Thursday 3 January 2013
Learning objectives
The prime objective of the discussion is to make the students aware of the role of the banks and financial institutions in encouraging SMEs.
Expected learning outcomes
Ø The students will apply their learned concepts in real time cases.
Ø Students will comprehend the hurdles in the way of Pakistani banks to adopt the lending model of Grameen Bank.
Ø Students will also learn how the banks can be helpful in encouraging SMEs in Pakistan.
The case
The banks, before extending loan to the entrepreneur, make sure five Cs of lending which are character (credit ratings, loan history, etc.), capacity (cash flows, sales, etc.), capital (owner’s share), collateral (assets of the business i.e. land, building, plant, stocks, etc.), and conditions (industry and market conditions). Grameen Bank (GB) of Bangladesh was started by Dr. M. Yunus to provide credit to the poor people in rural Bangladesh, without any collateral. Its main purpose was to eradicate poverty by encouraging small businesses. The GB gives a unique lending model in which loan is provided to a group of people and one person from each group is responsible to collect the loan amount from other group members after the loan period ends. Only those people are eligible to re-apply for loans that have paid their previous amount. Recovery rate of the bank is more than 90%. The bank has helped millions of depraved people and has turned baggers into small businessmen. The bank and Professor Yunus were awarded noble peace prize in 2006 for their invaluable services for the poor. But, unfortunately in Pakistan SMEs are not facilitated by the banks. Here banks are least interested in financing small entrepreneurs. Loan process itself is very complicated. As a result, the entrepreneurs prefer to get finance from other sources (family, friends, etc.) and avoid contacting commercial banks.
Point of ponder
Keeping in view the remarkable success of Grameen Bank lending model, in your opinion what are the hurdles in the way of Pakistani banks to adopt that model? Produce sufficient number of arguments.
