The banking sector’s next test

EDITORIAL: The SBP governor’s recent call for banks to re-orient their business models towards stronger retail deposit mobilisation and greater private sector financing deserves serious attention.

Addressing the Pakistan Banking Awards ceremony last week, he rightly noted that although the economy has reached the much-needed state of stabilisation, this alone is insufficient to put it on a path of high, sustainable growth, and the banking sector must play a much larger role in financing it.

Pakistan’s banks have certainly become large and profitable institutions. Their assets reached Rs69 trillion and deposits Rs43 trillion by end-June 2026. Yet, as the governor noted, these figures remain modest relative to the economy’s size compared with other emerging markets. This points to a relatively shallow financial system, with substantial room to bring more household and business savings into the formal banking system.

The high currency-to-deposit ratio reinforces the same concern: too much money remains outside the banking system, limiting the pool of funds available for productive investment. The same weakness is evident on the lending side. World Bank data show that domestic credit to the private sector by banks stood at just 10.7 percent of GDP in 2025, a level far below that of regional peers. In 2024, for instance, the corresponding ratio was around 40 percent in India and 35.8 percent in Bangladesh.

One obvious reason for Pakistan’s unusually low private sector lending is the government’s enormous appetite for domestic financing. Government securities offer banks a relatively safe, liquid and convenient asset, while lending to businesses requires assessing creditworthiness, monitoring borrowers and accepting default risk.

This, then, is a rational business decision from an individual bank’s perspective, but a problematic equilibrium for the economy. When the government becomes the dominant customer, banks have less incentive to invest in the infrastructure, skills and risk assessment capabilities needed to find and finance productive private borrowers.

Yet government borrowing alone cannot be an excuse. As the governor noted, other economies with substantial public sector borrowing have managed to maintain far deeper private credit markets. India, for instance, has general government debt of over 80 percent of GDP, compared with around 70 percent in Pakistan, yet its banking system continues to channel substantial credit to the private sector.

So, while high government borrowing is undoubtedly an important factor, it cannot alone explain Pakistan’s shallow private credit market. Banks’ capacity and incentive to serve the wider economy, their business models and risk appetites must also be part of the explanation.

Clearly, banks need stronger credit appraisal systems, digital lending infrastructure, better borrower information, and greater appetite for lending to SMEs and underserved segments. They also need a commercial incentive to compete for deposits rather than simply recycling a limited deposit base into government securities.

Retail deposit mobilisation is particularly important. The government has a role to play here. It must gradually reduce its reliance on bank financing, deepen non-bank sources of public borrowing and create a business environment in which banks can lend confidently to productive enterprises.

Pakistan cannot expect banks to diversify if the sovereign remains their most attractive borrower, nor can banks wait for public borrowing to disappear. If the country is serious about moving from stabilisation to sustainable growth, the government must leave greater room for private credit, while banks must become more willing and better equipped to fill it.

Greater private sector financing is essential because credit converts savings into investment. Without adequate credit, investment remains constrained, leaving economic growth disproportionately dependent on government spending, consumption and external financing.

If Pakistan is to translate stabilisation into higher, more sustainable growth, its banks must become a more effective conduit between the country’s savings and its productive capacity.

Copyright Business Recorder, 2026