Dr. Reza Baqir, Governor of the State Bank of Pakistan, revealed that banks have overwhelmingly embraced the State Bank’s novel financing strategy for collateral-free lending to SMEs, which is backed by the Pakistani government. SBP is introducing a comprehensive collateral-free SME financing plan for the first time in the nation. Out of the 20 banks that applied for a spot in the plan, eight were chosen in four categories based on the amount of money they could lend and the number of SME clients they could service. Large banks, mid-sized banks, small banks, and banks collaborating with fintechs are among the categories.
Habib Bank Ltd, United Bank Ltd, Allied Bank Ltd, Meezan Bank Ltd, Bank Alfalah Ltd, The Bank of Punjab, JS Bank Ltd, and The Bank of Khyber were among the winning banks. These banks were chosen in a competitive bidding procedure based on predetermined criteria. While praising the banks’ enthusiastic response, Governor State Bank Dr. Reza Baqir highlighted the need of banks implementing the plan as soon as possible. He also emphasised the significance of widespread knowledge and marketing of the plan in order for SMEs to fully benefit from it.
Access to finance for SMEs remains low in Pakistan due to a number of factors including lack of collateral and perceived high risk due to non-availability of track-record. To address these issues, SBP adopted an innovative approach by designing SME Assan Finance, commonly known as SAAF which refers to the collateral free nature of finance. SAAF has been developed after thorough consultation with stakeholders. To implement this scheme, the SBP decided that rather than advising all banks to offer this product, only willing banks will be encouraged to be part of this initiative and develop their expertise through a transparent process.
SAAF was launched in August 2021 and bids were solicited from the interested banks. Under SAAF, SBP will provide refinance to the banks at 1% per annum (p.a.) for onward lending to SMEs at a maximum end-user rate of up to 9% p.a. The end user rate under SAAF would be attractive for SMEs when compared with usual cost of financing for them from informal sources which can run 25% – 50% p.a. The margin available to banks will help them to make an upfront investment in human resources, technology and processes to cater to promote SME finance. This incentive has been provided to banks for the first three years of this scheme after which it is expected to become self-sustaining. Additionally, under SAAF, risk coverage of up to 60 percent is being provided by Government of Pakistan. Under the SAAF scheme, SMEs can avail collateral free financing of up to Rs. 10 million to meet their long-term capital expenditure and short-term working capital needs. Governor Baqir also emphasized that a Shariah compliant version of SAAF is also available.
SBP has allocated refinance limits to eight winning banks for three years. Currently, these banks are finalizing their roll out plans for successful implementation of the scheme. It is expected that selected banks will shortly roll out their SAAF programs through public announcements and marketing campaigns so that SME borrowers can approach any of these eight banks to request collateral free financing. Details of SAAF scheme are available at SBP website https://www.sbp.org.pk/smefd/circulars/2021/C9.htm.