SMEs in Punjab

Emma Zhang, Econ PhD student

The goal of this research project is to generate data on the impact and prevalence of informal lending within registered SMEs in Punjab.  I partner with the Government of Pakistan's Small Medium Enterprise Development Authority (SMEDA) to estimate whether the average cost of informal financing for SMEs is higher or lower than formal financing.

If informal financing costs are higher than formal financing costs to SMEs, policy makers should focus their efforts on the SMEs themselves by targeting informational campaigns about the access to formal loans. If informal financing costs are less than formal financing costs from banks, then policy makers should focus their interventions on the lenders themselves. They can do this by offering loan guarantees to banks to reduce the burden of adverse selection in lending risk, and by focusing on how to reduce the burden of information asymmetry between individual SMEs and lenders on ability to repay.