Despite concerted efforts by Pakistan’s government and the State Bank of Pakistan (SBP) to enhance lending to small and medium enterprises (SMEs), the sector is facing growing financial strain. The default rate for SME loans has climbed to 15.39% in the third quarter of fiscal year 2025, up from 14.16% just three months earlier, signaling increasing challenges in sustaining credit health among smaller businesses.
Shrinking Short-Term Loans Reflect Cash Flow Crunch
Data from the SBP reveals that working capital financing to SMEs fell to Rs311.33 billion by March 2025, down from Rs332.8 billion at the end of December 2024. This drop points to tighter lending conditions for short-term funding, which SMEs rely on to manage daily operations. Meanwhile, fixed investment in the sector remains largely unchanged at Rs2.42 trillion, suggesting long-term capital infusion is not gaining momentum despite ongoing financial constraints.
Non-Performing Loans Weigh Down Banks’ Appetite for SME Credit
One of the core reasons behind banks’ reluctance to extend more credit to SMEs is the rising level of non-performing loans (NPLs), which heighten perceived risks. With defaults on the rise, financial institutions are favoring safer bets like government securities, where nearly 60% of banking assets are currently tied up. This heavy concentration in domestic bonds is well above the 20% benchmark that economists often warn could signal an imbalance in developing economies.
SBP’s Tech-Driven Approach to Unlock SME Financing
In response to these hurdles, the SBP has launched the Challenge Fund for Technology Adoption and Digitalisation of SME Banking (CFS), aiming to encourage banks to create innovative, tech-based solutions to widen SME financial inclusion. Participating banks can receive grants to support their projects, provided they contribute 15% of the funding themselves. All projects must be wrapped up within eight months, emphasizing quick, tangible results.
By leveraging technology, the SBP hopes to break down barriers to SME financing and help these vital contributors to Pakistan’s economy access the credit they need to thrive amid ongoing economic pressures. However, the increasing default rates highlight the uphill battle ahead in restoring trust and financial stability within this critical sector.
