Businesses in Pakistan and Their Access to Financial Services
Businesses, large or small, are an important part of any society and fulfil various needs and functions. On one hand, they provide livelihood and employment to owners and workers, and on the other hand, they produce and distribute essential goods without which populations may not thrive. Almost 9 out of every 10 enterprises in Pakistan are classified as Micro, Small and Medium Enterprises (MSMEs). The MSME sector plays an important role in the economic development of Pakistan as these businesses contribute 30% towards the country’s GDP, employ more than 80% of non-agricultural workforce and generate 25% of country’s total export earnings. However, like all developing countries, information concerning these businesses in terms of their total quantum, geographic concentration, role and activities, operational structure and connectivity to the financial system (5 key questions), is not very well documented.
The last known official census of establishments, a usual instrument implemented across the world to answer these four questions about businesses, was done almost 15 years ago – known as Economic Census of Pakistan, 2005 (conducted by Pakistan Bureau of Statistics). Consequently, a few more independent surveys were conducted to gather meaningful data/insights on Pakistani businesses, however, these are either now outdated (a Gallup Pakistan survey in 2009) or are limited to a specific sector (various studies by SMEDA), or have not been made public.
Question 1: What is the total number of business establishments?
According to the Economic Census of Pakistan, 2005 a total of 3,249,482 business units were operating in the country.
Estimating the number of business entities as per recent data
The aforementioned figure is quite dated, it’s been more than a decade since the last economic census was done in the country. Accordingly a very basic forecasting exercise, with two scenarios, has been carried out below to estimate the current population of domestic business units. The key assumption is that the households served by these businesses have remained more or less constant throughout the years. Since the population has increased, it is assumed that the total number of businesses have grown at a similar rate. Scenario 2 takes a comparatively conservative approach, assuming the overall growth in business establishments to be half of that of overall population’s.
Table 1: Estimation of Total Establishments
|Total Population (2005)||153.9 million|
|Total Households (2005)||19.24 million|
|Total Business Units in Pakistan (2005)||3.2 million|
|Households Served per Unit||6|
|Total Households (as per census 2017)||32.2 million|
|Scenario 1||5.4 million units|
|Total Population (as per census 2017)||207.7 million|
|Cumulative Growth Rate of Population||35%|
|Scenario 2 – (17.5% growth rate)||3.8 million units|
Another estimate can be obtained from looking at the electricity connections for industrial, commercial and agriculture sectors. According to NEPRA, in 2017, there were a combined 3.7 million commercial and industrial connections in the country (based on 11 DISCOs), of which 3.3 million are commercial connections. With an addition of 0.3 million agricultural connections, this total reaches to 4 million connections. Assuming 20% informality i.e. enterprises operating under domestic electricity connections, the aggregated estimation for business units comes to 5 million.
The inherent limitation, however, with this estimation is that it assumes one electricity connection per establishment, which among majority establishments in not a usual case, however, it does give a ball park figure to policy makers and other key stakeholders.
Question 2: What is their geographic concentration?
These establishments were spread across the country; slightly disproportionate to the population size of the provinces, signalling difference in economic activity and purchasing power.
Table 2: Distribution of Establishments
|Province||Total Establishments||Province wise Proportion of Establishments – A (%)||Province wise Proportion of Population – B (%)||Difference % (B – A)|
Source: Economic Census 2005, Pakistan Bureau of Statistics
Question 3: What Sectors do Pakistani businesses operate in?
Of the total 3.2 million establishments, nearly 53% (~1.5 million) were categorized under the Wholesale/Retail Trade and Restaurants & Hotel sector. While, Community, Social and Personal Services, having around 650,000 businesses, emerged as the second largest group (these include the likes of tailors, barbers etc.)
The other major group was manufacturing of which there were around 590,000 units in the country.
Table 3: Distribution of Establishments by Major Industry Division
|Major Industry Division||%|
|Wholesale & Retail Trade and Restaurants & Hotels||52.96|
|Community, Social & Personal Services||22.30|
|Transport, Storage & Communication||1.74|
|Financing, Insurance, Real-Estate & Business Service||1.64|
|Agriculture, Forestry, Hunting & Fishing||1.57|
|Mining & Quarrying||0.02|
|Electricity, Gas & Water||–|
Source: Economic Census 2005, Pakistan Bureau of Statistics
Question 4: What is their operational structure and size i.e. how big or small Pakistani businesses are?
According to the 2005 census, majority (about 96%) of the total establishments that provided information on their employment size, reported to have 1 to 5 employees. 2.7% of the business reported an employee base ranging 6 to 10, while only 1% reported to have 11 to 50 employees.
