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

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

3. 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

4. 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

5. 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

6. 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

7. SME in Pakistan

8. 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.

9. World Bank Survey – Key Issues
Issues Identified Percentage
•Lack of finance %
•Shortage of skilled labour %
•Getting business site %
•Bribes %
•Orders/Marketing of Product %
•Lack of Knowledge %
•Government interference %
•Raw Material %
•License for work %
•New Technology %

10. 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)

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

12. SME Finance situation

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

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

19. CASE STUDY

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

23. 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

24. Akhuwat’s Borrowers

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

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

27. 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