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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