In a challenging economy, investments for economic and social development have become critical for Pakistan. With a devalued rupee and high inflationary pressures, support for small and medium businesses is required even more, particularly in export-oriented industries. Karandaaz Capital, the impact investing arm of Karandaaz Pakistan, has committed capital of GBP 187 million from United Kingdom’s Department of International Development (DFID) for the financial inclusion of micro, small and medium enterprises (MSMEs) in Pakistan.
The existing barriers to entrepreneurial growth and sustainability include lack of access to finance and low levels of skill and training. By improving capital access and building capacity through technical assistance for MSMEs, it is possible to boost business growth and ensure a broad-based impact in the economy.
Opportunity also lies in the gap of private sector lending for SMEs, which stood at7.7% as at March, 2019 (SBP). The sector also promises greater employment potential and overall sustained economic growth. Karandaaz has four interventions in the MSME finance space:
Wholesale Investments: Karandaaz Capital leverages the impact of its funds by partnering with existing financial institutions who provide matching capital under a wholesale risk participation arrangement. The partner financial institutions create a pool of SME credit financing through the leveraged funds and share profit and loss on the financing portfolio. Karandaaz is also piloting innovative SME-focused financing product programs, such as reverse factoring and invoice discounting, which banks are hesitant to undertake due to misperception of risk. Karandaaz also provides technical assistance to partner financial institutions to help build their capacity for SME financing.Todate Karandaaz has financed over 1,000 SMEs creating more than 31,000 jobs and contributing PKR 45 billion in incremental revenue.
Direct Investments: Karandaaz also has a unique equity investment platformtargeting the widely excluded segment of SMEs due to higher perceived risks and transaction costs. Karandaaz Capital provides growth capital to SMEs in Pakistan against equity stake in beneficiary companieswith an average ticket size of USD 5 million. Karandaaz has provided equity capital to five SMEs involved in software development, controlled atmosphere warehousing, pathology laboratory services, branded egg production and agriculture processing. Through Karandaaz’s funds, the equity investees have leveraged additional funds from the financial sector and with the assistance of the investment team, have developed sound business plans for expansion.
Strategic Investments: Karandaaz is well-positioned in the existing financial landscape to provide investments to fill market gaps in financial architecture of Pakistan. Karandaaz creates special-purpose vehicles with specific mandates to develop market and support infrastructure for MSME financing. Pakistan Microfinance Investment Company (PMIC) is one such investment, which was created by Karandaaz Pakistan along with Pakistan Poverty Alleviation Fund and KfW Germany as a wholesale platform for development and growth of microfinance in Pakistan. PMIC is working through 21 microfinance institutions and banks, with a loan portfolio of PKR 21 billion reaching more than 700,000 clients. Karandaaz is currently working toward establishing an SME Finance NBFC to fill the gap due to lack of a dedicated SME financing platform.
Sustainable Energy and Economic Development (SEED) Program: Karandaaz recently signed another agreement with DFID for GBP 15 million for investments that support widespread adoption of renewable energy and improvedenergy efficiency in the manufacturing sector of Pakistan.
MSMEs play a critical role in transforming communities through job creation, economic empowerment and integration. The MSME space can be converted into engines of growth for Pakistan. Meaningful interventions in MSME ecosystem can help improve financing and business frameworks, particularly innovations in credit scoring mechanisms by financial institutions. Increased interventions for promoting entrepreneurial ventures, especially crowdfunding for small growing businesses and startups can help create meaningful growth. Karandaaz Capital is always on the look for new and innovative financing programs and opportunities and encourages SMEs looking for capital to connect with the investment team via our website or email.