Small and medium enterprises (SMEs) are often described as the backbone of Pakistan’s economy, and for good reason. With more than 5.2 million businesses spanning manufacturing, services, and trade, SMEs contribute around 40 percent to the GDP and employ over 80 percent of the non-agricultural workforce. From the furniture workshops of Gujrat to the emerging tech startups in Karachi, these enterprises represent the resilience and diversity of Pakistan’s economic fabric.
Yet, despite their weighty contribution, SMEs continue to face significant roadblocks in their journey from potential to performance. The hurdles are not just financial, but systemic, ranging from outdated lending models and lack of access to credit to weak legal enforcement mechanisms that leave many businesses stranded. Although both the public and private sectors, including the State Bank of Pakistan (SBP) and the SME Development Authority (SMEDA), have made strides in extending support, the challenges remain deeply entrenched.
Access to finance stands out as one of the most critical barriers. While SMEs dominate private sector activity, they receive less than 7 percent of private sector credit, among the lowest ratios in South Asia. The issue lies largely in how banks define “bankable.” Traditional lending in Pakistan remains collateral-driven, with preference for titled land and property. For SMEs operating from leased premises, shared spaces, or small workshops, their real assets — inventories, receivables, and skilled workforce — are left unrecognized in lending assessments.
Take the example of a furniture exporter from Gujrat who secured a major order from the UAE with confirmed payments and attractive margins. Despite a strong case for financing, he was denied a Rs10 million loan because he lacked titled property in Lahore or Karachi. His story is emblematic of the countless businesses that fail to scale, not for want of demand, but because of rigid, outdated lending practices.
Banks have begun to acknowledge this gap, but reforms remain slow. To unlock growth, there needs to be a shift toward cash-flow-based lending models, where financing is tied to revenues rather than immovable assets. Complementary tools, such as credit guarantee schemes, can further reduce risks for banks. The Pakistan Credit Guarantee Company is playing an important role, but wider adoption is essential for sustainable progress.
Beyond finance, legal weaknesses also undermine SME growth. Loan recovery processes in Pakistan remain slow and uncertain, often riddled with stay orders and litigation delays. The case of a textile SME in Faisalabad illustrates this clearly: after defaulting on a Rs50 million loan, the borrower delayed recovery through court stays and false claims, while shifting assets to continue operations. The bank bore the loss and eventually reduced its SME lending exposure. Such cases discourage banks from expanding credit to the sector.
Although Section 15 of the Financial Institutions (Recovery of Finances) Ordinance was reinstated to allow banks foreclosure rights, its enforcement remains weak. Without reforms such as time-bound stay orders, fast-track collateral auctions, and tax incentives for buyers, legal ambiguity will continue to hinder SME lending.
Pakistan’s economic future depends heavily on empowering SMEs. The real engines of growth are not found in corporate boardrooms but in workshops, warehouses, and small offices across the country. Inclusive growth will only materialize when SMEs are given the financial access, legal clarity, and institutional support needed to thrive. Addressing these structural gaps is no longer optional — it is central to building a stronger, more resilient economy.