Real estate

Role of Financial Institutions and Business Incubators in Revitalising SMEs in Pakistan

By 02/06/2021 June 4th, 2021 0 Comments


With 25 percent of all manufactured exports of Pakistan coming from SMEs, its importance cannot be ignored. However, in terms of their composition of access and funding, SMEs in Pakistan are relatively younger when compared to their regional counterparts. Out of 1.2 million that exist, only 4 percent are older than 25 years, while 19 percent are less than 5 years old. India’s SMEs sector has a 95 percent ratio of micro-enterprises, 4.7 percent of small, and 0.2 percent of the medium. Whereas Pakistan has a 99.1 percent ratio of micro and small, and 0.9 percent of the medium. Among these, 96 percent employ less than 10 people and are owned and managed by single individuals. They also account for 90 percent of all enterprises in the formal sector with 50 percent being in manufacturing, 40 percent in services, and 7 percent in trade and hospitality. As the SMEs sector of Pakistan is similar to other regional counterparts, effective models can be taken from other countries to improve SMEs growth in Pakistan.

Role of Financial Institutions for the Uplift of the SMEs Sector

Multiple factors make the financing of SMEs problematic in Pakistan. As the sector is relatively young in terms of growth and expansion, recording progress for different enterprises is tricky. A large majority of SMEs are being managed by the owners themselves. Assessing their skillset and determining the processes and systems involved in the business can become challenging. SMEs are not restricted to one sector of the economy. Rather, they can be found in the manufacturing, services, trading, and hospitality industries. This increases the complications for banks as one single framework cannot be applied across the board. As the sizes of these enterprises also remain small, limited to under 10 employees, the cost of servicing them is also very high. Banks look for incentives before funding any business organisations, and SMEs, at the moment, provide a very little incentive in terms of growth and capacity. The pandemic has further compounded this problem as SMEs are the hardest hit sector of the economy.

The sector has become more of a sandwich between micro and commercial banking. It is becoming harder to differentiate where the SME sector falls. A majority of enterprises are considered micro, which means that they fall in the domain of microfinancing banks. Small enterprises are where the confusion lies as commercial banks are mostly driven by collateral assessments while providing loans, and the model of cash flow-based lending does not exist in SMEs, allowing for very few to qualify for funding.  There are 180,000 SMEs that are currently being financed by banking institutions. Only 40 percent out of these are relationship driven. Various surveys have been conducted to assess the challenges being faced by SMEs. Lack of access to funding, high markup rates, and many associated charges in terms of acquiring a loan are some of the major challenges. Another issue is that of collaterals and documentation.

As most SMEs start out with a very limited understanding of tax and regulatory requirements, documentation becomes a serious challenge for them. A majority of SMEs need financing for growth and business development. It is a requirement for their sustainability as well. Their expansion requires investment in the working capital space and also in trade services. Banks are familiar with managing risks in the trading side of businesses, but when it comes to working capital, the complications are enormous. A giant leap of faith is required to support the SMEs towards their next step. Risk assessment strategies used by commercial banks do not distinguish between SMEs and other businesses. That is highly unfair considering the differences between them. In a nutshell, banks do not consider SMEs as a strategic business.

The Role of Business Incubation Centres in Industry-Academia Linkage

SMEs, government institutions, financial institutions, and academia are currently working in individual capacities towards achieving SMEs growth in Pakistan.  There is a lack of synergy as policies are being made and initiatives being taken, but key stakeholders either lack interest, capacity or are not involved enough in the processes. Hence, comes the role of academia. It is a key player in this regard. Pakistan has a very high percentage of youth. This huge potential needs to be transformed into something worthwhile. The Indian government has included micro businesses in their SMEs definition, and this has helped their startups on a huge level. Human resource is a key element of any SMEs development. That resource is shaped through academia. Knowledge, skill, and action are three fundamentals of human resource development. They are also the focus areas where academia strives to function.

Business incubation has soared in demand over the last several years. Although, there are push and pull factors that decide the efficacy of their function. Industries are initially very forthcoming in regard to new ideas from the youth, but upon deeper inspection, there is no structured framework for students to work on. The needs of academic institutions are defined in the form of credit hours and course requirements. However, these incubation centres do not have mechanisms to incorporate these systems into their framework. Here comes the role of the government in policymaking. Financial systems are much more comfortable in giving loans to the government instead of educational institutions and business incubation centres. The government should realise this and make positive interventions in the forms of development funds and technical training. The Kamyaab Jawan program is a good example of what is needed in the future.


As long as the Pakistani government does not believe in the ability of its citizens to uplift the country’s economy, overall growth will remain a difficult task. Businesses and private sector investors must be deregulated as much as possible. Sectors such as information technology and fish farming have huge potential, but people lack funds. Therefore, revitalising the SMEs sector of Pakistan is fundamental to the growth of Pakistan’s economy.


Iqbal Institute of Policy Studies. (2021). Revitalising Small and Medium Enterprises (SMEs) in Pakistan. Islamabad: IIPS. Available at

Research Questions

1. What is the role of financial institutions in the uplifting of SMEs in Pakistan?

2. How can business incubators and the academia work together for SMEs growth in Pakistan?

Key Takeaways

1. There is a very big difference between the government’s definition of SMEs and what should be the actual definition.

2. SMEs are linked with improvements in many socioeconomic indicators such as poverty, joblessness, and reduction in crimes and corruption.

3. No social support program can come close to eradicating poverty than the proliferation of SMEs.

4. A new policy for SMEs growth has been made but its approval remains pending.

Leave a Reply