ECC approves injection of capital to operationalize PCGC

“The ECC is not selling any stakes. A rights issuance will happen in which Karandaaz will subscribe to 51% shares utilizing UK’s Foreign, Commonwealth, and Development Office’s (FCDO) funding, amount of which is less than actual amount contributed by DFID for Credit Guarantee Scheme (CGS), a Microfinance Credit Guarantee Facility (MCGF),” informed sources privy to the matter to Business Recorder.

Giving an overview, the sources said that in 2008, the UK and Pakistan government signed a Memorandum of Understanding (MoU) through FCDO, under which a grant of GBP 28 million or PKR 4 billion (as per the prevailing exchange rate during 2008) was provided to Pakistan through tranches, in order to enhance the access of financing to SMEs.

In order to utilize the amount, a Credit Guarantee Scheme (CGS) for Small and Rural Enterprises was launched in 2010 by the State Bank of Pakistan (SBP), which has been managing CGS, the entity which provides guarantees to banks to provide loans to SMEs in collaboration with the FCDO since 2010.

It was learnt that in 2018, the Ministry of Finance in deliberation with multiple stakeholders came up with an innovative structure and along with DFID decided to convert CGS into a company, namely Pakistan Credit Guarantee Company (PCGC). Expanding upon the shareholding structure, the source shared that the current shareholding of the PCGC comprises 3 shares, with the SBP holding 66.67% (2 shares), and the MoF with 33.33% shareholding for a total of PKR 300 in share capital. Post the transaction’s approval, the cumulative shareholding of MoF and SBP will be 49%.

On the shareholding structure, the sources explained that the source of nearly 91% of PCGC capital will be UK funds whereas remaining 9% is coming from MoF, however parties have agreed an arrangement by which UK sponsored Karandaaz will get 51% only whereas remaining will be split between MoF and SBP. 51% for Karandaaz would allow PCGC to be private sector led, free it of any undue influences which is root cause of failure of institutions, enable to innovate new products, gives FCDO oversight without claiming ownership of the funds, maximizes value for money and may crowd in more foreign (for which interest already exists) and private capital.

Furthermore, under the arrangement, the FCDO nominated entity Karandaaz will only get Rs 3.7 billion for 51% shareholding, “which is lower than actual contribution of the FCDO in 2008.” The official said “Karandaaz or FCDO are not getting any share of profits. If the same amount is remitted back to the UK, as mandated under an amendment to the MOU, at the current exchange rate, it would be equivalent to PKR 6.71 billion”. They further clarified that the State Bank of Pakistan is getting shares against the interest income but any dividends or sales proceed of SBP shares will be remitted in government treasury.

Furthermore, it was informed that multiple amendments were made in the MoU involving all stakeholders including the SBP, MoF and Economic Affairs Division (EAD). “There have been four more amendments after this. No such document is ab-initio invalid, and neither is such language used in any Amendment,” said the spokesperson.

On the issue of seeking approval from the Securities and Exchange Commission of Pakistan (SECP) for change in shareholding, it was learnt that PCGC is an SBP regulated entity therefore approval of SECP is not required.