How Digital Supply Chain Finance is Driving Economic Growth in Pakistan

In Pakistan, supplier finance, also referred to as reverse factoring or supply chain finance, plays a vital role in helping businesses improve cash flow and maintain efficient supply chain operations. Pakistan’s financial sector is witnessing a significant transformation through Global Supply Chain Finance Forum (GSCFF), revolutionizing how businesses access funding and manage their operations.

As of 2023, only a limited number of banks in Pakistan offer products like factoring and reverse factoring, according to an Asian Development Bank study.

What is Supply Chain Finance?

Supply Chain Finance (SCF) involves financing and risk mitigation practices designed to optimize the management of the working capital and liquidity across supply chain processes. Think of SCF as a toolkit that helps businesses manage cash flows and reduce the risks tied to domestic and international trade. ¹ 

Techniques Used in Supply Chain Finance

Various techniques are used in SCF across the globe which makes it difficult sometimes to exactly define what is meant by supply chain finance. This is because some techniques such as factoring and receivables discounting look similar but they have differences when it comes to operations mechanics. Keeping in view these challenges, global organizations are working to reach a standard definition and consider the financing techniques that come under the umbrella of supply chain finance. 

Some of the popular techniques that are used in SCF are:

• Receivable Purchase: A method where businesses sell outstanding invoices to third parties at a discount, improving immediate cash flow.
• Dynamic Discounting: This technique allows suppliers to access early payments at discounted rates based on payment terms agreed with the buyer.
• Bank Payment Undertaking: A financial guarantee from a bank to ensure payment obligations are met in trade transactions.
• Distributor Finance: A tool for financing distributors to help them purchase inventory without upfront payments.
• Loan Against Inventory: Providing businesses with loans secured by inventory, enabling them to maintain operations while awaiting sales revenue.

Supply Chain Finance for the SMEs 

The significance and demand of supply chain finance for both domestic and global trade have increased over the past few years. ² SCF is considered as an important tool to provide SMEs access to financing and bridge the global trade financing gap which is estimated at US$2.5 trillion. ³ 

It brings benefits for all the participants; banks, suppliers and vendors. Banks have a more diversified portfolio which helps mitigate the risk. Suppliers in the value chain get money early in the form of bank`s financing for their sale of goods/services. Vendors are able to access financing from the banks and optimize their working capital. 

Role of International Finance Corporation 

IFC (International Finance Corporation) has a dedicated program for trade and supply chain financing to help suppliers in emerging markets and has extended US$12 billion in FY 2024. ⁴ The aggregate support from multilateral development banks has reached US$ 50 billion. The total value of global supply chain finance is around US$ 2.3 trillion. ⁵

On a regional level, African and Asian markets are showing a more positive trajectory in terms of growth in the volume of supply chain finance. The volume has increased the most in Africa with the growth on a year-on-year basis.

Supply Chain Finance in Pakistan

In low-income countries like Pakistan, accessing SCF remains a challenge. Some studies by IFC (International Finance Corporation) and WTO (World Trade Organization) highlight that supply chain finance (SCF) is harder to obtain compared to traditional trade finance because of weaker financial infrastructures. This has left many SMEs struggling to secure financing. ⁶ 

The Rise Trend of Digital Supply Chain Finance (DSCF)

Considering the importance of supply chain finance for improving SMEs` access to financing, SBP (State Bank of Pakistan) has issued a circular in June 2024 ⁷, instructing the banks to establish a dedicated SCF function for developing and offering digital supply chain finance (DSCF) to their customers. 

The DSCF solutions can either be developed by the banks on their own or they can partner with fintech companies. Earlier in 2022, SBP invited requests for expression of interest from interested companies to establish a multibank technology platform for supply chain finance. This is in line with the global trends where the collaboration between the banks and fintech have led to the growth in supply chain financing.

