SME FINANCING INTRODUCTION

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1 SME FINANCING INTRODUCTION Small & Medium Enterprises (SMEs) sector contributes significantly towards national GDP, employment generation and export earnings. Hence, the impact of financial inclusion of SMEs has important implications for economic growth, competitiveness, and job creation. The potential for this sector to contribute to the economic development objectives of Pakistan, in areas like creating jobs, increasing incomes, improving competitiveness, boosting exports and fostering economic growth is the justification for a strategy of support to unleash the sector s potential. LEVERAGING TECHNOLOGY TO PROMOTE SME FINANCING Use of technological innovations in SME banking may pave the way for the banks to deliver their financial services to the target clients at a relatively low cost. The use of technology also reduces bank s clients searching and exploring cost. Although branchless banking, internet banking and SMS alert services are becoming common as a norm of current banking practices, technology can also be used in broad banking services like cash management (by integrating payrolls, trade credits & receivables), credit origination (through online credit applications) and other services etc. As a modern concept, financial technology (FinTech) is used to facilitate financial services by using technology. It aims to provide products and services through online and mobile channels. Currently, financial institutions are using FinTech for better customer service delivery and speedy expansion of branchless banking in Pakistan. SHARIAH COMPLIANCE FRAMEWORK [Shariah Governance Frame Work (SGF) Link: ISLAMIC SME FINANCING SMEs, particularly small enterprises and suburban business units, are more inclined to avail Shariah compliant facilities instead of conventional financing due to religious factors and their understanding of conventional banking. These SMEs create a sizable market for selling Islamic banking products. Realizing the strength of this market, Islamic Banking Institutions (IBIs) have expanded their business operations. SBP has also assigned SME targets to IBIs. Islamic Banking Division of conventional banks (IBDs) has also been advised to develop a detailed Islamic SME strategy for promotion of Islamic SME financing.

2 WHAT WE OFFER BOP Offer Complete Banking Solutions for Small & Medium Businesses Strictly under Shariah Modes The Bank of Punjab provides Shariah compliant banking services like financing, trade and deposit related services to small & medium sized enterprises. BOP therefore envisages itself to be the key lender to SME businesses across the country. BOP s proactive customer relationship management and a strong program lending approach with innovative product development has allowed the bank to differentiate itself in the country's SME sector. We at BOP, aimed to provide quick, easy and a convenient experience to our customers. We are focused to reach out and serve our SME borrowing customers in an efficient manner serving through dedicated Credits and Trade team to assist their funded / non funded needs. Eligibility State Bank of Pakistan segregates SME into Small Enterprises & Medium Enterprises to allow them certain ease of doing business, a brief of SME classification as per SBP guidelines is detailed below : SBP PRUDENTIAL REGULATIONS SMALL ENTERPRISES: Number of Employees Annual Sales Turnover Financing Allowed Up to 50* Up to Rs.150 Mn Up to Rs.25 Mn * including contractual employees However, in cases where an entity fulfills one parameter of SE and its second parameter falls within the range prescribed for medium enterprise (ME) or above the upper limit prescribed for ME, then the subject entity shall be classified as ME or commercial/corporate entity as the case may be.

3 MEDIUM ENTERPRISES Medium Enterprise (ME) is a business entity, ideally not a public limited company which meets the following parameters: Number of Employees Annual Sales Turnover Financing Allowed (Maximum per party) for Manufacturing and Above Rs.150M and up to Rs.200M (including leased Service ME Rs.800M for all types of ME assets) exposure from single or for Trading ME all banks *In cases where an entity fulfills one parameter of ME and its second parameter falls above the upper limit prescribed for ME, the subject entity shall be classified as commercial/corporate entity as the case may be. (For complete PRs, Click the below link): FINANCING IS BEING OFFERED TO SMES FOR THE FOLLOWING PURPOSES: Managing day to day business cash flows Expanding business Buying raw material, stocks Buying machinery and new equipment Trade finance Assuring payments from your inland and overseas clients through trade finance (import, export & guarantees) In order to facilitate and support the SME sector, SBP has offered refinance schemes for various segments. Please click below or visit your nearest branch for further details. SBP SME Finance Products (Link to be attached from SBP Site) PRICING Flexible pricing (floating / fixed with revision monthly/quarterly/half-yearly/yearly). MODE OF PAYMENT & PAYMENT FREQUENCY Long term: Monthly / Quarterly / Half-yearly Short term: As agreed between client and the bank Late Payment Charity 24% per annum will be received after due date which will be credited to Charity account.

