KARACHI: Despite contributing 40 per cent to Pakistan’s GDP and employing 80 per cent of the non-agriculture labour force, Small and Medium Enterprises (SMEs) continue to receive less than 10 per cent of total private sector credit.
A recent report by the Competition Commission of Pakistan (CCP) highlighted that Pakistan has over 5.2 million SMEs, which also account for 30 per cent of the country’s total exports. However, SMEs only receive between six to seven per cent of private sector financing, reflecting a persistent liquidity gap.
The limited flow of credit to SMEs comes despite efforts by the government and the State Bank of Pakistan (SBP) to enhance their access to finance. Banks have largely directed their liquidity towards risk-free domestic bonds offering high yields, with approximately 60 per cent of banking sector assets now invested in government securities.
This trend contrasts with a global benchmark of around 20 per cent lending to governments in developing economies.
Overall private sector credit growth has remained sluggish, with disbursements reaching only Rs513 billion in FY24 compared to a mere Rs46 billion in FY23. In contrast, the banking sector recorded a surge in profitability during 2024, primarily driven by investments in government papers rather than private lending.
High interest rates prevailing until last year further deterred lending to SMEs by increasing the perceived risk of defaults.
To support SME financing, the SBP launched the Challenge Fund for Technology Adoption and Digitalization of SMEs in October 2024. The fund was intended to help banks develop innovative technological solutions aimed at expanding credit access for small businesses.
However, lending patterns have shown little improvement, as banks continue to prefer lending to large corporations where risks are perceived to be lower.
