2024

SME Development: comparing government of Pakistan’s and SBP initiatives with global practices
Contents
Introduction.................................................................................................................... 3
Literature Review:..........................................................................................................4
SMEs and Economic Growth:..........................................................................................4
Challenges Faced by SMEs:................................................................................................5
The Role of the USA in Fostering SME Growth as a Developed Nation....................5
The Monetary Policies Supporting SMEs:.......................................................................6
1. Interest Rate Policies:...................................................................................................6
2. Quantitative Easing:......................................................................................................6
3. Emergency Lending Facilities:...................................................................................6
Eligibility Criteria for SME Support According to the Fed:.........................................6
Criteria for Specific Programs:.......................................................................................7
Financial Schemes and Programs.....................................................................................7
Strategic Initiatives:...............................................................................................................8
The Role of Government of India and RBI in development of the SMES:.................9
Government Initiatives:.......................................................................................................10
None financial assistance:.................................................................................................12
The Role of Government and State Bank Of Pakistan in Development of SMES:. 14
Introduction
In many nations, small and medium-sized enterprises are seen as the primary players in
regional and national development. Many nations have adopted policies and
programmes to help small and medium-sized enterprises. Many initiatives have been
put in place to boost SMEs' entrepreneurship and inventiveness. As a result, the
European Commission has made supporting SMEs a top priority in order to promote
economic growth, job creation, and social and economic cohesiveness. Due to its
substantial contribution to achieving a number of socioeconomic goals, including
increased employment, output, export promotion, and entrepreneurship, the SME sector
is widely acknowledged as being important on a global scale. According to recent
research, SME employment accounts for over 65% of total employment and over 55%
of GDP in high-income nations and account for over 60% of GDP and over 70% of total
employment in low-income countries.

The State Bank of Pakistan (SBP), Pakistan's central bank, is essential in developing
and carrying out monetary policy to maintain price stability and foster economic
expansion. One of the most important aspects of SBP's mandate is to create an
environment that is supportive of small and medium-sized enterprises (SMEs). SMEs
are the backbone of many economies because they contribute significantly to GDP
growth, job creation, and innovation, especially in developing nations like Pakistan.

SMEs now drive economic expansion on a global scale, creating jobs and generating
significant amounts of income from exports. They exhibit extraordinary adaptability and
resilience, frequently serving as hubs for new ideas and developments in technology.
However, SMEs confront a variety of difficulties in various regions, such as restricted
access to capital, inadequate infrastructure, limited market opportunities, and regulatory
obstacles.
 SMEs contribute significantly to the economy and play a big part in Pakistan's business
environment. However, a number of obstacles, such as a complicated regulatory
environment, limited access to reasonably priced credit, and infrastructure limitations,
prevent the industry's expansion and potential economic impact. Acknowledging the
significance and obstacles encountered by small and medium-sized enterprises
(SMEs), the State Bank of Pakistan has launched multiple programmes to offer
assistance to this industry.

Organizational Definition
SMEDA Any firm that has less than 250 employees and Annual Sales up to Rs.250
million
SBP A small firm revenue upto 150m

A medium scale firm annual sales up to 800m

PKR
International
Organizations
World Bank A registered business with less than 250 employees and have assets and annual sales of less
than $100,000
European A firm with employees less than 250 and an annual turnover is less than 50M
Union Euros

Literature Review:
SMEs and Economic Growth:

Small and Medium Enterprises (SMEs) have been increasingly recognized as vital
contributors to economic growth (Hall & Ventresca, 2000).

Recent studies have further emphasized their role in job creation, innovation, and export
diversification. For instance, Ayyagari, Demirguc-Kunt, and Maksimovic (2022) found a
strong correlation between SME development and overall economic performance in
emerging markets. This is supported by research from who argue that SMEs act as
catalysts for technological advancements and entrepreneurial activity.

However, SMEs also face numerous challenges, including limited access to finance,
infrastructure constraints, and market competition. To address these issues,
policymakers and researchers have focused on developing effective support
mechanisms.

Challenges Faced by SMEs:

Access to finance remains a persistent challenge for SMEs, hindering their growth
potential (Beck, Demirguc-Kunt, & Levine, 2021).

