Digitizing SMEs; Prospects And Challenges

Digital Dialogue Session 2.0 Titled ‘Digitizing SMEs For Digital Pakistan’ Held Virtually In Connection With Intl MSME Day Previous Month.

Pakistan’s micro, small and medium enterprises (MSMEs) have for a long time been one of the key contributors to crucial economic factors like employment, Gross Domestic Product (GDP) and trade between borders. According to recent statistics, the contributions of the MSME sector to the country’s exports amount to 40% while their contribution to the GDP is the same. These are significant numbers for a developing nation like Pakistan.

The share of MSMEs to the economy is crucial for nations across the globe. In order to highlight the impact that these enterprises have on financial dynamics worldwide, World MSME Day is also celebrated on 27th of June every year. It is a day for countries around the world to acknowledge the small and medium entities within their borders and renew their commitments towards developing these industries to a point where they can enact their true potential.

In Pakistan, MSMEs face a number of challenges. These issues range from access to credit, due to various reasons, to the inability of these entities to organize their business operations.

“On the supply side for MSMEs, there is an information asymmetry. This is due to the fact that data from SMEs is not yet available on the supply side. Again, there are risk policies and of course, enough crowding out of the private credit. As a result, the only credit available to SMEs is about 7% of the private credit. In other markets this could be as high as 30%. Similarly, 1% of our GDP is given to SMEs as credit. Whereas in South Asia, it ranges all the way up to about 9%  to 10%,” said Mr. Navid Goraya, CEO Karandaaz Pakistan while talking at a panel discussion organized by Telenor Microfinance Bank.

The Digital Dialogue Session 2.0 Titled ‘Digitizing SMEs For A Digital Pakistan’ Was Held Virtually In Connection With International MSME Day The Previous Month. The event featured distinguished personalities like Kamran A. Zuberi, CEO – Finja Lending Service Ltd., Navid Goraya, Chief Investment Officer – Karandaaz Pakistan and Syed Mohsin, CEO – Pakistan Microfinance Network. The discussion shed light on the challenges faced by Pakistan’s MSME sector and the efforts in digitization which can make a difference for them.

“MSME lending is a huge market with $15 billion worth of credit already out there. There are almost 4.3 million SMEs although the last census says there are only about 3 million, but the actual credit is only extended to about 260,000. It is clear that something is going wrong. However, at the same time there is also a problem with the SMEs who need to build the capacity to create documentation in order to get them up to speed in becoming bankable,”Mr. Goraya added further.

Associated costs and problems related to documentation are the two biggest factors which keep small businesses from availing formal credit. At present, only about 7.1% of the total MSMEs across the country have access to formal banking channels.

“We’ve always felt that the MSME segment has been largely underserved and there is a gap in terms of inadequacy in this particular function. The stats are abundantly available but at the same time there is a need to inculcate that behavior change of wallets usage with respect to deposit taking with a front facing KYC application as per the regulations of the State Bank,”said Mr. Kamran while talking about what needs to be done in order to make a difference.

The panelists discussed both supply as well as demand sides for MSMEs and how various factors or incentives like the waiving of IBFT charges, digital policy frameworks and efforts made by the microfinance sector in particular have influenced the industry over the years. All-in-all, there was consensus that pricing and documentation are key concerns for the MSME sector but Pakistan’s microfinance institutions are making a considerable difference here.

“Microfinance institutions are able to provide SMEs with a host of services that they will require for digitization and growth, but very critically financial access to these entities is being made simpler. Here we refer not just to credit but also the most important banking service, which is deposits. My vision for Pakistan’s digital process, especially in the context of micro and small enterprises and more importantly, micro finance and micro enterprise sector is a segment which is end to end cashless,”added Mr. Mohsin.

Pakistan has made some incredible developments in terms of digitization and the acceptance of online transaction mediums over the past few years. The on-set of the COVID-19 pandemic and some ensuing steps taken by bodies like the State Bank played an influential role in this as well. Mr. Kamran Zuberi of Finja used the waiver of IBFT charges as an example to highlight the impact of cost incentives on acceptance of digital financial platforms by the public.

“The minute that IBFT charges are waived during the pandemic, people became more comfortable in terms of making digital payments.We witnessed e-commerce going up. Yes, those were COVID times but a lot of people wanted to pay digitally. They were using e-payment gateways and digital transactions. These events highlight that the whole idea of behavior change at a mass level can come when there is no friction and friction comes in from pricing. As you remove pricing, which is now a proven fact, your digital payments automatically go up,” he pointed out.

Thankfully, in Pakistan, the costs and barriers to entry on digital platforms for SMEs have been close to none. The country is ranked 2nd amongst South Asia nations on the World Bank’s ‘Ease of Doing Business’ Index. In 2020 alone, Pakistani startups raised $56 million across diverse industries including fintech. At present, there are 40 different financial technology firms operating in the country.

Mr. Kamran pointed out the importance that these ventures hold for SMEs and their ability to adopt digital operations.

“There are retail as well as e-commerce platforms which have no costs associated to adopt for merchants on their own. Similarly, there are various companies that are creating platforms for digitizing sales invoices, payroll processing, vendor management and not just on their own but also in partnership with entities like Telenor Microfinance Bank. The idea is that when these platforms are there that do not require any capital expenditure from SMEs they ultimately become very easy to adopt,” he stated.

However, it is still a journey and a half but the initial steps have indeed been taken. The fundamental infrastructures are in place and with the government as well as its respective bodies being mobilized, the change is going to continue as it creates a ripple effect. Even if one side, i.e., either demand or supply payments are digitized, there is a high probability that as the inflow becomes digital, the outflow will follow suit or vice versa. This is where EMIs like Easypaisa will and are coming into play.

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