ishrat husain : sme financing - issues and strategies welcome address by mr ishrat husain, governor of the state bank of pakistan, at the conference on sme financing : issues and strategies, lahore, 10 may 2005. * * * mr. president, distinguished guests, ladies and gentlemen : it is an honour for me to welcome you all and particularly mr. president to this conference on sme financing : issues and strategies. i wish to thank you mr. president, sir, for your continued support in our efforts to develop a vibrant sme sector as an integral part of the poverty reduction strategy. you have spelled out this strategy on several occasions very clearly and i would like to dwell upon it this morning. but i would like to assure you that this conference is a modest contribution towards the fulfillment of that strategy. i would also like to welcome our foreign speakers and wish them a pleasant stay in our country. the overall objective of the conference is to bring together all the stakeholders in the sme sector to generate debate on the issues confronting the sector and look at the various strategies being developed at the regulatory and policy level to increase the flow of credit and financial services to this very important sector of our economy. the speakers of this conference will provide us with valuable insight into main issues as well as some of the “ nuts and bolts ” of how to do sme finance more profitably, as the state bank is not going to force the banks to undertake lending operations which are not profitable. the international speakers will share with us the best practices that have successfully worked elsewhere and we can explore ways of adapting them to our own situation. let me also remind you that lending to smes, if developed and practiced on modern lines shall primarily remain a profitable options for banks and can guarantee earning for banks at a rate higher than the lending to corporate clients. there exists strong evidence that smes expansion boosts employment more than large firm growth because smes are more labour intensive. in pakistan, the sme sector contributes 30 percent towards the country ’ s gdp, along with agriculture provides 90 percent of the jobs, accounts for 35 percent of the value added in the manufacturing industry and generates 25 percent of manufacturing sector export earnings ( $ 2. 5 billion ). given its huge potential for generating employment, the government has identified the sme sector as one of the leading sectors along with agriculture and construction and housing which will spearhead its efforts towards generating employment to alleviate poverty in the country within

sros were being used to favour certain individuals or tariffs were raised to protect selective groups or banks loans were given to supporters of the ruling parties. in the past five years, however, these practices have been done away and a level playing field now exists for all businesses – small or large – in the economy. the second player in this process is the provincial and the local governments. they have to allocate and earmark land for setting up industrial estates and deliver the infrastructure facilities in these estates. the economies of agglomeration dictate that if clusters of same industries are relocated in the same vicinity the suppliers of raw materials and components, and providers of services and marketing of output also move to the same areas. the logistics management and reduction in transportation cost reduce the unit cost of production and distribution for a single enterprise and also improve the reliability and timeliness in the delivery of products. in many countries such zones and clusters have worked very well and helped small and medium enterprises to become more competitive. thirdly, organizations such as smeda have to play a critical role in the business developments support, advisory services and managerial training of smes. for example, most small enterprises do not maintain proper accounting of their operation and do not have a trained accountant on their staff. this impedes their ability to access credit from commercial banks. smeda can organize training courses in accounting and assign these certified trainees to work on a part – time basis with a number of enterprises. simple accounting software packages are now available for small businesses and these can be profitably used in a large number of smes. smeda can design simplified standardized book keeping, inventory management and ledger forms which can aid in the preparation of financials. the sme bank, which was established in the public sector in 2002 to provide financing to the sme sector, is another important player in the sector. however, it alone cannot cater to the needs of the entire sector but it could develop a prototype of program lending, credit appraisal and delivery methodology, standardized documentation, monitoring mechanisms, which can be replicated and followed by other commercial banks. the sme bank can produce experienced and skilled professionals who are specialists in the sme credit for the whole industry. the commercial banks, leasing industry, modarabas themselves have to develop dedicated groups for servicing the smes. they should establish their presence and branches at the clusters and places such as daska, d. i. khan, wazirabad, khairpur