Studies have shown that financial constraints can limit investment, innovation, and job
creation, the COVID-19 pandemic exacerbated financial difficulties for SMEs,
necessitating innovative financing solutions (World Bank, 2023).

Beyond financial constraints, SMEs often grapple with market access limitations,
bureaucratic hurdles, and a lack of skilled labor these challenges can hinder their ability
to compete and expand their operations. To overcome these obstacles, governments
and other stakeholders have implemented various support programs and policies.

The Role of the USA in Fostering SME Growth as

a Developed Nation
The United States Federal Reserve (the Fed), as the central bank of the USA, plays a
crucial role in shaping economic policies that support Small and Medium Enterprises
(SMEs). Through various monetary policies, financial schemes, and strategic initiatives,
the Fed aims to foster a favorable economic environment for the growth and
sustainability of SMEs.
The Monetary Policies Supporting SMEs:
1. Interest Rate Policies:

During periods of economic downturn, the Fed often lowers interest rates to stimulate
borrowing and investment. For instance, in response to the COVID-19 pandemic, the
Fed cut the federal funds rate to near zero in March 2020, making loans more
affordable for businesses, including SMEs. This move aimed to ease financial stress
and maintain liquidity in the market. Additionally, the Fed's commitment has been crucial
in providing a stable financial environment for SMEs to recover and grow.

2. Quantitative Easing:

By purchasing long-term securities, the Fed injects liquidity into the financial system,
lowering long-term interest rates. This indirectly benefits SMEs by improving credit
availability and encouraging investment. The QE programs initiated during the 2008
financial crisis and the COVID-19 pandemic have been crucial in stabilizing financial
markets and supporting business continuity. These programs were expanded during the
pandemic to include a wider range of assets, further ensuring that liquidity reached
various sectors of the economy, including SMEs.

3. Emergency Lending Facilities:

The Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market
Corporate Credit Facility (SMCCF) were created to support credit flow to large
employers and subsequently ensure stability in the broader financial markets. While
these facilities primarily targeted larger corporations, their role in maintaining overall
market stability indirectly supported SMEs by ensuring that financial conditions
remained conducive to business operations and growth.

Eligibility Criteria for SME Support According to the Fed:

The Fed typically follows the SBA’s definition of SMEs, which varies by industry but
generally
includes businesses with fewer than 500 employees for manufacturing and less than
$7.5 million in average annual receipts for most non-manufacturing industries.

Criteria for Specific Programs:

1. Pay check Protection Program (PPP): Eligibility includes small businesses, non-
profits, veterans organizations, tribal businesses, and independent contractors
that were in operation before a specified date and have been affected by the
pandemic.

2. Main Street Lending Program: Eligible businesses must have been in sound
financial condition before the pandemic, with less than 15,000 employees or
2019 revenues of $5 billion or less.

3. SSBCI: States determine specific eligibility criteria, but generally focus on small
businesses that need help accessing capital, especially those in underserved
communities.

4. Many of the Fed’s programs require SMEs to demonstrate a level of financial

health before receiving support. For example, businesses applying for the Main
Street Lending Program must have been financially stable before the pandemic,
ensuring that the loans go to businesses with a viable path to recovery.

5. SMEs must comply with specific documentation requirements, including proof of

business operations, financial statements, and in some cases, a demonstration
of financial need due to the impact of economic disruptions.

Financial Schemes and Programs

1. Paycheck Protection Program (PPP):

Administered in collaboration with the U.S. Small Business Administration (SBA), the
PPP and Economic Injury Disaster Loans (EIDL) was designed to provide direct
financial assistance to SMEs affected by the pandemic. The program offered forgivable
loans to cover payroll and other essential expenses, thereby helping businesses retain
employees and stay afloat during challenging times. According to the SBA, it disbursed
over $800 billion in loans, demonstrating its critical role in supporting SMEs during the
crisis.
2. Main Street Lending Program:
Launched in 2020, the Main Street Lending Program was aimed at providing loans to
small and medium-sized businesses that were in sound financial condition before the
pandemic. The program offered five-year loans with more favorable loan terms, such as
longer repayment periods and lower interest rates. By the end of 2020, the program had
approved nearly $17 billion in loans, highlighting its impact on sustaining SME
operations.
3. State Small Business Credit Initiative (SSBCI):
Reauthorized and expanded under the American Rescue Plan Act of 2021, the SSBCI
provides nearly $10 billion to states, territories, and tribal governments to support small
business financing programs. These programs include capital access, loan participation,
loan guarantees, and venture capital initiatives, all aimed at enhancing access to credit
for SMEs. The SSBCI is particularly focused on promoting equity and inclusion by
ensuring that underserved communities have access to the necessary resources to start
and grow businesses.

