Q): Discuss the sources of short term Financing currently prevailing in Pakistan?
Short-Term Financing:
Short-Term Financing refers to the need for money for a period of less than a year. It is a
fundamental aspect of finance that deals with managing the demand and supply of capital for an
interim period. The funds can be secured or unsecured, depending on the company's requirements.
However, the decision to utilize such funds should be driven by the company's total financing
needs, and the company should carefully consider the risk-return trade-off before making any
decisions.
Sources of Short-Term Financing in Pakistan :
Various sources are available for short term financing in Pakistan. Some of them are explained
below:
Trade Credit:
Trade credit, also known as accounts payable, refers to the credit extended by a seller to another
when a credit purchase is made. It allows the buyer to receive goods without making immediate
cash payments, providing a floating time of around 28 days to manage cash flow. As a result, it is
a widely used source of short-term financing for businesses, with the amount of credit available
depending on the purchase units.
For instance, if a supplier sells goods on credit to a customer amounting to Rs. 20,000, the credit
is granted as per the terms of sale, with a net of $40. As per the terms, a trade credit of Rs. 20,000
is given to the customer for 40 days from the invoice date.
Additionally, as per the terms of sale, if the payment is made by the customer to the supplier within
15 days from the date of the invoice, a cash discount of 3% will be given to the customer, i.e., Rs.
600 (Rs. 20,000 * 3%). The customer is then required to make a payment of Rs. 19,400.
While trade credit can be a useful source of financing, it does come with some risk
for the supplier if the buyer fails to make the payment in due course. To minimize
this risk, suppliers may use instruments such as promissory notes and bills of
exchange. In case the supplier needs money, these bills can be discounted from the
banks, and the bills of purchase with a high credit rating can also be sold. These
instruments can help minimize the risk of bad debts.
In Pakistan, many firms face difficulties in obtaining trade credit due to banking
regulations regarding loans and short-term credit. However, trade credit can be a
source of growth opportunity at both the micro and macro level. Alternative sources
of financing like trade credit can play an important role in the performance of firms.
As Pakistan is a transitioning economy with a less developed financial system, trade
credit is extensively used by listed manufacturing firms.
A study conducted on 327 manufacturing firms listed in PSX Pakistan for the period
2005-2015 revealed that financial depth and credit information sharing have a
significant effect on the use of trade credit by listed manufacturing firms in Pakistan.
The study found that an increase in financial depth results in the private sector
receiving more funds, enabling suppliers to provide more trade credit to listed
manufacturing firms. On the other hand, if the lending rate increases, suppliers
reduce the transfer of costly funds to listed manufacturing firms through trade credit.
Additionally, there is a negative relationship between credit information sharing and
the use of trade credit, which is in accordance with the substitution hypothesis. These
findings have practical implications for both firm managers and policy makers.
Banks:
United Bank limited:
Introduction:
Agha Hasan Abedi established the bank in 1959 and under his administration, it turned
into the second biggest bank in Pakistan. In 1974, the Public authority of Pakistan
nationalized the bank. This, thusly, prompted Agha Hasan Abedi establishing the Bank of Credit
and Trade Global.
Open record arrangement:
• Any person(s) opening or working a record with the Bank will be considered to have
perused, comprehended and acknowledged the Terms of Record and the pertinent
Timetable of Bank Charges gave and corrected every once in a while by the Bank.
• Understanding of Agreements referenced in the record opening structure by the Bank
will be viewed as last and restricting.
• Appropriate
distinguishing
proof
as
Modernized
Public
Ident
ty
Card/SNIC/Visa/Outsider Enrollment Card/NICOP/POC will be expected before
the Bank opens any record in its only attentiveness, which will be freely confirmed
by the Bank. Any non-confirmation or on the other hand assuming something is seen
as off-base/confused, Bank has the privilege to stop the exchange till freedom of
uncertainty or close the record. Each record will have a particular number, which will
be cited in all correspondence with the Bank comparable to the record.
Momentary Funding’s:
• UBL Drive (Car credits)
• UBL Address (Home Advance office)
• UBL Money in addition to (individual advance office)
Promissory notes
UBL Money In addition to is an extraordinary term credit funding item which offers various
highlights, choices, and adaptability meant to satisfy your monetary requirements. It is intended
for salaried people of organizations keeping up with finance relationship with UBL or some other
Bank in Pakistan.
