KARACHI – In a key address at the Pakistan Banking Summit, State Bank of Pakistan (SBP) Governor Jameel Ahmad emphasized the need for banks to look beyond government borrowing and focus on increasing private sector credit to foster sustainable economic growth. He stressed that for any country to achieve long-term economic prosperity, it must have a healthy level of private credit and robust financial deepening, a sector where Pakistan currently lags behind its peers.
During his speech on Tuesday, Governor Ahmad pointed out a concerning trend in Pakistan’s banking sector: the country’s private-sector credit-to-GDP ratio has dropped to just 8.4% by fiscal year 2024, nearly half the level it stood at in 2004. This sharp decline, according to the SBP governor, indicates a heavy reliance on government borrowing, which has crowded out private sector credit in the financial ecosystem. He further added that Pakistan’s bank deposit-to-GDP and private sector credit-to-GDP ratios are among the lowest when compared to similar economies, a situation that needs urgent attention to ensure sustainable economic development.
Ahmad acknowledged the common argument that government borrowing has led to a reduction in credit availability for the private sector. However, he also pointed out that in many countries, including those with high levels of government borrowing, the private sector continues to maintain a significant share of the financial sector’s portfolio. This illustrates that the banking sector can and should find ways to balance government lending with greater focus on the private sector, particularly in areas that have been historically underserved.
In Pakistan, a stark imbalance is observed in the allocation of credit. Approximately 74% of lending is directed towards well-established sectors, while only 5% is allocated to small and medium enterprises (SMEs). This disparity, Ahmad noted, is a clear sign that Pakistan’s banking industry needs to reassess its lending strategies. While established businesses continue to receive a significant portion of financial resources, SMEs, which are key to economic diversification and job creation, are being left behind.
The governor emphasized that this imbalance must be addressed if Pakistan is to fully leverage its economic potential. He expressed optimism that with a more stable macroeconomic environment, the government’s borrowing would be reduced, allowing the banking sector to allocate more funds towards the private sector. He specifically highlighted SMEs and the agriculture sector as critical areas where increased lending could have a significant positive impact, driving growth and job creation in these vital segments of the economy.
Ahmad’s comments come at a time when the country’s economic growth is facing several challenges, including inflationary pressures and fiscal deficits. The banking sector, he noted, must adapt to the changing landscape by expanding its focus from government lending to a more balanced approach that includes private sector financing. With increased private sector credit, Pakistan could see improved economic resilience, greater innovation, and more opportunities for entrepreneurs.
As the SBP governor concluded his address, he called on the banking sector to rethink its current business models and prioritize financial intermediation, which involves facilitating lending and credit flow to productive sectors such as SMEs and agriculture. This shift, he argued, is necessary for fostering inclusive and sustainable economic growth.
By realigning their strategies and diversifying their lending portfolios, Pakistan’s banks have the potential to play a pivotal role in the country’s economic development, creating a more robust financial ecosystem that supports long-term growth and prosperity.