Streaming Media

Media Type

Keynote Address

Publication Date

10-24-2003

Description

I would like to congratulate SMEDA on bringing together all the stakeholders together to discuss the issue related to financing of SMEs in Pakistan. I have listened to the presentations and also the interventions from the floor very carefully. Let me therefore share my thoughts with you on this important topic. We should start with the basics. As you have heard, from the presentations this evening, there is a tremendous demand of bank credit by the SMEs who are at present meeting most of their financing needs through friends, relatives and other informal sources. At the same time the banks have surplus liquidity which they would like to deploy to earn a decent rate of return on their depositors’ funds. But there is a market failure in so far as the demand and supply are not being cleared and there is a disequilibrium in the credit market for SMEs. The banking business is characterized by asymmetric information. The borrowers’ willingness and capacity to service a loan on time is known to him. But this information is not available to the lender. In order to compensate for this information asymmetry the lender asks for securities and collaterals from the borrowers. Thus the collateral acts as a key input into the process of financial intermediation. As the small businesses cannot offer adequate collateral the banks are unable to determine whether the borrower possesses technical, managerial and marketing skills that will allow him to generate adequate cash flow and repay the loan on time. The process of financial intermediation therefore breaks down for the SME borrowers. In order to revive this process, the banks have to be reassured that the borrowers’ technical capacity, management and marketing skills are being taken care of and at the end of the day they will have sufficient cash flow to service their debt to the banks. .

Notes

Key note address at the SMEDA-IBP seminar on “Issue of SME financing” held at Lahore on October 24, 2003

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