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KARACHI: The State Bank of Pakistan (SBP) has announced that it will launch a Challenge Fund for SMEs (CFS) to support innovative solutions for SME banking in the country.

The CFS aims to support banks to leverage technology and innovation to develop new or amend existing financial products & services and delivery platforms that will enhance access to finance to the SME sector.

According to the SBP, this fund in the form of grant will facilitate banks in developing innovative technological solutions to cater the banking needs of the SME sector. This will also enable the SME sector to increase the access and usage of digital financial services by the SME sector. Going forward, it can play a major role to digitize financing and payment.

The purpose of this challenge fund is to develop and implement innovative ideas to increase financial inclusion of SMEs and also develop user-friendly and cost-effective innovative banking solutions for business entrepreneurs. This also helps to develop and integrate key offerings with other players in the banking system with interoperability options and novel solutions to create easy digital access to formal financial services including savings products, lending services, pensions, insurance tools, remittances, etc.

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State Bank has been taking various measures to facilitate banks in improving access to finance for the SME sector, therefore, SBP is launching a CFS to support innovative solutions for SME banking in the country.

As per eligibility criteria, commercial Banks (conventional & Islamic) are eligible to apply for grants under CFS. Banks can also apply in partnership with non-banking financial Institutions (NBFIs), Fintechs, Electronic Money Institutions (EMI) and software houses. However, lead responsibility will rest with the applicant bank.

Grant size will be determined according to the financing requirements of the proposal under consideration. However, each grantee will contribute 15 percent of the total cost. Depending upon the quality & innovations of the proposal, the grant size can vary, however one bank will get only one grant. The duration of the projects to be implemented through CFS grant should not exceed 8 months.

The SBP has invited interest of banks through Expression of interest (EOI) placed for availing grant under CFS to improve their SME financing portfolio. Banks proposals will be evaluated as per technical criteria developed by the SBP. The SBP has asked Banks to apply as per EOI latest by April 18, 2022.

The SBP is launching a challenge fund to spur innovations in areas such as sustainable business models that ride on utilization of technology or other alternative delivery channels and products & services tailored for SMEs.

This will focus on financial innovations leveraging the use of technology (including Fintech). Digital SME banking includes a broad range of financial services accessed and delivered at affordable cost through digital channels. It can be a catalyst in improving living standards by providing affordable financing options and encouraging entrepreneurship.

It is estimated that the market potential of Digital Finance Services in Pakistan will cross $ 36 Billion by 2025, providing a 7 percent boost to the GDP, creating 4 million new jobs and resulting in $ 263 billion new deposits.

The SBP believes that this potential can only be achieved through a robust and efficient Digital Financial Services (DFS) ecosystem. In this regard, SBP is focusing on leveraging technology not only in payments but also modernizing lending platforms.

The SBP is also promoting an enabling regulatory environment for new players and forming new contractual relationships between financial institutions and third parties.

The SME sector plays a significant role in the economic development of the country and more than 5 million SMEs contribute 40 percent to Pakistan’s GDP of Pakistan and 25 percent in overall exports. Due to various regulatory measures and facilitative role played by SBP, SME financing started rising from 2013.

The outstanding SME financing reached Rs 524 billion in December 2021 as compared to Rs 284 billion in December 2013.

However, structural barriers still exist which impede bank lending to SMEs, like information asymmetries, high transaction costs and lack of tangible collateral for availing loans by the SME owners and entrepreneurs.

Copyright Business Recorder, 2022

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