Eight banks to roll out collateral-free loan scheme for SMEs: SBP governor

KARACHI: The State Bank of Pakistan Governor Dr Reza Baqir announced that banks have shown an overwhelming response to an innovative financing scheme for collateral-free lending to SMEs introduced by the State Bank of Pakistan (SBP) and supported by the federal government.

It is the first time a comprehensive collateral-free SME lending scheme has been introduced by SBP in the country.

Out of 20 banks that competed for participating in this scheme, eight banks under four categories have been selected on the basis of the highest amount of finance and highest number of SME clients to be served.

The categories include large banks, mid-sized banks, small banks, and banks in collaboration with fintech. The winning banks are 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.

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The banks have been selected through a transparent bidding process based on prescribed criteria.

While appreciating banks’ enthusiastic response, Dr Reza Baqir emphasised the early rollout of the scheme by banks. He also underscored the importance of extensive awareness and marketing of the scheme for the SMEs to fully utilise its benefits.

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, read the SBP press release.

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To address the 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 the scheme, the SBP decided that rather than advising all banks to offer the product, only willing banks will be encouraged to be part of this initiative and develop their expertise through a transparent process.

SAAF had been launched in August 2021 and bids were solicited from the interested banks.

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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 the 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.

The 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 per cent is being provided by the Pakistani government.

Under the SAAF scheme, SMEs can avail of collateral-free financing of up to Rs10 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 rollout plans for the 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.