Financing SMEs, an opportunity for NBFIs, Modarabas

KARACHI: Non-Bank Financial Institutions (NBFIs) and Modarabas have a greater opportunity to increase financing to the small and medium enterprises (SMEs) as this sector lacks sufficient access to financing from the formal sector, a report said on Monday.

“There is immense potential for the NBFIs and Modarabas in SME financing since the NBFI and Modaraba sector complements the banking sector by serving the underserved sectors, for instance, SMEs, NBFIs and Modarabas have the potential to achieve the objective of macroeconomic policies of generating more jobs in the country by financing SMEs,” a country report on NBFI and Modaraba sector said.

The Institute of Business Administration held the launching of the report. It was prepared by the IBA Center for Excellence in Islamic Finance (IBA-CEIF) in collaboration with NBFI & Modaraba Association.

The SME sector in Pakistan is the neglected sector in terms of financing. SMEs do not have adequate access to financing from the formal financial institutions; therefore, they are primarily relying on the financing facilities from the informal channels at a cost even higher than the cost paid to formal financial institutions like banks, it said.

Though SMEs have the potential to contribute to growth and development of the country, employment generation, poverty alleviation, so on and so forth, it added. At present, only 180,704 SMEs are getting financing from banks and development financial Institutions (DFIs) out of approximately 4.5 million SMEs operating in Pakistan, it noted.

In view of that, the State Bank of Pakistan (SBP) has taken various initiatives to enhance SME financing in Pakistan including improved regulatory framework, SME supportive subsidised refinance schemes, risk coverage scheme, and Islamic SME financing.

The headline target set by the government of Pakistan is to increase the SME sector credit to 17 percent of the private 57 sector credit through financing 700,000 SMEs by 2023. It is suggested in National SME policy 2019 that NBFI’s and Modarabas should be included for the credit 58 guarantee scheme for the promotion of SMEs.

Moreover, SBP is starting a Modaraba-based Islamic Refinance Scheme for working capital financing of SMEs, the report said.

“The introduction of fintech in the country would disrupt primacy of both the banking and non-banking sector to reposition themselves,” said Advisor to Prime Minister on Institutional Reforms and Austerity, Dr Ishrat Husain at the launching ceremony. He also mentioned that SME lending of the banks has dropped from 17 percent to 7 percent which was very disturbing for the development of the SME sector. He suggested a number of measures to be taken by the NBFI and Modaraba sector for its development and growth. He congratulated the authors and people who worked hard to produce such a fine report on the sector.

Modaraba Association Chairman Basheer A Chowdry said that the report includes various aspects of the non-banking and Modaraba sector encompassing its evolution, growth, structure, performance, Shariah compliance and regulatory framework, and provided comprehensive coverage of the sector.