Pakistan’s banking sector continues to rely heavily on government borrowing instead of increasing financing for small and medium-sized enterprises (SMEs) and the wider private sector, despite repeated calls from the State Bank of Pakistan (SBP) and the federal government to expand productive lending. According to financial industry sources cited in a report by Dawn, commercial banks continue to allocate a significant share of their deposits to government securities, allowing them to generate stable returns while limiting credit available for businesses and economic expansion.
Industry representatives believe the lending pattern is unlikely to change during the current fiscal year. A senior banker quoted in the report stated that opportunities for extending credit to the private sector remain limited and that the situation is expected to remain similar to what was witnessed during FY2026. Banking executives also indicated that private sector financing could fall below the approximately Rs1.4 trillion extended during the previous fiscal year if current trends continue.
Government borrowing from commercial banks continued to increase during FY2026. According to the report, federal borrowing from the banking sector reached Rs5.9 trillion, compared with Rs5.4 trillion a year earlier. This increase came despite the Federal Board of Revenue (FBR) achieving its revised revenue collection target. Higher domestic borrowing has also contributed to rising debt servicing obligations, with nearly half of the government’s revenue now being used to meet interest payments on outstanding debt.
Bankers believe the current fiscal environment offers little indication that this borrowing pattern will change during FY2027. According to industry sources, government spending requirements continue to create financing needs that are largely met through domestic borrowing from commercial banks. One banking executive observed that policymakers remain focused on addressing external economic challenges while relying extensively on the banking system to finance domestic expenditure. The source also noted that annual budgets continue to include fiscal gaps that are ultimately financed either through additional borrowing or the introduction of new taxes.
Financial indicators released during the year also highlight the banking sector’s continued preference for investing in government securities rather than expanding lending to businesses. The advance-to-deposit ratio, which measures the proportion of deposits converted into loans, declined to 35.2 percent in June 2026 from 38.1 percent a year earlier. The report describes this as one of the lowest ratios in the region, reflecting the relatively small share of bank deposits being channelled into private sector financing. The low lending ratio is also associated with an estimated annual domestic debt servicing cost of around Rs8 trillion.
A similar trend is visible in the investment-to-deposit ratio, which remained exceptionally high. The ratio stood at 104.2 percent in June 2026, only slightly lower than the 106 percent recorded a year earlier. This indicates that a substantial portion of banking sector funds continues to be invested in government debt instruments rather than financing commercial activity, industrial expansion or business investment.
Money market experts cited in the report argue that demand for private sector borrowing also remains weak because of subdued domestic investment activity. According to their assessment, Pakistan’s domestic investment levels are among the lowest in the region, reducing the need for businesses to seek financing from commercial banks. Analysts also pointed to the impact of the ongoing five-month regional conflict, which has created additional uncertainty for investors and discouraged companies from taking on expensive bank financing during a period of elevated economic risks.
The latest assessment highlights the continuing challenge of increasing private sector access to finance while maintaining fiscal stability. Although policymakers have repeatedly encouraged banks to expand lending to SMEs and productive sectors of the economy, government borrowing continues to offer lower-risk investment opportunities with predictable returns. Until broader economic conditions improve and private investment demand strengthens, industry observers believe commercial banks are likely to remain heavily invested in government securities, limiting the pace of credit growth for businesses and the wider economy.
Follow the PakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem.