impact of financial constraints on growth and development...

© 2017 Research Academy of Social Sciences

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International Journal of Financial Markets

Vol. 2, No. 4, 2017, 131-145

Impact of Financial Constraints on Growth and Development of Small

and Medium Enterprises in Sialkot Pakistan

Tanveer Bagh1, Muhammad Arif 2, Idrees Liaqat3, Sadaf Razzaq4

Abstract

This study is carried out to explain the underlying impact of financial constraints on growth and development

of SMEs in Sialkot. It explains how SMEs in Sialkot are facing problems related to access financial market

and the assessment of Small and Medium Enterprises in Pakistan. This is of vital importance because Small

and medium enterprise (SMEs) are considered to be the most important pillar for the development and growth

of almost all economics in the world, but in particular to the developing nations like Pakistan with lofty

discrepancies between rich and poor, in conjunction with a headache of unemployment. SMEs play a striking

role by contributing to output by participating in the economy as well as by creating some “decent “jobs. SMEs

constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the non-agricultural labor force; and

their share in the annual GDP is 40%, approximately, the study based on quantitative data. The data were

collected through structured questioner of 150 respondents of SMEs in Sialkot. A model was set up to check

the relationship between the dependent and independent variables and statistical soundness of the results. It

consists of dependent variable SMEs growth and development and independent variables, core financial

constraints. The results showed the borrowing of money from the banks and financial institutions are not so

convenient for SMEs as compared to large firms. The financial constraints are creating hurdles in growth and

development of SMEs in Sialkot. The statistical results validate the relationship of variables and hypothesis

acceptance. The SMEs have enormous prospective for growth but the financial constraints are creating hurdles

in this way due to lack in legal structure, huge collateral requirement and government support and incentives.

Keywords: SMEs, Financial Constraints, Growth and Development, Pakistan, Sialkot

JEL Classification: G32, G31, O32, L30

1. Introduction

Small and medium enterprise (SMEs) are considered to be the most important pillar for the development

and growth of almost all economics in the world, but in particular to the developing nations like Pakistan with

lofty discrepancies between rich and poor, in conjunction with a headache of unemployment. SMEs play a

striking role by contributing to output by participating in the economy as well as by creating some “decent

“jobs. SMEs constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the non-agricultural labor

force; and their share in the annual GDP is 40%, approximately (http://www.smeda.org). Small and medium

enterprise (SME) is a term use for the businesses and other organizations fall under small office, home office

size and the large enterprise. SMEs can be defined and classified in terms of size of capital investment, the

total number of employees, the annual turnover, the management style, the location and the market share. The

overall country context is positively acting in determining the nature of SMEs. In the developing countries,

small enterprises means the enterprises with less than 50 employees and medium size enterprises will be

consider those have 50-99 employees.

1 MS Scholar, Department of Business Administration, University of Azad Jammu and Kashmir Muzaffarabad, Pakistan 2 Assistant Professor, Govt. Post Graduate College of Management Sciences, Swabi KPK Pakistan 3 MS Finance Scholar, Ripha International University Islamabad, Pakistan 4 MS Scholar, Department of Business Administration, University of Azad Jammu and Kashmir Muzaffarabad, Pakistan

http://www.smeda.org/

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In the developing countries like Pakistan, SMEs are frequently consider as the backbone for the economy

and SMEs are also said to be responsible for the dynamic innovation and for creating competition in many

economic sectors. SMEs are source for job creation and driving force for the entrepreneurial spirit. Various

authorities and institution working on SME sector like in Pakistan, SMEDA (Small and Medium Enterprises

Development Authority) defines SME in term of total amount of productive assets and number of employees

as being an entity which does not employ more than 250 employees with paid up capital to 25 million and PKR

250 million of annual sale volume (Smeda.org, 2014). SMEs take part in removal of unemployment by creating

jobs in the economic sector, helps to build the infrastructure for industries and reduction of investment risks.

The economic instability can remove through the help of SMEs and every one can gain equal opportunities of

conducting businesses in the economic sector. There is a debate in the global context, either to move towards

industrialization or to support SME sector (Quader & Abdullah, 2009).

There is a debate in the global context, either to move towards industrialization or to support SME sector

(Quader & Abdullah, 2009). The SMEs can play a major role in improvement of GDP, total amount of turnover

in form of taxes, encouragement of entrepreneurial culture, job creation and employment opportunities, income

generation sources, improvement in skills and behavior of labor force, poverty reduction, and improvement in

living standard of society. Such key economic benefits of SMEs can modify all the economic sector of country

positively by also creating perfect competition and equal distribution of wealth in the society (Qureshi &

Herani, 2011).

