The State Bank of Pakistan (SBP) has proposed performance-based incentives for banks and exchange companies to boost remittance inflows through formal banking channels.
According to sources, during a recent Economic Coordination Committee (ECC) meeting, the SBP’s deputy governor emphasized the need to shift from the current transaction-based incentives to a performance-driven approach.
Previously, banks received 30 Saudi Riyal (SAR) for every $100 transaction. The SBP now proposes reducing this base incentive to 20 SAR per $100 transaction.
Additionally, banks would receive an extra 8 SAR per incremental transaction if they achieve a growth of up to 10% or $100 million compared to the previous year, whichever is lower. For growth beyond 10% or $100 million, a further 7 SAR would be provided.
Concerns were raised during the meeting about whether a cost-benefit analysis had been performed, as the scheme could have significant financial consequences for the government.
The SBP clarified that the existing scheme has successfully increased remittance inflows, bringing in nearly $30 billion annually. The proposed reduction in the base rate from 30 SAR to 20 SAR would also reduce the government’s overall Telegraphic Transfer (TT) charges.
The SBP also outlined additional proposed revisions for exchange companies.
The Finance Division informed the committee that the government, through the SBP and the Pakistan Remittance Initiative (PRI), has introduced various schemes to promote remittances via formal channels. These schemes were revised in 2023, resulting in steady growth in remittances. In FY 2024, remittances saw a 10.7% year-on-year increase, totalling $30.3 billion, compared to $27.3 billion in FY 2023.
SBP has proposed further revisions to two Home Remittance Incentive Schemes, which were originally approved by the ECC/Cabinet and now require ECC approval for the proposed updates.
Reimbursement of TT Charges
This scheme, introduced in 1985, aims to provide remittance transactions at zero cost for both senders and receivers in Pakistan for transactions exceeding $100. Banks and financial institutions involved receive a uniform incentive for eligible transactions.
The incentive rate was raised to 30 SAR last year, leading to positive growth in remittances. Now, SBP proposes splitting the flat 30 SAR reimbursement into fixed and variable components.
The fixed component would provide 20 SAR for all eligible transactions over $100. The variable component would offer an additional 8 SAR per incremental transaction for growth up to 10% or $100 million, whichever is lower. For growth exceeding 10% or $100 million, an additional 7 SAR would be provided.
Banks achieving higher remittance inflows could earn up to 35 SAR per transaction, with performance reviewed monthly and adjustments made in the last quarter of the financial year.
SBP believes these changes will encourage banks to drive remittance inflows while potentially reducing the government’s TT charges.
Incentive Scheme for Exchange Companies
Introduced in 2022, this scheme incentivizes exchange companies (EC) to surrender 100% of their foreign exchange to the interbank market.
Currently, exchange companies receive Rs1 per USD mobilized. The SBP proposes increasing the base rate to Rs2 per USD surrendered to SBP-designated banks. A variable component would also be introduced, offering Rs3 per USD for incremental remittances up to 5% or $25 million, whichever is lower, and Rs4 per USD for growth beyond 5% or $25 million.
Payments would be based on surrendering foreign exchange in line with SBP’s prescribed percentages, with performance evaluated monthly and adjustments made in the last quarter of the financial year.
SBP argues that these revisions will incentivize exchange companies to mobilize more remittances and help offset their increased operating costs.
ECC Approval
The ECC reviewed the Finance Division’s summary on the “Proposal for Revision in Home Remittances Incentive Schemes” and approved SBP’s proposed changes to both the TT Charges Scheme and the Incentive Scheme for Exchange Companies.