For more than five decades, Zulqarnain Ali Chaudery and his family have run Electrum, an electrical equipment manufacturer in Lahore.
A few years ago, Chaudery landed a major contract with one of Pakistan’s biggest conglomerates, the type of deal that could take Electrum to the next level. But the company, which employs 20 people, was facing a conundrum: it didn’t have the manpower or equipment to complete the project.
So, Chaudery turned to Habib Bank (HBL), a long-time IFC client and one the few Pakistani banks that cater to small and medium enterprises.
The lender came through with a $35,000 loan, which allowed Electrum to expand quickly. Now the company, which is planning to double its workforce, is going after other major contracts.
"Acquiring new business is key for our company and HBL has made it possible," says Chaudery.
Electrum is one of many companies that have been helped by the lender, which in late 2011 launched a ground-breaking suite of financial services aimed squarely at smaller businesses. IFC played an instrumental role in that, advising the bank as it developed a new model for lending to small and medium enterprises (SMEs).
It was part of a wider effort by IFC to support smaller firms across Pakistan, a country where entrepreneurs often struggle to develop their businesses.
"SMEs are the backbone of Pakistan's economy, but they have trouble getting the financing they need to expand and create jobs," said Kaiser Naseem, IFC’s head of Bank Advisory Services in the region. "By helping them access that money, we can drive economic development across the whole country.”
Helping the little guy
There are close to 3 million small and medium enterprises in Pakistan, which account for 30 percent of the country’s gross domestic product. But these firms face an uphill battle. They often struggle to get loans from banks, which see them as risky investments. Red tape makes it hard for them to get crucial permits and licenses. Commercial disputes with other firms can drain their finances. And many entrepreneurs lack even basic business training. As a result, roughly 95 percent of SMEs will never employ more than five people and only 4 percent of smaller businesses will survive to their 25th birthday.
To help reverse these trends, IFC is ramping up its investment and advisory work in the country.
The organization has helped train more than 4,400 entrepreneurs in the fundamentals of commerce through Business Edge, a specially-designed program pioneered by IFC. About 20 percent of those were women. At the same time, IFC also has given instruction to over 200 trainers who have shared their expertise with scores of budding business people.
The organization has helped develop mediation and alternative dispute resolution centers in Karachi and Lahore. Those allow smaller business to settle commercial disputes quickly – and inexpensively – outside of Pakistan’s court system.
IFC has also trained close to 100 lenders in how to reach out to SMEs, whose needs are often different from those of other clients.
IFC is also working with banks to help them develop a suite of financial services tailor-made for smaller firms. A good example of that is the organization’s work with HBL. IFC provided the lender with in-depth advice on how to reach out to smaller firms, which resulted in the launch of the bank’s Business Faida program in November 2011.
It provided smaller businesses with an easy-to-manage bank account, financing to cover day-to-day operations, loans that help firms expand, and assistance in trading across borders. It also offers services in English and Urdu, the latter something most lenders don’t provide. Thanks to those efforts, the bank has added 80,000 small business customers in the last 15 months and increased its loan portfolio for those firms to $130 million.
Ahsen Khawaja, HBL’s head of small and medium enterprise banking, says IFC’s help was instrumental in getting the project off the ground.
“We had been trying to increase our outreach for several years, but we were struggling to find a model that worked,” he says. “IFC helped shift the way we were thinking about SMEs… and prompted us to offer them a complete suite of services in terms they could understand.”
Khawaja says HBL success could prompt more lenders to reach out to smaller businesses.
“SMEs are an integral part of Pakistan, and the more support we give them, the more we can encourage economic development across the country.”
There has already been a ripple effect; IFC is working with another Pakistan lender on SME banking and is in talks with others.
A prime example of the power of SME financing is Muhammad Ilyas, who owns a scrap metal business in Lahore. The 45-year-old was getting by, but he was chronically short of business capital, which meant he could only buy metal in dribs and drabs.
So, three months ago he went to HBL which gave him a small loan. He used the money to increase his inventory 10-fold. That freed him of expensive, short-terms loans and allowed him to dramatically increase production. Today, his revenues are up to 50 percent higher than they were last year.
"Now that my business is doing well, (my family is) living better and spending more," he says. Ilyas has already bought a plot of land near Lahore and is planning to build a factory to process scrap metal that will employ about 60 people.
"Opening a factory might be another 10 or 12 years in the future if I did not have the HBL loan. So