Strategic Initiatives:
1. Under the Community Reinvestment Act (CRA), the Fed evaluates how well
financial institutions serve low and moderate-income communities, which often
include numerous SMEs. Banks that meet CRA requirements are incentivized to
provide more credit and financial services to these businesses, promoting
inclusive economic growth. Recent updates to the CRA have emphasized the
importance of digital banking and technology-driven solutions to expand access
to financial services.

2. The Fed, in collaboration with various stakeholders, promotes financial literacy

and inclusion programs targeting SMEs. These programs are designed to
enhance the financial management capabilities of small business owners,
improve their access to credit, and facilitate their integration into the formal
financial system. Workshops, seminars, and online resources provided by the
Fed and its partners are crucial in building a resilient SME sector. For example,
the Fed's "Connecting Communities" webinar series offers insights and
resources on accessing capital, managing financial challenges, and leveraging
federal programs for small business support.

3. The Fed conducts extensive research on the SME sector to inform policy
decisions. Reports such as the Small Business Credit Survey provide valuable
insights into the challenges faced by SMEs and their financing needs.
 4. Fed has introduced programs aimed at helping SMEs transition to digital
operations. These include grants and low-interest loans for technological
upgrades, cybersecurity improvements, and e-commerce platforms.

5. The Fed has begun integrating climate risk assessments into its regulatory
framework. These efforts are particularly relevant for SMEs, which may face
unique challenges in adapting to climate-related risks and transitioning to
sustainable business practices.
The Fed’s schemes often have larger budgets and broader reach compared to SBP’s
initiatives. The Fed places a significant emphasis on supporting digital t;ransformation,
which is crucial for SMEs to compete in a global market. SBP has made strides in this
area, but the scale and variety of digital support programs from the Fed are more
extensive. The Fed’s climate and sustainability initiatives are more advanced, reflecting
the global shift towards environmental responsibility. While SBP has initiated green
financing schemes, the comprehensive nature of the Fed’s programs, which include
financial incentives and technical assistance, provides a more robust framework for
SMEs. The Fed’s response to emergencies like the COVID-19 pandemic has been swift
and substantial, with programs like the PPP and Main Street Lending Program providing
immediate relief. SBP has implemented similar measures, but the scale and rapid
deployment of funds by the Fed have been more impactful. Both the Fed and SBP
prioritize financial inclusion, but the Fed’s collaboration with a wider range of federal and
state programs ensures a more comprehensive approach.

The Role of Government of India and RBI in

development of the SMES:
MSMEs are among the primary drivers of economic development, innovation, and
employment in India, a country with stark disparities between the rich and poor and high
unemployment rate (RBI, 2019). MSMEs sector is characterized by minimal investment,
increased job opportunities, operational flexibility, reduction in regional disparities and
import substitution (Grover, 2012).
In India, more than 95% units are engaged in this sector and contribute to approx. 30%
Of India GDP, 45 % of manufacturing output, 45.56% of country’s total export (MMSME,
2024) and create 11.10 crore jobs (NSS 73rd round, 2015-16). Contribution of MSME
indicate that MSMEs is very important for every area. In accordance with the provision
of MSME’s development act 2006, the MSME classified into two Categories such as
manufacturing enterprises based on their investment in plant and machinery and
service Enterprises based on investment in equipment. Now, as per the revised
definition announced on May 13, 2020, MSME classified on the basis of two criteria:
investment in plant and machinery and annual turnover.
Micro Enterprise : Investment in plant and machinery or equipment does not exceed 1
crore and turnover does not exceed 5 crore
Small Enterprise: Investment in plant and machinery or equipment does not exceed 10
crore and turnover does not exceed 50 crore
Medium Enterprise :Investment in plant and machinery or equipment does not exceed
50 crore and turnover does not exceed 250 crore
According to the Ministry of Micro, Small & Medium Enterprises report, there are over
633.88 lakh registered MSMEs in India. 79.63% owned by Males and 20.37 % females
owned

