Pakistan’s new collateral-free financing scheme to benefit 10 million small businesses — traders

In this picture taken on July 14, 2021, a general view of Sitara market is pictured in the Karkhano area on the outskirts of Peshawar. (AFP)

• Majority of small businesses that do not have collaterals currently borrow at a minimum 25 percent rate 
• Central bank says the government will cover risk for small loans up to 60 percent under ‘SME Asaan Finance’ initiative 

KARACHI: A collateral-free financing scheme introduced by Pakistan’s central bank is expected to solve the liquidity problems of around 10 million Small and Medium Enterprises (SMEs) in the country, traders and a financial expert said on Friday. 
The State Bank of Pakistan (SBP) this week rolled out an innovative initiative to improve access to finance for SMEs that cannot offer collateral or security to banks. 
Under the scheme, titled ‘SME Asaan Finance or SAF,’ the government will provide risk coverage of 40-60 percent to selected banks against losses, depending on the size of loans.  
A majority of SMEs in the informal sector are currently borrowing in cash at a minimum 25 percent interest rate due to several reasons, including higher loan losses, high-cost bank finance models, less use of appropriate technology for SME finance and a lack of acceptable security, according to the SBP. 
Union of Small and Medium Enterprises (UNISAME) President Zulfikar Thaver appreciated the SBP’s new initiative, calling it the fulfilment of a long-standing demand by SMEs. 
“This is indeed a very big step to facilitate the sector,” Thaver said. “This move will help some 10 million SMEs, including farmers, in playing a vital role in the national economy.” 
SMEs were previously entitled to get only a Rs100,000 loan on the provision of security or collateral, which was later increased to Rs1 million.  
“The collateral-free loans will enable thousands of small traders to get financing which is their right,” Thaver said.
The UNISAME president said SMEs were the backbone of the country’s economy and a major contributor to the export sector. “With the financing made available, the exports are expected to boost,” he told Arab News. 
“This risk cover will be 60 percent for small loans up to Rs4 million, 50 percent for midsize loans from above Rs4 million to Rs7 million, and 40 percent for relatively larger loans of Rs7 million to Rs10 million,” the central bank said about the new scheme. 
Pakistani SMEs play a key role in the national economy and are estimated to contribute 40 percent to the gross domestic product (GDP) and 25 percent to export earnings. Despite this, small businesses find it difficult to access bank finance as SME financing stood at Rs444 billion on March 31, or only 6.6 percent of the total private sector credit, according to the Small and Medium Enterprises Development Authority (SMEDA) and SBP. 
Under the new scheme, the central bank will provide refinancing for three years to selected banks. Banks will get refinancing from SBP at 1 percent per annum and extend financing to SMEs at the end-user rate of up to 9 percent per annum, which is very attractive compared to informal finance costs, according to SBP, which has also added Shariah compliant features to the SAF scheme to accommodate financing needs of faith-sensitive borrowers. 
Some traders say the 9 percent interest rate being offered is still high.  
“The interest rate is high and if the process is done through banks it would be difficult for small businesses to get financing,” Iftikhar Ghani Vohra, the convener of the Federation of Pakistan Chambers of Commerce and Industry’s central committee on SMEs, told Arab News.  
Vohra said the FPCCI committee was studying the scheme and would present a detailed review at a later date. 
Samiullah Tariq, a research director at Pakistan-Kuwait Investment Company, said the relatively cheap financing rates would provide working capital to small businesses, which may ultimately enhance productivity. 
“This will help small businesses with liquidity for their working capital, expansion, vehicles and generators,” he said, “and will improve supply chain and productivity.”