NBFC’s play a pivotal role in mobilizing savings in the Pakistani financial system accepting term deposits of differing maturities and providing financing to a variety of sectors of the economy, with SMEs and consumer being the areas of especial focus. Parallel to the broader banking sector, in the early 1990’s, the financing activities of these institutions registered healthy growth under the market reforms instituted. In 2000 NBFC’s were able to report Prs.351.7 billion in assets ($6.1 billion equivalent) and Prs.93.3 billion in public deposits ($1.6 billion). During this period NBFCs in Pakistan underwent a significant shakeout due to a program of comprehensive financial sector reform which included: - liberalization of the foreign exchange market and interest rates; - increased autonomy to the central bank and its focus on monetary policy and banking supervision; - establishment of an independent regulatory department at Securities & Exchange Commission of Pakistan (SECP) for capital markets and NBFCs; - upgrading of legal and regulatory frameworks; - reduction of NPLs in the banking sector, and - restructuring of government-owned financial institutions. Recognizing the role that NBFC’s play in mobilization of long-term savings and sustainable investment in Pakistan, IFC intends to use this project to support the business development of a select group of NBFCs. The provision of long-term local currency funding will enable these NBFC’s to offer improved access to financial services for SMEs, and in turn support a key growth sector of the Pakistan economy.

The proposed investment will be structured as a local currency credit line, partially guaranteed by IFC. The credit line is expected to be between $30-50 million, with a tenor of 5-7 years, including up to a 2 year grace period. Since no hedging mechanism is available and the revenues of the selected companies are denominated in Pakistani Rupees, a funded US dollar line is not desirable. Hence the proposed structure of an IFC guarantee facility is more appropriate for the clients. Against IFC’s guarantee, one or two commercial banks will extend Pakistan Rupee loans to the NBFCs. IFC’s guarantee fee shall be denominated and paid in either US dollars or local currency. IFC has initiated discussions with local banks for local currency lending against IFC’s guarantee.

35.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee	35.0
Loan	0.0
Equity

* These investment figures are indicative

The project involves multiple NBFIs located in various cities in Pakistan, including Karachi, Lahore and Islamabad.

This is an FI Type 1 project. The borrower will be required to develop an environmental management system. The borrowers must require that investments under relevant operations meet host country environmental, health and safety requirements. IFC will assess the borrower''s capacity for environmental review and will provide training as necessary.
Location of environmental documents in locally affected community

Foreign investment in Pakistan has been negatively impacted by recent tension in the region. Through the facility, IFC will play a catalytic role in supporting the SME sector and evolution of a few selected NBFCs. IFC’s participation will attract the participation of major commercial banks to lend on a longer tenor to NBFCs. It will also create a new source of medium term funding for selected NBFCs. IFC’s role in this project is: - to encourage Pakistan NBFC’s to expand lending to SME’s and - extend the term funding available to NBFCs to 5-7 years as against the 2-3 year funds that are currently available to them. Local banks remain risk averse for longer maturity lending, especially for leasing companies which are operating in a highly competitive environment.