Government Initiatives:
The Indian government has launched various initiatives to support SMEs, such as the
Micro, Small, and Medium Enterprises Development (MSMED) Act, and schemes like
the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the
Prime Minister’s Employment Generation Programme (PMEGP )
MSME Business Loans in 59 Minutes:
With this scheme, an eligible MSME can avail a credit amount ranging from ₹1 lakh to
₹5 crores. Available from both traditional institutional lenders and NBFCs, a business
owner can get this MSME loan at a yearly interest rate of 8.50%.

National Small Industries Corporation (NSIC) Scheme:

Single MSME units can avail credit up to Rs. 5 crore, at interest rates charged between
9.5% and 12%.

Pradhan Mantri Mudra Yojana:

Pradhan Mantri Mudra Yojana scheme provides loans of up to Rs. 10 lakh to micro,
small, and medium enterprises (MSMEs) for their business operations. It has three
categories based on the amount of loan required – Shishu, Kishor, and Tarun.
Stand-up India:
The Stand-up India scheme is aimed at promoting entrepreneurship among women and
economically weaker sections of society. Under this scheme, loans ranging from Rs. 10
lakh to Rs. 1 crore are provided to help start-ups and businesses run by SC/ST or
women entrepreneurs.

Credit guarantee fund trust for micro and small enterprises (CGTMSE):
CGTMSE scheme provides collateral-free loans up to Rs. 2 crores to new or existing
MSMEs. Under this scheme, banks and other financial institutions provide loans to
MSMEs, and the government provides a credit guarantee of up to 75% of the loan
amount. Collateral free loans up to a limit of Rs.200 lakh – For individual MSEs

National small industries corporation (NSIC) subsidy schemes:

NSIC Scheme offers various credit-related subsidies such as financial assistance for
marketing, technology upgrades, raw material procurement, and one-time settlement of
outstanding dues for MSMEs.

Credit Link Capital Subsidy Scheme (CLCSS):

The Credit Linked Capital Subsidy Scheme (CLCSS) by The Ministry of Micro, Small
and Medium Enterprises (MSME) aims to boost the technological capabilities Of Micro
and Small Enterprises (MSEs) in India. It offers up to 15% upfront capital subsidy on
institutional finance, helping MSEs upgrade their machinery and adopt advanced
technologies. This initiative not only enhances product quality and reduces production
costs but also promotes Competitiveness and sustainability among small Businesses.
MSEs with a valid UAM number can Benefit from this scheme, ensuring inclusive
growth Across various sectors of the economy. NSIC Scheme offers various credit-
related subsidies such as financial assistance for marketing, technology upgrades, raw
material procurement, and one-time settlement of outstanding dues for MSMEs. The
revised scheme aims at facilitating Technology upgradation by providing 15% up-Front
capital subsidy to MSEs, Upto 1 core and 15% subsidy

Credit Link Capital Subsidy Scheme (CLCSS):

The Credit Linked Capital Subsidy Scheme (CLCSS) by The Ministry of Micro, Small
and Medium Enterprises (MSME) aims to boost the technological capabilities Of Micro
and Small Enterprises (MSEs) in India. It offers up to 15% upfront capital subsidy on
institutional finance, helping MSEs upgrade their machinery and adopt advanced
technologies. This initiative not only enhances product quality and reduces production
costs but also promotes Competitiveness and sustainability among small Businesses.
MSEs with a valid UAM number can benefit from this scheme, ensuring inclusive growth
Across various sectors of the economy.

