1

MICRO FINANCING GOVT

( Pakistan) INITATIVES
An
Analysis of SMEs
The Financing
Point of View
Development
Solutions

from
and
MTI
SBIR
First
Microfinance
Bank
Network
Leasing
Histor
y
1982
First NGOs:
AKRSP, OPP
1992
NRSP
1994
1995
Bank of
Khyber
1997
KASHF &
PMN
2000
PPAF &
Khushhali
Bank
2002
NGOs: 22
RSPs: 4
MF Banks: 4(+1)
Leasing: 2(+2)
Banks: 1 (+?)
Govt.
Subsidized
Small Farmer
Lending
1970s
What are banks doing?
Shareholders in Khushhalibank
Increasing consumer financing
Lines of credit and cash management for NGOs
Declining direct outreach to poor?

Limited vision of microfinance and few
partnerships

Active Borrowers
510,000
Outreac
h
Gross Loan
Portfolio
Rs. 5 Billion
MF Banks
30%
Leasing
17%
Bank
6%
RSPs
32%
NGOs
15%
RSPs
41%
NGOs
26%
MF Banks
30%
Leasing
1%
Bank
2%

Information asymmetry
( lack of information on SMEs at various levels -
industry, regional and company ).
SMEs are high risk due to:
Limited capital flexibility
Vulnerability to market changes
Inadequate management capability
Short business/industry track record
Inferior collateral offering
Problems in SME Financing
( From the Point of View of the Banks )
High transaction cost of loan packaging/
administration relative to mostly low loan-absorptive
capacity of SMEs
Long processing time and poor service
High interest rates
Problems in SME Financing
( From the Point of View of SMEs )
Voluminous documentation
Largely inaccessible, as offered by banks due to:
High loan floor, effectively barring SMEs
Nature/size of collateral requirement
Years of business experience required
Types of SMEs
The Financing
Point of View
from
Significant credit track record
Sufficient collateral
Already Bankable SMEs
Substantial business track record and/or size
Established management systems
Absence of or limited credit track record
Absence of or inferior collateral
Near Bankable SMEs
Substantial business track record and/or size
Established management systems
Absence of credit track record or, in the case of
recovering SMEs negative track record
Absence of or inferior collateral
Non-Bankable (But Promising) SMEs
Limited management systems
Limited business track record and/or size
SMEs Banks & Other Funding
Orgs
Credit Delivery Intervention
For Already Bankable SMEs
Wholesale funds
Helps SMEs get lower interest rates
Helps SMEs get longer repayment terms
Helps SMEs in the province access credit
(liquidity for the provincial financing system)
For Near Bankable SMEs
Credit guarantees
Helps SMEs enter into the formal financing
system
Helps banks open-up and learn more on how
to finance near bankable SMEs
For Non-Bankable but
Promising SMEs
Direct Loans
Helps SMEs access credit at better rates
relative to informal sources
Trains SMEs in formal financing and
in starting a credit track record
Helps an SME grow in its industry and
to a respectable size over time with
continuous financing
The SMEs & Other Credit
Delivery Intervention
Direct
Lending
Credit
Guarantees
Wholesale
Lending
Non-
Bankable
SMEs
Near
Bankable
SMEs
Bankable
SMEs
Direct Lending Facilities
of SMEs Group
Short-Term Facilities
(one year or less)
1. SME-FRIEND -
short-term financing of export orders
2. SME-FIRST -
short-term financing of receivables
(eventually POs) of suppliers of top 1,000 corps.
Loan Purpose: Transactional Working Capital
Direct Lending Facilities
---Continued
Medium-Term Facilities
(above one year up to five years)
1. SME-FORCE -
medium-term financing of start-up or
expanding franchisees
2. SME-GUIDE -
medium-term financing of SME projects
endorsed by DTI-POs
Loan Purpose: Production Upgrading/Expansion
Industry-based
Direct Lending Facilities

1. Shoe Industry (already approved by SBC Board)
2. Cable Operators (pipeline)
3. Bakeshop Operators (pipeline)
Endorsement Required:
Technical assessment by the industry
association on the proposed expansion
Loan Purpose: (Production Upgrading/Expansion)
Direct Lending Facilities
SME-FEEL -
financing of micro-finance conduits
Loan Purpose: Temporary Working Capital
Medium-Term Facilities
(above one year up to five years)
Basic Documentary Requirements
a. Filled-up Application Form
b. In-house Financial Statements
c. Registration Papers
d. Applicable Endorsement
Procedures for Loan Avail-ments
a. SME submits basic documentary
requirements to SMEs Bank.
b. SMEs conducts project visit
c. evaluates loan application
d. informs SME of status of loan
e. If approved, facilitates loan release
documents
f. Releases loan (Land bank Cheque)

