The SME Challenge Promoting Alternative credit Analysis Technique for SMEs Access to Finance

Outline What & WHY SME SME in Pakistan SME Finance Situation Traditional Credit Analysis Alternative (Psychometric Credit Scoring)

What Is SME? Various Definitions Differentiating Features Defined By Size Of Sales Or Number Of Employees Depends On Size Of Companies Relative To Economy EU Less Than 250 Employees & Sales Of Eur 50Million Or Balance Sheet Of Eur 43Million Citigroup $2-$50 Million In Sales [Up To$250MM In Some Countries] Number of Employees Up to 20 and Annual Sales Turnover Up to Rs. 75 million(SBP) Differentiating Features Owner/Family Managed Proprietorships, Partnerships Or Small Private Or Public Limited Companies Generally Suppliers To Larger Local Or Multinational Companies Low Capitalization & Limited Financial Strength Needs A Mix Of Consumer & Corporate Banking Products

Why SME? For The Banking System SME Represents A Large & Growing Opportunity Emerging Markets Banking Revenue Estimated At Over $40Billion For Policy Makers – It Is A Means To Achieve High Employment Employs Over 50% Of Labour Force Even In The Developed World High Economic Growth 50-60% Share of GDP – Engine Of Economic Growth Culture Of Entrepreneurship Wider Tax Base Alleviation Of Poverty

Why Now? Economic Liberalization Declining Public Sector Role Privatization Of Power Sector, Oil & Gas, Telecommunications & Other Industries Emergence Of Private Enterprise As The Engine Of Growth Central & Eastern Europe, China, India, Pakistan Increasing Regional Economic Cooperation ECC/EU, NAFTA A “Freer” Trade Environment Reducing Trade Barriers (Tariffs) Private Banks Entrepreneurial & Performance Driven Management Increasing Product Sophistication & Better Risk Management Improving Cost Management & Operating Efficiency Banking Reforms Improvements In Legislation & Legal Infrastructure To Protect Rights Of The Lenders

SME - A Hybrid? Corporate SME Micro Large & sophisticated relationship managed multi-product customers (need investment banking/corporate finance, derivatives and other high value added products along with traditional banking products). Corporate Upper tiers need relatively wider product set similar to the larger corporate entities. Lower tier, clients needs cut across boundaries of traditional consumer and corporate banking products. SME Micro

SME in Pakistan

Challenges to SME in Pakistan Poor record keeping by SMEs, particularly accounting information and other business documentation. Low productivity and their inability to improve quality of products over time. Poor operational performance. Problems with packaging bankable loan requests by SMEs. Limited knowledge of financing options for SMEs. Lengthy and cumbersome application procedures, which discourage both SMEs and Banks. High transaction costs owing to size of transaction, vis-à-vis volume of transactions which discourages banks. High turn around time owing to lack of timely and quality information from SMEs. Lack of skills in banks for identifying needs and structuring the delivery of financial assistance to SMEs. Lack of expertise in banks for appraising/structuring SME Projects. Stringent collateral requirements and other banking regulations. General risk aversion by banks.

World Bank Survey – Key Issues Issues Identified Percentage •Lack of finance 55% •Shortage of skilled labour 39% •Getting business site 38% •Bribes 21% •Orders/Marketing of Product 28% •Lack of Knowledge 12% •Government interference 12% •Raw Material 10% •License for work 8% •New Technology 8%

Sources of Finance and Stages of SME Development Access to credit/financing is deemed to be one of the greatest hurdles faced by SMEs The entrepreneurs require mainly three types of finances: (i) equity capital - to finance assets at the start of a business; (ii) debts – to refinance assets; and (iii) working capital – to maintain the day-to-day activities (Jesmin, 2009)

Traditional Credit analysis by Financial Instruction Documentation Record Keeping History with Bank/ FIs Collaterals Limited Amount

SME Finance situation

An Alternative Data Score analyzes a consumer’s or entrepreneur’s deep aspects highly related to their success and willingness to pay

Psychometric Credit Scoring Based on 40 years of academic research on entrepreneurs Screening tools used successfully by over a third of US companies

CASE STUDY

USE of EFL TEST Results increasing bank’s ability to Control Risk Increase Approval Transformational efficiency Compete in Digital world.

Akhuwat’s innovative model Principles Use of indigenous institutions like mosque and church Volunteerism & Reliance on civil society Interest free loans (Qarz-e-Hassan) Converting borrowers into donors Serving of Humanity

Akhuwat’s Borrowers

loan offering and process Two non-relatives to collateralize the Loan A social and financial appraisal of the potential borrower Borrowers as donors

Akhuwat’s innovative model Progress January, 2018 Offices in Pakistan: 771 No. of Cities: 300+ Total borrowers : 2,437,131+ Total Amount Disbursed: Rs.55 billion Recovery Rate: 99.9 %

Way forward Increasing Employment Opportunities SBP ,Financial Institutions, Academia learn lessons from international practices(EFL Psychometric Test for credit), Akhuwat model. Join Hands to promote SME’s access to finance which results in: Increasing Employment Opportunities Economic Development and Growth Promoting Culture Of Entrepreneurship Widening the Tax Base Alleviation Of Poverty