In the emerging global context, Pakistan is known, as the second growing economy in Asia after China in

2004 and 2005, as said by government also perceive by international ratters, and financial institutions. SME

sector is the backbone for economy of Pakistan and 90% of businesses consist on SMEs. The SME sector

contributes 40 percent of national GDP, 77% of total industrial level of employment, 25 percent earning consist

on goods send to abroad. In Pakistan, almost 3.2 million are small and medium businesses. As SME sector

contributes, a lot towards the economy of Pakistan but also neglecting by regulatory bodies, institutions and

researchers (Sherazi et al., 2013). According institute of bankers Pakistan, SME banking stage 3 shows that as

there are a lot of problems face by SMEs but the financial constraints constitutes 55% of all constraints. Due

to the lack of financial institutions and proper access to them, the financial problems are huge in these sectors

because of high risk. Such businesses mostly using internal source of funds to meet working capital needs. So

many literatures have discussed that SMEs facing more difficulties in obtaining of loan and having more

financial problems than large firms and are less likely to have access to formal finance.

However, the study showed that the size of the enterprise is the key determinant for the financial

institutions for providing the loan to the SMEs. The size is also important for determining of growth as well.

The financial constraints creating more obstacles for achievement of maximum growth for small firms and

such aspects prevent all firms from attainment of their optimal goals (Ali & Kazi, 2012).

It is also having seen that the small firms constantly have more problems in achievement of growth as

compared to other firms. There are some reliable and convenient predictor for determining the financing

obstacles like size of enterprise, age and its ownership (Wagenvoort, 2003).

Therefore, the impact of financial constraints creates hurdles for economic growth, equal opportunity of

competition, and job creation in economic sector. The improvement in it will improve betterment of economy

of Pakistan through generation of job opportunities, increase in earnings, and can improve the living standard

are the main aspects of which there is need to give potential to this emerging sector in Pakistan. There is need

to provide facilities to the SMEs for proper approach towards the financial markets. If this sector of economy

can strengthen, it will be profitable for the financial institutions like banks and lenders etc. The creditors seek

the information related to buyer’s credit worthiness and also asses the return on lending amount as well. The

major financing were used for the daily activities of small enterprises, and the financial institutions were not

willing to finance the long term projects.

Thus the practices shows that facilitating loan to larger businesses where efficiency in practices,

availability of periodically published financial information, fair assets as collaterals and reliable parameters

encourage the lenders to provide financial assistance to large businesses. As the small businesses mostly unable


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to fulfill such criteria so the banks hesitate to provide finance to small and medium type businesses because of

lack of specialties that enable the owners to earn the reasonable profit and make payments to lender on time.

There are thousands of SMEs working in Sialkot and this sector is famous around the world for manufacturing

of vast range of classy products. The range of such products starts from playing goods, surgical and leather

made products to musical stuff. The manufacturers are producing such goods that have more demand at local

as well as international level.

The manufacturers are also involved in huge quantity in exporting of their products like round about 4,

00,000. US $ 1 billion is the export earning of Sialkot city. According to SCCI president Dr. Sarfraz Bashir,

Sialkot is major hub of exports which included leather industry, sports goods and surgical instruments, and

contributing more than one and half billion dollars (6% of the entire export of country) to the national economy

annually. SMEs of Sialkot have a positive impact in national earning and creating thousands of jobs for the

people of Sialkot. There are hard efforts are conducting to make possibilities to remove financial constraints

for the economy of Sialkot. SMEs of Sialkot are committed in honoring the exports of the products globally

so that the owner and worker can gain maximum level of opportunity to explore their skills and to increase

their earnings as well (The Nation, 2014).

Hence, the intermediation breaks down for the SME borrowers. There are large numbers of institutions

that work together in coordinated and organized manner to remove the financial constraints that take place for

SME’s. The government and commercial bank as well as SMEDA are also contributing to proper access to

finance for it.

Problem Statement

The lack of finance is the 55% of total problems faced by the SMEs due to fluctuation in economy of

Pakistan and defaults in loan (Qureshi & Herani, 2011). Because of it the problem is selected for the study to

analyses “the impact of financial constraints on growth and development of SMEs in Sialkot Pakistan”.

Objectives of Study

The main focus of the study is as following:

1. To create a framework that embraces both the supply and demand side factors that influence financial

constraints and its effect on performance.

2. To identify core financial constraints and reasons in SMEs of Sialkot.

3. The government participation in the betterment of performance of this sector.

4. To identify at what extent financial constraints affecting SMEs operations.

Purpose of Study

The study will address the financial constraints that are creating hurdles in the growth and development

of SMEs in Sialkot.

1. The steps need to overcome the financial constraints.

2. The solution and policies need to increase the growth and development of SMEs in Sialkot.

Research Hypothesis

H0: SME Growth and development does not heavily depend on financial constraints.

H1: SME Growth and development heavily depend on financial constraints.

