By Muhammad Soban ISLAMABAD, June 16 (INP-WealthPK): The State Bank of Pakistan (SBP) aims to provide innovative and digital financial solutions for small and medium enterprises (SMEs) as part of its mission. Therefore, it is launching the Challenge Fund for SMEs (CFS) in order to find and support innovative SME banking solutions in the country. The SME sector is of great importance to the country’s economic development. The Small and Medium Enterprise Development Authority (SMEDA) estimates that there are more than five million SMEs in Pakistan. The SMEs contribute 40% to the country's GDP and 25% to its overall exports. The SME sector accounts for the highest proportion of employment in the country after agriculture sector. Small and medium-sized businesses employ 78% of the non-agricultural workforce. SMEs are one of the main drivers of poverty reduction, economic growth, and employment creation. The SME financing market started to grow in 2013 thanks to different regulatory measures and the facilitation role played by the SBP. In December 2021, SME financing was worth Rs524 billion, up from Rs284 billion in December 2013. Despite this surge in financing amount, there are still structural barriers that impede banks from lending to SMEs, such as information asymmetries, high transaction costs, and a lack of tangible collateral used as a guarantee for obtaining credit by the SME owners and entrepreneurs. To overcome this problem the Challenge Fund is being launched by the central bank to stimulate innovations in areas such as sustainable business models based on the exploitation of technology and alternative delivery channels and products and services designed to meet the needs of SMEs. This will focus on financial innovations that leverage technology (including fintech). The SMEs can access and receive a broad range of financial services via digital channels at an affordable cost. Providing affordable financing options and promoting entrepreneurship can boost improvement of living standards. The market for digital financial services (DFS) in Pakistan is predicted to exceed by $36 billion by 2025, boosting Pakistan's GDP by 7%, creating 4 million new jobs, and generating $263 billion in new deposits. The potential of DFS can only be realized with a robust and efficient ecosystem. The SBP is thus focusing on leveraging technology in payments and modernizing lending platforms. In addition, the SBP promotes regulatory environments that enable new players to enter the market, and create new contractual relationships between financial institutions and third parties. It is the need of the hour to fully utilize innovative technological solutions that provide access to financial services to small businesses in particular. The objective is to use innovation to make markets inclusive so that SMEs in Pakistan have access to digital business solutions in a hassle-free manner. The ultimate goal of the CFS is to encourage banks to develop innovative technological solutions to cater to the banking needs of the SME sector. This will help increase the SME sector's access and usage of financial services. Going forward, it can play a significant role in digitizing financing and payments. According to the SBP, the purpose of this Challenge Fund is to foster the development and implementation of innovative ideas that will increase the financial inclusion of SMEs. The CFS will provide help by developing innovative, user-friendly, and cost-effective banking solutions for entrepreneur businesses. With an inter-operability option, it will develop and integrate key offerings with other banking system players. The project will help create new ways for people to access formal financial services, such as savings, loans, pensions, insurance, and remittances.