SBP’s Priority Areas

Efficient credit allocation is critical for sustainable and inclusive economic growth. In this regard, agriculture, small & medium enterprises and low cost housing remain the priority sectors for State Bank of Pakistan (SBP) with Islamic banking and financial inclusion as cross-cutting themes.

Agriculture Finance:

The Agriculture sector continues to play a central role in Pakistan’s economy due to its significant contributions towards National Income, employment, food security and export earnings. The State Bank of Pakistan (SBP) Act, 1956 long recognized the need to promote access to finance for rural markets to help farmers in meeting their financial needs for increased productivity and profitability. Due to the significance of financing for sectoral development, regulation of agricultural lending was made an integral part of the functions of the Central Bank.

Prior to 1972, commercial banks' lending to agriculture was nominal, and the Zarai Taraqiati Bank Limited (former ADBP) was providing the bulk of credit to this sector. With the introduction of Banking Reforms in 1972, several policy changes were made with the objective of more equitable distribution of bank credit. As a result, an Agricultural Loans Scheme was introduced wherein mandatory targets were given to commercial banks for agricultural lending.

Towards the late 1990s and early 2000s, SBP worked towards the establishment of a supportive policy framework for entry of the private sector into un-banked areas. Since then, SBP has also adopted the role of a facilitator of financial institutions in promoting market information and infrastructure for agri. financing. Today, fifty-two institutions including five  major banks, two  specialized banks (ZTBL & PPCBL), 14 domestic private banks, 11 microfinance banks, five  Islamic banks and 15 microfinance institutions are directly providing finance to the agricultural community of the country.

Under the new paradigm of market based financial sector policies, SBP’s strategy for agricultural finance rests upon five pillars that include: (a) provision of an enabling policy environment, (b) diversification of lending portfolio, (c) introduction of innovative financing techniques (d) programs for farmers’ financial literacy, and (e) capacity building of financial institutions. 

Some of the major breakthroughs led by SBP for agri. financing include introducing modern financing methodologies  like warehouse receipt financing and value chain financing,  concessional financing schemes for priority areas; credit guarantee schemes for small farmers; simplification of loan application processes; specialized guidelines and regulations for sub sectors and loan insurance schemes etc. 

Through innovative policies, constant monitoring and targeted interventions in these areas, SBP has been able to expand the formal financial outreach to more farmers and has successfully achieved ambitious agri-lending targets. As a result of the collective efforts, agricultural credit has seen a robust and sustained growth from Rs. 109 billion in FY 2004-05 to Rs. 704.5 billion in FY17.

For 2017-18, SBP has assigned an unprecedented agri. financing disbursement target of Rs. 1,001 billion which is 43 percent higher than last year’s target of Rs. 700 billion. During July-May 2018, the banks have disbursed Rs. 849 billion or 85% of the overall annual target. With the achievement of this target, the formal financial institutions would meet approximately 75% of agri. credit demand – a historic landmark on its own!

SME Finance:

In Pakistan, SMEs constitute over 90 percent of the estimated 3.2 million business enterprises. They contribute 30 percent to the GDP and 25 percent to export earnings. Cognizant of its importance, SBP has been making continuous efforts to create an enabling and facilitating financial environment for the sector.

SBP has prepared a comprehensive ‘Policy for Promotion of SME Financing’, which was launched by the then Prime Minister of Pakistan, Mr. Shahid Khaqan Abbasi on December 22, 2017. This policy covers areas like regulatory relaxations, financing targets, provision of refinance and risk coverage facilities, promotion of value chain financing and program based lending, adoption of technology, awareness creation and capacity building of bankers as well as SMEs, hand holding of SMEs and facilitative taxation regime for SMEs. 

SBP is providing liquidity to banks and Development Finance Institutions for onwards lending to SMEs at discounted rates under different refinance schemes. Schemes such as ‘Refinance Facility for Modernization of SMEs’, ‘Financing Facility for Storage of Agriculture Produce’ and ‘Financing Scheme for Renewable Energy’ are the long term facilities to meet capital expenditures needs of SMEs. For short-term liquidity needs, ‘Export Finance Scheme’ and ‘Refinance Scheme for Working Capital Financing of Small and Low-End Medium Enterprises’ are being offered. Further, a refinance scheme with subsidized rates and risk coverage has also been offered for female entrepreneurs of underserved areas of the country.

