KARACHI: Eight banks have been selected to get financing at one per cent from the State Bank of Pakistan (SBP) but allowed to charge up to 9pc for onward collateral-free lending to small and medium enterprises (SMEs).

SBP Governor Dr Reza Baqir on Wednesday announced the banks had shown great interest in this innovative collateral-free financing scheme introduced with the support of the Government of Pakistan.

SMEs’ access to bank financing 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. For addressing these issues, the SBP has 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,” said the SBP, adding that this is the first time a comprehensive collateral-free SME lending scheme has been introduced by the SBP.

Under SAAF, banks will be provided refinancing at 1pc per annum for onward lending to SMEs at a maximum end-user rate of up to 9pc per annum. “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 25pc to 50pc per annum,” said the SBP.

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, said the SBP.

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, risk coverage of up to 60pc is being provided by Government of Pakistan. Under the SAAF scheme, SMEs can avail collateral-free financing of up to Rs10m to meet their long-term capital expenditure and short-term working capital needs.

Under the scheme risk coverage is 60pc for the loans up to Rs4m; 50pc for loans up to Rs7m and 40pc for loans up to Rs10m.

“Loans may be secured against personal guarantees of the borrowers,” said Mr Baqir, emphasising that a Sharia-compliant version of SAAF is also available.

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

He said that out of 20 banks — including large banks, mid-sized banks, small banks, and banks in collaboration with fintechs — competed for participating in this scheme, eight banks under four categories have been selected on the basis of highest amount of finance and highest number of SME clients to be served.

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. “These banks have been selected through a transparent bidding process based on prescribed criteria,” the SBP chief said.

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

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.

Published in Dawn, November 4th, 2021