Most extreme Limit: Up to Rs. 3 million
1. Tenor: 1 - 4 years
2. Speedy Handling
3. Cutthroat Rates
4. Adaptable Reimbursement Terms
5. Free Credit Protection
6. Handling expense on endorsement
Letter of agreement:
Under this office, UBL gives confirmation of a letter of credit by fastidiously inspecting the items
in the letter of credit started by the responsible bank. The greatest possible level of measure is
taken to safeguard your business against extortion.
Bank Alfalah:
Introduction:
Bank Alfalah is one of the largest banks in Pakistan, with a network of 800+ branches across more
than 200 cities in the country, and international presence in Afghanistan, Bangladesh, Bahrain and
the UAE. The Bank also has a representative office in Abu Dhabi. Bank Alfalah is owned and
operated by the Abu Dhabi Group. Incorporated as a public limited company on 21st June, 1992
under the Companies Act, 2017, Bank Alfalah commenced its banking operations in the same year.
The Bank provides financial solutions to consumers, corporations, institutions and governments
through a broad spectrum of products and services, including corporate and investment banking,
consumer banking and credit, securities brokerage, commercial, SME, agro finance, Islamic and
asset financing solutions.
Short Term Financing Details:
Falah Tijarah is a short term trade finance facility designed to meet the liquidity requirements of
the Bank Alfalah Islamic Customers. It is designed under the supervision of the Shari’ah Board to
enable our Customers to sell their finished goods stock, meet their working capital requirements
and enjoy the benefits of cash sales. It is just like a normal trade transaction where a seller (the
Customer) sells specified goods (Finished Goods) to a buyer (Bank Alfalah) on cash basis. Once
the purchase transaction is complete Bank Alfalah will appoint the Customer as agent to sell the
same goods in the market to third parties generally on credit basis and Customer will deposit the
sale proceeds with Bank Alfalah.
Open Bank Account Agreement:
Bill of exchange:
Alfalah Bill & Cash refers to extension of credit to vendors of large corporate/commercial/OEM
entities to streamline their working capital requirements and providing them with transactional
based credit facilities, thereby ensuring a smooth flow of goods through the supply chain.
Alfalah Bill & Cash focuses on lending to small & medium enterprises and emerging
corporate/commercial names. The main differentiating factor here is that through this product we
are financing the aforementioned target market on a ‘structured basis’ i.e. with more reliance on
business structure than security structure. For example, a company acting as a vendor for a certain
corporate/commercial/OEM for last 2 years and have satisfactory business relations along with
recommendation letter from corporate/commercial/OEM will be entitled to avail Alfalah Bill &
Cash.
Promissory Notes:
A Promissory Note from Bank Alfalah is a financial instrument that represents an unconditional
promise by the borrower (maker of the note) to repay a specified amount of money to the lender
(payee or holder of the note) at a predetermined time, along with agreed-upon interest rates. It
serves as evidence of a debt and includes details such as the principal amount, interest rate,
maturity date, and the borrower's and lender's information.
Bank Alfalah’ s Promissory Notes are typically used for various financial transactions, including
loans, and they provide a legally binding commitment to repay the borrowed funds. These notes
are commonly used in commercial and personal lending arrangements, helping ensure the clarity
and security of the borrowing and repayment terms. It is important to carefully review and
understand the terms and conditions of a Bank Alfalah Promissory Note before entering into a
financial agreement.
Letter of Credit:
A Letter of Credit (LC) from Bank Alfalah Pakistan is a financial instrument that serves as a
guarantee for international trade transactions. It ensures that the seller will receive payment for
goods or services upon meeting the terms and conditions of the LC. Bank Alfalah acts as an
intermediary, providing a commitment to pay the seller on behalf of the buyer, thereby reducing
the risk for both parties. This LC can be revocable or irrevocable, and it can be confirmed or
unconfirmed, depending on the terms agreed upon by the parties involved. Bank Alfalah’ s LC
services are widely recognized for their reliability in facilitating secure cross-border trade.
