Over the decades, the number of small and medium enterprises (SMEs) in Pakistan has been growing consistently. This sector has much more potential to increase economic resilience and promise long-term solutions for sustainable growth. Over 7.1 million SMEs collectively employ more than 25m people across the private sector, as stated by the Economic Census of the Pakistan Bureau of Statistics (PBS).
Economic performance is not based solely on trading floor activities or boardroom planning. The nation’s industrial evolution has been driven by the tooling workshops of Gujarat and the textile mills of Faisalabad, the auto part markets of Karachi and countless small storefronts and home-based businesses nationwide. Hence, more opportunities, incentives and reforms must be offered for this prolific workforce.
Despite its vast contributions, Pakistan’s SME financial landscape is restrained by structural barriers, inadequate institutional backing, and a persistent undervaluation of its entrepreneurial capacity. Despite dominating the commercial activity across Pakistan, SMEs receive less than eight per cent of total private-sector credit, one of the lowest shares in South Asia.
By comparison, banks in neighbouring countries like Bangladesh allocate more than a fifth of their lending portfolios to small businesses, creating a stronger impetus for expansion to nurture entrepreneurial spirit and empower the common people.
At the heart of the challenge lies a banking framework historically anchored in collateral-based lending
At the heart of the challenge lies a banking framework historically anchored in collateral-based lending. Instead of trusting entrepreneurial talent for extending loans, urban real-estate titles are preferred by the banks as low-risk ‘collateral’ for extending loans. Many small enterprises operate from rented premises or home workshops, while their real value often sits in receivables, confirmed export orders, machinery, or skilled manpower, or assets that conventional underwriting systems don’t consider as valuable security.
Although SME lending volumes in Pakistan have increased from approximately Rs543 billion in 2023 to nearly Rs876bn in 2025, according to the Pakistan Banks’ Association, the borrower base, exceeding 300,000 businesses, is modest for a country of over 240m people.
One positive development is the reduction in interest rates from 22pc in June 2023 to 10.5pc today. Narrower spreads are prompting banks to explore underserved segments. Some mid-sized institutions have already demonstrated that a stronger SME focus is commercially viable.
However, another structural barrier is informality, or ‘cash transactions’, because a significant portion of economic activity operates outside documented channels, obscured by a lack of audited financial statements, formal bookkeeping systems, or tax records, complicating risk assessment and making underwriting difficult for banks.
Therefore, smaller businesses are unfortunately forced to access informal credit, often at annualised rates of 30–40pc or more, as they prioritise speed and simplicity over affordability.
A more conducive legal framework is also needed to boost the lending volumes. Presently, slow recovery timelines, prolonged litigation in foreclosure cases, and uncertainty around enforcement increase perceived risk. When loan recovery stretches over years, financial institutions either add the ‘price of uncertainty’ into higher costs or limit exposure altogether.
A range of reforms for Pakistan’s SME policy framework is advisable for enhancing lender confidence, reducing the cost of capital, and facilitating SME growth.
Easing collateral laws is critical, since heavy reliance on immovable property as security remains a major barrier. Collateral registries should be expanded, digitised, and integrated nationwide, for real-time verification, to pledge movable assets. Whereby, SMEs will be able to pledge machinery, inventory, receivables, and intellectual property to secure transactions.
SME commercial courts with strict timelines are needed to reduce lending risks. It helps in faster case disposal and contract enforcement. Alternative dispute resolution (ADR) frameworks — such as arbitration and mediation can quickly resolve financial disputes, while digitising court processes can ensure timely and predictable resolution of recovery suits.
Existing schemes for SME credit guarantee need to be scaled, well-capitalised, and made more accessible by increasing the coverage ratio and simplifying claim procedures for timely reimbursement to banks. Fintechs and non-bank financial institutions should also be allowed to participate in risk-sharing mechanisms.
Deployment of intelligent technologies can be a great help in enabling more accurate evaluation of each borrower’s creditworthiness and commercial performance. Supply-chain finance is crucial for optimising working capital and improving cash flow. Enabling early payment to suppliers through financial institutions reduces financing costs and enhances liquidity for smaller suppliers. Financing for indirect exporters also represents a significant opportunity for the value chain.
Public procurement in Pakistan accounts for around 20pc of GDP, totalling approximately $60bn. A significantly higher percentage of this business should be allocated to SMEs, as per the Public Procurement Regulatory Authorityguidelines.
Integrating utility, telecom, and tax-payment data into credit-scoring models can reduce perceived lending risk while encouraging digital bookkeeping and transparency. Incentives can encourage SMEs to ensure export growth, employment generation, women-led enterprise participation, technology adoption, etc. In short, expanding credit guarantees and support through development institutions can transform the SMEs into a powerful engine to ensure robust and inclusive economic progress.
The writer is the chief operating officer of JS Bank Limited
Published in Dawn, The Business and Finance Weekly, April 20th, 2026
