By: Syed Asim Ali Bukhari, Associate Professor Dr. Fathyah Hashim and Prof. Dr. Azlan Amran
Small and medium-sized enterprises (SMEs) play a crucial role in every nation’s economic growth, such as B. creating job opportunities, generating income and wealth, and reducing poverty. These are very important in less developed economies. In developing countries, the SME sector plays an essential role in achieving the United Nations Sustainable Development Goals (UN-SDGs) 2030 by creating job opportunities, alleviating poverty, promoting innovation and promoting sustainable industrialization and reducing income inequalities. According to global data, formal and informal SMEs account for over 90 percent of all businesses, 60 to 70 percent of total employment and 50 percent of GDP in most countries. Despite its important economic role, the SME sector faces difficulties in accessing formal financial services. According to one report, about 130 million, or 41 percent, of formal SMEs in low- and middle-income countries faced credit crunch before the COVID-19 pandemic, and the SME funding gap was estimated at $5 trillion. We estimate that 600 million jobs will be needed by 2030 to accommodate the world’s growing workforce, making SME development a high priority for many governments around the world. In emerging markets, most formal jobs are created by SMEs, which create seven out of ten jobs. However, access to finance is a key barrier to SME growth: it is the second most cited barrier SMEs face to grow their businesses in emerging and developing countries.
The International Finance Corporation (IFC) estimates that 65 million businesses, or 40 percent of formal micro, small and medium-sized enterprises (MSMEs) in developing countries have unmet financing needs of US$5.2 trillion per year, the 1.4 -times the current level of global MSME lending. The SME sector serves as the backbone of various economies such as Malaysia, which has approximately 1.15 million SMEs accounting for 97.2 percent of the total number of enterprises in Malaysia. In 2020, the SME sector contributed 38.2 percent or 512.80 billion ringgit to the national GDP and employed about 48 percent of the country’s labor force.
About 3.25 million SMEs account for almost 90 percent of all companies operating in Pakistan, according to Pakistan’s Economic Survey 2020-21. This sector accounts for about 40 percent and 25 percent of the country’s annual GDP and exports, respectively. However, one of the main obstacles in the financial inclusion of the SME sector in Pakistan is that about 97 percent of SMEs are undocumented and privately owned and operate as an informal sector.
Pakistan’s SME sector needs to undergo green transformation to achieve environmentally, socially and economically sustainable development in the future. Due to the economic importance of this sector, the development of eco-friendly or green SMEs is relevant to realizing the vision of “Clean and Green Pakistan”. Because of their small and flexible nature, SMEs are better placed to drive green innovation and contribute to green growth, especially in local and emerging markets that may be neglected by large companies. By integrating the element of environmental sustainability into the SME sector, synergies can be created between this important economic sector and SBP’s Green Banking initiatives. SBP can introduce low-interest green finance programs for green SMEs such as renewable energy generation, smart metering, building retrofit, green supply chain activities, green channel finance and waste recycling under the Green Banking umbrella.
Pakistan’s SME sector can undergo green transformation under the circular economy model through green finance, remanufacturing, repairing, maintaining, recycling and eco-design companies. Green finance can also be provided for the development of sustainable activities in the agricultural value chain, such as B. The establishment of electronic warehouses for the storage of various goods as security, through which an Electronic Goods Receipt (EEA) system can be implemented across the SME sector. SBP can launch a low-interest financing program for the development of EEA and Green Warehouses to ensure economic and environmental sustainability in SMEs linked to the supply chain industry. This can play an important role in overcoming the lack of secure storage facilities for different companies through effective public-private partnerships.
The effective uptake of green business practices by Pakistan’s SME sector depends on building green capacity within the SME sector and among the stakeholders concerned. This can be achieved by educating students of all educational levels about green management. The SBP can provide stakeholder training and also university level awareness sessions to ensure green education and green awareness building. The green SME sector can play the role of an important cog in achieving the United Nations Sustainable Development Goals (UN-SDGs) 2030. An increase in employment and production in the country’s SME sector will lead to an increase in employment and production in the rest of the economy.
Existing SBP financing programs for SMEs, such as the SME Asaan Finance Program (SAAF), the Kamyab Jawan program, the Kamyab Pakistan program and the Housing and Construction Finance programs can be converted into green finance programs. Recently Prime Minister Imran Khan launched Rs 407 billion in interest-free financing for youth, women and farmers to build low-cost homes and start a business. If this initiative targets eco-friendly startups or green SMEs, it can lead to robust growth of Pakistan’s green industries and environmental sustainability.
Green financing can also be extended to small and medium-sized construction industry and related businesses under the Naya Pakistan Housing Scheme, such as financing zigzag brick manufacturers, green cement manufacturers, green warehouses and eco-friendly logistics companies. SBP can finance green SMEs according to the same pattern as “SME Asaan Finance”, with no collateral required and risk covered according to the financing amount. Similarly, government agencies such as the National Energy Efficiency & Conservation Authority (NEECA) can increase efforts to ensure environmentally and socially sustainable economic growth for Pakistan’s SME sector by collaborating with SBP to raise awareness and implement energy efficiency-based projects . SBP can work with the Small and Medium Enterprises Development Authority (SMEDA) to develop Pakistan’s green SME sector through green finance.
The effective uptake of green business practices by Pakistan’s SME sector depends on building green capacity within the SME sector and among the stakeholders involved. This can be achieved by educating students of all educational levels about green management. The SBP can provide stakeholder training and also university level awareness sessions to ensure green education and green awareness building. The green SME sector can play the role of an important cog in achieving the United Nations Sustainable Development Goals (UN-SDGs) 2030. An increase in employment and production in the country’s SME sector will lead to an increase in employment and production in the rest of the economy.
All authors, Syed Asim Ali Bukhari, Associate Professor Dr. Fathyah Hashim and Prof. Dr. Azlan Amran, are affiliated with Graduate School of Business, Universiti Sains Malaysia, Penang, Malaysia.