4 SME PRODUCTS roduct Product Purpose Remarks Murabahah Financing Trade related facilities based on Murabahah Diminishing Musharakah Financing Kafalah (Bank Guarantees) Ijarah Working capital Requirement/procurement of Raw Material/Semi Finished Goods/Finished Goods LC Sight LC Usance Term financing will be limited as per Facility approval of respective customers to a maximum tenure of 20 years for Commercial customers. Rental and principal payments in monthly / quarterly / semiannual installments. Bid Performance Mobilization Financial Repayment Shipping any other For import of machinery/equipment/vehicles for Corporate Commercial /SME /Retails customers. Revolving facility line, renewable subject to facility history / account behavior Total Tenure of Sight LC will not exceed 365 days Total Tenure of Usance LC will not exceed 365 days To finance Capital Expenditure As per approval from Concerned Committee on case to case basis As per approval from concerned committees. Istisna Working Capital requirement Revolving facility line, renewable subject to facility history / account behavior Murabahah / Musharakah IERF As per SBP Criteria Murabahah Murabahah means a sale of goods by a person to another under an arrangement whereby the seller is obliged to disclose to the buyer the cost of goods sold either on cash basis or deferred payment basis and a margin of profit included in the sale price of goods agreed to be sold. Murabahah is transacted in tangible assets only. Murabahah shall not be

5 transacted in respect of any debt instrument including receivables. Being a sale transaction, it is essential that the commodities which are the subject of sale in a Murabahah transaction must exist, owned by the seller and in his physical or constructive possession. Therefore, it is necessary that the seller must have assumed the risks of ownership before selling the commodities to the buyer/customer. It is a fixed price sale and normally is done for short term. The transaction can be used in order to meet the working Capital requirements by way of purchase of goods. It cannot be used to meet overheads payments such as settlement of utility bills or payment of salaries or settlement of amounts owed to others. Murabahah, as a mode of financing, has become synonymous with facility sale of goods by the Banks. As such, almost all kinds of businesses, including those providing services (hotels & hospitals, e.g.) may be the target for Murabahah facilities for their tangible assets or inventory. Diminishing Musharakah Diminishing Musharakah (DM) is a form of co-ownership in which two or more people share the ownership of a tangible asset in an agreed proportion and one of the co-owners undertakes to buy in periodic installments the proportionate share of the other co-owner until the title to such tangible asset is completely transferred to the purchasing co-owner. Diminishing Musharakah can be created only in tangible assets. It shall be limited to the specified Asset(s) and not to the whole enterprise or business. Proportionate share of each co-owner must be known and defined in terms of investment. There will be an undertaking by one of the co owners to the effect to purchase the units of other co-owner at a mutually agreed price until the entire ownership of the asset is transferred to the purchasing co owner. Additionally, an undertaking shall be given by the other owner to the effect that he will sell the units owned by him to the first co-owner in the event the latter desires to purchase the units earlier than the agreed schedule on such price as may be mutually agreed. Also rental agreement is in place with customer enabling bank to collect the rental on bank s rented share to customer. Ijarah Ijarah refers to a transaction where the corpus of leased assets remains in the ownership of the Lessor and the Lessee is allowed to benefit from the usefulness of these assets (i.e., their usufruct) for a consideration. Only those assets can be leased which can be used while retaining their original form, e.g., land, building, machinery, tools, crockery & cutlery. During the entire term of the lease, the Lessor must retain title to the assets, and bear all risks and rewards pertaining to ownership. However, if any damage or loss is caused to the leased assets due to the fault or negligence of the Lessee, the consequences thereof shall be borne by the Lessee. The consequences arising from non-customary use of the asset without mutual agreement will also be borne by the Lessee. The Lessee is also responsible for all risks and consequences in relation to third party liability, arising from or incidental to operation or use of the leased assets. The insurance/takaful of the leased asset preferably are in the name of Lessor and the cost of such insurance/takaful borne by him. The amount of rental must be agreed in advance in an unambiguous manner either for the full term of the lease or for a specific period in absolute terms.

