The SBP’s Committee on Rural Finance records the rise of cooperative agricultural credit and the creation of the Federal Bank for Cooperatives in the 1970s.

A productive financial system would combine several forms rather than search for one institutional saviour: professionally governed cooperative finance; specialised agricultural and SME institutions; commercial banks capable of cash-flow lending; credit guarantees priced transparently; crop and climate insurance; warehouse-receipt finance; leasing; venture and patient equity; municipal finance; and deeper capital markets.

State Bank of Pakistan, Report of the Committee on Rural Finance, including the history and assessment of cooperative credit.

Part VII distinguished borrowing to build from borrowing to survive. The distinction applies equally inside the economy. A financial system can mobilise savings to finance farms, factories, technology, housing and small enterprises. It can also become an efficient mechanism for transferring private savings to government. Pakistan increasingly confronts the second problem.

The State Bank of Pakistan (SBP) has described it with unusual clarity. Persistently large fiscal deficits, inadequate external inflows and weak non-bank financing have created a strong “sovereign-bank nexus”. Banks can earn substantial returns from government securities instead of undertaking the harder work of assessing private borrowers. SBP identifies this crowding-out as a leading reason Pakistan has one of the lowest private-credit-to-GDP ratios among peer economies.

World Bank data put domestic credit to Pakistan’s private sector at only about 10.7 percent of gross domestic product in 2025. This is not merely a banking statistic. It tells us something about the structure of development. An economy cannot continuously demand higher productivity from farmers and firms while denying them patient capital.

The banks are not villains in this story. They respond to incentives. When the sovereign is a large, regular borrower offering comparatively attractive risk-adjusted returns, purchasing government paper is rational. Lending to a small manufacturer, tenant farmer or new exporter requires information, monitoring, collateral assessment and tolerance of business risk. Debtocracy changes not only the state’s balance sheet. It changes the allocation of national savings.

Recent numbers show improvement, but also the scale of the unfinished task. The Finance Division reported that by end-August 2026 small and medium enterprise (SME) finance had reached Rs. 1.067 trillion, serving about 324,000 borrowers and accounting for 9.9 percent of domestic private........

© Minute Mirror