PTBP Web Desk

The State Bank of Pakistan (SBP) has implemented a revised incentive structure to enhance the flow of home remittances, a critical component of the country’s economy. The new structure targets both banks and Exchange Companies (ECs) by offering fixed and variable incentives aimed at motivating these financial institutions to increase remittance inflows through formal channels. These changes are set to take effect on October 1, 2024.

Home remittances, sent by millions of expatriate Pakistanis, are a vital source of income for many families and contribute significantly to economic growth. Recognizing this, the SBP, in collaboration with the Government of Pakistan, has consistently introduced policy initiatives to encourage the use of formal remittance channels. The revamped incentive structure is the latest effort in this regard, designed to further boost the inflow of funds and support the economy.

Under the new system, both banks and exchange companies will receive fixed incentives to encourage their efforts in bringing remittances through formal means. Specifically, Exchange Companies will now receive PKR 2 for every USD of remittances surrendered to SBP-designated banks, an increase from the previous rate of PKR 1 per USD. This incentive aims to enhance the efforts of Exchange Companies in mobilizing remittances.

For banks, also known as Authorized Dealers (ADs), a reimbursement of SAR 20 will be provided for all eligible home remittance transactions of USD 100 or more. This fixed incentive is designed to encourage banks to actively pursue remittance inflows, ensuring that these funds are brought into the country through formal channels.

In addition to fixed incentives, SBP has also introduced variable incentives for both banks and Exchange Companies. These incentives are designed to reward institutions that demonstrate growth in home remittances compared to the previous year.

For banks and microfinance banks (MFBs), the SBP will offer an additional reimbursement of SAR 8 per incremental eligible transaction for up to 10% growth or USD 100 million in home remittances, whichever is lower. For growth exceeding 10% or USD 100 million, the banks will receive SAR 7 per incremental transaction. This structure encourages banks to aim for higher remittance inflows by providing more rewards for substantial growth.

Similarly, Exchange Companies will benefit from a variable incentive based on their performance. Under this system, ECs will receive PKR 3 for each incremental USD surrendered to SBP-designated banks if the growth in remittances is up to 5% or USD 25 million, whichever is lower, compared to the previous year. For growth exceeding 5% or USD 25 million, the incentive increases to PKR 4 per incremental USD. This dual-incentive system is designed to motivate Exchange Companies to surpass their previous year’s remittance figures and contribute to the overall increase in remittance inflows.

The performance of both banks and Exchange Companies will be evaluated by the SBP on a monthly basis. The incentives will be paid accordingly, ensuring that institutions are rewarded promptly for their efforts in bringing remittances into the country. In cases where adjustments are necessary, these will be made on a consolidated basis during the final quarter of the fiscal year.

The SBP’s continuous evaluation of these financial institutions ensures transparency and accountability in the remittance process. This performance-based incentive structure is expected to boost competition among banks and Exchange Companies, ultimately resulting in higher remittance inflows through formal channels.

Home remittances play a pivotal role in Pakistan’s economy, providing much-needed foreign exchange reserves and supporting families across the country. With the rise of informal remittance channels, which bypass formal financial institutions, the government and SBP have been working to encourage more Pakistanis living abroad to use official channels to send money home.

This new incentive structure not only helps banks and Exchange Companies by rewarding them for their efforts but also benefits the economy by ensuring that more funds are transmitted through legal and formal pathways. By incentivizing higher remittance inflows, the SBP aims to strengthen the country’s foreign exchange reserves, stabilize the currency, and promote financial inclusion.

The SBP, in collaboration with the Government of Pakistan, has a long-standing commitment to improving the country’s financial infrastructure and fostering economic growth. Various initiatives have been introduced in recent years to streamline the remittance process, making it easier, faster, and more affordable for Pakistanis living abroad to send money home.

The revamping of the incentive structure is a continuation of these efforts, aimed at maximizing the potential of the financial sector to support remittance inflows. The government has also worked on improving financial literacy, making remittance channels more accessible, and reducing the costs associated with sending money through official channels.

This incentive scheme is a crucial step in ensuring that Pakistan continues to benefit from the billions of dollars sent home by expatriates every year. By rewarding banks and Exchange Companies for their efforts, the SBP hopes to secure a larger portion of remittances through formal channels, which in turn will help stabilize the economy and promote long-term growth.

The new incentive scheme will take effect from October 1, 2024. While operational instructions related to the implementation of the incentive scheme will be communicated separately by the SBP, the changes are expected to have a significant positive impact on remittance inflows in the coming months.

As Pakistan continues to face economic challenges, measures like the revamped incentive structure for banks and Exchange Companies are essential for ensuring a stable and sustainable economic future. With the potential to attract higher remittance inflows, this initiative demonstrates the government’s commitment to strengthening the financial sector and supporting Pakistan’s long-term economic goals.