Why Pakistan's banks won't finance the solar revolution

Pakistan's banking sector presents a striking paradox. With over $131 billion in deposits and gross advances of only $50 billion as of June 2025, the financial system sits on enormous pools of capital. 

The recent surge in private sector credit, crossing Rs1.2 trillion in the first five months of fiscal year 2026 compared to just Rs41 billion in the same period last year, might suggest a credit boom is underway. Yet this apparent expansion masks a deeper structural malaise: the money flows primarily toward short-term working capital needs, particularly for rice crop processing and trading, rather than productive long-term investments.

Pakistan's investment-to-GDP ratio plummeted to 13.1% in fiscal year 2024, marking the lowest level in over five decades. This represents not just a cyclical downturn but a fundamental breakdown in the country's capacity to channel savings toward productive investment. While neighboring economies build infrastructure and expand manufacturing capacity, Pakistan's banks increasingly park their funds in government securities, which now constitute close to two-thirds of total banking assets.

This preference for government paper over private lending stems from multiple sources. Heavy budgetary borrowing by the government creates an attractive, risk-free asset class offering competitive yields. Banks can earn steady returns without the operational complexity of credit assessment, monitoring, and recovery that private sector lending demands. 

A sub 40% advances-to-deposits ratio reveals how far below potential the banking system operates, even as deposits grow.