SBP Launches Challenge Fund to Boost Digitalization in SMEs

The State Bank of Pakistan (SBP) has introduced a Challenge Fund aimed at promoting technology adoption and digitalization among small and medium enterprises (SMEs). This initiative reflects the central bank’s ongoing efforts to enhance access to finance for the SME sector.

Support for Innovative Solutions

In a circular issued on Saturday, the SBP outlined that the Challenge Fund will support innovative solutions specifically designed for SME banking. This fund, provided in the form of a grant, will enable banks to develop creative technological solutions tailored to the banking needs of SMEs. The digital SME banking landscape encompasses a wide range of financial services that can be accessed and delivered through digital channels at an affordable cost, ultimately encouraging entrepreneurship.

Market Potential of Digital Finance Services

Estimates indicate that the market potential for Digital Finance Services (DFS) in Pakistan could exceed US$36 billion by 2025. This growth is expected to provide a 7 percent boost to the GDP, create 4 million new jobs, and generate US$263 billion in new deposits. Achieving this potential hinges on the establishment of a robust and efficient DFS ecosystem.

Strengthening the DFS Ecosystem

Currently, Pakistan’s DFS ecosystem is still developing and requires nurturing at both governmental and industry levels. The Challenge Fund is designed to support banks and financial technology providers (Fintechs) in creating or enhancing financial products and services, as well as improving delivery platforms to increase access to finance for the SME sector.

Focus Areas of the Challenge Fund

The Challenge Fund aims to provide affordable financing options to encourage entrepreneurship. Its scope will focus on, but not be limited to, the following areas:

• Loan Origination and Processing Systems for SMEs: Developing streamlined processes to facilitate SME financing.
• Digital Product Development: Creating digital scorecards, digital supply chain products, and digital onboarding solutions for SMEs.
• Financial Education Platforms: Enhancing digital platforms that offer financial education, empowering customers to make informed banking and financial management decisions.
• Upgrading Digital Banking Platforms: Improving mobile banking apps, online banking systems, and customer portals to better serve SMEs.
• Innovative Technological Solutions: Exploring unique ideas that address the challenges SMEs face in accessing financing.

Targeting Marginalized Segments

The aforementioned areas will emphasize increasing financing for the SME sector, particularly focusing on marginalized segments such as startups, women-led SMEs, and underserved areas.

Eligibility and Grant Details

Commercial banks, both conventional and Islamic, can apply for the Challenge Fund. Other SBP-regulated entities are also eligible. Banks may collaborate with Fintechs or Electronic Money Institutions (EMIs). However, the applicant bank will have lead responsibility. The size of the grant will depend on the financial needs outlined in the proposal. Each grantee must contribute 15 percent of the total project cost. Grant sizes may vary based on the quality and innovation of the proposals. Each bank is limited to one grant. The SBP recommends that project durations should not exceed eight months.