Importance of SMEs in Pakistan and solutions offered by Bank Alfalah

By:

Mehreen Ahmed

Importance of SMEs in Pakistan 1. SME Sector Overview –”A Growth Engine for the Economy”

Small and Medium Enterprises (SMEs) represent a cornerstone of any successful economic development policy and their growth acts as an engine for job creation and GDP.

SMEs globally account for a significant share of employment and GDP a comparison of which is as follows:

Global Importance

Importance in Pakistan

99 % of Pakistani economic

establishments are SMEs (3.1 Million)

40 % of Pakistan’s GDP

25 % of Pakistan’s export earnings

70 % of Pakistan’s non agricultural

employment

35 % of the value add in

manufacturing industry

contributing

*Source: IFC Analytics, SBP

40% 40% 40%

60%

25%

56% 70%

45%

80% 92%

67% 61%

Pakistan India Bangladesh China Phillipines South Africa

SME Contribution

GDP Non Agricultural Employment

Importance of SMEs in Pakistan 2. SME Constraints –”Access to Finance ”

Access to finance remains one of the biggest constraints for the SME Sector due to risk averse approach of banks

Currently less than 7% of the industry are borrowing from Banks. A comparison of this statistic with other developing highlights this stark disparity

Major reasons for these obstacles on both the demand and supply side are as follows:

SME Constraints: Access to Finance

32% 33%

7%

Bangladesh India Pakistan

SME Borrowers

Bangladesh India Pakistan

High NPLs in the sector (31.8% of the borrowers) has resulted in a flight to quality for Banks which has

saturated the large corporate segment

Banks following a 100% secured lending model to minimize risk. Many businesses are unable to offer

the required collateral

High search costs for Banks in terms of information acquisition and lack of credible data on market

potential and opportunities

A high percentage of Banks do not offer a differentiated customer value proposition with

tailored SME asset and liability products

Borrowers hesitant to borrow from banks, preferring equity financing from other sources (acquaintances,

private investors) instead of debt financing

Smaller size of operations and irregular cash inflows result in a hesitancy to risk collateral with Banks

Limited management capability, expertise and multiple book keeping results in an inability to be

eligible for financing through Banking

Infrastructural constraints like power, labor, technology and law & order situation inhibit the

growth of a formalized sector with access to finance

Supply Constraints Demand Constraints

*Source: IFC Analytics, SBP

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

20

40

60

80

100

120

Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13

SME NPL Performance

NPLs % of SME Advances

-

50

100

150

200

250

300

350

400

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13

SME YoY Growth (PKR Bn)

Industry Advances SME Advances

Importance of SMEs in Pakistan 3. Bank Alfalah SME Overview – “Serving Over 200,000 Customers”

BAFL Performance

BAFL is currently serving a total of 200,000 SME customers out of which approximately 7,500 are asset customers

BAFL NPLs are currently at 12% vs. market average of 31.8%. BAFL has been able to outperform the industry through a structured lending program

273 Bn, 91%

27 Bn, 9%

BAFL SME Share (PKR Bn)

Total SME Outstanding BAFL Share

7,500 Asset

Customers

200,000 Total

Customer Base

CAGR 5.55%

CAGR -6.19%

Interest rate environment Power shortages Law & order situation

Development of CIB ratings to reduce banks’ high search cost for credit worthiness information Launch of a Credit Guarantee Scheme for small enterprises under which SBP shares 40% of credit losses of

lending banks Capacity building facilitation by SBP with support from IFC Revision of the SME Policy in 2013 with segregated policies for small enterprises to encourage the

development of tailored products for the segment The government has provided a tax exemption for to private equity and venture capital fund companies

Importance of SMEs in Pakistan 4. SME Sector –”Untapped Potential– An Opportunity for Banks”

Despite the risks, the SME Sector provides banks a tremendous opportunity to increase customer base and improve profitability in the short as well as the long run.

Following are some advantages of SME Lending for Banks:

Opportunity for Banks

High ROA

The SME sector offers very high yields on assets due to associated risk premium and guarantees faster revenue growth

Granularity

Extending relationships with SME customers would enable banks to create a large and sticky asset and liability customer base

Ancillary Business

Growth of SME customers would enable banks to pitch ancillary products that would increase our customers share of wallet

Leverage System

Relatively lower costs for Banks by being able to leverage the existing retail/corporate banking infrastructure

Action Plans taken by the Government

The outstanding credit to SMEs represents only 6.5% of the portfolio of local banks, while lending is extended to approx 7% of the estimated total SMEs. This highlights the need to increase the flow of financing to this sector.

To foster long term sustainable growth in SME by providing competitive SME solutions including a diverse product suite, meaningful advisory and

unparalleled service delivery

Importance of SMEs in Pakistan 5. Bank Alfalah – Strategic Intent

Importance of SMEs in Pakistan 6. Bank Alfalah – SME Value Proposition

Understanding the SME Customer

Customer and Market Analysis conducted to gauge sector potential Customer Focus Groups conducted for better insight into customer needs

Strategy & Business Model

Credit & Risk Management Support

Non-financial Services

Organization & Network Support

Strategic SME Banking Business Model Segmentation of BAFL SME portfolio into small, medium & commercial based on assigned limits and IFC

guidelines

A detailed SME Credit Policy document based on the internal SME definition covering Small, Medium & Commercial segments. Separate product/processes for these segments Develop a delegation matrix for small segment

Establish SME Hubs in SME concentrated areas to focus on medium segment Enhance rating tool in use for medium & commercial clients. Develop standard post approval document requirements for medium product programs. Also review and eliminate any unnecessary documentation requirements.

DIY Kits in branches and vie website - SME Toolkit Calendar of SME events Key industry based economic bulletins SME Business Information seminars Access to SME training (Eg Business Edge) Selected SME RMs accredited to be SME Advisors in key sectors/areas.

Plan and Design

Implementation Readiness

IFC’s Advisory initiative provides BAFL with a complete roadmap for managing & nurturing a “best in class” SME business adapted to local situation

Continued regulatory support

Improvement in infrastructure

Continued involvement of facilitator bodies

Political stability & favorable Govt. policies for economic development

Commercial banks must have a mind set to promote SMEs

Importance of SMEs in Pakistan 7. Conclusion

Where Do We Go Form Here