In continuation of my previous suggestion on increasing SME growth in Pakistan through taxes by discouraging shops buying SME products on credit. There is also another way of overcoming this problem and that is through SME Banks.

In Mexico to increase SME growth, the government introduced a SME bank. Thailand also introduced a similar model for it’s SMEs. How the SME Bank works? An SME industry takes a loan from the bank to manufacture it’s product. Once the product is sold to a shop, the bank loan is transferred to the shop and the SME gets cash after it’s initial loan is paid back. The shop is given 3 months time to pay back the loan, after which monthly fines are added to the loan. As there is big difference between manufacturing cost, trade price and retail prices of shops, therefore there is little risk to banks.

For Pakistan the government would have to ask all the banks to provide this facility to the SMEs. Since most shop keepers already have bank accounts, they should be allowed to open their shop account with same bank. Banks should be allowed to charge a small percentage as fee from industries only on each sale transaction. While they should have a mechanism for fee free movement of loans from one bank to the other, as one industry might deal with shops who have accounts in various different banks.

This SME Banking system will also get the retailers into the tax net, while tax avoiding industries would also be highlighted. But for this system to work the banks should not be allowed to charge bank transfer and other related fees, as that is the main reason the shop and retailers avoid using banks. The small fees have formed a psychological barrier for these businesses from using banks.

The SME Banking will give SME’s in Pakistan some breathing space. The SMEs can spend their profits on their growth rather on credit to retailers. The government would also need to have set a mechanism for return of stock with SMEs, banks and shops for it to be a success. And also create a dispute resolution mechanism to avoid unnecessary burden on courts.