Cheap credit essential for SME Development

June 2, 2012 | By More

The World Bank estimates that SMEs contribute an average 51.5 percent of GDP in high income countries—but only 15.6 percent in low-income countries. There is need for a turnaround of these numbers. Developing countries are heavily depended on SMEs for creating employment and supporting large industries.

SMEs in developing countries complaint about non-availability of cheap credit for fueling their growth potential. On the other hand, banks are shy in putting their bet on risky businesses!

There is no doubt that smaller businesses are more risky. They either do not posses valuable collateral or have noting pledge at all. SMEs mostly remain in the fire fighting mode, due to ever increasing cost of doing business and their inability to sustain economic shocks, paying off loans is also an uphill task.  Lack of disclosure and poor documentation are the major reasons for SME’s inability to attract financing from banking channels.

My study of three major SME groups i.e., manufacturing, women owned SMEs and Technology oriented SMEs indicates that every group has unique funding requirements that are mainly based on the level of maturity of business and growth stage.

Most interestingly, manufacturing sub-sector is most attractive for financial institutions. SMEs in this sector generally have capital equipment to pledge against loans. Whereas women owned SMEs and technology driven SMEs suffer. In case of women owned SMEs, documentation is almost non-existent; they are unable to show their track record. But this group gets some attention from donor agencies and loans via NGOs are quite popular in this sector. Worst sufferers are the technology driven SMEs. These are generally owned and managed by young people with only intellectual capital, idea or software.  In many developing countries, banks are shy of taking risk with technology oriented companies.

It is indeed essential for regulators to prepare and implement policies that are SME friendly. But in my views, the main trigger needs to come from business support organizations such as chambers and associations as most of their members are SMEs.

Donors also need to support SME development in a big way. In my views, they need to consider creating some credit lines through central banks for cheap credit to SMEs. Moreover, donors generally like to work with the economically deprived class. This is the extreme bottom of the pyramid, instead, if they shift their focus and extend support to mid-tier companies that have already showed growth, the snowballs affect will be much bigger.

Contributed by Hammad Siddiqui, Deputy Country Director at Center for International Private Enterprise (an affiliate of the US Chamber)-Pakistan office.

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Category: SME Development

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