Pakistan expects specialist lenders to reach businesses that banks overlook. Those lenders first need someone willing to lend to them.
Pakistan’s SME financing problem begins one floor above the entrepreneur. Before a specialist lender can finance a small manufacturer, someone must finance the specialist lender. Much of the policy conversation skips this inconvenience. Banks are encouraged to lend, guarantees are announced, and non-bank financial companies are expected to deliver the last mile. The question of who funds that delivery remains awkwardly unresolved.
Microfinance offers a useful institutional lesson. Its commercialisation involved decades of institution building, regulatory development and wholesale support, including through the Pakistan Poverty Alleviation Fund. Established in 2016, the Pakistan Microfinance Investment Company, or PMIC, consolidated a dedicated commercial apex-lending role within that ecosystem. Microfinance did not become bankable simply because somebody discovered that poor people repay loans. Institutions had to become credible borrowers themselves.
The scale of PMIC’s funding illustrates what that architecture can achieve. Its 2025 annual report records Rs8.1 billion raised from commercial banks and Rs2.4 billion through commercial paper during the year. At year-end, equity stood at Rs10.4 billion and subordinated loans at Rs8.3 billion. PMIC reported gross financing exposure, including non-funded exposure, of approximately Rs37 billion across 28 financial institutions. Development capital was supporting an intermediary capable of mobilising commercial funding and financing other lenders.
The SME non-bank sector has no comparably established, dedicated wholesale architecture. Its collection of investment finance companies, leasing businesses, modarabas and discounting companies should provide alternatives to conventional bank lending. The sector’s composition suggests that this promise remains substantially unfulfilled.
According to SECP’s December 2025 snapshot, 116 lending entities, including modarabas, held approximately Rs824 billion in assets. Non-bank microfinance companies accounted for Rs410 billion and Rs306 billion of the sector’s Rs444 billion in loans and advances: roughly 69 percent of that lending category. Three leasing companies held just Rs5.27 billion in assets; the single discounting company held Rs120 million. These figures exclude leasing undertaken within other institutional categories, but the small scale of the dedicated segments is striking.
Even apparently larger balance sheets require inspection. Investment banks and investment finance companies held Rs339 billion in assets, of which Rs189 billion comprised investments and Rs86 billion loans and advances. These regulatory categories do not identify how much financing ultimately reaches manufacturing SMEs. They do show why growth in aggregate NBFC assets cannot automatically be presented as growth in productive enterprise lending.
The underlying difficulty is a financing trap. A specialist NBFC needs funding to build a diversified loan portfolio and demonstrate collections across business cycles. A wholesale bank wants evidence of precisely that performance before committing meaningful funding. Equity finances the experiment, but a lender confined to its shareholders’ capital struggles to achieve the scale needed to establish the track record its prospective creditors demand.
There are sound reasons for banks to hesitate. A capable loan originator is not necessarily a sound institutional borrower. Weak capital, concentrated portfolios, uncertain recoveries, poor reporting and mismatched maturities can make the intermediary riskier than its sales pitch suggests. The bank must assess both the underlying SMEs and the institution standing between itself and those borrowers.
Nor is SME risk imaginary. SBP’s December 2025 banking statistics reported approximately Rs903 billion in SME advances and an infection ratio of 12.5 percent, compared with 6.2 percent for corporate lending. These figures do not establish what a well-run specialist NBFC would experience. They explain why wholesale creditors will require more than assurances about an underserved market.
Partial credit guarantees can improve this calculation. Their effectiveness depends on what prevents the transaction. Where a bank understands an NBFC and finds its business credible, sharing credit losses may unlock a facility. Where the bank distrusts the institution’s accounts, servicing capacity or governance, partial cover leaves substantial unresolved risk. A guarantee cannot perform institutional due diligence or manufacture a repayment history.
This is where an SME wholesale apex lender earns its place. It would specialise in assessing financial intermediaries, provide appropriately structured funding, enforce reporting standards and monitor the underlying portfolios. Its commercial task would be to distinguish a promising specialist with a funding constraint from a weak lender seeking a more accommodating creditor.
The proposition is particularly relevant to manufacturing and production-linked value chains. Financing a supplier’s receivables, a processor’s inventory or a small factory’s equipment requires knowledge of operating cycles, buyers and recoverable assets. A specialist can develop that knowledge around a narrow market. Its funding arrangements must then accommodate the business it is underwriting. A lender dependent on uncertain renewals has an understandable incentive to favour short, easily recycled credit over productive investments with longer repayment periods.
The policy framework has recently moved towards recognising this division of labour. On 28 October 2026, SBP introduced wholesale and agency arrangements through which banks can finance small enterprises and small farmers using eligible partner institutions, with financing covered under the relevant government risk-coverage schemes. The framework requires, among other conditions, at least three years’ enterprise or agricultural financing experience, operational self-sufficiency of at least 100 percent and relevant non-performing loans of no more than 5 percent.
That is a useful opening. It also sharpens the institutional question: who helps capable specialists become acceptable partners? Regulatory permission enables banks to participate; it cannot ensure that banks will fund every institution with credible potential. An apex lender would address that intermediate stage, while established NBFCs could proceed directly to bank partnerships.
Its design would require discipline. Shareholders should provide sufficient loss-absorbing capital. Wholesale facilities should carry commercial pricing that recognises funding costs, operating expenses and expected credit losses. Partial guarantees could support funding into the apex or eligible onward facilities, with clearly defined limits and meaningful retained exposure. Cheap money should never become the substitute for credit judgement.
Accreditation should examine capital, governance, underwriting, collections, portfolio concentration and data quality. Drawdowns should follow verified eligible lending, with suspension triggers when performance deteriorates. The apex would need the authority to refuse applicants, stop funding and recognise losses. An institution unable to say no would soon become a refinancing window for yesterday’s mistakes.
The case also requires a sharper diagnosis than “NBFCs need liquidity”. Some need new capital. Some need competent management. Some have lending models whose revenues cannot cover acquisition, servicing and credit losses. Wholesale debt cannot repair those economics. Initial deployment should therefore concentrate on a small group of specialists whose viable origination capacity demonstrably exceeds their access to suitable funding.
An existing development-backed finance company could be repurposed for this role, provided its capital, licence and capabilities support the mandate. That would demand a clear institutional choice. Wholesale underwriting requires different skills and incentives from running a retail lending business, and lending to potential competitors creates conflicts that governance must address.
Graduation should define success. After successive lending cycles, an accredited NBFC should possess audited performance, credible portfolio data and an institutional repayment record that commercial banks can assess. Bank co-financing should expand as that evidence accumulates, reducing dependence on apex funding. The relevant measures would include additional productive SME credit, portfolio performance, funding tenors and commercial money mobilised.
Pakistan needs to finance the institutions capable of financing its smaller businesses. PMIC demonstrates that a wholesale intermediary can mobilise capital and support a specialised lending ecosystem. The SME sector needs an institution built to perform that function, with the commercial discipline to create bankable lenders and the restraint to let successful ones graduate.
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