The Missing Middle in Pakistan's Credit System

Small and medium enterprises occupy an awkward place in Pakistan’s economic story. They are praised as engines of employment, exports, and innovation, yet many remain too large for microfinance and too informal, young, or collateral-poor for conventional bank credit.

This is the missing middle of the financial system.

Why Banks Say No

Banks face genuine constraints. Smaller firms often lack audited accounts, stable cash-flow records, formal property, or reliable governance. Assessing them individually is expensive, while government securities offer simpler returns with lower operational effort.

But the result is circular. A firm cannot build a formal credit history because it cannot obtain formal credit. It relies on supplier finance, family capital, or short-term informal borrowing, limiting investment in machinery, certification, inventory, and skilled workers.

Better Rules Need Better Practice

The State Bank’s revised SME prudential regulations aim to remove structural barriers, encourage technology, and support partnerships between banks, fintechs, and non-financial providers. The test is whether institutions change underwriting rather than merely relabel existing clients.

Cash-flow lending, digital invoicing, supply-chain data, movable collateral, and credit guarantees can reduce information and security gaps. They also introduce new risks: opaque scoring, weak consent, aggressive recovery, and exclusion of businesses whose activity remains partly offline.

Finance the Transition to Formality

Formalisation should be a ladder, not a cliff. Firms need simple accounts, predictable tax treatment, digital records, and proportionate compliance requirements that become more demanding as they grow. Credit products should reward progress rather than require perfect formality at the start.

Pakistan does not need every small business to become a bank borrower. It needs viable firms to stop being denied growth because the financial system cannot evaluate them. The real success measure is not a lending target; it is whether productive businesses can obtain patient capital on terms their cash flows can sustain.

Source note

This commentary is based on the State Bank’s revised SME financing regulations and the current SME regulatory framework.