Table 4: Employment Size by Major Industry Division
|Major Industry Division||Employment Size (as % of total establishments)|
|Agriculture, Forestry, Hunting & Fishing||97.4||2.2||0.4||–|
|Mining & Quarrying||50.9||26.7||19.8||2.6|
|Electricity, Gas & Water||91.2||2.4||5.6||0.8|
|Wholesale & Retail Trade and Restaurants & Hotels||99.0||0.8||0.2||–|
|Transport, Storage & Communication||96.8||2.5||0.7||–|
|Financing, Insurance, Real-Estate & Business Service||95.6||3.3||1.1||–|
|Community, Social & Personal Services||94.8||3.6||1.6||–|
Source: Economic Census 2005, Pakistan Bureau of Statistics
Question 5: What about their access to financial services?
The most recent and available data source on businesses’ access to finance is available from World Bank Enterprise Survey and it asks 13 very pertinent questions. A snapshot of these along with a comparison with other South Asian countries is provided in Table 5.
Table 5: Comparison on Access to Finance for Business
|Economy||Pakistan||Afghanistan||Bangladesh||Bhutan||India||Nepal||Sri Lanka||Pakistan’s ranking among South
|% of firms with a checking or savings account||58||44||86||93||87||86||89||6|
|% of firms with a bank loan/line of credit||7||5||34||46||21||35||40||6|
|Proportion of loans requiring collateral (%)||64||71||84||95||85||90||79||7|
|Value of collateral needed for a loan (% of the loan amount)||153||N/A||271||179||255||364||194||6|
|% of firms not needing a loan||57||45||42||59||50||36||25||2|
|% of firms whose recent loan application was rejected||14||35||16||8||13||6||8||3|
|% of firms using banks to finance investments||8||2||20||32||30||17||44||6|
|Proportion of investment financed internally (%)||88||85||75||75||72||70||54||1|
|Proportion of investment financed by banks (%)||2||1.5||12||19||18||13||35||6|
|% of firms using banks to finance working capital||8.6||4||30||42||36||14||41||6|
|% of firms using supplier/customer credit to finance working capital||14||4||10.5||5.5||25||19||24||4|
|Proportion of working capital financed by banks (%)||2.5||1||14||26||18||7.5||18||6|
|% of firms identifying access to finance as a major constraint||13||48||23||16||15||40||30||7|
Source: World Bank Enterprise Survey
- a) Percent of firms with a checking or savings account
58% of the firms in Pakistan have either checking or savings accounts, significantly lower when compared to 86% in Bangladesh, 87% in India, 86% in Nepal and 89% in Sri Lanka. The South Asian country with the highest percentage of firms with a checking or savings account is Bhutan (93%) and Pakistan ranks 6th among the 7 South Asian countries.
- b) Percent of firms with a bank loan/line of credit
The percentage of firms with a bank loan or a line of credit in Pakistan is even less than 10%, estimated to be 6.7%. In India approximately 21% firms report to have a bank loan/line of credit and the reading is even higher for Bangladesh, Nepal, Sri Lanka and Bhutan each reporting it at 34%, 35%, 40% and 46%, respectively.
- c) Proportion of loans requiring collateral (%)
Of these loans, the proportion requiring collateral for firms in Pakistan is 64%; fairly better when compared to peers. For firms in Afghanistan, 71% of the loans require collateral, while the reading is 79% in Sri Lanka, 84% in Bangladesh, 85% in India, 90% in Nepal and 95% in Bhutan.
- d) Value of collateral needed for a loan (% of the loan amount)
For firms in Pakistan, the value of collateral needed for a loan (as a percentage of the loan amount) was 153%. Nepal, reported the highest threshold in the region i.e. 391%.
- e) Percent of firms not needing a loan
More than half (57%) of the firms in Pakistan reported that they do not require any loan. Highest reading is for Bhutan, reporting a similar situation (58%) while this percentage is the lowest for Sri Lanka at 25%.
- f) Percent of firms whose recent loan application was rejected
14% of the firms in Pakistan reported that their recent loan application was rejected. Compared to this, a higher percentage of firms from Afghanistan (35%) and Bangladesh (16%) reported that their loan application was rejected while India reported a similar state of 13%. In Bhutan and Sri Lanka, 8.3% and 8.5% of the firms, respectively, reported rejection while Nepalese firms reported the lowest rejection rate of 6.4%.
- g) Percent of firms using banks to finance investments
In Pakistan, 8% of firms use banks to finance investments, comparatively better than Afghanistan where a meager 2% use bank lines. The scenario is much better in other peer country, each reporting a two digit figure (17% in Nepal, 20% in Bangladesh, 30% in India, 32% in Bhutan and 44% in Sri Lanka).
