Priority Sectors for Inclusive Economic Growth Efficient credit allocation is critical for sustainable and inclusive economic growth; The key priority sectors as per SBP’s vision are: Agriculture, SMEs & Housing Finance; Financial Inclusion and Islamic banking are cross-cutting themes in this endeavor.

Contribution of SMEs to Pakistan Economy % of Firms Having a Bank Credit The estimated share of SMEs as %age of total businesses (3.2 million); Estimated Contribution of SMEs to GDP Estimated proportion of workers employed in non-agricultural workforce Source: World Bank Enterprise Survey (2015 or latest available)

Overview of SME Finance in Pakistan

Consultation with Stakeholders Banks; Microfinance Banks; SMEDA; Important Training Institutes; Business Chambers and Trade Associations; Multilateral Institutions; Federal and Provincial Governments; SMEs.

Constraints to SME Financing SME financing considered riskier and costlier by banks; Lower regulatory credit limit for SEs; Lack of credit risk-sharing facility for low-end MEs; Cumbersome loan processing procedures at banks; Lack of program-based lending and value-chain financing; Scarcity of trained SME banking officers in banks and lack of incentives at the branch level; Lack of formal structures for awareness creation for SMEs; Limited use of technology for SME financing; SMEs concern on taxation and documentation issues.

Introducing Benchmarks for 2020 Current Status of SME Financing - 8% of private sector credit - Number of borrowers is 174,000 Indicative Targets for 2020 - Increase SME share to 17% - - Increase number of SME borrowers to 500,000 Current Status of SME Financing 8% of private sector credit Number of borrowers is 174,000 Benchmarks Increase SME share to 17% Increase number of SME borrowers to 500,000

Pillars of SME Finance 1 2 3 4 5 6 7 8 9 Improving Regulatory Framework Upscale Microfinance Banks Risk Mitigation & Incentives at Banks Capacity Building Non-Financial Advisory Extension Services: Simplified Taxation Regime Program Based Lending Value-Chain & Leveraging Technology & Innovation Challenge Simplified Procedures

Pillar 1: Improving Regulatory Framework Favorable Regulatory Environment Reserve Requirements Reconsidered Upper limit for retail exposure increased from Rs. 75 million to Rs. 125 million for preferential risk weight of 75% in CAR calculation; Condition of obtaining insurance for SE Loans up to Rs 2 million made optional; Establishment of R&D units at banks; Approval of program based products by CEO/President instead of the board of directors. General reserve requirement against unsecured SE financing portfolio reduced from 2% to 1%; General reserve requirement against secured SE portfolio withdrawn. Back to Pillars

Pillar 1: Improving Regulatory Framework Introduction of Indicative Targets Introduction of Refinance Facility Province-wise targets assigned to banks/DFIs from January 2018; Gender-based targets to be assigned from January, 2019; Targets stratified along multiple dimensions (level, growth, number of borrowers etc). New refinance facility for Working Capital loans ifor priority sub-sectors; The priority sub-sectors are: IT, Furniture, Surgical Goods, Gems & jewelery, Leather industry, Fruits, Printing & packaging, Dates, Processing, vegetables & food processing and packaging; The rate for end user will be 6% and SBP Refinance rate will be 2% Back to Pillars

Pillar 2: Up-scaling Microfinance Banks Graduate eligible MFBs into MSE Banks; Financing limit of eligible MFBs increased from Rs 0.5 million to Rs 1 million; Prescribed regulatory limits and caps to manage risks. Back to Pillars

Pillar 3: Risk Mitigation Low-end medium enterprises covered in Credit Guarantee Scheme; A new Credit Guarantee Company to be established; Partnerships with provincial governments in risk sharing schemes starting with GoPb & GoS; Establishment of Secured transaction e-registry for un-incorporated entities. Back to Pillars

Pillar 4: Simplified Procedures Loan Application Forms (LAF) for SE & ME simplified; Borrower’s Basic Fact Sheet made part of LAF; Turn around Time for SE loan reduced from 30 to 15 working days; Turn around Time for ME loan prescribed at 25 working days; Small Enterprise Loan Documentation Manual to be standardized through PBA. Back to Pillars

Pillar 5: Value-Chain and Program-Based Lending Targets to be assigned for Value-Chain Financing; Banks asked to adopt program-based lending; Program-based lending to expedite credit decision-making for SME Financing. Back to Pillars

Pillar 6: Capacity Building & Incentives of Banks Training programs by NIBAF for capacity building of bankers (100 programs per annum); Awareness programs by SBP BSC and SMEDA (150 programs per annum); Centre of Excellence to be established to undertake R&D; Back to Pillars

Banks to provide NFAS to develop the capacity of SMEs; Pillar 7: Extension of Services: Non-Financial Advisory Services (NFAS) Banks to provide NFAS to develop the capacity of SMEs; Focus on improving the management and organization practices of SMEs; 3S forum (SBP, SMEDA & SECP) to facilitate and steer this effort. Back to Pillars

Pillar 8: Leveraging Technology & Innovation Challenge Use of Information Technology to support growth in SME Finance Development of a web-based marketplace for e-Commerce; Launch an innovation challenge fund to promote SME financing through technology. For this purpose, budget has been allocated. Back to Pillars

Pillar 9: Simplifying Taxation Regime Tax rate reduction on banks’ income derived from SME financing; Tax holiday on income of eligible start-ups and women SE borrowers; Reduction in sales tax on services sector SEs & MEs (provincial governments).

Pillars of SME Finance 1 2 3 4 5 6 7 8 9 Improving Regulatory Framework Upscale Microfinance Banks Risk Mitigation & Incentives at Banks Capacity Building Non-Financial Advisory Extension Services: Simplified Taxation Regime Program Based Lending Value-Chain & Leveraging Technology & Innovation Challenge Simplified Procedures

Robust home Remittance inflows have shored up forex reserves and provided relief from large trade deficit over the years. Pakistani diaspora in Gulf countries and North America contributed to around 50% of total remittances in FY17 Back to M-Wallet