2. Literature Review

The identification of central hurdles and problems in financing of SMEs of Sialkot which inhabit their

expansion and also sabotage the liquid and financial position stance is the crux of this study. In Sialkot major

dilemma SMEs face is access to finance in shape financial constraints. All the industrial cities which heavily

depend and consist of SMEs are facing similar problems. The study conducted includes both quantities and

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qualitative data. A concrete model/ framework formulate to investigate and establish the results based on stats

tools, which ultimately validate the study. The study consists of dependent variable in the shape of growth and

development, and independent variables which are financing constraints, inner barriers, collaterals, low

business output, government support and incentives.

The maturation of SMEs played a healthy role on growth and means of a nation. Many countries’

economic history shows that SMEs have played a vital role in expansion of their growth (Caner, 2010).

The significance of SMEs is accepted vastly around the globe instead of existence of large scale

companies and business which have greater contributions and market shares in economy of a country. SMEs

share remarkable part towards contribution in gross domestic products, income in the form of taxes, expansion

of entrepreneurship trends, decrease in unemployment, wealth expansion, human resource development,

reduce poverty and improve the living standards. By the development of SMEs sector directly affect the

competition and wealth equality. SMEs provide regional/domestic/local/provincial progress as they heighten

the industrialization in rural sector by connecting the more establish area like urban with less developed area

like rural and make a balance economic activities in both sectors (Qureshi & Herani, 2011).

SMEs playing a significant role in economic development in Pakistan as in other countries of the world

like Japan, China and Taiwan. South America and south Asia are also putting hard work to develop this sector.

It contributes in level of employment more than the large firms because more labor is involve in it. There are

various problems in this sector related to skilled human resources, lack of capital goods, lack of proper

maintenance of book of accounts and financial information. The lack of finance is the upfront constraint for

SMEs. The state bank of Pakistan is providing suitable environment for SMEs to remove financial obstacles.

There is need of participation of other regulatory agencies like SMEDA to putt efforts at ground level to

improve this sector in Pakistan. In general finance in the shape of loan means it is from banks, SMEs are very

small in nature and size so they did not have any approach to the real market of capital generation like bond

markets. it is the basic need of SME and also the main problem for them because can effect there expansion

and development survival, and growth of SMEs (Husain, 2005).

All the SMEs located in Sialkot and in Pakistan are incapable to gain in the form of finance and the

acceptable level of finance and also SME in our country has lack of technological innovation and the skills

required to handle this sector, also the managerial point of view. When Pakistan came into being SMEs are

very less developed but now we can see a great change, all the SMEs in particularly Sialkot and Pakistan region

have great expansion and growth. Many policies and innovative schemes are opened in whole world to attract

SME sector. Though, there have been numeral unique periodic approaches to SME constraints in the shape of

money (Qureshi & Herani, 2011).

Securitized offerings are given by local/traditional banks and institutions.

1. Finance consists of loaned backed by a security in other mean asset based finance. Two other forms

which are offered are factoring and contribution based finance through reliable customers.

2. Another form of lending which is typically from information of financial statements there rated scoring

of these statements and the relationship of customer with bank.

3. In last a finance scheme our service which is based on venture capitalist is through viability based

finance.

4. Institute of bankers Pakistan contributes a lot towards SME sector. The institute of bankers Pakistan

(IBP) shows following literature on SMEs of Pakistan:

SME banking (stage 3) states that a multi-phase, all-round and competitive SME circle has an amazing

role in economic boost and also decline in unemployment. SME considered as the best “training ground” for

the innovative mind persons and it provide grounds for entrepreneurship and self-develop managerial skills,

due to sole-proprietorship create a flexible environment and dictions are made quickly, this supportive

environment also give easiness to change the structure of your business. SMEs gives many benefits in the

shape of new jobs to jobs less and the main and the most amazing benefit in long term is the SMEs are future


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big firms, this small base provide them a platform. The SMEs share of output and employment is depend on

SMEs various sectors in the shape of small or big and also less or more rapidly growing. In the Asian and

pacific countries SMEs compose of 99.8% of whole population of SMEs in Korea, 99.7% in both Thailand

and Singapore territory, in Philippines99.6%, in china 99.0%, in Japan 98.9%, 98% and 97.7% in Hong Kong

and Taiwan respectively (Ali & Kazi, 2012).

There is a need of equity finances for starting of small enterprise. As the small entrepreneurs start

businesses with very small amounts of capital and rapidly construct their enterprises with only seasonal base

of external finance. So for the achievement of speedy growth and maximum employment level such enterprises

are using personal resources and funds are managed through the sources other than banks and institutions. The

deficiency in financial resources in sector creates hurdles in exploring the maximum profit opportunities. Other

than internal resources as mean of financing external borrowing has a prominent role in expansion of SME.

The payment of huge level of interest on loan by this sector shows that there is high a demand of credit. The

international financial institutions are playing their role in providing of finance but the banks have not done

enough efforts to facilitate this sector. This sector is under estimated by them and the banks cannot develop

comprehensive policies to facilitate it because of high rate of transaction cost, lack of collaterals and risks.

