).

The standard deviation shows how much variation or dispersion of data there is, from the mean value. The standard

deviation of respondents‟ opinions on “Financial Regulations” was the least (0.3), as compared to the other

dimensions. A low standard deviation indicates that the data tend to be very close to the mean. The standard

deviation of respondents‟ opinion on “Loan Quota/Quota of Loans” was the highest (.47), as compared to other

dimensions. The high standard deviation indicates that the data are spread out over a large range of values.

N Mean Std. Deviation

LOAN QUOTA 30 3.6667 .47184

FINANCIAL REGULATIONS 30 4.8333 .30290

LOANS FOR BUSINESS GROWTH 30 3.5000 .30513

LOANS FOR BUSINESS

COMPETITVENESS

30 3.5333 .34575

Valid N (list wise) 30

http://en.wikipedia.org/wiki/Statistical_dispersion

http://en.wikipedia.org/wiki/Mean

http://en.wikipedia.org/wiki/Mean

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Table No. 3 Correlations

LOAN

QUOTA

FINANCIAL

REGULATIONS

LOANS

FOR

BUSINESS

GROWTH

LOANS FOR

BUSINESS

COMPETITVENESS

LOAN QUOTA Pearson

Correlation

1 .712** .602** .623**

Sig. (2-tailed) .000 .000 .000

N 30 30 30 30

FINANCIAL

REGULATIONS

Pearson

Correlation

.712** 1 .575** .590**

Sig. (2-tailed) .000 .000 .000

N 30 30 30 30

LOANS FOR

BUSINESS

GROWTH

Pearson

Correlation

.602** .575** 1 .5 93**

Sig. (2-tailed) .000 .000 .000

N 30 30 30 30

LOANS FOR

BUSINESS

COMPETITVENESS

Pearson

Correlation

.623** .590** .593** 1

Sig. (2-tailed) .000 .000 .000

N 30 30 30 30

** Correlation is significant at the 0.01 level (2-tailed)

The correlation test indicates the perfect positive correlation among all the variables. The dependent variable Loan

Quota has the strongest correlation with Financial Regulations (0.712**), then with Loans for Business

Competitiveness (0.623**), and then the least with Loans for Business Growth (0.602**).

The level of significance shown in the above table is at 0.01 level, while Pearson correlation is significant at 0.01

level (two tailed), which means correlation is found amongst variables and thus both the afore-mentioned

hypotheses are accepted.

5. RESULTS AND FINDINGS

Keeping in view the nature of research questions and hypotheses, the data is qualitative as well as quantitative in

nature. The results and major findings are delineated hereunder:

Most of the participants agreed with the notion of fixing a quota of loans for SME sector out of total financing by

the lending institutions (the commercial banks and financial institutions). Some of the senior bankers expressed

reservations on the proposed policy because they raised their concerns that if the SMEs become unable to avail the

quota of loans, then it will cause under-utilization of the allocated funds and thus result in a loss to the lenders.

Most of the participants hold the view that due to the salience of SMEs in the socio-economic development, there

share in total loans portfolio should be between 40 to 60 percent. But some of the SME owners and (some experts

from SMEDA informally sharing their views) suggested that it‟s better to earmark a quota of 20 to 25 percent, i.e.

doubling the present status (which is about 10% of the total financing portfolio) and then, allowing three years to

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nourish the SME sector and later on, on the basis of monitoring and evaluation of performance and growth of the

sector, further fluctuation in the quota can be made, or it can be outright abolished.

The results of the correlation test accepted both the hypotheses that:


H2: The uninterrupted financial supply helps SMEs to become more competitive.

6. CONCLUSION AND RECOMMENDATIONS

6.1 Conclusion

After a comprehensive review of the SME sector in Pakistan, lenders and government‟s policy perspective regarding

SME financing, and an acquaintance on the sector at regional and global level, the conclusion is drawn hereunder:

Most of the participants under the study appeared in favor of fixing a quota of loans for SMEs out of total financing

by the lending institutions (the commercial banks and financial institutions).

It‟s better to earmark a quota of 20 to 25 percent, or doubling the present status of total financing to the SME sector,

allowing three years to nourish the SME sector, later on, on the evidence of monitoring and evaluation of

performance and growth of the sector, further fluctuation in the quota can be made, or it can be outright abolished.

Execution of such a quota requires a detailed study and policy formulation by SBP and the cooperation of the

government.

6.2 Recommendations

After a comprehensive study and analysis of the subject matter, various recommendations are framed and portrayed

here under,

In order to uphold the SME sector in Pakistan, it is proposed that there should be a fixed quota of loans for SMEs

out of total financing by banks and lending institutions.

The financial quota of loans for the SME sector in Pakistan should be fixed by the SBP, which should be 20 to 25

percent of the total financing in the country. However, the quota can be voluntarily rather than compulsory and

forfeit-oriented, while the lending institutions should earmark annual targets of loans to the SME sector. The SBP

should annually monitor and encourage the quota accomplishment requirements by the lenders and appreciate and

acknowledge through certifications and awards. This policy will greatly motivate the SME owners that they are

receiving the priority based lending and it will trigger the growth and development of the SME sector.

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