Challenges and Potential of SME Sector Financing in Pakistan and a Way Forward; through CPEC

Introduction:

Small and Medium Enterprises (SME) are the firms that have limited businesses activity. Commonly, SMEs are the startup companies or already operating companies with limited financing. By a standard textbook definition; SME is characterized by the firm having a number of employees and various amounts of financial assets. According to OECD, Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which employ less than a given number of employees. This number varies across countries. The most frequent upper limit designating an SME is 250 employees, as in the European Union. However, some countries set the limit at 200 employees, while the United States considers SMEs to include firms with fewer than 500 employees.

In Pakistan, SME authority is the Small and Medium Enterprise Development Authority (SMEDA). According to the state bank of Pakistan, ‘A small Enterprise (SE) is a business entity which does not employ (including contract employees) more than 50 persons and annual sales turnover is up to Rs.150 million. Small Enterprises can be extended finances up to Rs.25 Million.

With small size of SME there are a number of problems in getting the proper financing for the firms due to new entry, credit worthiness, risks of venture failure and the ability to service their loans properly. Now, that China Pakistan Economic Corridor (CPEC) is near its completion of early harvest stage, a number of bottlenecks that had previously retarded the industrial growth in Pakistan are also being removed one by one e.g. energy projects, law and order situation and new network of communication. In this scenario, it is expected that SME will be the main beneficiaries of the opportunities produced under the CPEC. Also a number of other countries such as China, European Union countries and USA have shown interest in investing in Pakistan….