SBP is also managing ‘Prime Minister’s Youth Business Loans Scheme’ which offers subsidized loans to the youth for establishment of business/expansion of existing ones.

In addition to above facilities, SBP offers the risk coverage through its Credit Guarantee Scheme (CGS) for Small and Rural Enterprises with the aim to provide comfort to the banks to lend SMEs, especially collateral-deficient. Going forward, this CGS will be converted into an independent Credit Guarantee Company.

Creation of Secured Transactions Electronic Collateral Registry for unincorporated entities under the Financial Institutions (Secured Transactions) Act, 2016 is other important market infrastructure development initiative which is in progress of completion. This E-Registry will facilitate SME borrowers to access credit from banking sector by creating charge on their movable assets as collateral.

SBP is very keen for capacity building of bankers and awareness creation of SMEs. The senior management of SBP is conducting awareness programs in different cities of the country. Additionally, SBP Banking Services Corporation and National Institute of Banking & Finance are also conducting series of awareness and capacity building programs for the stakeholders in different cities.

Over the past five years SME financing portfolio of banks & DFIs has shown an increasing trend  with average annual growth rate of around 11%.  SME financing reached its highest level of Rs. 449 billion in December, 2017.  It is envisioned that by 2020, SME finance as percentage of private sector credit will increase from the current level of 9% to 17% with SME borrowers increasing to 500,000.

Low Cost Housing Finance:

Home ownership represents the best way for households to build wealth and long-term assets. By investing in homes, people, especially the low-income groups, accumulate equity that can then be used as a collateral, making them more credit-worthy for accessing finance through formal channels, and for generating income.

Pakistan has been facing shortage of housing units; and this basic human need is felt more profoundly for financially underserved people. The increase in the demand and supply gap is the result of various challenges including housing finance.

Recent data suggests a considerable increase in housing finance over the past few quarters. Housing finance portfolio increased from Rs. 69 billion in December 2016 to Rs. 83 billion in December 2017, showing an increase of 20 percent over the year. The new mortgages primarily cater to the formally salaried middle class and upper class borrowers (around 60% of the total portfolio).

SBP has undertaken a number of measures to develop a conducive regulatory environment for efficient housing finance market, which provides financing facilities to all segments of the society, including low-income individuals. On the regulatory side, State Bank issued separate Prudential Regulations for Housing Finance. Similarly, SBP has facilitated the establishment of Pakistan Mortgage Refinance Company (PMRC) to assist banks in exploring fixed rate or hybrid models of mortgages, improving liquidity of the financial system and enabling them to prudently match maturity profile of their assets and liabilities.

SBP has also kept the capacity building of stakeholders on its priority list. Workshops, training programs and conferences are organized on regular basis to keep the industry abreast of developments in housing finance.

In an attempt to address the issues faced by the housing finance industry, SBP has developed a policy for promotion of low cost housing.  This policy aims to address both supply and demand side issues, by focusing on regulatory incentives, risk mitigation mechanism for financial institutions and measures to address the issue of affordability of low-income borrowers.

With the establishment of PMRC and presence of an enabling regulatory framework, banks are now in a better position to provide adequate and affordable housing finance products. Further, the policy for promotion of low cost housing will open up new frontiers for banking industry as low-income group represents a large segment of the society, which remains underserved in terms of housing finance. It is expected that banks would now become more inclined towards serving this segment and the overall volume of housing finance in the country will rise.

Islamic Banking:

Pakistan witnessed an emergence of Islamic banking in response to both religious and constitutional needs. The history of Islamic banking in Pakistan matches with that of the global emergence of Islamic banking; the process, which began in 1960s, made considerable headways in 1980s. However, efforts in 80s could not produce desired results mainly due to abrupt transformation and absence of necessary operational and regulatory framework.

Efforts towards Shariah compliant banking system in Pakistan were re-launched in 2001-02. This new paradigm allowed Islamic banking to operate in the country as an alternative and parallel system .This approach has proved to be a success as reflected by considerable growth; by March 31, 2018, Islamic banking industry’s share in overall banking industry’s assets and deposits stood at 13.5 percent and 14.6 percent, respectively. During the same period network of Islamic banking industry consisted of 21 Islamic banking institutions (5 full-fledged Islamic banks and 16 conventional banks having standalone Islamic banking branches) with a network of 2,589 branches and 1,283 Islamic banking windows (Islamic counters at conventional branches) spread across the country.

