Pakistan Banks' Reluctance to Fund SMEs Persists Despite Government Push

Prime Minister Shehbaz Sharif has once again urged Pakistani banks to increase lending to Small and Medium Enterprises (SMEs), a call that has been echoed by successive governments for the past three decades. The current Access to Finance Plan initiative aims to raise the share of SME lending in private sector credit from 7% to 10% within two years and increase the number of SME borrowers from 310,000 to 750,000. Despite these ambitious goals, banks have historically shown little change in their lending practices, leaving a significant financing gap for SMEs. These enterprises, which constitute an estimated 5 million businesses, contribute substantially to Pakistan's economy, accounting for nearly 40% of GDP, a quarter of exports, and around 80% of non-agricultural employment. However, only about 300,000 businesses currently have access to formal bank credit. Banks cite risk as a primary reason for their hesitancy, pointing to SMEs' lack of audited financial statements, unreliable cash-flow records, and weak legal enforcement mechanisms. While these concerns are valid, the situation is exacerbated by the attractive, low-risk returns banks can achieve by investing in government securities. This environment, where financing the government offers predictable profits with less effort, diminishes the incentive for banks to develop the specialized expertise required for SME and agricultural lending, fostering a culture resistant to financial inclusion. Even with subsidized schemes and risk guarantees from the State Bank, many commercial banks have continued to avoid financing SMEs and agriculture, suggesting inertia and a preference for easy government profits over the complexities of productive sector financing. This pattern was acknowledged at the Pakistan Banks’ Association’s recent Banking Summit, where policymakers and bankers agreed on the unsustainability of the current credit allocation. The finance minister emphasized the need for banks to direct more financing towards employment and export-generating sectors, warning that the economy's long-term growth and the viability of future borrowers depend on the expansion of SMEs and other priority sectors.