industrial policy, its spatial aspects and cluster development in ...

the average value of the collateral was higher, the smaller the business. This, however,
leads to other issues as SMEs generally do not have many assets that can be
collateralized; for example, over 40 percent of the SMEs in Pasha’s survey admitted to
not receiving a bank loan because they lacked the necessary collateral. Moreover, it is
difficult for banks to take possession of the collateral though legal procedures given the
slow working of Pakistan’s judicial system. The World Bank team for the 2005 report
was told by banks that the average period for taking custody of the collateral, in
instances when they were able to do so, could be 4–5 years or more after default had
been declared, and the time and costs of pursuing the process of obtaining possession
kept mounting.
Moreover, most commercial banks regard SMEs as riskier than large firms due to many
reasons. Firstly, SMEs face a more uncertain competitive environment compared to
larger companies; they experience more variable rates of return and higher rates of
failure. Secondly, SMEs are less equipped in terms of both human and capital resources
to withstand economic adversities, particularly unanticipated economic shocks. Thirdly,
their inadequate accounting systems and lack of financial controls undermine the
accessibility and reliability of information on profitability and repayment capacity.
Finally, SMEs in Pakistan operate in a somewhat ambiguous environment regarding
governance, which reduces the security of transactions. Thus there is a greater risk that
banks will not get paid, or that assets such as property will not be properly registered.
In view of all these difficulties, banks frequently refuse to lend at all or severely restrict
the size of their loans to SMEs. It is, therefore, not surprising that 86 percent of the
SMEs surveyed by Pasha had not acquired a bank loan. Moreover, in the total private
sector credit disbursement of PKR1,669.740 billion in FY2007, the share of the SME
sector was a shocking 1.7% [Asian Development Bank (2008)].
40 State Bank of Pakistan. (2007). SBP Annual Report 2006-07, Vol I. Karachi
142