To highlight the impact of Small and Medium Enterprises (SMEs) on the economy and the urgent need to remove impediments in the rapid progress of this sector, are the favourite topics of most of the policymakers of the country.

Presiding over the 4th meeting of the SME Credit Advisory Committee, SBP Governor, Yaseen Anwar has said the growth of the SME sector is critical to the country\'s prospects of increasing employment, supporting productivity through greater business innovation and reducing income inequalities.

Insofar as its importance in the economy is concerned, SMEs account for the vast majority of business establishments in Pakistan (over 98 percent) and over 78 percent of the non-agricultural employment in the country.

However, he does not seem to be satisfied with the present state of affairs in the SME sector and insists that a sustainable approach towards development of this sector will require a more active role from all the stakeholders.

Expressing dissatisfaction over the role of financial institutions in promoting the SMEs, the Governor points out that SME financing by banks which was Rs 437 billion in December, 2007 had dropped to Rs 268 billion by September, 2011, resulting in the fall of the lending portfolio of banks from 16.2 percent to 7.7 percent in the same period.

Further, a broad analysis of banks\' aggregate loan portfolio has revealed that a major share of total SME advances (76 percent) constituted working capital loans, suggesting reluctance on the part of the banks to meet the long-term financing needs of this sector.

This had significant implications for modernisation, expansion of business and asset formation by SMEs.

On its part, the State Bank was ready to support banks wishing to increase lending to this sector with appropriate policy interventions.

The State Bank had revamped its Credit Guarantee Scheme and other refinancing schemes with some encouraging results.

However, overall utilisation of these schemes was still below the expected level and this needed to be looked into seriously by the participating banks.

The focus of the central bank of the country on the development of SME sector, in our view, is largely justified due to the peculiar conditions in Pakistan where most of the households are not well-acquainted with the proper functioning of the modern corporate sector and prefer their own family businesses due to a variety of reasons including the possibility of contact with tax authorities, application of labour laws and harassment by various government agencies if they borrow from the banks.

Nonetheless, there is no denying the fact that this model of growth is not only highly suitable for its potential to accelerate development in a country like Pakistan but could also go a long way in promoting employment generation, entrepreneurial skills, business innovation, helping poverty alleviation and reducing income inequalities.

However, as is widely known and also expressed by the Governor, the potential of this sector has not been fully exploited and it has failed to make the necessary contribution to the growth of the economy.

It is good to see that the State Bank is fully aware of the importance of this sector and prepared to offer the necessary assistance.

Its strategy to increase the flow of funds to this sector, particularly greater focus on providing fixed capital requirements, could help in facilitating and strengthening the SME sector.

However, the State Bank\'s strategy to provide financial incentives alone cannot be a sufficient condition for the desired growth in the SME sector.

In our view, the authorities of the country need to analyse thoroughly why this sector has failed to show the necessary dynamism and also initiate a probe to know the reasons for slow growth of credit in this sector.

Borrowers may be reluctant to avail credit facilities due to the hassles associated with bank loans, disclosure requirements etc and banks may be avoiding lending to the SME sector due to difficulties in the recovery of loans.

The SME sector, in particular, has been facing a very hard time due to severe energy shortages, law and order situation, overall deterioration in the economy etc and, therefore, probably was not able to play its due role in the economy, thus affecting its ability to repay its loans in time.

Therefore, in our view, it is much more important to improve the overall enabling environment in this sector than to focus only on the provision of credit.

Also, while on the subject, we would like to advise the State Bank not to try to unduly interfere with the credit market or the workings of the boards of the banks or think about the segmentation of credit to favour a particular sector.

Such a policy thrust generally leads to sub-optimal utilisation of credit.

Hopefully, the government would adopt a multidimensional strategy to remove the impediments to the growth of SMEs so that the sector could stand on its own feet to claim its due share of credit from the banks on the strength of its performance record, and without crutches from any source.