None financial assistance:

For the development of MSMEs The Goverment of India not only focus on access to
credit but access to market, technology upgradation, ease of doing business and sense
of security. Following are som3 major steps taken by GOI
MSME SAMBANDH ( procurement from central ministries / departments / CPSEs )
National Institute for Micro, Small and Medium Enterprises ( ni-msme )
Development of msme Technology centers at 14 locations on public private partnerships
ppp
National small industries Corporation ( facilitating the growth of small enterprise since
1955)
Single point registration Schemes
Technical services centers
E marking / digital services facilitation for MSMEs
Stablishment of Small Industry Development Bank of India to specially facilitate the
MSMEs

The National Single Window System (NSWS.GOV.IN)

 Get all approvels required to start your business in india

 Identifying and applying for approvels according to your business requirements

 Know your aprovel KYA module includes guidance for 32 central departments
and 32 states

 The portal hosts applications for approvals from 32 central departments and 28
state Governments
International Cooperation (IC)
95% of airfare and space rent for entrepreneurs.

Assistance to Training Institutions (ATI)

Maximum assistance for creation or strengthening Of infrastructure will be Rs.150 lakh
on matching Basis, not exceeding 50% of project cost. However, for the North-Eastern
Region(including Sikkim), Andaman & Nicobar and Lakshadweep, maximum assistance
on matching Basis would be Rs.270 lakh or 90% of project cost, Whichever is less.

ISO 9000/ISO 14001 Certification Reimbursement

75% of expenditure Subject to a maximum of Rs.75,000 in each case.

Entrepreneurial and Managerial Development of SMEs Through Incubators

Funding support for setting up of ‘Business Incubators (BI)’: The cost may vary from
Rs.4 to 8 lakh for each incubatee/idea, subject to overall Ceiling of Rs.62.5 lakh for
each BI.

RBI Role in MSMEs Development

All private and public sector banks in India have targets prescribed by the Reserve Bank
of India (RBI) for lending to the MSE sector. Under these guidelines, domestic
scheduled commercial banks (except small finance banks and regional rural banks) and
foreign banks with more than 20 branches will allocate 7.5% of their Adjusted Net Bank
Credit (ANBC) or credit equivalent amount of off-balance sheet exposure, to the
microenterprises sector.
As per the RBI regulations, banks have been mandated to offer MSME loans of up to
Rs.10 lakh without accepting collateral. Sometimes, depending on the financial position
and track record of the MSME units, banks can increase this limit to Rs.25 lakh
The RBI has directed all public sector banks to open at least one specialised branch in
each district for lending to the MSME sector. At present, there are 2,032 such branches.
The Role of Government and State Bank Of Pakistan
in Development of SMES:
The Government of Pakistan and SBP play significant role the development of the
SMES. By making certain policies the government and SBP overcome some of the
issue regrading SMES (small medium enterprises) but there are some complications
which must be resolve in order to achieve exponential growth in SME sector. Here
government and SBP play significant role for the emergence of the SME.
The Government's Roles and Responsibilities:
As the government acknowledge the economic development rile of SMEs, they have
provided different business support programs to ensure the sustainable growth of the
economy. Therefore, the Pakistani government has launched several initiatives to
facilitate and promote expansion of the SMEs. These initiatives aimed to create the
institutional and systematic conditions to support upgrading of firm level capabilities,
diversification, and creation of new firms. This is a sign on how the Pakistani
government deals with managing some development for the SMEs in Pakistan to
mature in their own field as well as benchmark themselves with the best in industry.
The following role and responsibilities through which government give benefit to SME.
1. Policy Formulation:
Government should develop and implement policies that support the growth and
sustainability of SMEs. Create a conducive business environment through legislation
and regulations that simplify the process of starting and running SMEs. In 2007 the
government introduce the policy regrading to development of the SMEs. This policy
established a long-term framework for SME development, focusing on access to
finance, business development services, and a conducive business environment. After
the 14 years, in 2021the government update this policy. This updated policy,
emphasizing reducing the cost of doing business and promoting growth in key sectors
like IT and e-commerce.
A major challenge for SMEs is securing financing. The government must work on
facilitating access to credit through loan guarantee schemes, promoting alternative
financing options like venture capital, and encouraging banks to develop SME-specific
products.
 2. Infrastructure Development for SMEs
Logistic has become essential part of business practice for both small and large scale
business. It is important for individuals and businesses to understand process of
logistics. This is process of taking goods or services from company to bring in the
market for customer use. In addition, logistic is a process of future estimation and
dealing with it competitively to move furnished or unfurnished commodities from one
place to another. This process is very important for most businesses, it helps them to
stock their products and move from one place to another place when needed.
The government's assistance is necessary for both developing and developed countries
for SME growth which ultimately leads in economic development. Moreover,
government's help and its importance can be seen from example of China which shows
that government interference with businesses towards logistics issues is very important.
Furthermore, importance of logistics increases with complicated issues because of
supply system in market. Therefore, logistic professional often helps to solve those
complicated issues. However, logistic has become separate field these days and
created its own place in market, without logistics, it is difficult to survive in market.
Provide essential infrastructure like roads, power, and telecommunications that facilitate
the operations of SMEs. Establish industrial parks and special economic zones with
facilities for SMEs.