HBL Bank:
Introduction:
HBL, Pakistan’s largest bank, was the first commercial bank to be established in Pakistan in 1947.
Over the years, HBL has grown its branch network and maintained its position as the largest private
sector bank in Pakistan the Government of Pakistan (GoP) privatized HBL in 2004 through which
Aga Khan Fund for Economic Development (AKFED) acquired 51% of the Bank’s shareholding
and the management control. The remaining 41.5% shareholding by the GoP was divested in April
2015. AKFED continues to retain 51% shareholding in HBL while the remaining shareholding is
held by individuals, local and foreign institutions and funds including CDC Group Plc which holds
4.99% and International Finance Corporation which holds 0.87%. with over 1,650+ branches and
2,100+ ATMs globally, serving 27 million customers worldwide.
Short Term Financing Details:
HBL-IB offers flexible and convenient import financing facility on the basis of Musawamah/
Murabaha. If the customer wants to finance its letter of credit, the Bank appoints the customer as
its agent to import the goods and customer establishes the LC as an agent of the Bank. Upon
receiving possession of the goods, the Bank sells the goods to the customer on a deferred payment
bases. In order to provide financing for the immediate financing needs of the exporters HBL-IB
offers a Shariah-compliant alternative to export bill discounting where instead of providing loan
against the export order.
Open account Agreement:
An Open Account Agreement from Habib Bank Limited (HBL) is a contractual arrangement
between a seller and a buyer in which the seller extends credit to the buyer, allowing them to
purchase goods or services on credit terms. In this agreement, the seller ships the products or
provides the services to the buyer without requiring payment at the time of the transaction. Instead,
the seller invoices the buyer, specifying the payment terms and due date.
HBL's Open Account Agreement outlines the credit terms, including the payment schedule,
interest rates (if applicable), and any other conditions agreed upon by both parties. It is a flexible
and common method of trade financing, providing the buyer with a period to settle the invoice
while allowing the seller to extend credit to the buyer. This agreement streamlines the purchasing
process and is widely used in business-to-business (B2B) transactions, allowing for efficient and
straightforward credit arrangements.
Bill of Exchange:
A Bill of Exchange from Habib Bank Limited (HBL) is a written financial instrument used in
commercial transactions. It represents an unconditional order from one party (the drawer) to
another party (the drawee, often HBL) to pay a specified amount of money to a third party (the
payee) on a predetermined date. Essentially, it's a legal document that outlines the obligation to
make a payment.
HBL's Bills of Exchange are commonly used in trade and commerce to facilitate transactions and
ensure that payments are made as agreed. These instruments can take various forms, such as sight
drafts or time drafts, depending on whether they are payable immediately or at a specific future
date. HBL's Bills of Exchange provide a structured and legally binding mechanism for financial
transactions and are widely used in the business world to manage trade-related payments and credit
terms.
Promissory notes:
A Promissory Note from Habib Bank Limited (HBL) is a financial document that represents a
formal and legally binding promise by the borrower to repay a specific amount of money to the
lender (HBL) within a defined time frame. The note typically includes essential details such as the
principal loan amount, interest rate, maturity date, and the borrower's and lender's information.
HBL's Promissory Notes are commonly used in various financial transactions, including loans, to
establish clear terms and conditions for borrowing and repayment. They provide a written
commitment from the borrower to repay the debt according to the agreed-upon terms. It is essential
for both parties to carefully review and understand the terms outlined in the HBL Promissory Note
before entering into any financial agreement.
Letter of Credit:
A Letter of Credit (LC) from Habib Bank Limited (HBL) is a financial instrument that plays a
crucial role in international trade transactions. It serves as a written guarantee from HBL to a seller
(beneficiary) that they will receive payment for the goods or services they provide to the buyer
(applicant) as long as they meet the specific conditions outlined in the LC. HBL acts as an
intermediary, assuring the seller that they will be paid once the terms and documentation
requirements are met, reducing the risk for both parties.
HBL's LCs can come in various forms, such as revocable or irrevocable, confirmed or
unconfirmed, and others, depending on the mutually agreed terms between the buyer and the seller.
HBL's LC services are recognized for their reliability in facilitating secure international trade by
providing a trusted mechanism for payment and ensuring a smoother transaction process for all
parties involved.