- h) Proportion of investment financed internally (%)
For Pakistan firms, using internal funding is a preferred choice to finance investments, as high as 88% of the investments are funded internally. Among the peers, this reading is lowest in Sri Lanka where only half of the total investments consume internal sources of funding.
- i) Proportion of investment financed by banks (%)
In Pakistan, 2% of the investments made by domestic firms is financed by banks. A very similar situation reported by Afghanistan, ~1.5% of the investments financed by banks. In Sri Lanka 35% of the investments are funded by banks, while for the other countries in the region this proportion ranges from 12-19%.
- j) Percent of firms using banks to finance working capital
9% of the firms in Pakistan use banks to finance working capital. The figure is lower in Afghanistan, only 4% reported of using banks for short term funding. The threshold is significantly higher in peer countries, i.e. 14% in Nepal, 30% in Bangladesh, 36% in India over 40% in Bhutan and Sri Lanka.
- k) Percent of firms using supplier/customer credit to finance working capital
Nearly 14% of firms in Pakistan rely on supplier/customer credit. This mode of financing is most popular in India and Sri Lanka, with over 24% of firms reporting the use of such facilities, followed by Nepal with 19%. Bangladesh stands at 10% while Bhutan and Afghanistan reported it at 4% and 5.5%, respectively.
- l) Proportion of working capital financed by banks (%)
In Pakistan, the proportion of working capital financed by banks is 2.5%; Afghanistan reports it at 1.2%. The situation is slightly better in Nepal with 7%, while all other peer countries report it above 10% – in a range of 14%-26%.
- m) Percent of firms identifying access to finance as a major constraint
Surprisingly, only 13% of the firms in Pakistan identify access to finance as a major constraint. While other metrics relating to their connectivity to the formal financial system portray a different picture all together. The proportion is much higher in Afghanistan, where 48% say it is a major constraint. For India, Bhutan, Bangladesh, Sri Lanka and Nepal this threshold stands at 15%, 16%, 23%, 30% and 40%, respectively.
Suggestions and Recommendations:
Looking at the World Bank’s data, it can be inferred that access to finance is very low within Pakistan’s business community and concrete steps are required to improve their connectivity with the financial system. Government needs to consider the following:
- For making relevant policy interventions access to quality demand and supply data is imperative. Currently, all the data points with respect to businesses are significantly dated. The primary document Economic Census was released in 2005 (15 years old). Even surveys undertaken by other independent institutions such as World Bank are dated and the last enterprise survey for Pakistan was done in 2013. The updated economic census needs to be conducted on priority. Meaningful partnership between government and development sector is imperative, donor agencies can play a vital role in mobilizing interest and ensuring the availability of resources to create fresh data sources so that an accurate landscape of business enterprises is used for policy interventions.
- Questions related to access to finance need to be incorporated in the Economic Census data. In the interim period, as the Census takes a few years to complete, questionnaire of other large-scale surveys (such as Pakistan Social and Living Standards Measurement Survey (PSLM), planned to be initiated in FY21) can be amended and expanded to ascertain the business activity.
- An SME Survey may also be considered by the government through public private partnership or the relevant questions may be added in the relevant PBS surveys. The SME surveys should address at least following aspects i.e. i) financial access behaviour and major impediments, ii) alternative financial arrangements that replace the formal financial services and iii) insights on behavioural change strategies to convince domestic businesses to adopt formal financial services.
- Access to finance for Women owned businesses needs special attention with policies that are tailored to facilitate female entrepreneurs of Pakistan. One constraint highlighted in Access to Finance Survey, conducted by the State Bank of Pakistan in 2015, was availability of identification documents (such as CNIC and formal registration of businesses among males and females) which makes it hard for women entrepreneurs to access formal sources of funding that require such documentation and are compelled to rely on informal sources of finance. Resolving these structural constraints for women’s entrepreneurial activity and their access to finance can help increase participation of women in the labour force.
- Businesses should be made aware of the recently launched digital Secured Transactions Registry (STR). The STR has allowed financial institutions to record charges or security interests created by unincorporated entities or individuals on their movable assets. This will open up new avenues for small and medium enterprises and agriculture sector borrowers to secure credit from financial institutions, as they usually have limited immovable property to mortgage which severely impacts their ability to grow and expand.
- Facilitating Innovative credit scoring model and use of non-financial data will help in facilitating businesses that do not have an established credit history with formal financial system. A number of local Fintechs are contemplating and deploying use of modern technology with innovative techniques to circumvent regulatory and operational hurdles to ease the lending process; these initiatives need support from industry stakeholders and policy makers. Regulatory easing, well-structured policies and an unambiguous framework are imperative to develop this aspect of the credit value chain.
 SMEDA, State of SMEs in Pakistan