The huge demand of credit motivates the regulatory bodies to facilitate this sector by formulating the

policies and spreading of awareness in SME sector. Like, SMEDA, SBP and SME bank. The availability of

information of business activities and collaterals can helpful in this regard (Kioko, 2009). According to

economic survey 2008 Pakistan’s total population of enterprises are 3.2million from which 3.0 million

enterprises which is 93% are SMEs. SMEs are numerous and located across whole country which mainly

consists of production as well as service business like hotels and restaurants, sale base business are

53%,services 27% and production are manufacturing business are consists of 20%. The SMEs survey tells that

SMEs contributes about 40% of GDP and 35% to the earnings which are export based 70% consists of services,

production and trading business. According to these statistics Pakistan’s most populated industry and business

area in the shape of small and medium enterprises are the hub of countries overall growth and indicator for

economic healthiness also shows the industrial sector strength .SMEs are also a source of shifts in the lower

class to middle class.

SME banking (stage 3) also states that SMEs are often main driver for a country economic growth.

However, as a number of SMEs increases, competition increases, which then result in decrease in prices,

customer based, or both. This in turn will erode existing profits, creating fewer incentives for people to start

SMEs. Some points regarding the useful aspects of SMEs in Sialkot are:

They foster entrepreneurial culture

1. They contribute to export such as sports goods and surgical instruments

2. SMEs development cause reduce poverty by decreasing the unemployment ratio

3. Their efficiency and resource allocation is higher

4. They help the economy by creating competition in the market

Shortage/Irregular Availability of Financing

The developing countries basic problem is lack of capital so this problem directly affect the SMEs sector

and create problems which is in the form of lack of finance. The banks and other financial institutions prefer

big firms because of secured business environment so affecting the small business. In banks thinking small

business are not attractive form of investment because they have low output so profits gain by the banks are

also low. Some institutions have criteria for accessing finance like book keeping and other standards which are

worldwide popular but on the other hand SMEs lack in this area due to management lack and narrow business

environment.

On other front, due to weak and less developed legal system banks hesitate to invest because in long run

it can be a dangerous investment. Any business loss and other natural climate can shut down the whole business

any time so banks feel insecure in financing of small business. Government and special dedicated departments

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to this sector can eliminate the hurdles by doing reforms. Government particularly focused on this sector

through its own bank state bank of Pakistan and making new regulation and reforms to make a secured and

friendly environment because it is 93% of whole enterprises. Some news terms are also introduced in the shape

of institutions, which are thrifts in nature because they are formed for special purpose to focus on special areas

of economy like Khushali bank and the microfinance bank.

Lastly, there is also a different aspect in mentality of people in Pakistan. They are hesitate and shy in

taking loan from banks, a recent survey of 600 firms are taken which shows that only 40% business ask for

loans and monetary aid from banks and other institutions and remaining 60% met their needs from personal

saving and family borrowing. And another interesting thing which is highlighted by this survey is that only

16% and 19% go for long term and short term respectively.

Reasons for not Approaching Formal Financing

1. A high rate on interest is charged by lender.

2. A very complex and difficult paper work.

3. Long process.

4. Collateral requirements.

5. SMEs are mostly unregistered.

6. Information about tax returns (Ali & Kazi, 2012).

The interview with “Praise Corporation” explored that there are financial problems like interference of

bank. When banks lend loan, they try to influence on the policies of corporation. The manager also highlights

the aspect of interest free loan because it is against the religious aspects. The financial institutions also demand

mortgage double for the loan which is not favorable for SME’s, as said by ‘M Aslam’ manager of “Praise

Corporation” (Aslam, 2014).

According to the president of SCCI Dr. Sarfraz Bashir , due to variety of exports industry like leather

industry , sports goods and surgical instruments made Sialkot the major focal point in Pakistan and contribute

more than 1.5 billion dollars (which consist of 6% of total export of Pakistan) every year. Small and medium

scale business is making earning more attractive and also helping in the unemployment problems in Sialkot

sector. Many big steps are taken to remove the hurdles and the financial constraints faced by this sector which

consists of small and medium business. SMEs of Sialkot by showing there maturity and promises to the global

stock holders by giving quality products in shape of leather, sports and surgical instruments and the services

etc (The Nation, 2014).

The theme for learning is the basic and major impacts of various finance practices in small and medium

businesses growth criteria. Lack of finance facilities SMEs are mainly the important hurdle to growth and

development of this sector. The argument in this case for giving loan and finance services is a major way to

activate the resources for more meaning full way. The more finance facilities given to small and medium

business can make more chances for SMEs to save and generate more capital for further business activities

(Babajide, 2012). On the other hand, small and medium business in Nigeria has great problem in access to

finance from local and commercial banks. The lack which is facing by SMEs is to meet the financing standards

which are set by financial institutions provides easiness, “the banker’s committee” on his 246th general

meeting which took place on December 21, 1999 took a firm step for the financing of small and medium

business (Babajide, 2012).

