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Helping Small Businesses in Pakistan

For more than five decades, Zulqarnain Ali Chaudery and his family have run Electrum, an electrical equipment manufacturer in Lahore.

LAHORE, Feb. 13, 2021 (LPP): A few years ago, Chaudery landed a major contract with one of Pakistan’s biggest conglomerates, the type of deal that could take Electrum to the next level. But the company, which employs 20 people, was facing a conundrum: it didn’t have the manpower or equipment to complete the project. So, Chaudery turned to Habib Bank (HBL), a long-time IFC client and one the few Pakistani banks that cater to small and medium enterprises. The lender came through with a $35,000 loan, which allowed Electrum to expand quickly. Now the company, which is planning to double its workforce, is going after other major contracts.

"Acquiring new business is key for our company and HBL has made it possible," says Chaudery. Electrum is one of many companies that have been helped by the lender, which in late 2011 launched a ground-breaking suite of financial services aimed squarely at smaller businesses. IFC played an instrumental role in that, advising the bank as it developed a new model for lending to small and medium enterprises. It was part of a wider effort by IFC to support smaller firms across Pakistan, a country where entrepreneurs often struggle to develop their businesses.

Reversing the Trend

There are close to 3 million small and medium enterprises in Pakistan, which account for 30 percent of the country’s gross domestic product. But these firms face an uphill battle. They often struggle to get loans from banks, which see them as risky investments. Red tape makes it hard for them to get crucial permits and licenses. Commercial disputes with other firms can drain their finances. And many entrepreneurs lack even basic business training. As a result, roughly 95 percent of SMEs will never employ more than five people and only 4 percent of smaller businesses will survive to their 25th birthday.

To help reverse these trends, IFC is ramping up its investment and advisory work in the country. We have helped train more than 4,400 entrepreneurs in the fundamentals of commerce through Business Edge, a specially-designed program pioneered by IFC. About 20 percent of those were women. At the same time, IFC also has given instruction to over 200 trainers who have shared their expertise with scores of budding business people. The organization has helped develop mediation and alternative dispute resolution centers in Karachi and Lahore. Those allow smaller business to settle commercial disputes quickly and inexpensively outside of Pakistan’s court system.

IFC has also trained close to 100 lenders in how to reach out to SMEs, whose needs are often different from those of other clients. We also work with banks to help them develop a suite of financial services tailor-made for smaller firms. A good example of that is the organization’s work with HBL. IFC provided the lender with in-depth advice on how to reach out to smaller firms, which resulted in the launch of the bank’s Business Faida program in November 2011.

It provided smaller businesses with an easy-to-manage bank account, financing to cover day-to-day operations, loans that help firms expand, and assistance in trading across borders. It also offers services in English and Urdu, the latter something most lenders don’t provide. Thanks to those efforts, the bank has added 80,000 small business customers in the last 15 months and increased its loan portfolio for those firms to $130 million.

BUSINESS ADMINISTRATION

By ZACHARY WARMBRODT: A bike sits outside Artisan Bar and Cafe on St. Claude Avenue on Jan. 30, 2021, in New Orleans. | Dorthy Ray/AP Photo

NEW ORLEANS, Feb. 12, 2021: Tens of thousands of small businesses have faced delays in receiving emergency payroll support loans that Congress authorized in December, sparking an uproar that has forced the agency responsible for distributing the funds to quickly find a solution. The Small Business Administration, which acknowledges the delays were caused by efforts to ratchet up anti-fraud measures that the Paycheck Protection Program lacked when it was first launched last year, revealed plans Wednesday to speed up the process and keep the government-guaranteed loans flowing.

The move came amid growing complaints from banks that submit loan applications to the SBA on behalf of small businesses. While lenders say they support efforts to combat criminals and block the duplicate loans that plagued the program last year, they warned that the agency's new fraud controls created significant impediments in delivering aid. "The SBA has put up this firewall" against fraud, said Sam Sidhu, vice chair of Customers Bank, which experienced an immediate loan rejection rate of as high as 75 percent at first. "The firewall's going to be very beneficial in the long-term, but it's extremely painful right now, especially when we feel pretty comfortably the money is going to mostly satisfy the demand."

The latest bottleneck crimped the disbursement of aid in one of the government's largest Covid-19 relief programs, which despite a series of implementation problems has approved more than $623.4 billion in loans since its creation in March. The program has proven to be a massive and unprecedented challenge for the relatively small SBA, which has faced complaints about opaque decision-making, the release of funds to large, publicly traded companies and, at least initially, lax fraud controls. So far this year, the agency has issued more than $100 billion in loans as small employers continue to struggle with daunting restrictions on business. Data released by the National Federation of Independent Business on Tuesday showed that small business optimism fell in January to an eight-month low.

The Paycheck Protection Program has proven popular with businesses because loans don't have to be paid back if borrowers agree to maintain their payroll. The money has also become a prime target for criminals. When the SBA first launched the PPP in early April, it did so just a week after President Donald Trump signed the program into law. Facing dire economic uncertainty as Covid-19 began to spread in the U.S., officials put a premium on speed. Even with significant technical glitches, the SBA allowed lenders to obtain nearly instantaneous approval for businesses seeking loans. The initial $350 billion made available for the program was exhausted in less than two weeks before Congress was forced to enact more funding.

