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Govt to offer collateral free loans to small businesses

The State Bank of Pakistan (SBP) on Monday launched SME Asaan Finance to facilitate small and medium enterprises by providing them with collateral-free loans. This is following the government's promise to promote SMEs that contribute 40pc to the annual GDP of Pakistan.

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State Bank of Pakistan (SBP) on Monday has launched the SME Aasan Business loan scheme to facilitate the Small and Medium Enterprise (SME) sector of Pakistan.

Fulfilling the commitment by the federal government during the budget speech to support the SME sector, the scheme for the first time allows the business owners to apply for loans without collateral.

The scheme is called ‘SME Asaan Finance’ or SAAF, emphasizing ‘clean’, meaning collateral-free, financing.

According to the statement by the central bank, the purpose of the scheme is to has to improve access to finance for SMEs in collaboration with the Government of Pakistan with the express aim of enabling businesses who cannot offer security/collateral to access bank finance.

Offers under SAAF

This support is being provided initially for three years to facilitate investments by banks in technology, infrastructure, and team building specialized in SME lending, after which SME financing by banks is expected to be sustainable without SBP or Government support.

“Selected banks will get refinance from the SBP at 1 percent per annum and extend financing to SMEs at an end-user rate of up to 9pc per annum, which is very attractive compared to informal finance costs,” the SBP said.

Under SAAF, all SMEs that are new borrowers of a bank will be eligible to avail of financing of up to Rs 10 million. The collateral-free (clean) financing will be available to SMEs for long-term fixed capital investment and working capital finance requirements.

Shariah-compliant Islamic modes of finance, as well as conventional, will be offered. The scheme will be available to SME borrowers towards the end of September 2021.

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An attractive feature of the scheme is that the Government of Pakistan will provide risk coverage of 40 to 60 percent to the selected banks against losses depending on the size of loans. This risk cover will be 60% for small loans up to Rs 4 million; 50% for midsize loans from above Rs 4 million to Rs 7 million and 40% for relatively large loans of Rs 7 million to Rs 10 million.

It is expected that this initiative will enable sustainable growth in SME Finance as it aims to address the core issues facing this important sector, SBP statement read.

SME sector Pakistan

It is worth mentioning that the SME sector plays a pivotal role in Pakistan’s economy and is estimated by the Small and Medium Enterprises Development Authority (SMEDA) to contribute 40% to GDP and 25% to export earnings.

However, SMEs find it difficult to access formal bank finance as SME financing stood at Rs 444 billion as of March 31, 2021, which is only 6.6 % of the total private sector credit.

There are several reasons for this. They include relatively higher loan losses, high costs
in bank finance models, low usage of appropriate technology needed for SME finance, and the lack of acceptable security. SMEs therefore often turn to exorbitantly expensive informal credit and face impediments to growth.

According to official estimates the majority of SMEs in the informal sector that do not have collateral are currently borrowing in cash or kind at rates of at least 25%, and this scheme according to the SBP targets such businesses.

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