The literature explores the ease of access to finance for SME in Sialkot. Collateral security has a great

effect on financial requirement because collaterals are lacking by small entrepreneurs and business in Sialkot.

The micro financial field is highlighted by a noble prize holder belongs from Bangladesh Muhammad Younus,

in start he give a few money to a needy worker in way back 70s. It is true Asia is very underdeveloped mainly

south Asian region in a compare with Latin American and some parts of Europe but the most excellent micro

financial reforms are come from Asian regions. In 1974, a famine is spread all over the Bangladesh which

effect Bangladesh economy badly but 1976 Muhammad Younus start his microfinance structure to rebuilt

economic backbone of country. In other parts of world like Africa microfinance create later impacts in 80s and

became much stronger and reliable in 90s, this information from a index prepaid by Oxford which also shows


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that Africa is the most underdeveloped area in world. Micro financial system is a “programmed that extend

small loans to very poor people for self-employment projects that generate income in allowing them to take

care of themselves and their families”.

Micro financial system benefits in many ways to eliminate poverty and The World Bank issues unequal

distribution of wealth in the different sectors of economy and this statement. Latterly the World Bank suggested

the 2005 a special year, which is known as microfinance year. The provision of microfinance includes saving

as financial services, financial services to needy in both urban as well as rural areas, which are not receiving

these facilities from local and commercial banks. In Sialkot as an export and SMEs hub heavy collateral and

security requirement creating problems in accessing finance and also charging heavy interest rates. Therefore,

research conducted for the analysis of finance in SMEs sector and accessibility to finance. Capital in the shape

of finance for mostly to the business which are running by low income people, the area of micro financing is

vast it includes small saving, insurance, right off payment and debts which have great factor or hurdle for a

low income business man (Ali & Abu-Hadi).

There are many financial departments and institution, which is popular in whole world but Grameen Bank

that is located in Bangladesh, is the most amazing one. This bank was come into being in 2006 by Muhammad

Younus. This bank has a vast number of customers ranging more than 7 million. Microfinance is a growth and

development way in which grants are given in many ways, which ultimately benefits the needy one.

Poor ones irrespective of their sect whether are below a certain level or above have many negative

thoughts in lack of finance. Finance and other Monterey aids for small businesses can help them to overcome

problem of business continuity on long term and improve their standard. From this analysis, microfinance is

assumed to highlights and improve standard of living. A good economy always have best financial services

which ultimately developed that economy, more financial services to poor is also a good way to remove circle

of poverty (Ali & Abu-Hadi). The economic well-being of a country is linkerd with strengthening SMEs, both

internal and external (Berry, Aftab, & Qureshi, 1998).

This study started to discover the relationship among different variables that are present in target area or

segment like services and manufacturing both in Sialkot. A definition of SMEs tells that SMEs are businesses,

which have at least 250 employees not more than it. However, it cannot say that it is authentic definition

because it can changed from country to country and region to region. We already discussed that SMEs are

backbone of an economy, in the present of large firms they show a respectable presence so any policy or reform

made by government in industrial sector may cause directly to them. They have a great contribution in income

of any country showing their importance. Following their importance many countries has a great focus on this

area and playing a role to strengthen them because they can reduce unemployment, poverty and also increase

living standards of poor people.

News researches and findings are used by most countries, which show the key role of small business in

an economy and led it to industrialization. Developed countries like America, France and Britain they have

strengthen their small businesses in stages and now a days they are industrialized and living standards is also

very high as compared to other nations. SMEs also beneficial in the form of tax collection and also due to labor

intensive they cause their standard and income to increase. Pakistan’s government, through its special

departments and state bank making policies and reforms to strengthen, SME sector. There are also taking place

many researches to find the problems and needs of small business and related sects. Some banks are also made

to focus on this particular area and thus eliminated the gaps between both parties. Many new banks are made

by governments which are thrifts and special purposes banks and also a special department named as SMEDA

is also made to facilitate SMEs. SEMDA came into being in 1998 and from that day this department has great

contribution towards the economy of Pakistan, because it has only focus on small and medium enterprises. The

employment ratio is many areas like informal manufacturing have almost three million persons, agriculture

sector has 23 percent share. This shows that 77 percent is belongs to non-agriculture sector. This study has

many points of view but mainly focus on analysis of SMEs. This includes different variables. Analyze the

relations of variables which are very important and effecting the growth and development.

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The literature which is collected have factors which affecting the expansion and growth of SMEs. There

are a lot of hurdles and problems faced by SMEs because a complex industrial system and unfair distribution

of wealth across the sectors. Some factors are multiphase and complex in nature. Due to a competitive

environment in today era business men are worried how to tackle these problems and making solutions.

