The State Bank of Pakistan (SBP) has put forward a significant proposal to introduce performance based rewards for banks and exchange companies in a bid to encourage greater remittance inflows through formal banking channels. According to sources familiar with the matter, the proposal was discussed during a recent Economic Coordination Committee (ECC) meeting. The SBP deputy governor emphasized the need to shift from the current transaction-based incentives to a system that rewards performance, which could have a transformative impact on Pakistan’s remittance landscape.
At present, the incentive base rate stands at 30 Saudi Riyal (SAR) per $100 transaction. However, under the new performance-based rewards system, the SBP proposes to reduce the base incentive to 20 SAR per $100 transaction. Additionally, an extra reimbursement of 8 SAR would be provided for incremental growth of up to 10% or $100 million over the previous year, whichever is lower. For growth exceeding 10% or $100 million, a further reimbursement of 7 SAR would be offered.
During the meeting, concerns were raised about the potential financial implications for the national exchequer and whether a cost-benefit analysis had been conducted. However, the SBP clarified that this performance-based rewards system has been in place for several years and has been instrumental in boosting remittance inflows, which now total nearly $30 billion annually. The proposed reduction from 30 SAR to 20 SAR is also expected to reduce the government’s overall Telegraphic Transfer (TT) charges, further easing the financial burden.
Performance-Based Rewards are a key aspect of the proposed revisions affecting exchange companies, as explained by the SBP representative. The Finance Division informed the ECC that the government, through SBP and the Pakistan Remittance Initiative (PRI), has implemented a range of schemes aimed at encouraging remittance inflows through formal channels. These schemes have been periodically revised, with the most recent changes in 2023 resulting in consistent year-on-year growth in remittance inflows.
For FY 2024, remittance inflows grew by 10.7% year-on-year, reaching $30.3 billion compared to $27.3 billion in FY 2023. SBP has now proposed further revisions to two key Home Remittance Incentive Schemes, which were originally approved by the ECC and Cabinet but now require approval for the proposed changes.
Reimbursement of TT Charges Scheme
Launched in 1985, this scheme aims to ensure that remittance transactions for amounts exceeding $100 remain cost-free for both the sender and the receiver in Pakistan. Banks and financial institutions involved in these transactions receive a uniform incentive for all eligible transactions. Last year, the incentive rate was raised to 30 SAR, which positively impacted remittance inflows. Under the new performance-based rewards system, the SBP proposes dividing the 30 SAR reimbursement into fixed and variable components.
The fixed component would provide 20 SAR for all eligible transactions over $100, while the variable component would offer an additional 8 SAR for incremental eligible transactions with growth up to 10% or $100 million, whichever is lower. For growth exceeding 10% or $100 million, an additional 7 SAR per incremental transaction would be provided. This structure would allow banks that achieve higher remittance inflows to receive up to 35 SAR per eligible transaction. Performance would be evaluated monthly, with adjustments made during the last quarter of the financial year.
SBP believes that these revisions, aligned with the performance-based rewards initiative, will incentivize banks to further increase remittance inflows, while also potentially reducing the government’s overall TT charge expenses.
Incentive Scheme for Exchange Companies
Launched in 2022, this scheme encourages exchange companies (EC) to surrender 100% of their foreign exchange earnings in the interbank market. Currently, the rate stands at Rs1 per USD mobilized. The SBP proposes increasing the fixed base rate from Rs1 to Rs2 per USD surrendered in the interbank market 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 exceeding 5% or $25 million.
Payments would be contingent on surrendering foreign exchange according to SBP-prescribed percentages. As with the banking scheme, performance would be evaluated monthly, and adjustments would be made in the last quarter of the financial year. SBP argues that these revisions would not only mobilize greater remittances but also help offset the increased operating costs faced by exchange companies.
ECC Approval
The ECC of the Cabinet has now considered the Finance Division’s summary on the “Proposal for Revision in Home Remittances Incentive Schemes.” After careful review, the ECC approved the SBP’s proposed changes to both the TT Charges Scheme and the Incentive Scheme for Exchange Companies. The new performance-based rewards structure is expected to drive further growth in remittance inflows, helping the country meet its financial goals.
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