In an economy scarred by one crisis after another, Pakistan’s banking sector has been a notable exception even as others struggled. With interest rates peaking at 22 per cent two years ago, sustained government borrowing allowed the sector to lock in high returns by parking liquidity in fixed Pakistan International Bonds (PIBs), earning bumper profits with minimal balance sheet risk.
However, the past is another country, and now things seem to be returning towards normalcy — whatever that means in Pakistan’s context. For the most part, monetary policy has already been eased as the key rates have reverted towards their long-term (20-year) average of 10.35pc, naturally raising expectations that it would revive private sector activity.
Unfortunately, the data is troubling as private sector credit becomes increasingly divergent from the broader monetary cycle, reflecting structural incentives that favour the deployment of liquidity into government securities rather than lending to the real economy. The system is so warped that scheduled banks now put $1.01 into (mostly treasuries) for every dollar of deposits they mobilise.
On the other hand, advances-to-deposits slipped below 40pc and stood at 39.75pc by December, not too far away from the trough of 36.33pc seen at October end. Unsurprisingly, private sector credit as a share of GDP has been on a declining trend since Covid-19, and currently clocks at 9.2pc, down three percentage points (pps) from its level a decade ago. This stagnancy was particularly visible as 2025 closed with loans to the private sector at Rs10.67 trillion, barely inching up 1pc from the same period of the previous year.
While advances remain stagnant, the sectoral mix is broadly unchanged, with industrial and services sectors dominating lending, and agriculture and personal credit remaining sidelined
Peer analysis further illustrates the extent of this challenge, where our private credit-to-GDP is a fraction compared to economies like Bangladesh (35.8pc), Indonesia (36.4pc), Egypt (27.6pc), and the Philippines (49.81pc). In any case, while advances remain stagnant, the broader sectoral mix has broadly remained unchanged, where industrial and services sectors continue to dominate lending with contributions of 62pc and 19.4pc, respectively. Meanwhile, agriculture and personal credit remain sidelined, except for bank employees, of course.
Amidst much of the same old, there was nevertheless one glimmer of hope as small and medium enterprise (SME) financing witnessed one of the strongest years in recent history. Loans to this segment reached Rs952.5bn by 2025 end, surging by 52.6pc or Rs328bn from the same period of the previous year. As a result, its share in total private business loans crossed 10pc for the first time in the 2020s.
Credit where due, this growth was in large part enabled by targeted initiatives like first-loss guarantees, while the refinancing schemes of the past were phased out.
In line with past trends, wholesale and retail trade remained the hot favourite, with outstanding advances of Rs326bn, outpacing manufacturing. Though nowhere near, advances to agri SMEs have also found momentum and soared by 64.5pc, well above the overall rate of 42.2pc. While data for December is not yet available, the growth has come on the back of a substantial increase in the number of borrowers, which has risen by more than 100,000 in the first six months of the previous year alone.
What’s perhaps more interesting is that even as the policy rate has declined by more than 1,200 basis points since 2022, spreads remain elevated and are near decade highs. In December, weighted average lending rates on incremental advances (excluding zero markup and interbank) stood at 11.8pps while those on deposits were 8.3pps.
Quite understandably, microfinance banks had the largest delta of 23pps at the end of the year, followed by specialised institutions at 10pps, as per an analysis done by the Karachi School of Business & Leadership InsightLab in its 2025 Credit Review.
Naturally, the question is, where does our private credit ecosystem go from here? As macroeconomic stabilisation finds firmer footing and begins yielding results, demand for financing will almost certainly increase. But supply is another matter entirely, given that capital has a safer, more attractive home in federal government securities.
One could argue that it’s simply a matter of proper incentives. Help the sector reduce its risk and it will eventually build the capacity to lend without external support. In theory, this makes perfect sense. But if the past is any guide such interventions can just as easily create structural dependencies.
Mutaher Khan is co-founder of Data Darbar and works for the Karachi School of Business and Leadership, and Hasan Umair, analyst at KSBL InsightLab
Published in Dawn, The Business and Finance Weekly, February 2nd, 2026
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