Monterey resources are very important for a business point of view because it is the blood stream of any

business. Due to small businesses they have also very low capital and investment. SMEs are lack in many ways

like technological ways, managerial and old age style of book keeping so creating hurdles in accessing finance.

Government should focus on all these constraints and make reforms that are helpful for all business (Jasra et

al., 2011).The evidence showed that financial problem for SMEs cannot be taken as hard proof. SMEs need a

highly support from government as incentives, but the high interest rate and need of collaterals for fetching of

loans create a lot of hurdles for such business as compared to large companies. The complaints of SMEs about

financial constraints in economic slump reflect well recurring problems. SMEs also facing many financial

problems due to different kind of information in credit market which is causing credit rationing. Due to

similarities in information provided by borrowers lenders faced problem in lending the credit (Wagenvoort,

2003).

The basic hurdles in the growth of SMEs are less capital and financial resources. Banks and other financial

institutors have difficult and lengthy paper work causing banks and financial institutions to focus more on

formal resources, and lack of collaterals securities causing financial institutions to divert (Sitoresmi & Fuad,

2013). SMEs largely need the finance and there is lack of facilities provided them by the regulatory bodies.

They have minimal approach at the sources of finance. The lenders consider high level of risks while providing

of loan to them so they demand the security for it, which is some time not affordable for businesses. Every

firm has certain and specific type of business environment, which is, enforce by the society as well as religion.

Some time it is not possible for the lenders to provide loans to them because of lack of trust worthy credit

policies. Like, mostly the high interest rate is not affordable for businesses because it can effect on the overall

return of business. The trend is also diverting towards the Islamic way of banking where the reasonable interest

rate is charge based on sharing of loss and profit. Nevertheless, the thing is the non-conventional banking also

feeling risk while providing loan to SMEs like mismanagement, misuse of resources and lack of specialties as

well.

Research Model / Theoretical Frame Work for the Study

Figure 2.1

Source: (Qureshi & Herani, 2011).

The Under Laying Impact of Financial Constraints on Growth and Development of Small

and Medium Enterprises in Sialkot: Evidence from Pakistan

Independent Variable Dependent Variable

Lack of Legal Structure

Government Support

Interest Rate (IR)

Lack of Collateral

FINANCIAL

CONSTRAINTS

SMEs Growth and

Development


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The study explore that the SMEs have a great potential for improvement in economy and industrial sector

but the problems are also present because of lacking of comprehensive business trend as the large businesses

have. The need of creation of trust among the buyer and lender of finance is also important. As the finance is

the back bone for the business activities and lack of this aspect can create problems for the mechanism.

Therefore, by under minding the importance of finance for business there is need to address the issue

because there is a gap in study of literature and need to highlight and conduct the research on it. The Sialkot

sector has a great impact and a big stakeholder in the economy of Pakistan and the finance problem is in huge

quantity there. So this study tries to explore the current scenario running in Sialkot.

Explanation of Independent Variables

o Interest Rate

The SMEs are not feeling convenient in fetching of loan from institutions due to high rate of interest. The

high rate of interest can increase the cost of capital and badly affect the total amount of income.

o Lack in Legal Structure

SMEs lack in formation of a formal legal structure. This constrain is result of tough statutory regulations

imposed by Law.

o Lack of Collateral

Due to low earning capacity, SMEs found almost impossible to manage the creation of fresh collateral

and their characteristic itself fall short in meeting collateral requirement.

o Government Support

Before the last decade, contribution of SMEs in Economic development was neglected. But since the past

ten years, importance of SMEs is accepted and government is taking steps for its nourishment.

3. Research Methodology

The area of the study is the small and medium size businesses in Sialkot, as Sialkot is a business hub of

Pakistan. We have selected 150 small and medium firms including sports, surgical and leather industry, to

extract our finding data for the study. The quantitative research techniques used to find out transform ways to

resolve SMEs financial constraints and their impact on growth. The chamber of commerce and industry Sialkot

played an important role in collection of data. SPSS software is used to analyze the data with help of descriptive

analysis and correlation test. The chronbach alpha test was also applied to check the reliability of data. The

chamber of commerce and industry Sialkot played an important role in collection of data. The SPSS software

was use to analyze the data. The table also use for the purpose of explanation of results of analysis. The primary

data was collected through the distribution of questioner .The questionnaire was framed, pretested and filled

by a sample of 150 respondent of SMEs in Sialkot (males and females) of varying ages selected on the basis

of convening methods belonging to manufacture, traders, importers and service businesses. The measurement

scale selected was likert scale to know the amount of agreement or disagreement of respondents on a scale of

five. The secondary data was collected from books. Journals, internet. In particular, was extracted from the

publication of SBP, Smeda, World Bank, research papers and other various authentic data sources. The data

analysis was carried for a quantitative assessment to know the relationship between variables.

