SBP launches collateral-free financing scheme for SMEs

KARACHI: State Bank of Pakistan (SBP) on Monday launched a scheme to provide collateral-free financing of up to Rs10 million to small and medium enterprises (SMEs) in bid to stoke sustainable growth in the cash-strapped sector.

The central bank in a statement said “SME Asaan Finance” or SAAF was an innovative initiative to improve SMEs access to finance in collaboration with the government.

Under the scheme, SBP will provide refinance for three years to the selected banks. After three years, refinance will be repaid by banks in ten equal yearly installments. Selected banks will get refinance from SBP at a rate of 1 percent per annum and extend financing to SMEs at end-user rate of up to 9 percent per annum, which is very attractive compared to informal finance costs.

The collateral-free (clean) financing will be available to SMEs for long-term fixed capital investment and working capital finance requirements. Shariah-compliant Islamic modes of finance, as well as conventional, will also be offered. The scheme will be available to SME borrowers towards the end of September 2021.

An attractive feature of the scheme is that the government will provide risk coverage of 40 to 60 percent to the selected banks against losses depending on the size of loans. This risk cover will be 60 percent for small loans up to Rs4 million; 50 percent for midsize loans from above Rs4 million to Rs7 million and 40 percent for relatively large loans of Rs7 million to Rs10 million. “It is expected that this initiative will enable sustainable growth in SME finance as it aims to address the core issues facing this important sector,” the central bank said in its statement.

SAAF is a refinance and credit guarantee facility which has been developed through a wide-ranging consultative process and is aimed at assisting SMEs that are creditworthy but are still unable to access finance as they cannot offer the security required as collateral by banks. The SBP will provide refinance to banks while the government will support via partial credit guarantees to the participating banks. This support is being provided initially for three years to facilitate investments by banks in technology, infrastructure and team building specialised in SME lending, after which SME financing by banks is expected to be sustainable without SBP or government support.

Commenting on the development, Finance Minister, Shaukat Tarin said, “The MOF (Ministry of Finance) welcomes and supports this innovative initiative of the State Bank, which would enable SMEs without collateral to access bank finance. We look forward to seeing strong participation from commercial banks to take this initiative forward.”

The SME sector plays a pivotal role in Pakistan’s economy and is estimated by SMEDA (Small and Medium Enterprises Development Authority) to contribute 40 percent to GDP and 25 percent in export earnings. However, despite this SMEs find it difficult to access formal bank finance as SME financing stood at Rs444 billion as of March 31, 2021 which is only 6.6 percent of total private sector credit. This is due to several reasons including relatively higher loan losses, high costs in bank finance models, low usage of appropriate technology needed for SME finance, and the lack of acceptable security. SMEs therefore often turn to exorbitantly expensive informal credit and face impediments to growth. The majority of SMEs in the informal sector that does not have collateral is currently borrowing in cash or kind at rates of at least 25 percent. This scheme is primarily targeted to such SMEs.