Banks usually grow and decline along with the economies they serve. Pakistan, for better or worse, is a different story, though. Its banks have fared much better than the country’s economy as a whole.
But they lend more to the government than the real economy, and there seems to be a compelling reason why banks avoid private-sector lending and prefer safer government securities: the nation’s loan recovery laws and inefficient judicial system reward default rather than punish it. You can borrow money from banks and avoid or delay repayment for years — even decades — because litigation would drag on endlessly.
“Weak enforcement, legal loopholes and slow courts collectively make loan recovery extremely difficult,” says a senior executive of a foreign bank speaking on condition of anonymity. “As a result, banks are reluctant to lend to the private sector, especially where default risk is higher. They know that if a loan goes bad, they would be stuck in legal limbo.”
The case with public-sector banks is different, he says. “They can afford default and write-off losses. But private banks cannot afford this because they don’t have government support or guarantees to absorb their losses like the state-owned lenders.”
The economic fallout of a weak loan-recovery framework is huge, with SMEs and farmers struggling to access finance
The consequences of delays in recovery case decisions are evident in Pakistan’s exceptionally high loan infection ratio, with the current non-performing loan (NPL) ratio well above global trends.
In the US, the NPL ratio stands at 1.5 per cent and in the UK at only 1pc. Even emerging markets like Indonesia and Malaysia have impaired-loan ratios of 2.25pc and a 1.6pc, respectively. In contrast, Pakistan’s NPL ratio remains significantly higher at 7.4pc, underscoring persistent asset-quality challenges and weaker recovery systems relative to regional and global peers.
The State Bank data shows that the country’s top 13 banks, which carry a high volume of bad loans, hold a very large portfolio of Rs622.84 billion in domestic NPLs, with the industry’s total NPL standing at Rs964bn as of September. National Bank of Pakistan tops the list with bad loans of Rs158.3bn followed by United Bank with roughly Rs76bn and Habib Bank with Rs70.6bn. Bank of Punjab ranks fourth with NPLs of Rs54.3bn and Bank Alfalah holds fifth place with Rs42.4bn.
The law — Financial Institutions (Recovery of Finances) Ordinance, 2001 — that is supposed to fix this situation falls short of its purpose, says a corporate lawyer who has represented various banks during the last couple of decades. The law creates special banking courts, promises speedy decisions, and gives lenders a clearer path to repossessions.
“The law allows lenders to sell mortgaged property like land, houses, and equipment through a public auction without the intervention of any court after serving a final notice and following the prescribed legal procedure and timeframes. Suits are expected to be disposed of within 90 days. The court may also require defaulters to deposit cash or provide security equal to the claim amount if proceedings extend beyond this period due to their conduct.
‘Borrowers routinely obtain stay orders, file parallel suits, drag out appeals, and exploit every procedural loophole the system offers to avoid repaying loans’
“The Ordinance includes penalties, including imprisonment and fines, for deliberate default, fraudulent activities, or intentionally destroying or removing secured property,” he says.
But in practice, the system still favours delays.
“Borrowers routinely obtain stay orders, file parallel suits, drag out appeals, and exploit every procedural loophole the system offers. Even when a decree is issued, repossession remains a political, administrative and logistical nightmare. Police hesitate, revenue officials duck responsibility, and borrowers simply refuse to hand over pledged assets.
“Vehicles vanish, equipment goes missing, and properties remain stuck in litigation. Banks either spend heavily to trace and seize assets or simply write-off the loss,” maintains the lawyer, who says some of the cases he is pursuing date back to 2009.
The State Bank regularly collects data on all pending court cases from banks, but it does not publicise this information for good reasons, as per global practices. However, data obtained by Dawn privately from five of the 13 banks mentioned above on recovery suits pending with high courts across Pakistan, shows that recovery suits involving an aggregate amount of Rs75bn are pending decision at various stages.
Additionally, cases involving a cumulative amount of Rs43bn decided or decreed in their favour are at different stages of execution. This represents only the tip of the iceberg, as it does not include details of litigation pending in banking courts, nor does it capture the total volume of appeals and petitions filed by borrowers or banks against high court decisions.
“When a borrower defaults, our whole recovery system turns into a labyrinth of court cases and delays. Even after a decree, actual recovery drags on for years. Banks suffer losses. They will lend to what you call underserved or unserved segments of the economy only when they are confident that they will get their money back,” the foreign bank executive says.
The banking industry has regularly taken up this issue with both the previous and incumbent governments, urging reforms to Pakistan’s weak loan recovery laws and procedures. It has repeatedly been pointed out that Pakistani courts operate at a painfully slow pace, and recovery suits often take years to resolve, calling for the implementation of Sri Lanka’s Parate Execution mechanism in the country to expedite the recovery of bad loans.
Sri Lanka solved its chronic delays in loan recovery decades ago through this mechanism. Under it, banks can seize and auction mortgaged assets without first going through courts. Courts intervene only when a borrower can show a clear legal violation. The process is swift: after default, the bank issues a notice; if no payment is made within 14 days, a board resolution allows the bank to auction the property.
Auctions are publicly advertised, and recovery is completed within weeks rather than years. If an auction fails, the bank may temporarily take the property onto its books but must resell it and return any surplus to the borrower. This non-judicial foreclosure system has transformed Sri Lanka’s credit market by giving banks confidence to lend to small and medium enterprises, homebuyers, and consumers.
Another banking sector lawyer says the country’s loan recovery law itself is straightforward; the flaw lies in its weak implementation. “The core problem is the lack of competent judges who understand banking and recovery laws. Those judges who do have the expertise are overworked.
“This is a specialised area, and without the right judicial capacity, cases cannot be decided correctly or on time. Banking courts perform somewhat better because they handle only these matters, but high court judges are overwhelmed and simply do not have the time to hear our cases. The systemic delays have made the foreclosure process ineffective despite what the law promises.”
The economic fallout of a weak loan-recovery framework is huge. Small and medium enterprises and farmers struggle to access finance. The mortgage market is virtually non-existent, as no lender can offer long-term housing finance without the assurance of repossession in the event of default. Even consumer credit — personal loans and credit cards — remains underdeveloped.
These segments pay the price for a legal system that is unable to enforce contracts while banks retreat to the safer options of lending to government or large corporations, leaving the broader economy starved of credit.
Published in Dawn, The Business and Finance Weekly, December 8th, 2025
