Pakistan’s rapidly expanding distributed solar sector is sitting on an estimated Rs800 billion in untapped lending potential across just three major cities, yet structural barriers within the financial system continue to prevent millions of households and small businesses from accessing financing, according to a new study released by Renewables First.
The study, launched on Monday at an event in Karachi, underscores a widening gap between the country’s accelerating solar adoption and the ability of its banking sector to support inclusive energy transitions. While solar installations have grown swiftly in recent years, the benefits have largely flowed to affluent households and large enterprises with the capacity to self-finance. In contrast, lower- and middle-income households and small and medium enterprises remain locked out of the market.
Despite holding approximately $131 billion in deposits, Pakistan’s banking sector channels only around $50 billion into lending, the report notes. Nearly 63% of banking assets are invested in government securities, leaving limited capital directed toward productive sectors such as renewable energy. This imbalance, the study argues, reflects institutional preferences and outdated risk perceptions rather than actual credit performance.
Conducted in partnership with the Pakistan Banks’ Association, the National Institute of Banking & Finance and the Karachi School of Business & Leadership, the study was presented to bankers, policymakers and energy sector stakeholders at a local hotel. Speakers repeatedly emphasized that the primary obstacle to solar lending is not financial viability but internal banking frameworks that have failed to evolve alongside market realities.
Climate finance expert and co-author Naveen Ahmed pointed out that distributed solar projects demonstrate strong repayment characteristics, yet continue to be viewed through a conservative lending lens. He said banks are overlooking commercially viable opportunities because risk models have not adjusted to reflect changing energy economics and consumer behavior.
The report highlights a striking paradox. Electricity tariffs in Pakistan have increased by more than 200% since 2012, placing significant pressure on household budgets and business operating costs. At the same time, the cost of solar panels has fallen by 73% since 2017, reducing payback periods to under two years in many cases. Even so, financing remains inaccessible to many consumers who spend up to 20% of their income on electricity, as well as to SMEs struggling with energy expenses.
Rigid collateral requirements are cited as a major barrier, with banks often prioritizing asset ownership over cash-flow viability. The study finds that banks operate at an advances-to-deposits ratio below 40% and frequently demand double collateralisation for solar loans. This approach persists despite evidence that distributed solar portfolios have default rates below 2%, significantly lower than the more than 10% observed in traditional SME lending.
Shezad Abdullah, a banker and co-author of the study, described this segment as a “missing middle” comprising households and enterprises that are too large for microfinance but too informal or small for commercial banks. Addressing this gap, panelists argued, requires targeted product design rather than broad risk aversion.
Ammar Habib Khan, chief executive of the National Credit Guarantee Company Limited, said scaling up solar finance would depend on identifying eligible segments, assessing their risk profiles and designing instruments suited to their needs. He emphasized that guarantees and structured risk-sharing could play a catalytic role.
PBA Managing Director Nejib Rehman echoed the view that banks are not fundamentally opposed to solar lending. However, he cited concerns around repayment consistency, property ownership issues in apartment buildings, limited historical data and regulatory uncertainty as factors shaping cautious lending decisions.
The study proposes several financing models already proven in comparable markets, including anchor-based and vendor-linked financing, on-lending through development finance institutions and microfinance providers, and securitisation of solar loan portfolios to unlock liquidity. It also highlights systemic gaps such as the absence of credit bureaus covering informal borrowers, lack of standardized documentation for small-ticket loans and weak dispute resolution mechanisms.
Looking ahead, speakers identified battery energy storage systems as the next phase of innovation, building on the momentum of distributed solar adoption. With Pakistan having imported more than 50 gigawatts of solar panels over the past five years, equivalent to the country’s total grid capacity, the physical infrastructure is already in place.
The event concluded with the launch of the Pakistan Energy Finance Network, a practitioner-led platform intended to align energy policy goals with financial market practices. The study closes with a stark assessment, arguing that the real question is no longer whether Pakistan’s financial system can support the energy transition, but whether the country can afford the cost of continued inaction.
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