In May 2018, almost two months before the July elections and more than three years ago, PTI had revealed a comprehensive agenda for its first 100 days in office. These plans promised to usher in policies that will help businesses add 10 million jobs in five years.
Technical and Vocational Education & Training for the youth of Pakistan was part of the deal. These ideas materialized in Kamyab Jawan Program (KJP) under a young PTI leader from Sialkot: Usman Dar.
Youth Entrepreneurship Scheme (YES), as part of the Kamyab Jawan program, to offer credit to young men and women with ideas was officially announced in 2019 – but then came the hurdle of complex negotiations with the banking sector.
Nothing like that – at least on this scale and with such ambition – was ever put into operation before. On May 25th, 2021, two months ago, Prime Minister Imran Khan finally announced details.
The government, in its budget for FY: 2021-22, has put aside Rs. 100 billion for the Kamyab Jawan Program. It includes funds for youth to support “startup ideas” to promote entrepreneurship in the country.
Impact of Rs. 100 billion from the government will be multiplied manifold as commercial banks are part of the scheme. Govt funds will only subsidize cheap loans – on markup below KIBOR – offered by the banks.
Operationally banks will implement the plan and will be responsible for due diligence. And this is what promises results. “YES” as the abbreviation of Youth Entrepreneurship Scheme sounds magical – and those who carved the term must have understood that words inspire.
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The fundamental goal of YES is to give young Pakistanis with good ideas money to turn their ideas into reality and to convince them and the world that YES turning around a nation is possible – when there is sincerity. Supporting existing micro and small business enterprises is part of the scheme.
To incentivize women-led startups, 25 percent of the loans are aimed at women entrepreneurs in the country. The government had initially planned YES to be implemented by state institutions like the National Bank of Pakistan, Bank of Khyber, and Bank of Punjab.
But YES attracted commercial banks who approached the State Bank of Pakistan, showing their willingness to participate in the scheme. Now, most of the country’s major banks have said yes to “YES” – multiplying its reach and impact manifold.
According to UNDP, Pakistan’s median age is 22.8, which is very young compared to other countries, even in the region, and 64 percent of Pakistan’s population is under 30. PM Imran Khan has often spoken on creating employment opportunities for the youth to save the country from chaos and brain drain.
According to Usman Dar, Special Adviser to the Prime Minister on Youth Affairs, around 10,000 businesses have already been launched with the disbursement of around Rs. 9 billion under the “YES” – sending a positive message of hope across the country.
Types of YES loans
According to the YES program, there exist three kinds of loans. Tier-1 loans are within a range of Rs. 100,000 to Rs.1 million, Tier-2 loans would be from Rs.1 million to Rs.10 million, and lastly, Tier-3 loans offer a range of Rs.10 million to Rs.25 million. JS Bank is one of the banks that has partnered with the government to provide these loans.
Ms. Nafas Nauman, JS Bank’s Product Head Social Loans while speaking with GVS, explained that Tier-1 loans would not need any collateral/security; however, these loans do require equity of around 10 percent, except for JS Bank loans distributed to Careem vendors where 20 percent equity is being applied.
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Ms. Nafas explained that Careem is one of the most significant partners that have been onboarded with a sizeable portfolio and to ensure that a clean portfolio from this one group, the bank had kept a higher equity contribution and equal opportunity was given to other partners as well.
She further added that the government is now thinking of expanding the ambit of the Tier-1 loans to give access to even smaller micro-businesses. Such small businesses may only be looking for credits of Rs.50,000. On the upper end of the spectrum, the government may increase Tier-1 loans.
JS bank, Ms. Nafas explains, is focused on Tier-1 individuals and small businesses. Tier-2 and Tier-3 tiers are focused on bigger well-established businesses. These YES loans will be for eight years with a grace period of one year.
To help banks with their NPL concerns, Ms. Nauman explained that the government is taking up 50 percent of risk coverage in Tier-1 loans from the funds it has kept in the budget. It essentially means that the government will reimburse the banks 50 percent of any defaulted principal amount in Tier-1.
The government has given different risk coverage on the different tiers; on Tier-2, they will cover 20%, and in Tier-3, only 10%. It explains why such a scheme could not have taken off without this well-thought-out government support to the banking sector. The devil lies in the detail, and here this phrase makes perfect sense.
As mentioned above, small existing businesses can benefit from YES too. According to the government website, existing businesses are not required to have an equity contribution under Tier 1.
In case of a new business, borrowing from the bank, the borrower would have to give some equity, this contribution of equity would be in the form of cash (in Tier-1), and in the cases of Tier-2 and Tier-3, these will be secured loans as per banking practices.
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The debt-to-equity ratio for a Tier-1 borrower would be 90:10, with a 3 percent markup. For Tier-2 borrowers, the debt-to-equity ratio would be 80:20 with a 4 percent markup. For the Tier-3 borrower, it would be 80:20 again, with a 5 percent markup.
YES loans: Who & who can apply?
