Evaluating barriers to SME financing in Pakistan

Mahmood, S 2022, Evaluating barriers to SME financing in Pakistan , PhD thesis, University of Salford.

Download (1MB) | Preview


This thesis examines the two most detrimental, but obscured obstacles faced by Small and Medium Enterprise (SME) in Pakistan in obtaining finance from the formal financial sector despite a strong policy support from the State Bank of Pakistan (SBP) and the government. The reason for their obscurity is that both are demand-side issues, difficult to identify as gathering information from SMEs in Pakistan is extremely challenging. In study is extremely important as SMEs comprise of 90% of the estimated 3.2 million business entities in Pakistan employing more than 80% of non-agricultural workforce, contributing towards 30% of the country’s GDP and generating 25% of export earnings (SBP Annual Report 2018-2019). As per SBP Annual Performance Review Fiscal Year 19, banks/ financial institutions have achieved outstanding SME finance of Rs 464.85 billion at end June 30, 2019, showing year-over-year growth of 12.8 percent in total SME credit outstanding portfolio. Despite the above improvements, a significant number of SMEs continue to remain financially excluded by mainstream commercial banks (SBP Policy 2017). According to SBP Quarterly SME Finance Review, (2021) loans issued by banks and financial institutions to SMEs only accounted for 6.51% of the entire loan portfolio. This indicated a massive financing gap for only 164,756 entities succeeded in procuring access to finance out of a total of 2.88 million SMEs prevalent in Pakistan. Not much research has been conducted on the problems faced by this sector in Pakistan and whatever efforts made have only covered the generic issues instead of finding the root cause so that it may be addressed. This is empirical research where the responses of 416 SMEs have been collected and using the mixed-method approach identifies several impediments faced by SMEs, such as high interest rate, banks are unapproachable, but two findings stood out, first one is the silent but deep-rooted influence of extrinsic religiosity and the impact it has on the mindset and growth of SMEs in the country. This was identified when 50% of our total sample pointed out that they have never made any efforts in approaching banks for credit. This issue is interesting as it is unique to this sector and effectively keeps the SMEs from approaching banks for finance, thus introducing the concept of self-induced credit rationing. The second impediment is the caustic outlook of the SME sector towards formal finance, which is the result of discouragement faced by them in approaching financial sector for credit. The findings of these two issues highlight a dominant presence of borrower discouragement chiefly created by the acute communication gap between SMEs and financial institutions. This gap, generally referred to as the Macmillan gap, is usually created due to the presence of asymmetric information between borrowers and lenders coupled with small loan amount, high credit frequency where cost outweighs the benefits and lenders avoid such portfolio and instead concentrate on large companies (Yu and Fu 2021). Finally, this research proposes strategies which policymakers can implement to facilitate SME financing and enhance the performance of this much neglected sector.

Item Type: Thesis (PhD)
Contributors: Syme, RA (Supervisor)
Schools: Schools > Salford Business School
Depositing User: Safia Mahmood
Date Deposited: 02 Feb 2023 11:49
Last Modified: 02 Mar 2023 02:30
URI: https://usir.salford.ac.uk/id/eprint/66174

Actions (login required)

Edit record (repository staff only) Edit record (repository staff only)


Downloads per month over past year