For the longest time, Pakistani banks have come under fire for being rent-seeking organisations that do nothing but park the public’s money in risk-free government securities. That is well-evidenced by the investment-to-deposits ratio consistently staying well above 60 per cent, and clocking in at 75pc in July.

This government borrowing in turn leads to crowding out of the private sector, where again most of the funds are channelled towards the few big corporates. Meanwhile, small and medium enterprises (SME) continue to be deprived of capital and thus fail to scale. This vicious cycle results in a lack of corporatisation, as one can easily see from the flat trend in total listed companies on the Pakistan Stock Exchange.

If nothing else, then at least the market gap has allowed the few “thought leaders” to make the same, old and cliched arguments about promoting financial inclusion and serving the underserved at fancy conferences hosted at premium hotels, mostly attended by people who were dropped in front of the lobby by their chauffeurs. In these rooms, these thinkers deliberate on the plight of the underprivileged and decide on their needs and how they can be served. The lucky ones even get a few grants to solve the problem. Policy papers are presented, strategy documents prepared and the cycle is repeated all over again, but the said segment continues to stay neglected.

All this while, the government, the Securities and Exchange Commission of Pakistan (SECP) and the State Bank kept casually complaining about the situation as if they were just bystanders with no power or mandate. That was until the PTI administration decided to up the game by unveiling its ambitious Kamyab Pakistan Programme with the aim of making borrowing easier for underserved segments. No-markup loans for small entrepreneurs and farmers in an otherwise high-interest rate, and more importantly unwelcome, environment should at least encourage people to seek the borrowing route. Whether financial institutions — whose executives know nothing but to pat themselves on the back for signing meaningless memoranda of understanding — have the ability to deliver a project of this magnitude is yet another question, which we’ll only find out with time.

‘The consortium that will win this space is not the one with the money but the one that creates a cost-effective and reliable credit scoring system for the SME sector’

The SBP also entered the game in this regard through a circular, titled SME Asaan Finance (SAAF) Scheme last week. Under the initiative, the central bank “will provide time-bound refinancing for three years to the banks selected through a transparent bidding process. After three years, banks will repay the refinanced amount in ten equal yearly instalments. The risk coverage will, however, be valid for a period of four years starting from the launch of the scheme, in order to suitably cover loans extended during the third year of the scheme,” the document read.

Banks — large, middle, small, or either in collaboration with a fintech — can express their interest and those offering the highest portfolio size and the largest number of borrowers will be selected for participation in the scheme. Once it comes into force, the SMEs can avail collateral-free lending for up to a maximum of Rs10 million. A Shariah-compliant version of the same initiative has also been introduced.

This inclusion of fintechs, albeit in collaboration with banks, could be seen as a welcome sign. For their part, local startups had been taking interest in the lending space long before the circular was even envisioned. Take Finja, which has been among the first few tech-enabled financing — both consumer and business-to-business — players and has scored a cumulative investment of around $15m since founding in 2016 (though they have a range of other services including payroll management solution, an under-pilot Electronic Money Institution etc).

Tez Financial has also been active since 2018, when it raised $1.1m, in tech-enabled nano financing while Creditfix (now renamed Creditper) announced an undisclosed seed round in the outgoing June to build a digital lending platform. Trellis also got approval from the regulator to do housing loans in July.

And then come what appear to be unlicensed entities (alternatively, regulated by another name or yet to come under the SECP list which was last updated as of June 22) that are offering microloans. Among these is Barwaqt, recently founded by some financial services professionals, and has crossed 100,000 downloads already since its app launch on Jun 9. Duckloan is the second notable name, currently trending third in the finance category in the country, though scant details are available about its profile or team.

The entire point behind all these details is that new players are increasingly eyeing the gap that traditional financial institutions have historically left behind. However, with them, the problem is the high rates — often going upwards of 30pc — which no amount of seemingly intellectual reasoning can subside. The issue is obviously with our macroeconomic cycle which oscillates between contractionary and expansionary monetary policies and is well beyond the control of any private player, whose biggest brunt is borne by the borrower.

SAAF has the potential to address that problem thanks to cheap refinancing by the SBP and end-user markups of up to 9pc. While the exact nature of collaboration between banks and fintechs to this end will surface soon enough, it will likely be the latter becoming a sort of distribution channel for the former.

“One combination that can work is that the fintechs bring their existing SME customers with a track record and give them access to these larger loans from mainstream banks. The win-win is that fintechs don’t have the power to lend up to Rs10m but have the data on the SME’s whereas the banks have the money to lend but don’t have the data on the SME nor the system to document them in a cost-effective way,” says Shehryar Hydri, Managing Partner at Deosai Ventures, which has invested in Creditper.

“The consortium that will win this space is not the one with the money but the one that creates a cost-effective and reliable credit scoring system for the SME sector. Once that backbone is available, it will be tapped into my multiple banks that will start lending based on their trust of this rating system,” he adds.

Add to this the much more ambitious and cheaper Kamyab Jawan and Kissan programmes. Under the former, second and third tiers are meant for startups and SMEs, offering maximum financing in the range of Rs1-10m and Rs10-25m at 4pc and 5pc, respectively. As of March 31, the total outstanding finance in Tier-2 was Rs1.731 billion and Rs1.197bn in Tier-3. Could this possibly have a cannibalising, or at least discouraging, effect on entrepreneurs and push them away from the relatively expensive SAAF? Let me get my crystal ball to answer that.

Published in Dawn, The Business and Finance Weekly, August 23rd, 2021