As the age-old proverb goes “A chain is as strong as its weakest link” and the Small & Medium Enterprises (SMEs) in Pakistan are playing the role of a weak link in the country’s Just Green Transition. According to the statistics, Pakistan hosts approximately 4.5 million SMEs, accounting for approximately 90 percent of all businesses. This SME sector contributes to almost 40 percent of Pakistan’s GDP and employs about 80 percent of the non-agricultural workforce in Pakistan. You may be thinking that these statistics do not depict a weak link but unfortunately, when it comes to the Just Green Transition of Pakistan’s economy the SME sector is a major factor holding back this green revolution. It must be understood that the green economic equation cannot be created without the existence of an environmentally & socially sustainable SME sector.
The Just Green Transition of any economic sector cannot be achieved without the banking sector’s support in the form of green and sustainable financing. Unfortunately, in Pakistan despite the unquestionable significance of the SME sector, only a small fraction of such businesses have access to formal financial services. A report reveals that the SME sector in Pakistan faces a credit gap of approximately US$ 5 billion, negatively affecting their sustainable growth prospects. According to a report, commercial banks’ SME lending, during 2023, met only 13 percent – 16 percent of the potential demand leaving behind a significant gap. In Pakistan, the majority of the MSMEs are facing financial, institutional, and structural shortcomings. Green and Sustainable financing under the umbrella of Green Banking is required to power the Green SME revolution in Pakistan. Banks can finance the creation or the restructuring of SMEs under the ESG (Environmental, Social, and Governance) ideology.
A green economic equation cannot be created without the existence of an environmentally & socially sustainable SME sector.
In the current times, a country’s economy is a blend of Born Green and Re-Born Green SMEs. The Born Green SMEs are the businesses that invest and trade in green products and services and integrate ESG and responsible business conduct into their core business model from the start. In comparison, the Reborn Green SMEs are the ones that successfully adapt their traditional business model and production techniques by utilizing modern technologies to produce environmentally neutral or environmentally friendly goods and services for the domestic and international markets. The categorization of the country’s SME sector on this basis is critical since it will determine their type of green & sustainable financing requirements. Banks may foster the development of a green & sustainable SME sector by providing financing for startups that are Born Green SMEs like The Bank of Punjab’s (BOP) Punjab Rozgar Scheme, Prime Minister’s Youth Loan Scheme, and Apni Dokan. Similarly, customized green and sustainable financing schemes like The Bank of Punjab’s e-Business Qarza, Shamsi Tawanai, Refinance Scheme for Modernization of SMEs, Refinance Scheme for Special Persons, Refinance Scheme for Women Entrepreneurs, E-vehicle financing, and financing for conversion of traditional brick kilns to zig-zag technology, may be developed to facilitate the Reborn Green SME sector. Due to the integration of ESG ideology in its SME financing, The BOP is playing an important role in powering Pakistan’s Green SME revolution and has been given Pakistan’s Best Bank for SME 2023 award by AsiaMoney.
In Pakistan, the majority of the SMEs’ activities do not align with environmental protection goals and sustainable development, as the estimation results revealed their significant contributions to CO2 emissions. The SME sector in Pakistan is not prepared for the carbon tax policies and carbon-neutral business world. As per the Carbon Border Adjustment Mechanism (CBAM), the new set of trade rules will impose carbon fees on all imports into the European Union from non-member countries. This means that GHG emissions will act as a major trade barrier for unsustainable businesses. Immediate action is required for the Just Green transition of Pakistan’s SME sector if it wants to survive in the new business paradigm and Green Banking is a major part of this revolution. The SME sector needs to integrate carbon footprint calculations in line with the national and international environmental standards. The digitalization of SMEs is an important step in making them environmentally sustainable.
Pakistan’s SME sector can boost the country’s economy if it is nurtured through effective policy, financial, technical, and technological support, education and skills development, capacity-building, adoption & conversion to environmentally friendly technology, integration of artificial intelligence-based value chain solutions, access to green and sustainable financing, access to information and the creation of synergistic public-private partnerships. A need exists to strengthen education and training to equip SMEs with the skills required to promote sustainable production models and business practices, including in the context of capacity building for international trade and investment. The strive for sustainable development, coupled with the digitalization process, can foster a new generation of SMEs equipped with effectively handling the various challenges associated with climate change.
Instead of being a weak link, Pakistan’s SME sector holds the potential to positively transform the country’s economy. SMEs embody innovation and agility, making them strategic investments in the ever-evolving market. The entrepreneurial spirit and adaptability of the SME sector make them the perfect candidate for green transformation. So, whether it is the Born Green or the Re-born Green SMEs, it is time that the government, financial market, and the SME sector join hands in a strategic and synergistic partnership and lead Pakistan into the Just Green Horizons.
The writer is working as SVP/Head – ESG at The Bank of Punjab. He can be contacted at aasimalibukhari@gmail.com