The pace exposed the program to waste and abuse, according to government watchdogs. The SBA's inspector general says he found 55,000 loans for about $7 billion that went to potentially ineligible businesses. Some business entities were even able to get approval for more than one loan last year. So when Congress in December agreed to restart the program with more than $284 billion in new funding, the SBA decided to take a more aggressive approach to combating fraud. Rather than offer immediate approvals, the SBA established a new loan-processing system that would try to validate identifying information provided by borrowers before the agency allowed banks to disburse aid. The agency alerted lenders that it could take more time to complete the checks but that there would be plenty of funds available.

"So far, those predictions have come true," said Bill Briggs, a former SBA official who ran the Paycheck Protection Program before leaving the government last month. "Money has not run out. But sometimes figuring out how to get through the validation checks has taken a little bit more time and caused more frustration. It's a balancing act." Banks and PPP applicants told POLITICO that the new system has sometimes left them in limbo without a clear path forward. Banks say they have struggled to resolve error messages and hold codes for loans flagged by the SBA's new review system.

They say it has sometimes triggered "false positives," rejecting an application because the agency used erroneous data for things such as bankruptcy histories, criminal records and even economic sanctions. They say it can be impossible to correct the false positives because that would require a business to disprove a negative and there may be no documentation they can provide to dispute the issue. Banks say some small businesses have had to wait weeks to resolve another delay. The hurdle emerged when businesses applied for second PPP loans — now allowed by Congress — but used a different form of taxpayer identification than they applied with on their first loan.

Lenders have also run into snags when submitting the so-called second-draw applications for businesses that had initial PPP loans under SBA review, which accounts for about 240,000 loans issued last year. The Consumer Bankers Association, which represents lenders including JPMorgan Chase, Bank of America and Wells Fargo, says that 30-50 percent of all applicants are running into delays because of error messages or hold codes. The Bank Policy Institute, another large lender association, said it was encouraging agency officials to "quickly resolve operational issues with their fraud prevention measures."

The issues have proven to be particularly challenging to manage for lenders handling a high volume of loans. Sidhu, the chief operating officer of Customers Bank, said his company has trained and deployed "SWAT teams" to resolve errors arising with individual loans. The bank has gotten SBA approval for 20,000 loans out of the 100,000 applications it has received. "Many lenders are saying it's a game of Clue trying to figure out how to clear these hold codes," said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.

"We probably swung the pendulum too far to the [fraud] control side," Wilkinson said. "We need to moderate that a bit so that we find that sweet spot, because a lot of small businesses just can't wait to clear up irrelevant hold code issues." Lenders say the problem has been compounded by the timing of the PPP relaunch, which fell in the middle of a presidential transition. They say it has been a challenge to communicate with officials overseeing the program. "The SBA has not been very communicative around the process here and how they're going to resolve these issues," Consumer Bankers Association General Counsel David Pommerehn said.

The SBA on Wednesday said it planned to tackle the problem with new changes to its loan processing system. Starting Thursday, when lenders see that the agency has flagged issues with borrower identification information, they will be able to tell the SBA that they have documentation to verify the eligibility of the business, and the agency will advance the application. After making the certification, the SBA will not require the banks to provide the documents until the agency reviews how the business spent the funds and whether the loan should be forgiven. The agency also plans to provide more information on what documents would resolve issues with borrower applications.

As a check on the new process, the SBA will review a random sample of lenders to see if they collected the documents. If a lender fails to produce the supporting documents during the loan forgiveness process, it won't be penalized if the borrower turns out to be eligible. But the lender could lose government backing of the loan if it turns out the borrower should not have received the funds. The SBA said the issues have affected about 40,000 PPP applications. The agency has been able to resolve around 15,000 of those through its current process in an average turnaround time of about 40 hours. The agency as of Sunday had approved about 1.3 million loans this year for more than $100.9 billion.

“Our goals are to ensure equitable access to underserved businesses, promote rapid and efficient distribution of funds, and increase the integrity of the program," SBA senior adviser Michael Roth told. “We have empathy for small businesses in a difficult spot and recognize that lenders want to help their borrowers," he added. "It’s significant enough that if we can ensure the integrity of the program and get businesses their money fast, we want to be able to do that.” Some small businesses that have applied this year say they've been left waiting for weeks. Payroll services firm Gusto says that 54 percent of businesses that sought second PPP loans this year have been approved and that 33 percent have not heard back, according to a survey conducted Jan. 31 to Feb. 8.

"It went into this black hole," said Patrick Watson, co-owner of a salon outside Austin, Texas. After receiving a PPP loan last year, he said he applied for a second on Jan. 20 but is still waiting for an update on his application's fate. "Hopefully we get this and we can move forward but right now we're in a holding pattern." The issues have begun to draw the attention of Congress. The House Small Business Committee is proposing $1 billion in new administrative funding for the SBA for administrative costs to implement better internal systems to prevent errors that disrupt small business relief, committee Chair Nydia Velázquez (D-N.Y.)