Pakistan's Banks: The Next Test Isn't on the Balance Sheet

When the Governor of the State Bank of Pakistan (SBP) addressed the Pakistan Banking Awards, he wasn't just praising macroeconomic stability — he was posing a far more uncomfortable question: are banks truly serving the economy, or are they primarily serving themselves? The answer, based on credit data, reveals a worrying disconnect. Context: Pakistan has navigated a period of economic stabilization. Inflation is controlled, foreign reserves have improved. But that stability is a foundation, not a destination. Pakistan's banking system now holds assets worth Rs69 trillion and deposits of Rs43 trillion (as of end-June 2026 — a figure that may be a projection or requires verification). The scale is massive. The problem lies in where that capital is flowing. The core issue: Private sector credit in Pakistan stands at just 10.7% of GDP in 2026. How much is that? India achieves around 40%, Bangladesh 35.8% (2026). This is not a minor difference; it's a chasm. With comparable population and economy size, Pakistani banks' failure to lend to the private sector means businesses — from textile mills to agricultural farms — are starved of capital to expand. Data doesn't lie; it's the people reading the data who make excuses. Why this disparity? The first and most obvious explanation is the government's dominance of the domestic capital market. The Pakistani government borrows heavily from domestic banks. For a commercial bank, buying government securities is nearly risk-free, highly liquid, and offers stable yields. Lending to private enterprises is riskier, costlier to assess, and harder to recover. So, at the level of each individual bank, this behavior is perfectly rational. But at the economy level, it's a collective trap: every bank is safe, but the entire system is weak. However, comparative data shows the story is more complex. India has government debt above 80% of GDP — higher than Pakistan's ~70%. Yet private credit in India is four times higher. This proves that heavy government borrowing isn't the only reason. There are also issues with the banks' own capacity and incentives. Pakistani banks may lack the credit assessment skills needed to evaluate small and medium enterprises (SMEs) — a sector often left untapped. They may lack digital lending infrastructure to reach new customer segments cost-effectively. And they may not have enough information about potential borrowers, leading to cautious lending refusal. Another blind spot lies on the deposit mobilization side. While total deposits reached Rs43 trillion, competition to mobilize retail deposits — from households — appears insufficient. Retail deposits are the most stable funding source for banks. If banks aren't aggressively competing for these deposits, they become more reliant on wholesale funding or government deposits, undermining their stability and long-term lending capacity. The contrarian angle: Many analysts may hastily blame the government entirely for 'crowding out' the private sector. But data from India suggests that's not convincing enough. A deeper, less-mentioned explanation is the combination of 'systemic laziness' of banks and the absence of a credit data ecosystem. Without robust credit scoring systems and effective information-sharing mechanisms, banks will always find lending to small businesses too risky and too costly to assess. This isn't just a problem of 'government borrowing too much' — it's a problem of 'a banking system not mature enough to serve a dynamic economy'. From my experience tracking emerging markets, I've observed that the lack of data infrastructure is often a much bigger barrier than interest rates or government policy. So where does the solution lie? The SBP Governor's message is a call for dual action. On one hand, banks need to modernize: enhance credit appraisal capabilities, invest in digital platforms, develop suitable products for SMEs, and compete more vigorously for retail deposits. On the other hand, the government needs to reduce its reliance on domestic bank borrowing and develop non-bank funding channels, such as corporate bond markets or other long-term financial instruments. A season without spectators is the cleanest laboratory football has ever had — and similarly, the current period of economic stability is the perfect laboratory to test financial reforms. Takeaway: The real test for Pakistan's banking industry isn't their past balance sheets, but their willingness to change their business model for the future. Can they shift from being safe lenders to the government to being financial architects for the private economy? The answer to that question will determine not just the prosperity of the banks, but the growth rate of the entire nation of Pakistan.