SBP since beginning has put in place a comprehensive and robust multi-tiered Shariah compliance mechanism. SBP is among pioneer regulators that introduced Shariah inspection of Islamic banks. Promoting Islamic finance has remained an important component of SBP’s strategic goals. SBP has also issued a survey based research report entitled, “Knowledge, Attitude and Practices of Islamic Banking in Pakistan” (KAP study). Being cognizant of potential of Islamic finance to contribute towards financial inclusion, this has been made an integral part of National Financial Inclusion Strategy (NFIS) of Government of Pakistan (GoP). SBP also assists GoP for issuance of domestic and international sukuk.

Formation of a high level Steering Committee for Promotion of Islamic Banking by GoP in 2013 shows its strong commitment towards the development of Islamic finance in the country. The Committee completed its tenure of two years in 2015 and submitted a comprehensive set of recommendations. Subsequently, an Implementation Committee was formed under the Chairmanship of the Governor, SBP. Some of the major achievements from this platform include launch of All Share Islamic Index, establishment of Islamic Finance Department at Securities & Exchange Commission of Pakistan(SECP) and extension of tax neutrality for Islamic financial institutions and their customers.

In its supporting role, SBP is addressing the issues of awareness, misconception and HR development of the industry. To this end, SBP is arranging seminars, conferences, targeted programs and focused discussions for business community, academia, bankers and policy makers. Moreover, in order to ensure adequate supply of trained human resource and to act as incubator for research, SBP in collaboration with the Government, industry and other stakeholders has helped in establishing three Centers of Excellence at leading business schools of the country. In recognition of its efforts, SBP was voted as the Best Central Bank for 2017 in promoting Islamic finance by a poll conducted by Islamic Finance News (IFN), an arm of REDmoney Group, Malaysia. SBP has also won this award in 2015.

Financial Inclusion:

SBP has been driving ‘Financial Inclusion’ as a strategic goal through agile & innovative regulations, development of market information & infrastructure and capacity building of providers and clients. Primarily, SBP played a leading role in developing a formal microfinance sector as an alternative to conventional banking, which meets the needs of lower income segments. The Microfinance Ordinance issued in 2001 to introduce Microfinance Banking for development of a sustainable banking model for low-income segments in Pakistan. SBP also prepared a National Microfinance Strategy in 2007, which recognized 4 essential areas of action to revive the microfinance sector; i) commercialization, ii) sustainability of operations, iii) private domestic capital, and iv) building human resource.

To foster innovations for financial inclusion from brick-and-mortar banking models, SBP issued Branchless Banking (BB) Regulations in 2008 which allowed banks to leverage the networks of telecommunication companies for wider outreach of financial services, especially in rural areas. 

Through SBP’s prudent regulatory and market development approach, the industry has evolved to become structured, innovative and well capitalized. As of December 2017, the microfinance banks have more than 2.5 million borrowers, while 37 million BB accounts have been registered, out of which 7.39 million belong to women. Since 2010-11, The Economist Intelligence Unit in its annual Global Microscope review of financial inclusion environments has continued to rank Pakistan amongst the top five countries creating an enabling environment for financial inclusion.

Nonetheless, SBP remained cognizant that financial inclusion in Pakistan remains lower than its regional peers. In 2015, SBP launched a comprehensive NFIS  that has been adopted by the government of Pakistan, which creates the foundation for all stakeholders to implement reforms to tackle persisting financial exclusion.

NFIS targets to increase adult population’s access to formal financial accounts from 16% to 50% and grow women’s bank account ownership from 11% to 25% by 2020. The NFIS covers priority areas such as BB, Digital Payment Systems, Agri, MSME, Housing and Islamic Finance, Consumer Protection, Financial Literacy, Insurance and Pensions.

Accordingly, several initiatives have been introduced to improve the access, usage and quality of formal financial services. These include i) development of Asaan Mobile Account Scheme ii) rationalization of NADRA’s verification cost, iii) exemption of withholding tax on cash withdrawals by BB agents iv) enablement of NADRA’s Biometric Verification System for Micro Insurers, v) creation of Innovation Challenge Facility to promote Digital Financial services, and vi) Implementation of Nationwide Financial Literacy Program to improve financial literacy.

The NFIS actions are slowly bearing fruit, as World Bank’s Global Findex Report 2017 notes that 21% of adult population has an account, up from 13% since 2014.  Despite the challenges of creating an inclusive financial system, SBP remains committed to champion financial inclusion in Pakistan and achieve the vision of empowering all citizens