SBP plans Modaraba-based financing for SMEs

KARACHI: The State Bank has decided to introduce a Modaraba-based Islamic Refinance Scheme for working capital financing of small and low-end medium enterprises.

The central bank on Wednesday said that it will make Modaraba investment in general pool of Participating Islamic Financial Institutions (PIFIs) under the scheme.

The financing will be initially available for information technology, furniture, gems and jewellery, leather industry, surgical goods, dates processing, fruits, vegetables and food processing and packaging, and printing and packaging.

Small enterprises (SEs) for SME financing are eligible under the scheme while medium enterprises (MEs) with annual sales turnover of up to Rs300 million can also avail the scheme. Maximum financing limit for MEs is Rs50m, with a maximum financing tenure of one year.

The banks and DFIs may submit their requests for the status of PIFI. They may also apply for allocation and assignment of limit under the scheme. The SBP said these requests may be submitted within 30 days from the date of issuance of this circular.

The funds made available under the scheme to PIFIs will be provided by the designated offices of the SBP under the limits conveyed by the concerned department of SBP in favor of each PIFI. The SBP will review the utilisation of limits by the PIFIs periodically (quarterly) and may cancel or reduce the unutilised limit. No PIFI will be authorised to sanction financing with a view to merely utilise the limit under the scheme, said the SBP.

The financing will be allowed against a single or multiple underlying transactions, designed on the basis of Islamic modes of financing, approved by the Sharia Board of the concerned PIFI. The PIFIs will not take more than 15 days in case of SEs and 25 days in case of medium enterprises MEs in evaluating an application for financing under the scheme from the date of receipt of complete information from the customer.

According to the SBP circular, disbursements by PIFIs should not be made to the customers directly. Payments will be made to the suppliers of the customers. The expected rate of return on financing provided by the PIFI to its customer under the scheme may not exceed rates announced by SBP on similar refinance facilities. The SBP expects profit rates or return on its investment close to its return on such type of refinance facilities.

The expected rate of return on financing once fixed will remain locked-in for the entire duration of the financing, provided that the customers continue to pay all scheduled amounts at the respective due dates.

“The SBP’s investment in the general pool will be assigned profit sharing ratio and weightage keeping in view SBP’s expected rate of return as well as PIFI’s policy and practice for such type of depositors in the general pool. Such weightages shall be used to calculate profits on SBP investments,” said the SBP.

Meanwhile, the central bank has planned to engage consultants to devise methods for improving access of women entrepreneurs to bank finances and develop new financial products, The News learnt.

Official documents showed that the State Bank of Pakistan (SBP) would design a plan by clearly defining the financial solutions and different activities needed to enhance women’s access to finance and products needed to enhance access to finance to women-owned small and medium enterprises (SMEs) through formal banking channel.

“Moreover, an action plan will be launched in order to create awareness among women entrepreneurs,” an official document said. “For this purpose, SBP is hiring consulting services to provide recommendations on improving access to finance to SMEs owned by women entrepreneurs of Pakistan and to assist banks in designing women specific financing and non-financing products.”

Access to finance for women remains a key challenge in Pakistan. Women face both social and financial challenges in setting up and running a business as the overall environment is not very conducive for female entrepreneurship. The share of female borrowers was a mere five percent in the total outstanding SME borrowers as of December 31, 2017.

Improving financial inclusion of women is one of the priority areas under the SBP’s National Financial Inclusion Strategy (NFIS), as it aims to enhance formal financial access to 50 percent of the adult population and envisions that 25 percent of adult females should have a formal bank account by end of 2020. NFIS of Pakistan was launched in 2015 to increase the access and usage of financial services especially for the under-banked and un-served population of the country.

Other than the lack of family support, financial constraints act as a major hurdle restricting women from opting for entrepreneurship. Banks in general are hesitant to lend to start-ups and in case of females this reluctance increases due to a high risk associated with such financing. Realising the importance of female contribution towards economic development, different measures have been taken to facilitate women entrepreneurship particularly with respect to increasing access to finance.

The SBP’s plan would foster availability of finance to women entrepreneurs through designing and implementing a women linkages program. The program aims to conduct a diagnostic survey, prepare an action plan to implement the proposed recommendations, including a mechanism for monitoring the plan and assist banks in designing women specific products financing and non-financing products and services.

The diagnostic survey on women’s access to finance with reference to SME financing would define the key impediments faced by women entrepreneurs. It would study the current initiatives taken by various organisations to improve financing to women entrepreneurs, shortlist sectors wherein women entrepreneurs are more involved, and identify their needs and financing requirements.

“It will ultimately contribute in enhancing the ability of women entrepreneurs to pursue economic opportunities and to grow their businesses,” the document said. “The consultancy will focus on addressing the extent to which women are less able to access finance.”

The hired consultants would develop a comprehensive plan for designing and implementing the women’s linkages program for improving access to finance in the country. They would give an overview of international best practices and share success stories of jurisdictions where women financing has been enhanced. They would do the stock taking of the current initiatives taken by various organisations in Pakistan to improve financing to women entrepreneurs.