4. Results and Discussion

This section presents results and hypothesis testing in detail.

The questionnaires were distributed by hand that’s why the total number of 150 is filled completely and

result shows no waste of any questionnaire.

T. Bagh et al.

140

Table Gender

Frequency Percent Valid Percent Cumulative Percent

Female 5 3.3 3.3 3.3

Valid Male 145 96.7 96.7 100.0

Total 150 100.0 100.0

Our female respondent was 5 which is 3.3% of total questionnaire and male respondent were 145 which

were 96.7% of the total sample size. As the statistics indicates that we have no missing respondents that are

why our valid percentage is same like percent of respondent.

Table Ages

Majority of our respondent were age of 26-34 which is 42% of overall respondent. And from total 150

respondents they are of 63 in number which shows their frequency in table. The remaining respondent is

distributed according to their percentage: age group of 44-52 was 28%, age group of 35-43 is 14%, age groups

of 53-60 were 8.7% and 18-25 were 7.3%.

Table Education

The education table statistic indicates that majority of our respondents were graduate 79 in number which

is 52.7% of the total sample size. Remaining respondents includes 32.7 were intermediate and 7.3% are matric

and master respectively.

Gender Age Education Business Life Time

Valid N 150 150 150 150 150 150

Missing 0 0 0 0 0 0


18-25 11 7.3 7.3 7.3

26-34 63 42.0 42.0 49.3

35-43 21 14.0 14.0 63.3

Valid

44-52 42 28.0 28.0 91.3

53-60 13 8.7 8.7 100.0

Total 150 100.0 100.0

Frequency Percent Valid

Percent

Cumulative Percent

Matric 11 7.3 7.3 7.3

Intermediate 49 32.7 32.7 40.0

Valid Graduation 79 52.7 52.7 92.7

Masters 11 7.3 7.3 100.0

Total 150 100.0 100.0


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Table Business

We have selected 50 respondents from each business which shows their percentage and valid percentage

33.3% respectively.

Table Life

The table of life of business indicates that businesses of life age 5-10 were in majority and are 97 in

number of over all respondents, 29.3% of life age 2-4 and 6% are of 0-1.

Table Time

Frequency Percent Valid Percent Cumulative

Percent

0-1 4 2.7 2.7 2.7

2-4 85 56.7 56.7 59.3

Valid

5-10 61 40.7 40.7 100.0

Total 150 100.0 100.0

The results for the respondents of SMEs indicated that 56.7% of respondents were age group of 2-4 and

85 in numbers. Time period group 5-10 have 40.7% and 61 in numbers. In the last 0-1 group have 2.7% and 4

in numbers.

Table Reliability Statistics

Cronbach's Alpha N of Items N

.882 22 150

The table of reliability statistics indicated that over sample size was 150 and number of items was 22. And

the data reliabity is 88% which comes in the category of good reliability.

The results for the SMEs respondents indicated that relatives are source of financing and sufficient funds

are better mean of financing having the highest mean (3.66). Adequate information by lender, paper work

problems, government credit to SMEs having mean (3.32). Bank loan and personal guarantee have (3.16)

Frequency Percent Valid Percent Cumulative

Percent

Sports 50 33.3 33.3 33.3

Surgical 50 33.3 33.3 66.7

Valid

Leather 50 33.3 33.3 100.0

Total 150 100.0 100.0


0-1 9 6.0 6.0 6.0

2-4 44 29.3 29.3 35.3

Valid

5-10 97 64.7 64.7 100.0

Total 150 100.0 100.0

T. Bagh et al.

142

mean. Interest rate and venture capital having (2.92) respectively. Collaterals and standardized accounting

having the lowest mean of (2.78).

The results indicate that for the SMEs the relatives source of financing and sufficient internal funds are

major obstacles for the growth and development. In addition respondent perceive adequate information by

lender, paper problems and government credit to SMEs as obstacles to the growth and development of SMEs.

Interest rate, bank loan and personal guarantee are also major hurdles in the way of growth and development.

The lowest obstacle which affects the growth and development of SMEs are collaterals and venture capital.

Table Descriptive Statistics

Correlation test is used to check the relationship between the variables, we also use the correlation, which

indicates the relationship between financial constraints and growth and development of SMEs. According to

statistics, results are highly significant and there is a negative relationship between financial constraints and

growth and development of SMEs. The negative relationship indicates due to increase in financial constraints

growth and development declined. The one unit increase in financial constraints causing 52% change in growth

and development of SMEs.

The value R-square (0.644) shows that the dependent variable has 64% explained variation, in simple

words there 64% variation in dependent variable is taking place due to independent variable and 36% is

unexplained variation. So we can say that model is good fit. The beta value (-0.52) shows that our independent

variable financial constraints have average negative affect on dependent variable growth and development.

