Despite initiatives by the government and the central bank to improve access to financing, the default rate in Pakistan’s small and medium enterprises (SME) sector is on the rise, reaching 15.39% in the third quarter of FY25, up from 14.16% in the previous quarter.
SBP data indicates that total SME financing was recorded at Rs311.33 billion in working capital loans as of March 2025, a decline from Rs332.8 billion in December 2024. This contraction in short-term lending highlights the difficulties in obtaining working capital. However, fixed investment in the sector was Rs2.42 trillion, showing that long-term investment remains relatively stagnant compared to short-term borrowing.
The rise in non-performing loans (NPLs) is becoming a major hurdle for SME financing. Banks are increasingly hesitant to lend to SMEs due to the higher credit risk, and the more attractive option of investing in government securities.
Currently, about 60% of banks’ assets are invested in domestic bonds, significantly above the 20% threshold considered problematic in many developing countries.
To address these financing challenges, SBP has introduced a Challenge Fund for Technology Adoption and Digitalisation of SME Banking (CFS). This initiative is designed to help banks develop tech-driven solutions that improve financial access for SMEs.
Under this initiative, banks will be eligible for grants based on their proposals, with the requirement to contribute 15% of the total project cost. Each project must be completed within eight months.
