Banking inertia

Prime Minister Shehbaz Sharif's latest directive for banks to expand lending to small and medium-sized enterprises (SMEs) is a familiar refrain in Pakistan's economic history. For decades, successive governments have urged financial institutions to bolster SME financing, recognizing their crucial role in job creation and exports. Yet, despite repeated calls and the announcement of ambitious targets, the needle has barely moved.

The current government's "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. These are laudable goals, considering SMEs contribute nearly 40% of Pakistan's GDP, a quarter of its exports, and around 80% of non-agricultural employment. However, the central question remains: are banks sufficiently incentivized to meet these targets?

Banks frequently point to risk as the primary deterrent to increased SME lending, and their concerns are not without merit. Pakistan's estimated 5 million SMEs face significant challenges, and a large majority, over 4.7 million businesses, lack access to formal bank credit. This persistent financing gap underscores a fundamental inertia within the banking sector, where the perceived risks often outweigh the potential rewards, leaving a vast segment of the economy underserved.