The Haball Model: A Game Changer for SCF

Among the notable developments in SCF is the Haball platform, offering a unique solution to solve the SCF challenges in Pakistan. This solution works on the model of anchor financing whereby a large supplier e.g., FMCG supplies goods to small vendors/dealers.

Working of Haball Model 

Here’s how it works: 

Financing the Underserved 

Smaller vendors often struggle to secure bank financing due to their limited ticket size and lack of collateral. The Haball platform enables banks to provide financing by directly paying suppliers on behalf of these vendors.

Risk Management 

The supplier ensures the bank that if the vendor defaults in payment it shall block the dealership and stop supplying the goods further. Due to the lucrative nature of business and decades-long relationship with the suppliers, vendors usually don’t take risk of defaulting in repayment of bank`s financing. 

Tech-Driven Efficiency 

Technology is at the core of this solution. Haball system processes bank disbursements in just 5 seconds, making faster and more efficient financial flows across the supply chain. ⁸ 

Integrating Shariah Compliance With Technology

Such technological solutions not only facilitate supply chain finance but also improve Shariah compliance. The platform offers Islamic finance structures such as: 

• Murabaha: Short-term sale contract. 
• Tijarah: Financing for finished goods.

Both products have traditionally faced scrutiny over Shariah compliance risks. However, by using technology, the platform makes sure that invoices issued by suppliers are authentic and verifiable, thus reducing the risk of non-compliance.

Challenges and Risks Faced in SCF

While DSCF offers immense potential, its success heavily relies on the support of anchor suppliers. If the supplier fails to back the arrangement, the bank will be exposed to higher credit risk. This highlights the importance of trust and collaboration between vendors, suppliers, and financial institutions.

Credit Guarantee

Traditionally, the banks have been reluctant to provide financing to SMEs for a variety of reasons including the low quality of security against the advances. To mitigate such risks, the Government of Pakistan has designed a risk coverage scheme to secure bank’s financing. ⁹ Under the said scheme, the Government shall absorb credit loss and provide 20% first loss coverage to SEs and 10% first loss coverage to MEs. All commercial and Islamic banks are entitled to participate in the said scheme.

Another important arrangement is the establishment of Pakistan Credit Guarantee Company (PCGC) by SBP in 2019 with major funding from the UK. The main objectives are to increase the financing to the SME sector and lower financing cost by the banks.

Conclusion

The supply chain finance (SCF) plays a critical role in the growth of the SME sector, particularly in trade finance. In low-income countries like Pakistan where the share of SMEs in overall credit provided by the banks is already very low, SCF provides a solution for increasing access to credit for small vendors and suppliers alike. 

Considering the importance of SCF in the growth of SM and ME segments, SBP has taken an initiative to improve multibank technology platform for development and offering of digital supply chain finance solutions. One such platform, Haball, is already working with the banks including Meezan and Al Falah to provide financing to suppliers under the Islamic mode of finance. However, given the gap and opportunity, new solutions are also needed to scale up the SCF by the banks.

Sources

1. http://supplychainfinanceforum.org/ ↩︎
2. http://supplychainfinanceforum.org/ICC-Rules-for-Supply-Chain-Finance-EN.pdf ↩︎
3. https://www.ifc.org/en/pressroom/2024/ifc-and-hsbc-partner-to-boost-trade-flows-in-emerging-markets ↩︎
4. https://www.ifc.org/en/what-we-do/sector-expertise/trade-and-supply-chain-finance ↩︎
5. https://www.wto.org/english/news_e/news24_e/trfin_25oct24_e.htm ↩︎
6. https://www.wto.org/english/news_e/news24_e/trfin_25oct24_e.pdf ↩︎
7. https://www.sbp.org.pk/smefd/circulars/2024/C1.htm ↩︎
8. https://haball.pk/wisaaq-islamic-supply-chain-financing-platform/ ↩︎
9. https://www.sbp.org.pk/smefd/circulars/2024/C2.htm ↩︎