Barriers Faced By Pakistani SMEs in Raising Bank Finance :: Business, Banks

1. Introduction The SMEs globally, are recognized as engines of economic growth and play a pivotal role in boosting the economy. The importance of the SMEs sector is well recognized and its Contribution is relevant in achieving several socio-economic objectives, such as employment generation, contribution to national output and exports, and fostering new entrepreneurship. SMEs contribute in economic growth of both developed and developing countries, as they: Provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units (Sadaquat and Sheikh, 2010). The SMEs sector’s growth of output trend to decrease in recent years since liberalization and adjustment policies (Bari and Haque, 2008). So, it is important to specially address the policy issues regarding lending toward the SME sector. This sector is facing severe problem in financing, regulatory aspects, access to non-financial inputs. Some recent trend shows that Government policies have discriminated against small-scale enterprises (Raza and Murad, 2010). There is nothing wrong with a situation in which inexperienced entrepreneurs are unable to get institutional credit. In the same study he shows that, the relative decline of small-scale enterprises in most developing countries has been accelerated by the industrialization policies adopted in these countries (Bari and Haque, 2008). Protection, regulatory constraint, investment incentives, credit control, and the promotion of industry in the public sector have all discriminated against the small. Especially, facilities reg arding small groups like female were poor and create adverse impact on the growth of SMEs (Sadaquat and Sheikh, 2010). The common idea that the cost of capital is very high for small enterprises is overly simple (Basu, 1998). A research of World Bank suggests the existence of financial constraint because formal banks do not lend to the smallest firms in most countries. It has also severe impact on the smallest firms. Access to equity and formal debt financing has repeatedly been identified as a recurring constraint to SME growth and development. Commercial banks apply conservative policies in lending to SME. More, importantly the existing structure of financial sector was developed to serve medium to large enterprises which are organized as a formal business (Kon and Storey, 2003). Most banks prefer to hold risk free-income generating assets and lending to SME is unattractive due to a range of objective and subjective factors. These include high transaction costs, inability to do away with tangible collateral requirement, no linkage of financial products with sector needs and the inability to structure/ offer and manage risk-prone SME specific medium to long term financing options.