LAHORE (PR) - Karandaaz Pakistan, under its third round of Innovation Challenge Fund (ICF), has signed an agreement with Allied Bank Limited (ABL) to support the bank for developing an innovative, cash-flow based, credit scoring model for small and medium enterprises (SMEs). During this annual challenge, Karandaaz had invited ideas from entities interested in developing and testing innovative credit scoring models for SME lending in the country.

ABL, the fifth largest bank of Pakistan with ‘AAA’ rating assigned by PACRA, will use this support, including risk sharing, from Karandaaz to design and test its innovative method of calculating credit scores for SME obligors looking to avail credit facility from the bank.

Currently, banks approach assessing credit risk for lending to small and medium sized businesses based on collateral. Although SMEs accounts for 30 percent of GDP, generate 78 percent of non-agri employment, and contribute 25 percent of manufactured goods exports, their ability to access finance suffers due to collateral related impediments. As procedures and requirements for SME financing remain complex, time-consuming, and costly, the SMEs end up relying on their own resources or informal financial service providers to meet their financing needs. The innovative idea emerging from the collaboration between Karandaaz and ABL will disrupt the status quo for assessing credit needs and risks of SMEs and help lead the industry to break away from the conventional, collateral-based model presently used.