Credit policies: Pakistan vs developed world

Pakistan has similar initiatives yet their effectiveness is curtailed by funding constraints, administrative hurdles

Syed Adil Abbas Rizvi May 08, 2024
The writer is a credit analyst


Access to credit is paramount for the growth and prosperity of small businesses worldwide. Yet, the efficacy of credit policies varies markedly across countries, profoundly influencing small businesses’ ability to flourish. Let’s delve into a comparative analysis of international credit policies vis-à-vis those in Pakistan, alongside exploring the pivotal role debt analysts play in facilitating the success of small businesses, both domestically and on the global stage.

Comparative analysis first:

1. Collateral Requirements: Developed countries often embrace credit policies with minimal or no collateral requisites, instead of prioritising factors like business performance and credit history for assessing creditworthiness. Conversely, Pakistan’s credit policies typically mandate substantial collateral, posing hurdles for small businesses in securing financing and stifling entrepreneurial growth.

2. Interest Rates: Internationally, interest rates for small business loans fluctuate based on prevailing market conditions, with some countries offering subsidised rates or low-cost financing initiatives to bolster small business development. In Pakistan, interest rates can be relatively high, particularly for small businesses deemed high-risk borrowers, amplifying borrowing costs and impeding growth and profitability.

3. Government Support: Many nations extend government-backed loan guarantee programmes or financial aid schemes to bolster small business expansion, aiming to mitigate lender risk and incentivise financial institutions to extend credit. And though Pakistan has introduced various such programmes, their efficacy is hampered by challenges like limited funding and bureaucratic red tape.

4. Loan Guarantee Programmes: Developed nations often deploy loan guarantee programmes, wherein the government or designated entities partially underwrite small business loans, thus encouraging lenders to extend credit. Pakistan too has similar initiatives, yet their effectiveness is curtailed by funding constraints and administrative hurdles, highlighting the need for streamlining and expansion.

5. Credit Reporting Systems: Developed countries boast robust credit reporting systems, facilitating risk assessment and fostering responsible lending practices, ultimately enhancing credit access for businesses with limited credit history. And while Pakistan has made strides in this domain, challenges such as data inaccuracies persist, necessitating enhancements to bolster credit access and reduce borrowing costs.

6. Microfinance and Alternative Lending: Many nations promote microfinance institutions and alternative lending platforms to cater to small businesses’ financing needs, offering tailored financial products and fostering inclusive economic growth. Pakistan’s microfinance sector is vibrant yet it faces challenges such as high interest rates and limited rural outreach, underscoring the need for regulatory reforms and expanded access.

And now let’s analyse the role of debt analysts in small business success:

Debt analysts provide invaluable insights into local market dynamics, empowering small businesses to make informed decisions and identify growth opportunities.

– Safeguard lenders’ investments and facilitate informed lending decisions by evaluating creditworthiness and mitigating risks.

– Conduct thorough market research to assess risks and feasibility for small businesses eyeing international expansion, aiding in strategic decision-making.

– Assist in crafting tailored financial strategies to optimise performance and maximize profitability, ensuring sustainable growth.

– Help small businesses navigate entry into foreign markets, minimising risks and capitalising on opportunities, through market research and strategy formulation.

– Develop contingency plans and risk mitigation strategies to shield small businesses from economic uncertainties and geopolitical risks.

– Provide ongoing support to navigate challenges and capitalise on emerging opportunities by continuously monitoring financial performance.

In conclusion, harnessing the expertise of debt analysts and aligning credit policies with international best practices are pivotal for Pakistan to empower its small businesses in today’s competitive landscape.

Published in The Express Tribune, May 8th, 2024.

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