All men and women holding CNIC, aged between 21 and 45, with entrepreneurial potential are eligible. For IT/e-commerce-related businesses, the minimum age limit is set at 18. However, it is worth mentioning that for the IT/e-commerce-related businesses, the entrepreneur must have at least acquired matriculation or any other equivalent level of education.
To reach out to even more people, the government is currently mulling over increasing the upper age limit – which might benefit struggling businesses in Tier-2 and Tier-3 and those who started late with entrepreneurship ideas in a country where middle classes have historically believed in salaried jobs.
Small and medium enterprises (startups and existing businesses) as per the definition of SBP and owned by youth as per the above-mentioned age brackets are also eligible. According to the State Bank of Pakistan, small enterprises are those whose employees constitute a maximum of 50 people, including contractual employees.
The maximum annual revenue must be Rs. 150 million. A medium enterprise, according to SBP, is one where the number of employees in Manufacturing & Services can be 51-250 (including contractual employees), and in trading, businesses can be 51-100 (including contractual employees). The annual sales turnover for a medium-sized enterprise must be above Rs.150 million and up to Rs. 800 million.
Challenges of illiteracy: How SMEDA and JS Bank are making a difference?
One of the first and foremost requirements of borrowing money under the Youth Entrepreneurship Scheme (YES) is that businesses and startups must have their feasibilities, business plans, financial models ready.
This is a troubling aspect for most startups, especially small entrepreneurs who are not well versed in finance and do not have access to this know-how and would be left behind from the initial distribution of funds.
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To tackle this, the Small and Medium Enterprise Development Authority (SMEDA) has some basic Urdu templates on its website. However, looking at it from the perspective of a layman starting a business without financial knowledge, it is still challenging to understand and is cumbersome for the borrowers.
Ms. Nauman conceded that there is still a considerable gap in the financial literacy of the borrowers and that training and development is very important for borrowers, and thus one should be well versed in financial jargon and understand the financial goals of the startup/business.
To counter this financial illiteracy JS Bank is working with partners like Careem and Foodpanda to equip the individual borrower with the basic knowledge of what the loan is and even how to use the loan properly.
For loans bigger than Rs.15 million, the bank expects borrowers to present audited financials. This is to mitigate risk and make a rational decision about the company with greater knowledge.
In the case of a startup, they like to know about the borrower’s business profiles, their turnover, any series investment or crowdfunding, and lastly, the business model, as they serve as a reliable source of information for risk assessment.
The program’s scope is significant for the success of YES, as not every loan is expected to lead to successful business development. Ms. Nauman explained, to GVS, that JS bank has targeted to disburse around Rs 4.4 billion by December 31st, 2021 to this portfolio, and already Rs 1.5 billion in loans have been disbursed to small businesses.
One major problem that can occur with any program that involves borrowing from banks is the pre-requisite of the borrower’s financial standing. Thus the question arises whether the banks would be lending more to the businesses who need acceleration rather than a startup that may just have an idea.
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To clear this, Ms. Nafas Nauman from the JS bank said that there is no discrimination policy. In fact, she added to level out the playing field; the government has already given out a grace period of one year at the beginning where the startups are exempt from paying anything back to the bank.
Similarly, there is an option for startups who have an idea and need help to get the startup running; the banks would be providing them with the working capital based on their feasibility, credibility, and business model.
Real Challenge for YES: Outreach to public that needs it
The biggest challenge for the PTI government is to increase the outreach of the program – making it possible to help that section of the public that needs it. According to Ms. Nauman, JS bank can best do it by partnering with companies like Foodpanda and Careem.
These are “business-to-consumer startups” and have high outreach into the lower sector of the economy and relate to small-sized entrepreneurs. JS Bank has partnered with Foodpanda to provide financing to existing Home Chefs and Restaurants of Pakistan on the Foodpanda panel.
Another way is marketing to the mass public and raise awareness of the program. However, Ms. Nauman said that JS Bank is currently not doing any mass marketing of this project because it is a pre-defined product and is being marketed through the State Bank of Pakistan.
Instead, the bank is highlighting the positive outcomes of the scheme via testimonials of the businesses and individuals whose lives have been uplifted due to this. Ms. Nafas said that marketing and sales were two important elements to the project’s success to make sure that it reached out to all the sectors of the economy.
JS Bank has set up two direct sales teams for specifically disbursing these loans with this idea in mind. Furthermore, to meet the year-end target for disbursement, JS Bank incentivizes its Regional Sales Managers and Relationship Managers who deal with these applications.
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One major problem that can occur with any program that involves borrowing from banks is the pre-requisite of the borrower’s financial standing. Thus the question arises that whether the banks would be lending more to the businesses who need acceleration rather than a startup that may just have an idea.
To clear this, Ms. Nafas Nauman from the JS bank said that there is no discrimination policy. In fact, she added to level out the playing field; the government has already given out a grace period of one year at the beginning where the startups are exempt from paying anything back to the bank.
If successful in its outreach, the YES program initiated by PM Imran Khan will be an incentive for unemployed youth to start their businesses, which by extension could become significant contributors to Pakistan’s economic growth and development.