LAHORE: The most lethal blow to SMEs has been denial of affordable credit. What remains is a cruel choice of either shutting down or walk into the arms of informal lenders.
These lenders operate on predatory terms that would be illegal in any functioning regulatory state. SMEs are lured with the illusion of “manageable” repayments -- interest-only servicing that keeps monthly outflows low. But the principal never reduces. After years of payments, the loan remains intact, untouched, unforgiven. When business cycles turn -- as they inevitably do -- the SME defaults not on the loan, but on interest. The consequence is swift and brutal: confiscation of property, machinery, or ancestral assets. Thousands of entrepreneurs lose in one stroke what took generations to build.
From commercial banks the SMEs face interest rates 30-40 times higher in effective terms and they have to pay principal as well as interest on every installment. Formal banking channels also make the loan process difficult by citing lack of collateral, documentation or risk appetite.Small and medium enterprises (SMEs) are celebrated in speeches as the “backbone of the economy”, yet in practice they are treated as expendable. In Pakistan, no other productive segment has been as systematically denied access to capital, protection, and policy coherence as SMEs. The result is not merely stagnation -- it is slow economic strangulation.
Equally damaging is the state’s distortionary intervention through subsidies and packages that undermine competition rather than strengthen it. Government support, when provided, often comes in the form of input subsidies, concessional utilities, or sector-specific favours. Such measures interfere with market signals, encourage inefficiency, and reward scale over productivity. Prices deviate from cost realities, misallocating resources and entrenching incumbents. SMEs -- lacking political leverage -- remain spectators while larger players arbitrage subsidies into profit.
Pakistan’s industrial policy has thus evolved into an anti-SME framework, even if unintentionally so. Tax policy, energy pricing, compliance regimes, and documentation requirements are calibrated for large corporations with legal departments and lobbying power. For a small manufacturer, compliance costs alone can wipe out margins. Yet paradoxically, SMEs are still expected to ‘grow big’ without innovating -- because innovation itself is neither protected nor incentivised.
Globally, innovation is the engine of SME growth. In Pakistan, innovators are rare not because talent is absent, but because the ecosystem punishes risk. There is no patient capital, no meaningful R&D support, no innovation-linked financing, and no protection against rapid imitation. When survival depends on cash flow alone, experimentation becomes a luxury few can afford. Large firms survive downturns with balance-sheet strength and policy cushions; SMEs collapse quietly, one workshop at a time.
This neglect is historically indefensible. Pakistan’s own experience proves that SMEs flourish when the state facilitates rather than suffocates them. In the 1960s, small and medium manufacturing enterprises thrived under a policy regime that prioritized access to finance, import substitution, and technological upgrading. Over the past three decades, however, SMEs have been reduced to a policy slogan -- invoked often, supported rarely.
The irony is that some of Pakistan’s most successful consumer durable brands -- televisions, split air conditioners, microwave ovens, and refrigerators -- originated in the SME sector, particularly in light engineering. These firms built domestic capability, created skilled employment, and reduced import dependence. Unlike value-added textiles, light engineering is not excessively labour-intensive, but it is productivity-rich, technology-driven, and export-capable. It is precisely the sector Pakistan should have scaled. Instead, it was left to fend for itself.
An economy that systematically weakens its SMEs weakens its entrepreneurial pipeline, its innovation capacity, and its social mobility. No country has industrialized on conglomerates alone. Until access to affordable credit is restored, predatory informal finance dismantled, subsidies rationalized, and innovation rewarded, SMEs will remain trapped -- working hard, borrowing dearly, and dying silently. And Pakistan will continue to ask why growth does not translate into jobs, exports or prosperity.The answer is already written -- in the closed workshops, auctioned machines and broken dreams of its small and medium enterprises.
