Road to growth: Access to finance biggest brick in the wall

KARACHI:

When a country’s gross domestic product (GDP) growth falls below an acceptable level, like it has for Pakistan for five years, investment climate deteriorates, business opportunities are found lacking and foreign direct investment reduces massively.

This has several consequences, most serious of which is increasing poverty. In addition, existing businesses stop expanding and hiring is frozen, resulting in graduates unable to find jobs.

Due to the shrinking job market, the only viable alternate left for the youth is to start their own businesses — and look to become entrepreneurs. Of the many challenges faced by a budding entrepreneur, access to finance is, obviously, the most crucial.

Funding is critical to starting a business — from renting a premise, hiring staff, funding office equipment, start-up capital, construction costs among others. All of these require massive amounts of capital.

Pakistan’s growth, like any developed nation, will be driven by entrepreneurs and small and medium enterprises (SMEs). Unfortunately, there is no entrepreneur ecosystem or a national strategy to tackle this issue.

Hence, access to finance is one of the five areas to be focused on, addressed and fixed.  Some key elements of a position paper on access to finance include:

The World Economic Forum carried out a global survey in 2013 of active entrepreneurs from 43 countries. Pakistani entrepreneurs rated funding and access to finance at the bottom of the list with only 22% identifying it as being available.

The biggest impediment for entrepreneurs is the lack of credit history.  For the majority, this would be the first time they will approach any bank for a loan. This data is needed by financial institutions to evaluate risk for first-time borrowers.

Presence of highly developed mobile-banking applications and payment system is a positive sign. The evolution of microfinance banking is making significant progress towards the financial inclusion of the poorest socio-economic group of the country.

The ideal solution is for the government to encourage both public and private sector banks to provide financing options to entrepreneurs. In the meantime, some of the alternate sources of raising fund via equity funding include

Crowdfunding

This occurs when a venture is raising funds via small monetary contributions but from a large number of people through the use of the Internet. In the US, there were over 200 crowdfunding sites and an estimated $1.5 billion was raised through these platforms in 2011.

Venture capitalist

These are high-risk individuals with an eye for business opportunities. They usually fund start-ups that do not have access to capital markets, yet have a perceived long-term growth potential.

Angel investors

They provide seed capital or a one-time injection to small start-ups or entrepreneurs in exchange for a convertible debt instrument or an equity state.

Business angels

These are high worth individuals, usually businessmen who started off as entrepreneurs. They usually make early stage investment in new companies with vivid ideas.

Initial Public Offerings (IPOs)

This requires a fairly mature stock market. An entrepreneur makes a public offering to sell stocks of his business venture. A good idea can raise a lot of capital quickly, but also carry shortcomings with it such as disclosure of pertinent information to competitors.

If the government or the private sector does not address plugging the ‘access to finance’ gap in the entrepreneur ecosystem, this will significantly hinder Pakistan’s economic growth and negatively impact the standard of living.

This is hardly the time when the country can afford to move at a slower pace. Urgent reforms are needed and contributions from both the private and public sectors are needed.

THE WRITER IS ASSOCIATED WITH THE CORPORATE SECTOR AND A SUPPORTER OF MANY SOCIAL ENTERPRISES AND FOUNDATIONS

Published in The Express Tribune, October 6^th, 2014.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.