State Bank of Pakistan (SBP) has decided to establish credit guarantee company for SMEs and the Centre of Excellence for SME banking & finance for promotion of SMEs finance in the country. SBP, in its Policy for Promotion of SME Finance, has also urged for simplification of taxation regime for SMEs.
Realizing the importance of SMEs' economic and developmental contributions in GDP, SBP has developed a policy for promotion of SME finance (Conventional & Islamic) in Pakistan. The policy was formally launched by Prime Minister Shahid Khaqan Abbasi on Friday at SBP head office.
There are 9 key pillars of this policy which include improving regulatory framework, up scaling of micro finance banks, risk mitigation strategy, simplified procedures for SME financing, programme based lending & value chain financing, capacity building & awareness creation, handholding of SMEs, leveraging technology and simplification of taxation regime
As per policy, the SBP has decided to convert the existing Credit Guarantee Scheme into a Credit Guarantee Company that will function as an independent entity. Consultants have been engaged for developing a business plan for the proposed Credit Guarantee Company. Efforts will be made to make the company operational by December 31, 2018.
Further, the Centre of Excellence for SME banking and finance will also be established in collaboration with National Institute of Banking and Finance (NIBAF) and other institutions. This centre will work with renowned international and local institutions to impart quality training to banks (conventional & Islamic) and SMEs. The centre will also liaise with SMEDA and other financial institutions to create awareness on banking products.
Urging for simplifying taxation regime for SMEs, SBP in policy said that small businesses are mostly owned by proprietors or partners who prefer to avoid inclusion in tax net. Therefore, due to lack of organized and formal structure, banks and DFIs are reluctant to finance these entities. Thus, a large part of small & medium businesses remain deprived of bank finance and resultantly fail to grow, it added. According to SBP, the Technical Committee of SMEs under National Financial Inclusion Strategy (NFIS) is deliberating to prepare recommendations to resolve the taxation issues of SEs and MEs.
In this regard, tax rate reduction on banks' income derived from SME financing has been recommended. In addition, tax holiday on income of eligible start-ups and women small enterprises borrowers, which eligibility criteria and tenure for holiday to be finalized in consultation with Ministry of Commerce and Federal Bureau of Revenue (FBR).
While, reduction in sales tax on service sector small enterprises (SEs) and medium enterprises (MEs) has also proposed. As per policy, from January 01, 2018, SBP will assign provincial targets for SME financing to banks conventional and IBIs. SBP BSC offices will be involved in monitoring mechanism. Going forward from January 01, 2019, gender-wise targets as well as separate targets for small and medium enterprises will also be assigned to banks and DFIs.
In line with the strategic direction of SBP, key benchmarks to be achieved by 2020 are to increase SME share from existing 8 percent of private sector credit to 17 percent and to increase the number of borrowers from existing 174,000 to 500,000.
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