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SMEs in Pakistan: Exploring the True Potential

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By Pakonomy, unique site covering everything about economics and finance of the 6th largest country in the world by population.


The growing wealth distribution in Pakistan is hard to ignore – 10 per cent of the soon to become 200 million population earns 27.6 per cent of income. Pakistan has been experiencing a simultaneous growth in poverty and population, which can be only be resolved by creating equal employment opportunities for rural areas, as compared to the developed urban areas.

One effective and noteworthy measure to cater the aforementioned dilemma can be by increasing the business activity of Small and Medium Enterprises (SMEs). These SMEs can provide great support in boosting the economic growth, concurrently assisting in achieving a fair distribution of income throughout the country. SMEs have done wonders in developing economies such as Japan, while its positive effects can also be witnessed among uprising nations such as Hong Kong and Taiwan.

The alarming ranking of Pakistan being 135th among the 187 countries on the Human Development Index is largely due to the low levels on income prevalent among the masses. Though, Small and Medium Enterprise Development Authority (SMEDA) have rightfully taken it upon themselves to turn the potential of SMEs into high profits, but no concrete results have been achieved yet.

SMEs can provide a ray of hope to the underprivileged masses of Pakistan. Through effective integration between the financial institutions and SMEs, monetary obstacles can be eliminated. Though, various researches have shown that SMEs have a comparatively lower default rate as compared to the established enterprises, yet for years SMEs have faced dreadful fund shortages. The main sources of finance for SMEs in Pakistan are informal means which include borrowing from family and friends. It is said that around 61 per cent of financing comes from relatives, while hardly 7 per cent comes through banking. As surprising as it sounds, it should have been the other way around, but the absence of conventional banking systems in the rural areas have made it hard for such SMEs to easily obtain finance at affordable rates. However, The International Council of Small and Medium Enterprises (ICSMEs) have highlighted this major area of concern, and have urged the policy makers to make financial support in form of leasing available to SMEs.

The dire importance of SMEs can be understood by the fact that SMEs make up of almost 90 per cent of all the enterprises in Pakistan and have a 40 per cent share in the annual GDP. If the government take appropriate measures, then the abundance of manpower (courtesy of past population explosion) can be effectively channelized to overturn the decline of industrial and agricultural sector of Pakistan.

The poverty-ridden country, Pakistan, which is already home to 1.2 million street children, can follow suit of the Asian figureheads in effectively utilizing the absolute potential of SMEs in achieving economic growth. It is imperative that finance should be made available to SMEs at easy terms, so that hundreds of thousands unemployed citizens, including the invasion of fresh graduates seeking for job, may effectively work towards breaking the vicious circle of poverty which has encircled Pakistan in the recent years.

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