Small and Medium Enterprises (SMEs) are critical to the economic fabric of many countries, including Pakistan. Despite their importance, SMEs in Pakistan face significant barriers to accessing financing. These challenges not only hinder the growth of SMEs but also constrain the country’s broader economic potential.

While the government has shown commitment to improving SME financing, the issue is not merely about intent: it’s about addressing the structural hurdles that prevent SMEs from accessing capital. Pakistan’s SMEs are especially impacted by the dominance of government borrowing and the cautious approach taken by banks.

The Pakistani government, particularly through the leadership of Prime Minister Shehbaz Sharif and the Special Assistant to the Prime Minister (SAPM) on Industries and Production Haroon Akhtar Khan, has made concerted efforts to improve access to credit for SMEs. He has emphasized expanding credit access to promote SME growth and reduce unemployment. However, despite these efforts, SME credit in Pakistan remains dismally low, accounting for under 2 percent of the country’s GDP. This is starkly low compared to emerging markets, where SME financing can reach up to 18% of GDP.

One key reason for this financing gap is the lack of structure within many SMEs. Business owners in Pakistan are often hesitant to register their businesses with regulatory bodies, fearing harassment. This reluctance to formalize business operations makes it difficult for banks to assess and lend to SMEs. Furthermore, banks in Pakistan are generally reluctant to extend credit to SMEs due to perceived risks banks prefer government-backed investments, such as Treasury Bills, which are seen as safer.

In addition, the heavy reliance on government borrowing exacerbates the problem. Pakistan’s banks, like those in many other countries, favour government-backed, low-risk instruments such as Treasury Bills and other government securities. This creates a crowding-out effect, where banks allocate capital to the government rather than lending to SMEs. When the government absorbs a significant portion of available credit, SMEs are left with limited access to funding. Banks, opting for the safer route, choose to lend to the government instead of small businesses. This practice stifles the growth potential of SMEs, which are critical for long-term economic development.

For Pakistan’s economy to thrive, creating space for SME financing is essential. The government must reduce its borrowing demands to free up capital for SMEs. This shift would enable banks to lend more freely to small businesses, which would help them grow and contribute more effectively to the economy.

Other countries have successfully developed structures to support SME growth. China, South Korea, and Thailand are prime examples. In China, credit guarantee programmes have helped SMEs access financing, even when they lack collateral. Southeast Asian countries have embraced FinTech innovations, such as peer-to-peer lending platforms like Funding Societies in Singapore, which provide businesses with an alternative to traditional banking.

India’s MUDRA scheme, which offers low-interest financing to micro and small enterprises, has helped businesses too small to access traditional credit. These international examples show that innovative financial mechanisms and policies can significantly improve SMEs’ access to credit and foster business growth.

In Pakistan, the lack of innovative financing models is one of the key reasons for the stagnation of SME credit. The banking sector remains hesitant to lend to smaller, riskier businesses, leaving many SMEs without access to financing. To overcome these barriers, Pakistan must explore innovative financing models that go beyond traditional bank lending. One promising approach is the development of alternative credit evaluation methods. For example, banks could assess utility bills (electricity, gas, etc.) as a proxy for business operations, or evaluate workforce size to gauge an SME’s capacity for growth. These alternative models would allow banks to better understand the potential of SMEs, enabling them to approve more loans without relying solely on formal financial documents.

The rise of FinTech platforms presents another opportunity for SMEs to access financing. Peer-to-peer lending platforms like Funding Societies and Lenddo EFL in Southeast Asia and the Philippines allow SMEs to connect directly with investors and secure funding based on non-traditional data, such as digital footprints, social media activity, and e-commerce sales data. Pakistan could benefit greatly from developing similar platforms that facilitate alternative financing channels for SMEs, bypassing traditional banking systems.

Islamic banking is another area with growth potential for SMEs in Pakistan. Many SME owners in Pakistan prefer Sharia-compliant financial products. The government should promote Islamic financial products that cater to the specific needs of SMEs, such as Islamic microfinance and Sharia-compliant lending. This would not only increase access to financing for SMEs but also contribute to a more inclusive financial ecosystem in Pakistan.

Leasing can be a critical tool for helping SMEs acquire essential assets, such as machinery, vehicles, and equipment, without large upfront costs. The government should subsidize the cost of funds for leasing companies, enabling them to offer competitive rates to SMEs. This would help SMEs scale their operations while avoiding high-interest loans. Leasing provides a cost-effective alternative to traditional financing methods, helping SMEs build the assets they need for growth. By reducing reliance on high-interest loans and upfront capital, leasing helps create an environment in which SMEs can grow sustainably.

To reduce the risk associated with SME lending, the government can introduce credit guarantee schemes. These schemes would allow financial institutions to share some of the lending risk, encouraging them to provide more credit to SMEs. By de-risking SME lending, the government can incentivize banks to extend loans to businesses that might otherwise be considered too risky.

Pakistan’s economic future depends heavily on the success of its SMEs. To unlock the full potential of the SME sector, the country must address the barriers to financing. This means creating room for SME lending by reducing government borrowing, promoting Islamic finance, leveraging FinTech innovations, and making tools like leasing more accessible.

The government must take immediate steps to tackle the financing imbalance and provide SMEs with the resources they need. Only by implementing these changes can Pakistan unlock the full potential of its SME sector, leading to more sustainable economic growth and job creation.

Copyright Business Recorder, 2026

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