ISLAMABAD: The Competition Commission of Pakistan (CCP) has concluded an extensive study titled “Enhancing Economic Efficiency of SMEs in Pakistan”, identifying barriers to competition, and providing recommendations for improving the economic efficiency of Small and Medium Enterprises (SMEs).

The study is based on data from 50 Financial Institutions (FIs), 18 focused group discussions, and 362 SMEs across 11 cities and a seminar conducted by CCP on women entrepreneurs.

The study recommends reviewing the definition of SMEs in comparison to other regional countries, as the current National SME Policy, 2021 excludes micro-enterprises, which overlooks an important segment of the policy focus. Additionally, startups are addressed in the policy, but their unique characteristics warrant separate treatment in line with international best practices. A comparison of definitions across the Companies Act, SME Policy, and Income Tax Ordinance reveals varying thresholds for revenue, innovation, and age, indicating the need for rationalization. Moreover, establishing a clear and transparent legal framework for startups is emphasized to define the rights and obligations of all stakeholders operating within the startup ecosystem.

Access to finance is a significant barrier to SME growth, as highlighted in the study. Despite policy measures to increase financing to 17%, the SME sector in Pakistan only receives 6-7% of private sector financing. In comparison, SMEs in Bangladesh receive 25% financing, and in India, it’s 18%. Data from financial institutions reveals that Medium Enterprises receive over 80% of the financing, and only 2 FIs achieved the SME lending targets set by the State Bank of Pakistan during 2018-2020.

The study also identifies issues with the SME definition based on annual turnover criteria. The lack of differentiation between Small Enterprises (SE) and micro enterprises’ annual turnover, along with the wide benchmark for Medium Enterprises (ME), creates challenges. These thresholds can hinder access to finance for SMEs. To enhance access to finance, it is recommended to rationalize the SME definition by considering the annual turnovers more effectively.

In response to CCP’s questionnaire, it was concluded that 93% of SMEs found it cumbersome to avail of financing facilities from banks, and 80% had not availed of bank financing. It is recommended that SBP may consider allocating separate SE and ME lending targets for FIs, set sector-specific targets, set separate financing facilities (for poor districts) and introduce standardized pricing of insurance and evaluation reports. In line with international practices, public sector commercial banks should be encouraged to take the lead in SME financing. To increase SE lending the top-tier banks may be given mandatory credit targets. In addition, a framework also needs to be developed by the SBP for greater engagement of small chambers of commerce.

The study highlights that the funds available under various SBP credit guarantee schemes for micro and SEs need to be enhanced. Non-bank financial institutions, leasing companies, crowdfunding, and equity financing can play an important role in the provision of credit to startups and SMEs. Improvement in the regulatory environment for these alternate financing channels is required.

The study points out that there are at least 12 different categories of general regulatory layers that are applicable to all firms doing business in Pakistan. In the manufacturing sector, a total of 50 laws and numerous secondary regulations are enforced by over 40 national and subnational agencies and departments. It is proposed to simplify the system of licensing and registration and develop one-stop portals for issuing licenses, permits, and registration of SMEs. The data also shows that the regulatory duties in various sectors make imported raw materials expensive for downstream businesses and therefore a critical review of such import duties is paramount.

Pakistan’s business environment faces a complex and non-conducive tax structure which adds a burden on businesses. The study data reveals that SMEs find it difficult to comply with the existing tax system. The withholding tax deduction from the registered SMEs is a challenge due to the existence of a large informal/unregistered SME sector. It is recommended that the tax structure must be based on fairness, efficiency, convenience, and certainty.

The interests of SMEs need to be safeguarded in existing Special Economic Zones (SEZs) and industrial parks. Also, small chambers are recommended to be engaged on the board of SEZs and to ensure that land is made available to SMEs at affordable rates. A review of the MSME sector in international jurisdictions shows that countries have either legislation or master plans to achieve growth in the sector. Enacting an MSME Act is therefore proposed. Legislation may provide clarity in enforcing rights within a framework.

The study data depicts that SMEs lack the requisite skills and training to efficiently conduct their businesses. It is recommended to the federal/provincial authorities invest greater funds in Technical and Vocational Education and Training institutions with the latest learning output, systems and use of technology and to fast-track the non-operational training institutes. In addition, higher education institutions and business incubation centres should also be focused on and utilized.

The study points out that women’s participation in the labour force in Pakistan is only 24.6%, while they constitute almost 50% of the population. The country has only 1% female entrepreneurs compared to 21% male entrepreneurs. SBP data reveals that women SMEs received only 3.2% of the total SME lending in 2022. Although, SMEDA is part of the National Coordination Committee (NCC) to review SMEs’ policy and the regulatory framework. It is recommended to have women departments and women-led SMEs in the NCC to propose concrete measures in policy and legislation for women’s inclusion. For enhanced financial inclusion the FIs should be required to maintain a certain percentage of financing for women entrepreneurs. Further, the maximum limit of SBP’s refinance and credit guarantee scheme for women entrepreneurs may also be enhanced.

Pakistan lacks a key financial institution specializing in SME financing and a dedicated SME banking network. There is also a lack of trained banking staff to deal with SMEs. For the growth of the sector, it is proposed to create dedicated SME desks across the banking network to educate, guide, and facilitate SMEs. Capacity building of the banking staff dealing with SMEs is also proposed.