3. Financial Support:
Allocate budgetary resources for grants, subsidies, and incentives to support SMEs.
Facilitate access to credit and funding through state-run financial institutions and
guarantee schemes.
Financial institutes and banks have different schemes for different customers. In the
same way these institutes have also special loans for those enterprises which want to
grow in particular area, to expand it or want to grow further. However, enterprises pay
some what high interest rate to access these special loans. Whereas, banks/financial
institutes do not approve these loans directly therefore, they go through different
requirements which might include surveying of market, business operations, product
demand and rate of return [. Due to this reason, sometimes SMEs provide false
financial statements of their businesses which become difficult for banks to assess
applications, resulting in delay in decisions for sanction of loan. The government must
make certain regulation for the loans. So SMEs easily take loan from banks.
 4. Training and Capacity Building:
Offer training programs and workshops to enhance the skills and knowledge of SME
owners and employees. Support vocational and technical education that aligns with the
needs of SMEs. financial literacy of SMEs in Pakistan is of great importance to avoid
the unawareness of SMEs related to financial services available through formal source
and as well as through Capital Markets. In order to create a healthy and sound growth
of SMEs it is very essential to reduce the gap of knowledge between financial
institutions and SMEs.
The government supports providing training programs, mentorship initiatives, and
consultancy services to enhance SME skills in areas like marketing, financial
management, and technology adoption.
Create awareness for financial institute to approve finance on minimum documents for
SMEs growth.

5. Market Access:
Assist SMEs in accessing local, national, and international markets. Organize trade
fairs, exhibitions, and business delegations to promote SME products and services. The
government must work on creating a level playing field for SMEs in the domestic market
and supporting them in entering international markets through trade facilitation
measures and participation in trade shows.

6. Regulatory Support:
Simplify and streamline licensing, registration, and compliance procedures to reduce
bureaucratic hurdles for SMEs. Implement favorable tax policies and incentives for
SMEs.
Complex regulations can lead to high compliance costs for SMEs. Regulatory support
can help them understand specific requirements, avoid unnecessary expenses, and
ensure compliance.

7. Technology and Innovation:

Technology and innovation are potent forces driving the development of Small and
Medium-Sized Enterprises (SMEs). By embracing these forces, SMEs can gain a
competitive edge, improve efficiency, and reach new markets.
by the process of automation, Repetitive tasks can be automated using software or
machinery, freeing up human resources for more strategic activities. This helps to
reduce the cost and save the time.
By Accessing powerful computing resources and software on-demand eliminates the
need for expensive upfront investments in hardware and IT infrastructure. Like cloud
computing.
SMEs can leverage data to gain insights into customer behaviour, optimize operations,
and make data-driven decisions. From this process firm easily make its decision.
By the awareness of the technology. SMEs can establish an online platform for sell of
products directly to customers worldwide.
Cost-effective social media tools allow SMEs to connect with customers, build brand
awareness, and promote offerings.
By using CRM software helps manage customer interactions, personalize marketing
efforts, and improve customer service.
Promote the adoption of new technologies and innovations in SMEs. Support research
and development initiatives that benefit the SME sector.