6 Mudaraba Mudaraba means an arrangement in which a person participates with his money (called Rabbulmal) and another with his efforts (called Mudarib) for sharing in profit from investment of these funds in an agreed manner. A Mudarib may be a natural person, a group of persons, a legal entity or a corporate body. The profit shall be divided in strict proportion agreed at the time of contract and no party shall be entitled to a predetermined amount of return or remuneration. Financial losses of the Mudaraba shall be borne solely by the Rabbulmal; unless it is proved that the Mudarib has been guilty of fraud, negligence or willful misconduct or has acted in contravention of the mandate. The Mudarib can invest his funds in the business of the Mudaraba with the permission of Rabbulmal. The condition is that in such situation, the Rabbulmal shall not be entitled to a proportion of profit in excess of the ratio that his investment bears to the total investment of the enterprise. The loss, if any, shall be shared in proportion to the Capital of the parties. The amount of Mudaraba investment standing to the facility of Rabbulmal on the culmination or termination of Mudaraba arrangement shall be undertaken to be discharged by the Mudarib. Istisna Istisna is a mode of sale, at an agreed price, whereby the buyer places an order to manufacture, assemble or construct, or Cause so to do anything to be delivered at a future date. Price of the goods to be manufactured must be fixed in absolute and unambiguous terms. The agreed price may be paid in lump sum or in installments in the matter mutually agreed by the parties. Unless otherwise mutually agreed, any party may cancel the contract unilaterally if the seller has not incurred any direct or indirect cost in relation thereto. If goods manufactured conform to the specifications agreed between the parties, the purchaser cannot decline to accept them except if there is an obvious defect in such goods. However, the agreement can stipulate that if the delivery is not made within the mutually agreed time period, then the buyer can refuse to accept the goods. The IBOP IBD (buyer in Istisna) can enter into a Parallel Istisna contract without any condition or linkage with the original Istisna contract. In one of them, the BOP IBD will be the buyer and in the second the seller. Each of the two contracts shall be independent of the other. They cannot be tied up in a manner that the rights and obligations of one contract are dependent on the rights and obligations of the parallel contract. Further, Parallel Istisna is allowed with a third party only. In Istisna transactions the buyer shall not, before taking possession (actual or constructive) of the goods sell or transfer ownership in the goods to any other person. If the seller fails to deliver the goods within the stipulated period, the price of the commodity can be reduced by a specified amount per day as per the agreement. Also Murabahah can be done instead of parallel Istisna. Letter of Credit (LC) through Murabahah LC is one of the most widely used modes of settling trade debts on an international level. Also, it is a convenient method for obtaining short-term financial accommodation from banks by the customers. The concept of documentary letter of facility is to provide comfort and protection to suppliers / exporters, in respect of payment of the good supplied to the importers, by

7 providing written assurance to pay the specified amount, in the original currency, upon conformity / acceptability of the documents. It is pertinent to mention that the payment is guaranteed upon fulfillment of certain terms and conditions and submission of desired documents under Uniform Customs and Practices (UCP) 600 {The Uniform Customs and Practice for Documentary Facility (UCP) is a set of rules on the issuance and use of Letters of Facility. It provides all the important aspects and definition of terms used in documentary operations in foreign trade}. The documentary letter of facility is deemed to be irrevocable unless specially marked as Revocable. Irrevocable documentary LCs may not be amended or cancelled without the agreement of all the parties involved. LCs, in general should not exceed 90 days. In Case of any exception, the facility should be adequately collateralized and/or sources of retirement should be properly identified. Reference to UCP 600 is to be made for details on types of LCs. SME SEGMENTS AND SECTORS COVERED BY THE BANK The Bank of Punjab covers all sectors and SME business concerns. (Disclaimer: Facility approval is subject to terms and conditions based on Bank s risk assessment of application). IDENTIFICATION OF REGIONS FOR TARGETING SMES All potential business hubs/ Wholesale and Trade markets across Pakistan fall under SME criteria will be targeted. SME FINANCING DOWNLOADABLE FORMS (URDU AND ENGLISH) Already available on BOP web site under SME section, same are to be attached: ELIGIBILITY CRITERIA FOR FINANCING ELIGIBILITY CRITERIA FOR SME CLIENTS Stated below are the minimum parameters for prospective borrowers that meet the minimum criterion of qualifying for obtaining financing from our SME division. Please note that these requirements only represent a reasonable benchmark for eligibility and their fulfillment does not guarantee approval of finance. Bank on its discretion can vary these benchmarks on case to case basis as per its internal policies and holds the final right to accept/reject a loan application.

