Islamic Republic of Pakistan Data Collection Survey on SME Finance in the Islamic Republic of Pakistan Final Report August 2018 JAPAN INTERNATIONAL COOPERATION AGENCY IMG Inc. 4R JR 18-053 Data Collection Survey on SME Finance in the Islamic Republic of Pakistan Map i Data Collection Survey on SME Finance in the Islamic Republic of Pakistan Table of Contents Summary ............................................................................................................................................ 1 Introduction ........................................................................................................................................... 6 1 Background and Objective of the Survey ...................................................................... 6 2 Survey Team Members .................................................................................................. 6 3 Survey Area .................................................................................................................... 6 4 Survey Methodology ...................................................................................................... 7 Chapter 1 Pakistan’s Macroeconomic Overview .............................................................................. 10 1-1 Economic Growth ........................................................................................................ 10 1-2 Balance of Payment ...................................................................................................... 11 1-3 Foreign Exchange Rate ................................................................................................ 13 1-4 Fiscal Balance .............................................................................................................. 14 1-5 Public Debt ................................................................................................................... 15 1-6 Monetary policy and inflation ...................................................................................... 15 1-7 Structural Reforms ....................................................................................................... 16 Chapter 2 SME Sector in Pakistan and their Support ....................................................................... 18 2-1 Overview of the SME Sector in Pakistan ..................................................................... 18 2-1-1 Definition of SMEs .................................................................................................. 18 2-1-2 Number of SMEs ...................................................................................................... 19 2-1-3 Target Sector and Sub-Sectors of the Survey ........................................................... 21 2-2 Overview of the Target SME Sectors .......................................................................... 21 2-2-1 Textile ...................................................................................................................... 21 2-2-2 Gem and Jewelry ...................................................................................................... 25 2-2-3 Marble Processing .................................................................................................... 27 2-2-4 Leather Goods Manufacturing ................................................................................. 29 2-2-5 Sports Goods Manufacturing ................................................................................... 31 2-2-6 Surgical Instruments ................................................................................................. 32 2-2-7 Auto Parts Manufacturing ........................................................................................ 34 2-2-8 Light Engineering Products ...................................................................................... 37 2-3 Current Condition of SMEs.......................................................................................... 41 2-3-1 Technology ............................................................................................................... 41 2-3-2 Raw materials ........................................................................................................... 42 2-3-3 Marketing ................................................................................................................. 42 2-3-4 Human resources ...................................................................................................... 42 2-3-5 Financing .................................................................................................................. 43 2-3-6 Problems and Challenges ......................................................................................... 44 2-4 SME Development Policy and Plans ........................................................................... 46 2-5 Overview of SME Support Projects and Activities ...................................................... 46 Chapter 3 Financial Sector Overview and SME Finance ................................................................. 48 3-1 Financial Sector in Pakistan ......................................................................................... 48 ii Data Collection Survey on SME Finance in the Islamic Republic of Pakistan 3-1-1 Financial Sector Landscape ...................................................................................... 48 3-1-2 Interest Rate Environment ........................................................................................ 50 3-1-3 Dynamics of Public Debt and Private Sector Credit ................................................ 50 3-1-4 Financial Soundness of the Banking Sector ............................................................. 52 3-1-5 Composition of Private Sector Credit ...................................................................... 52 3-2 SME Finance ................................................................................................................ 53 3-2-1 SME Finance Landscape .......................................................................................... 53 3-2-2 SME Finance by Facility and Industry ..................................................................... 55 3-2-3 SME Finance by Banking Groups ............................................................................ 56 3-2-4 SME Finance and Performance of Commercial Banks in Pakistan ......................... 58 3-2-5 Financial Products for SME Finance........................................................................ 64 3-3 Selected Ongoing Financial Assistance by Donors ...................................................... 66 3-3-1 Credit Enhancing Products and Schemes ................................................................. 66 3-3-2 Karandaaz and IFC for Supply Chain Finance ......................................................... 70 Chapter 4 Financial Access and Inclusion for SMEs ........................................................................ 72 4-1 Low level of Financial Inclusion in Pakistan ............................................................... 72 4-2 Primary Constraints in Advancing SME Finance ........................................................ 72 4-2-1 SMEs’ Informality.................................................................................................... 75 4-2-2 SMEs’ Lack of Collateral ......................................................................................... 76 4-3 Current status of SMEs’ Financial Inclusion ............................................................... 77 4-4 Reforms Targeting SME Finance ................................................................................. 79 Chapter 5 Proposed SME Support by JICA ...................................................................................... 83 5-1 Financial Assistance ..................................................................................................... 83 5-2 Technical Assistance .................................................................................................... 86 Annex 1 List of Banks Operating in Pakistan ..................................................................................... 91 Annex 2 Pakistan’s Economic and Social Developmental Goals and Policy Guidelines ................... 92 Annex 3 Utilization Status of the Credit Guarantee Scheme of SBP .................................................. 94 Annex 4 Options for JICA Financial Assistance ................................................................................. 95 Annex 5 Overview of Pakistan’s Microfinance Sector and Micro Enterprise Lending ...................... 96 Annex 6 Financial Scheme of Foreign Currency Loans for Export Oriented Medium-sized Enterprises ........................................................................................................................................ 102 Annex 7 Summary of Recent SME Support in Pakistan ................................................................... 105 iii Data Collection Survey on SME Finance in the Islamic Republic of Pakistan List of Tables and Figures Table 1 Institutions related to SME finance visited by the JICA Survey Team ...............................7 Table 2 Organizations related to SME development interviewed by the JICA Survey Team .........8 Table 3 Balance of payment summary ...........................................................................................12