The Role of State Bank of Pakistan:

At first it is important to mention the role of State bank of Pakistan (SBP). It is the
central bank responsible for making and implementing the monitory policy of Pakistan.
Since the establishment of State bank, it has seen many ups and downs. At the time of
inception, it had very little reserve to work with. In the 1970’s a nationalization
movement was started. A large number of banks were nationalized. This was a major
blow for the SME sector. Many banking activity restrictions were imposed on the private
sector. The focus of banks had shifted from SME sector to the financing of large-scale
public sector manufacturing. After the nationalization movement the government quickly
realized the problem faced by the SME. In order to rectify the mistake in 1972 the
government established many small financial institutions that would help and support
SME. The SBP again in 2007 tried to make new regulations for the SMEs, so they can
have better access to finances but failed to do so. The banks in Pakistan found it difficult
to finance SMEs because their profitability was less as compared to large institutions.
The other issues were, Banks’ risk averse approach, Alternate liquidity deployment
options, High transactional cost of serving SMEs, Lack of Financial Products’
Innovation, Lack of legal framework, The banks inability to monitor the performance of
SME to achieve high efficiency The commercial banks of Pakistan are still not willing to
finance the SMEs. It is due to this there is negative growth of 0.37%. This was recorded
in the second quarter of 2015.
The State Bank of Pakistan is highly focus and play crucial role in the development of
the SMEs,

1. Monetary Policy Implementation:

Monetary policy can play a significant role in supporting the development of SMEs
(Small and Medium-sized Enterprises) by influencing the availability and cost of credit.
Central banks can implement policies that reduce interest rates. This makes borrowing
cheaper for SMEs, encouraging them to invest in expansion, inventory, or equipment.
Easier access to capital allows them to grow their businesses.
By injecting more money into the economy, central banks can increase liquidity. This
makes it easier for banks to lend and can stimulate overall economic activity, benefiting
SMEs as well.
Central banks offer cheap loans to commercial banks on condition that they lend this
money on to SMEs at a lower rate.
Governments or central banks can provide loan guarantees, reducing the risk for
lenders and making them more willing to lend to SMEs.
Implement monetary policies that ensure stable economic conditions conducive to SME
growth. Maintain inflation rates and interest rates at levels that do not impede SME
financing.

2. Credit Facilitation:
Encourage commercial banks to extend credit to SMEs by setting favorable terms and
conditions. Develop and promote specialized financial products and services tailored to
the needs of SMEs. The commercial Banks offer finance to Small and Medium
Enterprises in three modes like for working Capital requirements, Trade financing and
fixed investment. The main portion of the total outstanding SME portfolio is drawn on
working capital finance followed by trade finance and fixed investment. This state of
utilization of outstanding finance shows the major finance requirement is to run day to
day operations for SMEs.

3. Financial Inclusion:
Financial inclusion helps SMEs move away from expensive informal lenders like loan
sharks, freeing up resources for growth. Financial inclusion initiatives, these programs
equip SME owners with the skills to manage their finances effectively, make informed
decisions, and grow their businesses.
Promote financial inclusion initiatives to ensure SMEs, especially those in rural areas,
have access to financial services. Implement programs that support the unbanked and
underbanked SME sectors.

4. Regulation and Supervision:

Regulate and supervise financial institutions to ensure they provide fair and transparent
services to SMEs. Ensure that financial institutions have adequate capital and risk
management frameworks to support SME lending.

5. Developmental Initiatives:
Launch and manage development finance institutions and funds that specifically target
SME growth. Collaborate with international financial institutions and donor agencies to
mobilize resources for SME development.

6. Capacity Building and Advisory Services:

Provide advisory services and technical assistance to financial institutions on SME
lending practices. Organize training programs for SME owners on financial literacy and
business management.

7. Credit Guarantee Schemes:

Implement and manage credit guarantee schemes to reduce the risk for banks lending
to SMEs. Ensure that these schemes are accessible and effectively promote SME
financing. The higher access to banking finances should be provided especially for
working capital finance to fill the gap of capital shortage and output. This measure will
increase the SME production and employment opportunities within the sector. This
policy measure can be implemented with government and commercial banks
partnership under Credit Guarantee Scheme (CGS) for SME sector.