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

KARACHI: The banks have shown overwhelming response to an innovative financing scheme for collateral-free lending to the Small and Medium Enterprises (SMEs), a statement quoted State Bank of Pakistan Governor Dr Reza Baqir, as saying, on Wednesday.

This is the first time a comprehensive collateral-free SME lending scheme has been introduced by the central bank in the country.

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

These categories included large banks, mid-sized banks, small banks, and banks in collaboration with fintechs. The winning banks are Habib Bank Limited, United Bank Limited, Allied Bank Limited, Meezan Bank Limited, Bank Alfalah Limited, the Bank of Punjab, JS Bank Limited and the Bank of Khyber

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

Appreciating the banks’ enthusiastic response, Dr Reza Baqir emphasised early rollout 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.

Access to finance for the SMEs remains low in Pakistan due to a number of factors, including the lack of collateral and perceived high risk due to unavailability of track-record.

To address these issues, the State Bank adopted an innovative approach by designing the SME Assan Finance, commonly known as SAAF, which refers to the collateral-free nature of finance.

SAAF has been developed after thorough consultation with the stakeholders. To implement this scheme, the SBP decided that rather than advising all the 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 this financing facility, the SBP will provide refinance to the banks at one per cent/annum for onward lending to the SMEs at a maximum end-user rate of up to 9 per cent/annum.

The end-user rate under SAAF would be attractive for the SMEs, compared with the usual cost of financing for them from informal sources, which can run 25 per cent to 50 per cent/annum.

The margin available to the banks will help them make an upfront investment in human resources, technology and processes to cater to promote SME finance. This incentive has been provided to the banks for the first three years of this scheme after which it is expected to become self-sustaining.

Additionally, under SAAF, the risk coverage of up to 60 per cent is being provided by the government of Pakistan. Under the SAAF scheme, the SMEs can avail collateral-free financing of up to Rs10 million to meet their long-term capital expenditure and short-term working capital needs.

SBP Governor Baqir also emphasised that a Shariah-compliant version of SAAF is also available.

The central bank has allocated refinance limits to eight winning banks for three years. Currently, these banks are finalising their rollout plans for successful implementation of the scheme. It is expected that the selected banks will shortly roll out their SAAF programmes through public announcements and marketing campaigns so that the SME borrowers can approach any of these eight banks to request collateral-free financing.