Banks urged to prioritise SME lending

Express Tribune

25-02-2025

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State Bank of Pakistan (SBP) Governor Jameel Ahmad has urged commercial banks to rethink their business models and prioritise loans to small and medium enterprises (SMEs) to support the country's economic growth instead of lending heavily to the government.
Speaking at the closing session of the two-day Pakistan Banking Summit 2025 on Tuesday, Ahmad stressed the need for banks to shift their focus from financing the government and large corporations to increasing SME lending and microfinancing. While he had previously raised the issue in internal meetings with the Pakistan Banks Association (PBA), he now publicly stressed its urgency.
Pakistani banks have primarily lent their deposits to the government to help bridge the budget deficit, limiting credit availability for the private sector. As of December 5, 2024, commercial banks held total deposits of Rs30.3 trillion, of which Rs29 trillion—around 96%—had been loaned to the cash-strapped government, according to SBP data.
In late 2024, banks reportedly increased short-term lending to large corporate entities to avoid additional taxation due to lower private sector credit disbursement. This raised private sector lending from Rs11.8 trillion in August 2024 to Rs15.1 trillion in December 2024, according to analysts and SBP data.
Ahmad noted that Pakistan's banking sector lags behind regional counterparts in deposits and private sector financing, stressing that sustainable growth is impossible without adequate private sector lending. He also urged banks to accelerate digitalising payment systems across public and private sectors, ensuring customers can process transactions through online banking.
Additionally, Ahmad encouraged banks to engage in climate-resilient financing, warning that neglecting climate issues could have severe economic consequences. He advocated investing in technology, artificial intelligence (AI), infrastructure, and human resources to develop customer-centric products and adopt best practices. Greater technology investment would promote financial inclusion, with AI helping to identify gaps in the banking sector, he added.
Currently, banks have expanded account access to 64% of the adult population, up from 47% in 2018, while the gender gap in banking has decreased from 47% to 34%. The SBP aims to increase account ownership to 75% and reduce the gender gap to 25% by 2028.
Speaking to The Express Tribune, Muneer Kamal, CEO and Secretary General of the Pakistan Banks' Association (PBA), explained that a lower Advance-to-Deposit Ratio (ADR) reflects the health of the economy, as limited borrowing demand indicates sluggish business growth. He noted that India and Bangladesh have ADRs around 80%, while Pakistan's ADR reached approximately 77% in 2008 when government borrowing stood at 24%. This figure has now surged to around 86%.
As of December 6, 2024, the banking sector's ADR had improved to 49.7%, up from 47.8% in November 2024, after hitting a low of 38.4% in August 2024—an 11.4 percentage point increase over the past few months. During this period, total deposits declined by 1.6%, from Rs30.8 trillion in August to Rs30.3 trillion in December, while advances surged by 27.6%, rising from Rs11.8 trillion to Rs15.1 trillion.
This upward trend suggests banks have gradually increased private sector lending, reducing reliance on government securities. However, some market sources claim these figures are manipulated by reallocating deposits to subsidiary companies within banking groups, which then invest in government bonds instead of genuine business activities.
The Investment-to-Deposit Ratio (IDR)—a measure of government borrowing—stood at 95.7% as of December 6, 2024, up from 93.2% in November 2024. Although slightly down from 100.8% in August 2024, this remains extremely high, indicating banks continue allocating most deposits toward government securities rather than expanding credit to businesses and consumers.
Industry experts note that the SBP issues bonds on behalf of the government, which commercial banks prefer to purchase for their security. Kamal remarked, "Government borrowing and low private sector lending reflect the state of the economy. The government comes to us; we don't go to the government." He added that Pakistan's private sector—especially SMEs and agriculture—remains significantly under-leveraged, limiting credit demand.
"When the economy grows, credit demand increases," Kamal explained, comparing Pakistan's situation to India and Bangladesh, whose faster-growing economies generate greater credit demand. With Pakistan's GDP growth hovering around 3% or lower, businesses have limited need for expansion and borrowing.
Kamal also highlighted the high tax burden on the banking sector, which pays around 49% in taxes compared to 39% for the broader corporate sector. Banks paid Rs160 billion in taxes in 2021, which surged to Rs613 billion in 2023.