Financial Facilities
Funding source used by PAK fast growing
SMEs - first own funds then,,
42%
19%
13%
11%
7%
4%
3%
1%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Banks
Family&friends
Customers
Other
Public offerings
Private investors
Venture capitalists
Vendor& suppliers
Source: SMEDA(2007) Leading practices of fast growth entrepreneurs
Fin Assistance in SMES
PAK Org/Banks/NGO
SME Bank
All other Banks
Listed with SBP
First Women Bank
Koshali Bank
Agha Khan
Foundation
European Union

GTZ (German &
Dutch NGO)
Oxfam
CSF
(USAID)Program
Several Pak NGOs
World Bank
ADB Pak
Business Finance
Borrowers: Resident Pakistani Nationals. Facility:
Running Finance/Term Finance.
Financing Limits:
Maximum up to Rs.3Million-Small Business Enterprise.
Maximum upto Rs.50 Million-Medium Business
Enterprise.
Business Finance
Primary Security: Mortgage of property.

Mode of Financing:
a) Running Finance: One year line of credit
(renewable).
b) Term Finance: Maximum up to 7 years (with 2
years grace period).
Business Finance
Repayment:

a) Running Finance: Monthly debt servicing on
the outstanding balance.

b) Term Finance: Monthly installments.
Markup Rates: 13.5 to 14 %
Business Finance
Eligibility to Apply :
Age: Between 25 to 65 Years.
Borrowers: Resident Pakistani Nationals.
Business Finance
Business Requirements:
a) Minimum one year's business or
professional experience in the present
business (in case of small business
enterprise) and minimum five years business
or professional experience in the present
business (in case of medium business
finance).
b) Member of the relevant trade body (in case
of medium business enterprise) or relevant
professional association (in case of self
employed professional).

However ,, if you chose venture
capital? Who are the venture capital
providers and what do they want?

Types of venture capitalists (VC):
1. Business angels
Often previous entrepreneurs that have sold thir firms
Often older actors with knowledge of the market and you
=> they may like to help you
2. Venture capital firms / funds
A) Small actors e.g. SME Bank have 548 members
Often specialised on a financing or market segment e.g. seed
financing, growth financing, MBO/IPO or biotech, ICT,
construction
B) Large institutional VCs in Pakistan
C) Corporate VC e.g.
The venture capitalist looks at:
1. THE GROWTH POTENTIAL OF THE FIRM
The most important for a VC is often how fast and
how much a firm to be financed can grow
How can the management perform that growth ,, is a
standard key question
Realism versus dreams?
Competence and already shown results i.e. sales

The venture capitalist looks at:
2. THE MANAGEMT TEAM


Will these people deliver what they say they will?
The father of venture capital G.Doroit: Bet on the
jockey not the horse
How big is the risk that key personnel will leave the firm.
All managers should be owners
Note that receiving financing relates to trust
Relevant experience is important
Venture capitalists formula
It is the expectations that are crucial in
valuations of a listed or not listed firm
How is a firm that you may buy 10 % of
valued?
It is a complex and time dependent issue
The expected p/e value is important as
well as the size i.e. total sale
One way to value a firm is to use the
venture capitalist formula, i.e. a version of
the standard NPV
Venture capitalist formula (VCF) a simple
way
Assume that a venture capitalist has estimated that the
likely profit of a firm is 100 after 3 years from now and
that the profit can be assumed to stay at that level.
Then you can assume that the firm value after 3 years
is: 10 * 100 = 1000. However, what do you today pay for
something that perhaps after 3 years is worth 1000?
NPV or VCF gives that if you are a VC with a discount
rate (r) of 50% so is the firm valued at 1000/(1+0,50)
3

~296,3 today. And 10% of the firm is then worth ~ less
than 29,6 for the investor
However, if r
vc
= 20% ,, so is the venture capitalist
willing to value the firm at 578,7. And if r
vc
= 100%?
VCF
Note that in an exam it is that simple.
However, in reality it is more complex.
In the real world the venture capitalist may
want to control the firm (more than 50% of the
votes) so that he can push the development
of the firm.
However, VCs are often happy with 10-30% of the
firm in the first financing round, and less in the
second financing round.
Is there really buyers out there? The usual way
that a VC exits is through industry sale. So you
have to work on that concept. IPO is hard! To buy
out the VC is not that common ,,
Impact On
Poverty
Focus on poor: 30% of GDP per capita

Focus on rural & agriculture: 70% of loans
Shifting with recent developments
PPAF: 9% Increase in income
KASHF: 15% Increase in income and social benefits
PMN Seminar Paper December 2003 mixed picture
Need more data
Could do more to reach poorer people
Limited Outreach: challenge & opportunity
Role of NGOs, MF Banks, Commercial banks,
Leasing?
Need for clear vision and focused business plans to
attain sustainability.
Future? Partnerships for scale and sustainability
towards an inclusive financial sector that includes
everyone?

Diversification & New Initiatives: microinsurance,
housing loans, larger enterprise loans, better
application of technology.
Challenges & Issues
Thank you.