Recommendation

SMEs in Peshawar are using different type of financial instrument to fulfill financial need of their business.  SMEs need safer and less costly financial instrument, in this regard they examining Islamic financing system as well conventional financing system. The entrepreneurs usually feeling hesitation in use conventional financing system because of interest.

Islamic Bank should to reduce the rate of financing to make it more attractive for their clients, as the study shows that most of the respondent considering it more costly as comparing to conventional system.

Islamic Banks should also make aware people of Peshawar about the Islamic mode of financing by advertizing etc

Conventional Bank should provide interest free financial instrument for the SMEs as there are a large number of SME customers who do not avail riba-based conventional banking services due to religious reasons. Doing so is even more possible now that SBP has allowed banks to open stand-alone Islamic banking branches. Particularly in areas like D. I. Khan, Swabi, Charsada, Loralai, etc. availability of Islamic banking products is likely to impact the demand for SME finance.

The mechanism of providing SME finance should be based on ‘relationship banking’. In this context, banks can get the available information from SMEDA and other local organizations, and appoint relationship managers who are equipped with the relevant expertise pertaining to the industrial activities of a particular city or area.

Banks should develop one or two specific SME products in consultation with SMEDA and the Export Promotion Bureau. Using similar tools of risk assessment for SMEs and Corporate business creates problem, Banks should use different tool of risk assessment for SMEs. SMEs not like a corporate business, using the same tool of risk assessment creates complexity for in financing SMEs Banks should give more attention to efficiency and speed of delivery then risk assessment process. The consideration of SME as a corporation and using same tool of risk assessment proves to be expensive and not familiar to SMEs.

An important step for banks is to recruit fresh people from local areas and train them on credit assessment tools such as cash flow lending and credit appraisal processes pertinent to SME financing. This is important because local people have a better knowledge of the area, local industrial activities and repayment capacity of the borrowers.

Banks should standardize and simplify the requisite documentation, and publish and print them in Urdu and regional languages. This is how banks can improve communication with their borrowers which would serve to bring a large segment of population under their clientele.

Banks should invest in information technology in order to track and monitor a large number of loan accounts and their performance. By developing such capabilities, banks can also use various analytical exercises including stress testing and trend analysis through which they can be more proactive in tracking loan performance. Adequate risk mitigation tools should be utilized by banks to ensure a smooth running of business. For instance, banks can use tools like credit insurance, third party guarantees, risk based pricing, etc.

To make SMEs more bankable, adequate geographic coverage should be given to the staffing process at SMEDA.

Role of private credit bureaus and rating agencies should be encouraged so that banks are provided with the requisite information about potential customers.

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