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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.

Speaking about the partnership, Mr. Tahir Hassan Qureshi, CEO Allied Bank said, “Allied Bank Limited, with its extensive outreach of over 1,300 branches across the country aims to be the first bank of choice for customers. Simultaneously we have undertaken various initiatives to provide high-tech innovative solutions to meet customers’ requirements and create sustainable value through quality growth, efficiency and diversity for all stakeholders. Being a socially responsible institution, ABL has always endeavoured to play a proactive role in contributing towards the economy and society. We are confident that the success of this innovative credit scoring model will add value to our modelling capabilities. The associated learnings would also benefit the overall banking industry and SME financing landscape in the country.”

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Speaking about the collaboration, Ali Sarfraz, CEO Karandaaz said, “We are confident that the funding from Karandaaz to Allied Bank will help the bank pursue the agenda of disruption and innovation in financial sector and develop a model of innovative credit scoring that favours SME lending. Karandaaz is committed to the financial inclusion of small and medium enterprises and we can see that this round of Karandaaz Innovation Challenge Fund has motivated innovators to look beyond the obvious and come up with credit scoring ideas that suit small and medium sized entrepreneurs. Small and medium sized businesses must be provided an environment where access to finance through formal channels is easy for them so that they grow, create more jobs, and benefit the overall economy.”

Karandaaz Pakistan is supporting small and medium entrepreneurs by: increasing access to finance for unbanked populations by leveraging digital technologies, developing and disseminating evidence based insights, and encouraging innovation in financial space. Karandaaz has been funded by UK’s Department for International Development (DFID) and the Bill & Melinda Gates Foundation.

Amongst other attending the signing ceremony were Ms. Aban Haq, Head of Innovation at Karandaaz, Mr. Aizid Gill, Chief Risk Officer, Allied Bank, Mr. Shahid Amir, Chief Commercial & Retail Banking Group, North, Allied Bank and other senior team members of Allied Bank from Business and Risk Management. 

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