SBP directs banks to adopt digital supply chain finance solutions 2024

KARACHI – The State Bank of Pakistan has issued instructions to banks to develop and implement digital solutions for supply chain finance within six months. It is aimed at leveraging the technology for increasing the SMEs’ access to finance as well as digitizing the retail payments.

The circular issued by SBP requires banks to establish an effective Supply Chain Finance (SCF) function having suitably trained HR and systems to develop and offer digital SCF products to the SMEs. The banks have been further advised to either develop their own digital solutions for SCF or partner with any Fintech Service Providers for providing digital SCF.

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The State Bank of Pakistan (SBP)

The DSCF solutions will not only increase access of SMEs to finance but also improve operational efficiency, reduce costs, and strengthen risk management practices.

The State Bank of Pakistan (SBP) has instructed the banks to develop and implement digital solutions for Supply Chain Finance (SCF) within six months to leverage the technology for increasing the SMEs’ access to finance as well as digitizing the retail payments.

The circular issued by the SBP requires banks to establish an effective Supply Chain Finance function having suitably trained HR and systems to develop and offer digital SCF products to SMEs. 

The banks have been further advised to either develop their own digital solutions for SCF or partner with any fintech service providers for providing digital SCF.

The DSCF solutions will not only increase access of SMEs to finance but also improve operational efficiency, reduce costs, and strengthen risk management practices.

(SBP) is developing a framework to cover SCF.

Several factors restrict the full development of SCF in this market. The legal framework needs to adapt to accelerate the use of e-invoicing and facilitate various products of SCF. Moreover, the current tax law requires payment to be made directly to the seller to obtain tax credits, which renders SCF product operations untenable.

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The ADB cautioned that the growing demand for Islamic banking products is also creating hurdles for the development of SCF. Despite encouragement by the government and the State Bank, the country’s banks are still cautious about offering SCF because of a lack of clarity in the regulations and low awareness of the nuances of SCF, the report said.

The market for SCF in Pakistan is relatively new, but has been growing gradually, largely because of strong government initiatives since 2017. Banks and regulators have benefited from knowledge sessions and webinars on SCF done by multilateral development banks such as ADB.

A few banks have started offering factoring and reverse factoring products, which were developed with the support of the International Finance Corporation (IFC).

The main SCF products currently offered in Pakistan are domestic factoring, known locally as “invoice discounting”; and reverse factoring, often referred to as “supply chain finance.”

Market volumes, especially for reverse factoring, are small but growing.

There is high suppliers’ interest in these products mitigating challenges of supplier education.

Notwithstanding that, significant challenges to accessing technology and enabling platforms, as well as fulfilling various compliance andknow-your-customer requirements, persist in the market.

As per the estimates of the Small and Medium Enterprise Development Authority, there are more than 5 million SMEs in Pakistan. SMEs contribute 40 per cent of the country’s GDP and 25 per cent to its overall exports. Therefore, the National Financial Inclusion Strategy in 2017 set out a plan for SME finance, which included SCF.

Supply chain finance (SCF), with various techniques under that umbrella term, has grown rapidly in recent years, providing access to working capital finance to small and medium-sized enterprises (SMEs) involved in global supply chains. Although various forms of SCF are now commonly used in developed markets, with a notable contribution in certain emerging markets, adoption and acceptability of SCF tools took years, and even decades, to develop. SMEs are the main economic drivers in many countries in developing Asia, but they often struggle to obtain adequate financing, including trade-related financing.

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As per trade finance gap study of ADB in 2021, the global trade finance gap is estimated at $1.7 trillion. This estimate for the gap likely increased to at least $2 trillion in the following years because of heightened economic and financial uncertainties. The study also highlights that 40pc of the trade applications rejected by banks are from SMEs.

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