Small & Medium Enterprise (SME) Financing and Poverty Alleviation– A Case of Pakistani Islamic Banks

Abstract

SME sector in Pakistan is challenged due to unavailability or restricted availability of credit from financial institutions which hinders their growth and development. Risk sharing system of Islamic finance can facilitate to achieve sustainable growth and reduce poverty in the country, through SMEs. The subject paper aims to determine empirically, preference of Islamic financial institutions and banks towards specific SME financing areas. Inequitable wealth distribution has been the main challenge for alleviating poverty within emerging economies. Through this paper, it is assessed does the availability of Shariah-compliant products to SME plays a role in poverty alleviation. The research design is descriptive and cross-sectional data has been collected from 63 respondents, mainly branch managers at different Islamic banks, through purposive sampling technique. Structured questionnaires have been used to collect primary data. Findings from the study indicate that Islamic banks (and Islamic windows of commercial banks) prefer to provide SME loans for working capital requirements and acquisition of machinery. Sole proprietorships are preferred over partnership concerns and almost 60% of the respondents prefer to have a simultaneous deposit and loan relationship with SME customers. However, the bank’s internal risk aversion policies act as the main hindrance in disbursing loans to SME clients. Of the four poverty alleviation indicators, business growth reported the highest correlation with SME loans, followed by improvement in the general income level of SME owners, indicating that both these indicators are mutually dependent on each other.