SBP Increases Incentives for Banks and Exchange Companies to Boost Remittances

SBP Enhances Incentives for Banks and Currency Exchange Companies to Boost Remittances

Pakistan’s central bank, the State Bank of Pakistan (SBP), has introduced significant incentives for banks and currency exchange companies to attract more remittances from overseas Pakistanis. These remittances are vital for financing imports and managing foreign debt payments.

Incentives for Exchange Companies

According to the SBP, starting from October 1, 2024, the base rate for exchange companies has been doubled from Rs1 to Rs2 for each US dollar deposited into the banking system. This move is designed to maintain strong remittance inflows.

The central bank also introduced performance-based incentives. Exchange companies will now be compensated Rs3 per incremental US dollar surrendered, for remittance growth of up to 5% or $25 million, whichever is lower, compared to the previous year. An additional Rs4 per dollar will be provided for growth exceeding 5% or $25 million. The SBP will review the performance of exchange companies on a monthly basis, and adjustments will be made by the end of the fiscal year.

Bank and MFB Incentives

In a separate notification, the SBP has incentivised authorised dealers (ADs), which include banks and microfinance banks (MFBs), to maximise their efforts to attract remittances. Under the new system, ADs and MFBs will be reimbursed SAR 20 for every eligible home remittance transaction of $100 or more. In addition, under the variable component, they will receive SAR 8 per transaction for growth in remittances of up to 10% or $100 million. For growth exceeding 10%, an extra SAR 7 will be provided per transaction.

Revised SME Financing Limits

The SBP has also revised financing limits for small and medium enterprises (SMEs). Small enterprises can now access financing of up to Rs100 million, while medium enterprises can secure loans up to Rs500 million. This adjustment is aimed at fostering business growth in Pakistan.

Banks and Development Financial Institutions (DFIs) can deduct the value of liquid assets, such as bank deposits and securities, from the exposure limits when calculating SME financing.

Remittance Growth in FY24

Zafar Paracha, Secretary General of the Exchange Companies Association of Pakistan (ECAP), stated that remittances grew by 11%, reaching $30.25 billion in FY24 compared to FY23. Inflows remained strong, averaging $3 billion per month in the first two months of FY25, compared to an average of $2.5 billion in FY24.

Exchange companies attracted $5 billion in remittances during FY24, up from $4.25 billion in FY23. Paracha added that if exchange companies were given incentives similar to those offered to banks, they could bring in even more remittances. Currently, banks receive Rs15-20 per dollar, while exchange companies receive Rs2.

Market Outlook

Market analysts expect remittance inflows to remain strong, projecting $3 billion for September 2024. These new incentives are anticipated to help stabilise Pakistan’s remittance inflows, which are crucial for the country’s economic stability.