New windows for financial inclusion – Journal


For a very long time, Pakistani banks have been criticized for being rent-seeking organizations that only park public money in risk-free government securities. This is well demonstrated by the investment / deposit ratio which remains consistently well above 60% and reached 75% in July.

This public borrowing in turn leads to the crowding out of the private sector, where again most of the funds are channeled to the few large companies. Meanwhile, small and medium-sized enterprises (SMEs) continue to be deprived of capital and therefore fail to grow. This vicious cycle results in a lack of corporatization, as the stable trend of total companies listed on the Pakistan Stock Exchange easily shows.

If nothing else, then at least the market gap has allowed the few “opinion leaders” to make the same old and cliché arguments about promoting financial inclusion and serving underserved people when luxury conferences held in high-end hotels, attended mainly by abandoned people. in front of the hall by their drivers. In these rooms, these thinkers deliberate on the fate of the disadvantaged 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 papers are prepared and the cycle repeats itself, but this segment continues to be overlooked.

All the while, the government, the Securities and Exchange Commission of Pakistan (SECP) and the State Bank continued to casually complain about the situation as if they were just spectators with no power or mandate. That was until the PTI administration decided to improve the game by unveiling its ambitious Kamyab Pakistan program with the aim of making borrowing easier for underserved segments. No-markup loans for small entrepreneurs and farmers at an otherwise high interest rate and, more importantly, an unwanted environment should at least encourage people to seek the route of borrowing. Whether financial institutions – whose leaders can only congratulate themselves for signing meaningless memoranda of understanding – have the capacity to carry out a project of this magnitude is another question, which we will only know with time.

“The consortium that will gain this space is not the one that has the money but the one that creates a profitable and reliable credit rating 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. As part of this initiative, the central bank “will provide three-year time-limited refinancing to selected banks through a transparent bidding process. After three years, the banks will repay the refinanced amount in ten equal installments. The risk coverage will however be valid for a period of four years from the launch of the device, in order to adequately cover the loans granted during the third year of the device ”, indicates the document.

Banks – large, medium, small or in collaboration with a fintech – can express their interest and those with the largest portfolio size and the largest number of borrowers will be selected to participate in the program. Once it comes into effect, SMEs will be able to benefit from unsecured loans up to a maximum of Rs 10 million. A Sharia-compliant version of the same initiative was also introduced.

This inclusion of fintechs, although in collaboration with banks, could be seen as a welcome sign. For their part, local startups were interested in the lending space long before the circular was even considered. Take Finja, which has been a pioneer in tech finance – both mainstream and business-to-business – and has made a cumulative investment of around $ 15 million since its inception in 2016 (although it offers a range of other services, in particular the payroll management solution, a sub-managed Electronic Money Establishment, etc.).

Tez Financial has also been active since 2018 when it raised $ 1.1 million in tech nano-finance, while Creditfix (now renamed Creditper) announced an undisclosed funding round in June to create a platform for digital loan. Trellis also obtained regulatory approval to grant housing loans in July.

And then come what appear to be unlicensed entities (or regulated by another name or falling under the SECP list that was last updated on June 22) that offer microloans. Among these is Barwaqt, recently founded by financial services professionals, and has already passed 100,000 downloads since its app launched on June 9. Duckloan is the second notable name, currently third in the finance category in the country, although few details are available. on his profile or his team.

The bottom line behind all of these details is that new players are increasingly eyeing the void that traditional financial institutions have historically left behind. However, with them, the problem lies in the high rates – often as high as 30pc – which no seemingly intellectual reasoning can mitigate. The problem obviously stems from our macroeconomic cycle, which oscillates between restrictive and expansionary monetary policies and clearly escapes the control of any private actor, whose greatest weight is borne by the borrower.

SAAF has the potential to solve this problem through cheap refinancing by SBP and end-user mark-ups of up to 9pc. While the exact nature of the collaboration between banks and fintechs for this purpose will become apparent soon enough, it will likely be the latter becoming a sort of distribution channel for the former.

“One combination that can work is for fintechs to provide their existing SME clients with a track record and access to those larger loans from traditional banks. The win-win is that the fintechs do not have the power to lend up to Rs10m but have the data on the SMEs while the banks have the money to lend but do not have the data on the SMEs nor the system to document them in a cost effective way, ”says Shehryar Hydri, managing partner at Deosai Ventures, which invested in Creditper.

“The consortium that wins this space is not the one with the money but the one that creates a profitable and reliable credit rating system for the SME sector. Once this backbone is available, it will be exploited in my multiple banks which will begin to lend based on their confidence in this rating system, ”he adds.

Add to that the much more ambitious and less expensive Kamyab Jawan and Kissan programs. In the first, second and third tiers are for startups and SMEs, offering maximum funding in the range of Rs1-10m and Rs10-25m at 4pc and 5pc, respectively. As of March 31, the total level 2 funding outstanding stood at Rs 1.731 billion and Rs 1.197 billion at Level 3. Could this have a cannibalizing, or at least discouraging, effect on entrepreneurs and move away from the relatively expensive SAAF? Let me ask my crystal ball to answer.

Posted in Dawn, The Business and Finance Weekly, August 23, 2021


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