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Boosting Competitiveness and Profitability of Pakistan's SME Sector

MANILA, PHILIPPINES (19 December 2003) - The Asian Development Bank (ADB) is helping to boost the competitiveness and profitability of Pakistan's small and medium enterprises (SMEs) to promote economic growth, through an assistance package approved today including US$170 million in loans and a partial credit guarantee (PCG).

The Sector Development Program will support Government policy reforms on SMEs to improve the business climate, emphasizing leveraging private sector involvement. It will also help build better services to SMEs from financial institutions and business development services (BDS).

The program comprises four parts:

• A program loan of $152 million to support policy reforms
• A project loan of $18 million equivalent to build institutions and markets for BDS and credit for SMEs. This will support implementation of the policy and institutional reforms designed under the program loan
• The PCG facility, of up to $65 million, to leverage market-based credit to SMEs
• A technical assistance (TA) grant of $250,000 to assist the Government and private sector stakeholders in coordinating reforms.

About 30,000 SMEs will benefit from access to financial services and 8,000 from the operations of the private sector-managed Business Support Fund, which will be set up to serve as a knowledge tool to enhance the productivity and competitiveness of SMEs.

"The program aims to fill an important gap in the Government's and ADB's strategic agenda, given that lack of access to formal sources of finance and BDS are big constraints on SME growth," says Rainer Hartel, an ADB Financial Sector Specialist.

The Government recently affirmed the importance of SMEs and their potential for economic growth, employment, and income generation in its Poverty Reduction Strategy paper.

SMEs are officially classed in Pakistan as units employing between 10 and 100 staff. Under this definition, there are about 80,000 SMEs in the country, most concentrating on trade and services. However the true significance of SMEs is much higher taking into account the SMEs operating in the informal sector each employing between 5 and 10 staff. SMEs account for about 80% of urban jobs and 30% of the country's gross domestic product.

However, despite their importance, policies and laws favor larger businesses and are mostly outdated and inaccessible to the vast majority of SME owners.

Preparatory work for the project identified SME needs as being highly diversified, including practical and strategic business advice, financing, marketing, and technology upgrading.

Under the program, a task force will be established to develop an SME policy paper and provide the background analysis and basis for improving the policy environment. To increase understanding of labor protection and its positive impact on enterprise efficiency, a national labor protection and labor inspection policies will also be developed. In addition, the program will enhance the effectiveness and outreach to SMEs of the country's Small and Medium Enterprise Development Authority.

The program will improve market-based access to, and delivery of, SME finance, including the regulatory and credit information infrastructure. It will build capacity among private sector financial institutions for SME finance, restructuring and privatizing the SME Bank.

"The enhanced business development and financial services will improve SME competitiveness and profitability, and help boost job security and creation," adds Mr. Hartel.

The PCG facility will be used to leverage the financial system's resources for lending to the SME segment currently underserved by financial institutions. This will provide catalytic support for innovative financial products and approaches in new and less familiar markets. ADB will share with participating financial institutions the credit risk of SME loans.

Once successfully tested among participating financial institutions, such products will be expanded among a larger number of financial institutions. The PCG facility will be available for five years until about end-2008.

The program loan comes from ADB's ordinary capital resources, with a 15-year term, including a grace period of three years. Interest is determined in accordance with ADB's LIBOR-based lending facility.

The project loan comes from ADB's concessional Asian Development Fund, with a 32-year term, including a grace period of eight years. Interest is 1% per year during the grace period and 1.5% per year afterwards.

The program will be implemented over a three-year period and the project will be implemented over five years.

The Ministry of Finance will be the executing agency for the loans and will also constitute the core program management unit in charge of monitoring and program coordination. The project loan will be largely implemented by a private sector-led SME Business Support Fund Company providing BDS and participating financial institutions benefiting from capacity building support. The executing agencies for the PCG facility will be the participating financial institutions, which will be identified through a due diligence process.

More at adb.org/media

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