8 ELIGIBILITY CRITERIA: Age of Business & Experience of Key Decision Maker Min 3 years Purpose of Loan -Facility shall be availed to meet business needs only. -Clear and precise intended fund utilization needs to be in place from the borrower. e-cib Status Clean credit history for the last 12 months, no write-off or litigation in past with any bank Market Check Supplier Checking Positive feedback from suppliers. Positive feedback from buyers. Buyer Checking No Negative feedback. General Market Check Collateral Requirement Yes. The exact requirement will vary on case to case basis STEP WISE PROCESS/PROCEDURE OF FINANCING HOW TO APPLY /REQUIRED DOCUMENTS: PROPRIETORSHIP CONCERN: CNIC copy of proprietor. Request for credit facility on letter head. Basic borrower fact sheet duly signed & stamped on each page by proprietor. Sole Proprietorship Declaration. Personal net worth statement of Proprietor. Last three years financial statements signed by Proprietor. Company Profile. Latest stock report. Latest ageing of receivables. Last six-month bank statement with other banks.

9 PARTNERSHIP CONCERN: CNIC copy of all partners. Request for credit facility on Letter head. Basic borrower fact sheet duly signed & stamped on each page by authorized signatories. Personal net worth Statement of all partners. Last three years Financial Statements signed by authorized signatories. Company profile. Latest stock report. Latest ageing of receivables. Last six-month bank statement with other banks. PRIVATE LIMITED COMPANY: CNIC copy of all directors. Request for credit facility on Letter head. Basic borrower fact sheet duly signed & stamped on each page by authorized signatories. Board resolution. Form A Latest form 29, Memorandum of association (MOA) & Article of association (AOA). Certificate of Incorporation (COI). Personal net worth statement of all directors. Last three years financial statements signed by authorized signatories. Company profile. Latest stock report. Latest ageing of receivables. Last six-month bank statement with other banks. SME FREQUENTLY ASKED QUESTIONS (CLARIFYING THE USER QUERIES) FAQS RELATED TO FINANCING Who can avail financing from BOP? Any individual( should be aged 18 years and above) or business concern (Manufacturing,Trading & Service sectors) and it can be an Individual/ Sole proprietor / Association of persons(aop)/ Partnership concern and all other legal entities

10 What kind of security does the bank require from the applicant/borrower? Residential/Commercial/Industrial property Hypothecation of Stocks,Receivables,Plant & Machinery LCY/FCY Deposits Personal Guarantee of Sponsors / Mortgagors / Others Any other security acceptable to bank 3. What is the minimum length of experience required in same line of business? At least 03 years, however new entities are considered on case to case basis 4. What are the documents required to apply for financing facility? Initial documents to be obtained as per the constitution type of the borrower and type of loan which may include Duly signed Request letter/ loan application form Attested copies of property documents Complete business profile Attested copies of CNICs of sponsors (individual, proprietors,partners or directors) Last Three years financials Board Resolution of company Proof of Income /business NTN Certificate Projected Cash Flows Any other documents may be required at the time of processing of loan 5. Can a Finance facility be transferred/swap from other Bank? Yes, subject to fulfillment of BOP s criteria 6. How long does it take to process a loan application?

11 After submission of required complete documents/information, it will usually take between 25 to 30 working days 7. What is the pricing for the facilities & Charity? Market competitive pricing will be offered. However Charity is deducted on the late/delayed payments as per undertaking from the customer. 8. For Submission of application for obtaining Finance facility, where should I visit? Visit any nearest BOP-Taqwa branch where our Branch Manager/Relationship Manager will assist you in this regard. CONTACT US: TAQWA Islamic Banking Division 17-A, Ali Block, New Garden Town, Lahore. Tel : ibd@bop.com.pk Shariah Compliance Department 17 A, Ali Block, New Garden Town, Lahore. Tel : ibd@bop.com.pk

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