In a bid to boost support for the Small and Medium Enterprises (SME) sector in Pakistan and strengthen their credit card portfolio, Muslim Commercial Bank (MCB) have launched the country’s first SME credit card. The launch was announced on December 6 last year, and the cards are expected to make their way into customers’ hands by the end of March. Given that liquidity is considered to be the predominant obstacle inhibiting the growth of SMEs, this card aims to provide convenient access to working capital for small businesses. Furthermore, the documentation requirements to obtain it are basic, and most importantly, the cost of borrowing funds is substantially lower compared to bank loans.
Explaining the drive behind the launch of this card, Muhammad Hassan Tariq, Head of Products & Sales Support, Retail Banking Group, MCB, says: “MCB wanted to bring a transactional revolution to the financial sector. Acquiring a bank loan is a tough task. You need to have collateral to offer as security, something which most SMEs have issues in arranging. MCB is offering aspiring entrepreneurs collateral-free credit through SME card.”
MCB’s decision to develop a specially-customised financial product of this nature for SMEs is not surprising. A quick industry review reveals that SMEs are an integral part of Pakistan’s economy. They constitute nearly 90% of all new enterprises, employ 80% of the non-agricultural labour force, and their share of GDP is approximately 40% (source: Small and Medium Enterprises Development Authority ([SMEDA]). On top of this, considering that various banks have extended approximately Rs 300 billion to SMEs in loans, MCB's zero borrowing cost product (provided timely payments are made) and easy access financing through the SME card has come at an opportune time. According to SMEDA estimates, the credit extended to SMEs accounts for only 19% of Pakistan's total credit. This is therefore a huge opportunity for MCB.
"MCB is offering aspiring entrepreneurs collateral-free credit through SME card."
MCB have made their card a close-loop card, meaning that it can only be used at dedicated point-of-sale (POS) machines at the bank’s partner vendors. In the initial phase, the cards will be operational only at Metro stores (one of the country’s biggest chain of cash and carry wholesale stores) throughout Pakistan.
According to Tariq, this restriction is to protect the interests of both the bank and the cardholders. He says that “banks run on shareholders’ and depositors’ money and the State Bank of Pakistan (SBP) does not allow any financial product in the market that puts capital at high risk. The card has a withdrawal limit of five million rupees, therefore it is important that the loan is used by the owner for the purpose it is given for and that the card cannot be used if stolen or compromised.”
As the card can only be used at dedicated POS at Metro stores, this minimises (if not eliminates) the risk of misuse by the cardholder. Given that the card allows cash withdrawals of up to five million rupees, ensuring transactional security was a paramount concern, which is why the design of the card is such that it cannot be used for internet shopping or for any other retail transaction. Taking things a step further, the user has to use the right PIN code to withdraw funds and the card has a photograph of the cardholder on it. Furthermore, at the POS at Metro outlets, the identity of the owner and the signature is verified before allowing him/her to use the card.
Although the target audience comprises the entire SME sector, in the first phase, only businesses operating in the HORECA segment (hotels, restaurants and caterers) for more than two years will be eligible to use the card’s credit facility. The bank’s rationale for focusing on the HORECA segment is that the cash-flow cycle is very swift in this category (the bulk of the inventory purchases constitutes perishable items) which in turn means that the loan pay-off will be quick, further reducing the bank’s risk of unrecoverable debts.
Tariq says that apart from security, the other concern that had to be addressed was customer facilitation and this is being achieved in two ways; firstly, by reducing the cost of acquiring the card and secondly, by minimising the hassle of applying for and securing a bank loan.
Customers can apply for the card at a nominal cost of Rs 1,000 by visiting any MCB branch in Karachi, Lahore, Islamabad and Faisalabad (the cities where Metro has a presence); the application turnaround time is a maximum of 30 days. According to Tariq: “We don’t require a lot of paperwork; applying for the SME card works like a simple credit card application.” Documentation requirements only include a personal bank statement, an audited statement of the business and personal financial guarantees from the owners and directors of the company.
The credit limit extended to each customer depends on the SME’s buying patterns, both in terms of value and volume. To keep the payment mechanism as simple as possible, the card is based on what Tariq describes as a “monthly utilisation-monthly settlement” model. This means that customers will be billed every month for the amount of credit they have used, which they will have to pay within 22 days from the billing date if they want to benefit from the zero cost facility.
Given the zero percent interest charge, Tariq says the bank’s revenue stream will be secured by virtue of the fact that on every card transaction made at Metro, MCB receives a fixed percentage return. However, he is quick to point out that MCB’s aim is not profit maximisation. “The goal is to ensure that entrepreneurs enjoy a smooth cash flow. Also, if you pioneer something in the banking industry, it automatically generates a lot of consumer and corporate interest, especially if it directly benefits the public and you get more brownie points for that.”
Despite the fact that the SME card has been launched after three years of extensive R&D by MCB and approved after two years of scrutiny by the SBP, there is still one challenge that the SME card programme faces and that is the fact that the segment they are dealing with is a highly undocumented one. As Tariq says: “In most case the applicants do not have the paperwork that we require from them mainly because most small businesses do not come under the tax net and are often not registered as commercial enterprises.”
Other than this hindrance, Tariq is of the view that sky is literally the limit for the card, and the initial market response corroborates this. Despite the fact that the bank has not invested extensively in advertising, the interest from the business community has been considerable.
The decision to stay away from conventional ATL promotions was deliberate, because Tariq believes “if we opt for conventional marketing, we will set off unnecessary queries which will flood our call centres. Instead, we will be organising customer orientation sessions at Metro outlets to maximise the penetration of our product to the right customer base.”