An edict from Pakistani authorities mandating banks to develop digital supply chain finance (SCF) capabilities by early December is only the first step toward widespread adoption of the financing practice, the founder of one of the country’s few home-grown platforms says.

The State Bank of Pakistan on June 10 directed the nation’s banks to “develop and offer a digital solution for SCF” within six months and create an SCF function with “requisite resources for developing and offering [digital] SCF products to their customers”.

Currently, only “a few banks” in Pakistan provide products such as factoring and reverse factoring, according to a 2023 Asian Development Bank study. It is a potentially lucrative opportunity for new entrants, with the same study estimating the local SCF market could be worth US$9bn within three to five years.

The central bank says forcing commercial lenders to adopt digital supply chain finance products will help SMEs become more bankable and gain access to financing, partly because moving away from cash transactions will allow small firms to build up a verifiable transaction history.

“From a regulator’s perspective, this is a first step amongst many that they’ll have to take,” says Omer Ahsan, founder and CEO of Haball, a fintech operating an SCF platform called Wisaaq, which has partnered with four local lenders.

“If you go through the state bank website, there’s no such word in their vocabulary called supply chain finance,” Ahsan tells GTR. “The fact that this [circular] exists now is the first step that there’s recognition that this is a safe and investable product for the banks.”

Several commercial banks already offer SCF products, either through fintech partnerships or vendor agreements, Ahsan says, but the volume of financing is still only a small portion of SMEs’ overall unmet credit needs.

At least two other Pakistani providers, CashNow and Dukan, offer some form of digital SCF in addition to Haball, a central bank spokesperson says. International platform providers are also interested in the Pakistani market, says Ahsan.

“Banks can opt for any solution of their choice or develop their own solution,” central bank chief spokesperson Noor Ahmed tells GTR. “It will purely be the banks’ own decision to develop or procure the solutions or partner with the fintech of their choice.”

“Establishing and/or leveraging technology platforms is one of the critical enablers for scaling up SCF and enabling SMEs to access bank financing,” he says.

The bank’s circular also requires lenders to submit a strategy for developing their SCF capacities within three months.

Asked if banks will face sanctions if they do not meet the regulator’s deadline, Ahmed says the central bank “issues instructions in consultation with banks through Pakistan Banks Association and regularly engages with banks for implementation of the instructions; we thus see no reason for non-compliance”.

Ahsan says financing for SMEs in Pakistan falls well short of demand because banks prefer to deploy capital in low-risk sovereign loans to the country’s perennially cash-strapped government. He adds that there is also growing demand for Islamic-compliant financing that providers will need to meet.

The ADB study found Pakistan’s legal framework, including tax law, “needs to adapt to accelerate the use of e-invoicing and facilitate the various products”.

“Despite encouragement by the government and the State Bank of Pakistan, 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 the practice, the ADB said.

As in other developing countries, development finance institutions have helped pave the way for investment in supplier finance in Pakistan.

Last year the International Finance Corporation said it would cover half the risk on up to US$200mn in trade and working capital loans provided by Standard Chartered Bank Pakistan, including SCF programmes.