Banks in Pakistan, once viewed as vital engines of economic growth, are increasingly perceived as irrelevant to the country’s broader economic progress. Over the past three years, the banking sector has focused solely on profit-making, contributing little to economic development. The reasons for this dismal performance are varied, with the high-interest rate of 22% throughout FY24 being a key factor.
While banks across the globe generate profits, the operational model of Pakistani banks has failed to support economic expansion. Instead of fostering growth, banks have prioritized earning profits, a shift that reflects a loss of direction. This trend has been exacerbated by the government’s heavy reliance on banks as a primary source of borrowing, diverting attention away from private sector needs.
Small and Medium Enterprises (SMEs) and agriculture, which collectively form the backbone of Pakistan’s economy, have been particularly neglected. SMEs contribute 40% of the GDP, account for 90% of private enterprises, generate 30% of export earnings, and employ one-third of the workforce. Yet, less than 3% of the country’s five million enterprises have accessed financing from banks, highlighting the sector’s lack of engagement in supporting economic growth.
The government’s failure to introduce policies aimed at boosting these critical sectors further compounds the issue. According to the United Nations Development Programme, 95 million Pakistanis live below the poverty line. Despite this alarming statistic, neither the government nor banks have taken steps to address the economic challenges that these numbers underscore.
The investment-to-deposit ratio (IDR) has surged dramatically, rising from 33% in 2007 to 88% by 2023. This shift indicates that 94% of deposits are being funneled into investments, primarily domestic bonds, leaving minimal resources for financing sectors like SMEs and agriculture. Despite repeated calls by the State Bank of Pakistan (SBP) for greater credit penetration, banks have remained focused on low-risk, high-profit activities.
The lack of lending has had far-reaching consequences. In FY24, banks’ lending to the private sector amounted to just Rs. 513 billion, compared to Rs. 46 billion in FY23. This stagnation contributed to the economy contracting rather than expanding, with growth rates remaining at a meager 2.4% during this period.
However, recent tax policies have begun to shift lending trends. The government’s decision to impose taxes on banks with an Advance to Deposit Ratio (ADR) below 50% has spurred an increase in lending. By December 2024, the ADR had climbed to 50%, leading to improved credit flows to the private sector and non-bank financial institutions (NBFIs).
Despite this progress, challenges remain, especially in agriculture. Around 75% of farmers still rely on informal credit sources, despite agriculture’s critical role in the economy. Limited access to affordable growth capital has restricted the sector’s expansion, with disappointing outputs in key crops like cotton and wheat.
The Large-Scale Manufacturing (LSM) sector has also struggled, recording a contraction of 0.76% in Q1 FY25. High-interest rates and banks’ reluctance to support SMEs have further stifled growth. With investments dominating bank activities and the fiscal deficit reaching 6.3% of GDP in FY25, banks’ contributions to economic progress remain negligible.
As Pakistan grapples with economic challenges, the banking sector’s role needs urgent reevaluation to align with the country’s development goals and address its pressing economic concerns.