Small and Medium Enterprises (SMEs) are the core lifeline of Pakistan’s economy, making around 40% of GDP and employing around 78% of its non-agricultural workforce. Although they are critical, growth in SMEs often runs into limitations, such as lack of access to finance, market intelligence, and operational inefficiencies. While Pakistan is moving towards technological advancements, artificial intelligence (AI) has come up as the solution to these hurdles and is ready to push SMEs into a new era of productivity and competitiveness.

SMEs contribute 40% to Pakistan’s GDP and employ 78% of the non-agricultural workforce, yet face barriers like limited financing and market intelligence.

Predictive analytics powered by AI can save SMEs’ day: powering data-driven decision-making to make the best company decisions regarding the operation, cost reduction, and more. For example, their use of AI algorithms can forecast demand trends with a level of accuracy allowing them to adjust the inventory levels, reduce waste, and meet customer expectations better, and fewer customers are lost during supply chain operations.

A local case in point is in e-commerce, where AI is increasingly being used by platforms such as Daraz to predict consumer behavior and recommend as well as to smooth the otherwise clunky logistics for the small sellers. These applications are not just for improving operational efficiency but enable SMEs to compete equally with corporate giants.

An estimated $4 billion financing gap continues to be a key bottleneck in accessing funding for SMEs in Pakistan, according to the State Bank of Pakistan. SMEs usually have an inadequate credit history and collateral, and this attitude from traditional financial institutions makes them consider SMEs high-risk business. One solution that they provide is the ability to develop various kinds of alternative credit scoring models that use non-traditional data points like transaction history, social media activity, and supply chain performance.

The integration of such AI-driven tools allows financial institutions to accurately determine the credit-worthiness of SMEs thereby increasing the amount of capital available to the SMEs. Already countries such as India and Kenya have successfully adopted this approach, which serves as proof of the application and scalability of this approach in Pakistan.

AI-powered predictive analytics can transform SME operations, reducing waste, improving customer satisfaction, and forecasting market trends with precision.

Another way that AI can be very valuable is in market intelligence, or a lack thereof. SMEs lack the resources to engage in full-blown market research and consequently do not know when opportunities or threats are emerging. With AI-driving platforms collecting massive data from social media, news articles, and consumer feedback among others, SMEs can get real-time market trends insight from such platforms.

For example, Pakistani textile sector exporters can employ the use of AI to look at the global fashion trends and then by adapting their offerings make their way into lucrative markets. Just like AI can enable small-scale manufacturers to identify untapped domestic demand as well as promote local economic growth.

Yet, despite potential applications, there is limited adoption of AI by SMEs in Pakistan with low digital literacy and a lack of infrastructure. According to the Pakistan Bureau of Statistics, only 23% of SMEs currently use digital technologies. But for policymakers, the biggest investment that needs to be made is in digital infrastructure and training programs specifically crafted for SME owners, who represent the largest part of the AI pie. In terms of creating digitally available solutions, panelists agreed that public-private partnerships could be of paramount importance, but also that tech incubators could function as a place for mentorship and resources for the betterment of innovation in the SME industry.

There is a lot that goes into adopting AI, but most of that is stuff along the lines of ethical considerations and data privacy. Working with AI requires huge amounts of data, and SME data in particular brings with it concerns about how this data is collected, stored, and used. Data protection has to be ensured, and developed alongside it innovation has to be. The Pakistan Digital Policy 2021 might be a good starting point but it requires expansion along with enforcement rigorously to deal with complexities of AI integration.

The repercussions of AI are already being felt in the SME sectors of other countries around the world. Alibaba’s AI-powered business tools are helping millions of small Chinese businesses scale operations, enter global markets, and invent at unprecedented speed. For instance, India’s government-backed AI projects have helped SMEs become pioneers in their markets. If Pakistan can emulate these examples, it might kick-start a wave of economic growth through empowered SMEs.

AI-driven credit scoring models address the $4 billion financing gap for SMEs by using non-traditional data points like transaction history and supply chain performance.

All of this is neither a tool … nor merely a tool. Harnessing its potential, Pakistan can help bring its SMEs past the traditional barriers, become more productive, and compete in world markets. With AI going mainstream, the SME ecosystem is fashioning a future that is not to be overlooked anymore and is an absolute necessity for Pakistan’s expedition toward the creation of a progressive and self-reliant economy. AI-driven solutions must be able to reach all corners of the SME landscape – through policymakers, businesses, and tech innovators – challenges must be transformed into opportunities and pave the way for sustainable growth.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.