N Mean Std. Deviation

Adequate information offered to business 150 3.3200 1.16619

Collaterals have impact on fetching loan 150 2.7800 1.33547

Interest rate is not affordable 150 2.9200 1.09618

Bank loan is not preferable 150 3.1667 1.14936

The relatives are source of financing 150 3.6667 .99439

Paper work as a problem 150 3.3200 1.16619

Lack of standardize accounting system 150 2.7800 1.33547

Venture capital as a mean of financing 150 2.9200 1.09618

Personal guarantee for loan 150 3.1667 1.14936

Sufficient internal funds 150 3.6667 .99439

Government credited to SMEs 150 3.3200 1.16619

Government role in growth 150 3.8267 1.02156

Market share trend 150 3.9867 .82728

Number of customers 150 3.5467 .90921

Productivity level in future 150 3.2733 1.04847

Turnover in future 150 3.9667 .78078

Business portfolio growth 150 3.8867 .82362

Business environment for SMEs 150 3.3533 1.23775

Profit level trend 150 3.4533 1.10876

Repayment of loans 150 3.6400 1.11295

Business assets 150 3.9667 1.04539

Liquidity level 150 3.9200 .94493

Valid N (list wise) 150


143

Table Correlation Matrix

IDV DV

Financial Pearson Correlation 1 -.520**

Constraints Sig. (2-tailed) .000

N 150 150

Growth and Pearson Correlation -.520** 1

Development Sig. (2-tailed) .000

N 150 150

**. Correlation is significant at the 0.01 level (2-tailed).

Table Regression Analysis

Value Significant level

Beta -.52 .000

R square .144 .000

F valve 24.994 .000

So from all above statistics we can now accept and reject the hypothesis framed:

Testing of hypothesis Status

Ho: growth and development does not heavily depend on the financial constraints Rejected

H1: growth and development heavily depends on financial constraints.

Accepted

Limitations

The time period was very limited to get fully understanding related to the complex sector of business in

Sialkot. The manager of the firms was very conscious to provide full of information because of competition

among the SMEs, tax issues and businesses are considering leakage of such operational information as a threat

for their business activities.

Mostly the owners and manager of the businesses are not enough educated to understand the questioner

and there was a challenge to deliver them the exact theme of questions in questioner and surveys.

5. Summary and Conclusion

The significant association and the negative sign showed that constraints have an impact on the growth

and development of SMEs in Sialkot. Financial constraints are the biggest problem of SMEs because it directly

influences the growth and development of business. Financial constraints mainly compromises of interest rates,

lack in legal structure, lack of collaterals and government role. Banks and other lending institutes are charged

a very high interest rate. Now a days interest rate is approximately near about 20%, which is very high a

business man whose income is very low.

As a highly significant study results shows that constraints have strong influencing on growth, legal

structure of business is also disturbing the output. Mostly business does not registered under the required laws

and regulations, banks feels hesitation in granting the loan. Awareness level of owners and managers are very

low as compared to big business thus creating many hurdles. Form the study it also came to know that business

is lacking in the collaterals and security. Banks demanded security on which they grant loans. But the ratio of

security and amount of loan has a big difference, for example if a person go to bank for a loan of 1 lac banks

demands a security of 2 lac. Thus business hesitates and feels insecure to apply for that money.

T. Bagh et al.

144

Government role in overall SMEs sector is not good. From the generated result of collected data we come

to know that government is not doing a fair job for the betterment of this sector of economy. Government does

not addresses financial institutions and banks for the efficient and attractive flow of funds to this sector. Other

hurdles are also highlighted form the study which includes less information provided by banks, mostly

businesses’ owners does not prefer bank loans, some prefer relatives a good source of financing, paper work,

poor book keeping, and venture capital a better mean of financing.

Recommendation

Following important policy suggestions/ recommendations are provided based upon the findings of the

study:

o Collateral Free Lending

The security is usually demand by the lenders especially by banks which creates hurdles in the

performance of SMEs so as the minimal amount of collaterals can be fruitful for the running of maximum

output.

o Government Support

Mostly business and SMEs in Sialkot are not cooperative in research work and this main problem is due

to government wrong tax policies and behavior, when students contact them they thought these are tax

authorities from government so hesitate to share data. Thus government should ensure them by securing their

rights and making these policies which show a positive and friendly behavior with them.

o Knowledge

SMEs in developing countries like Pakistan has great importance because these SMEs are backbone of

Pakistan’s economy but they are lacking in many ways whether by financing constraints or by technical and

technological skills. In field of technology these SMEs have enough technology to meet international standards

but in technical and educational knowledge they are lacking. Mostly owners their self-managing the company

and they do not have any qualification in business studies. The reason for that is lack of trust on employees so

they do all work them self and mostly make wrong decisions.

o Future Study Options

In order to get better insight on this topic similar may be conducted in future by considering other cities

of Pakistan like Islamabad, Muzaffarabad, Mirpur, Kotli, Rawalpindi and Lahore.

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