Five million SMEs; only 2% banked

Pakistan's economic landscape is characterized by a paradox: a vast number of small and medium enterprises (SMEs) that are ostensibly bankable remain largely excluded from the formal credit system. With roughly five million SMEs, these businesses are the backbone of the economy, generating nearly 40% of GDP, 25% of exports, and a significant portion of non-agricultural employment. Yet, as of December 2025, a mere 2.1% of them had access to formal banking, a figure starkly lower than the South Asian average of over 31%.

The core issue is not necessarily risk aversion within Pakistani banks, which are not unusually conservative by global standards. Instead, the problem lies in a profound lack of information. The median SME operates on cash, lacks audited financial statements, files no tax returns, and keeps records in ledgers that are difficult for credible auditors to certify. This invisibility makes risk assessment and pricing prohibitive, akin to the challenges faced in financing the agriculture sector. Consequently, SMEs are forced to rely on informal sources, often at exorbitant annual interest rates of 30% to 60%, which cripple their ability to modernize, build working capital, or invest in compliance.

However, a paradigm shift is underway, focusing on making these borrowers visible rather than simply urging banks to be braver. Promising initiatives are beginning to yield encouraging results. SME financing has seen a near doubling, growing from Rs457 billion in FY23 to Rs882 billion by December 2025, with a state bank target of Rs1.5 trillion by 2028. Punjab's Asaan Karobar Scheme exemplifies this new approach. Launched in January 2025, it employs a hybrid risk-absorption model, combining a first-loss guarantee from the federal government with an interest-rate subsidy from the Punjab government. Crucially, it utilizes digital architecture to integrate data from CNICs, FBR, credit bureaus, and banks, thereby enhancing borrower visibility. This scheme has already disbursed funds to over 110,000 SMEs, with a significant portion from low-income groups, demonstrating a tangible pathway to unlocking the potential of Pakistan's vital SME sector.