Who built the field?—I

I argued for bank privatization before it was fashionable. I would argue for it again. Nobody sensible wants back the nationalised banks of the 1980s, with their political loans and rotten books. But thirty years is long enough to judge a reform, and the verdict is lopsided. We got strong banks. We did not get a financial system. Bank owners have prospered by lending depositors’ money to the government. The saver earns little, the small firm borrows nothing, and between them the banks keep a spread of more than six percentage points.

Zafar Masud’s two-part defence of the banks in these pages was courteous and, in places, correct. Raast works. Balance sheets are sound. Banks pay heavy taxes. The FATF rules were not written on Chundrigar Road. I grant all of it.

What I do not grant is the move he makes again and again. The deficit, informality, the narrow tax base, KYC, the missing pension funds: each becomes part of “the field” on which the banks merely play. Put a neighbour’s banks on this field, he says, and they would lend as little as ours.

Perhaps. But a field is not weather. Somebody lays it out.

The groundskeepers

No profession has had more chances to run Pakistan’s economic policy than banking. Shaukat Aziz came from Citibank to run the finance ministry and then the government. Shaukat Tarin was finance minister twice. Muhammad Aurangzeb ran HBL and chaired the Pakistan Banks Association before taking the finance portfolio in 2024. Below the ministers, bankers sit on the SBP board and its committees, lead regulators or sit on their boards, run most development finance institutions, and sit on the boards of the companies they lend to. Ministers change. The network stays.

So bankers have not merely played on this field. They laid it out, marked the lines and wrote much of the rulebook. The tax code, the borrowing plan, the rules on who may lend, deal and compete: on each, a banker has held the pen or sat beside whoever did. Having designed the game, they cannot now say they only play the game they were given.

I allege no wrongdoing. I ask a plain question. The tax base stayed narrow, the deficit large and documentation optional while bankers sat in the room. They had every chance to push for an investment-friendly tax system and real control of spending, the only cure for a state whose hunger for debt is strangling the economy. They had every chance to open finance to competition. They did neither. Why?

The test

Masud’s core claim is that banks lend to every borrower they can see, and that documentation, not funding, holds them back. In 2024 that claim was tested. It failed.

The field did not change that year. The tax did. Any bank whose advances were below half its deposits on 31 December faced an extra 10 to 16 percent tax on its income from government paper. The advance-to-deposit ratio jumped from 38.4 percent in August to 49.7 percent in early December and about 52 percent by year-end. Between July and mid-November banks lent Rs880 billion to the private sector; a year earlier, over the same months, private borrowers had repaid Rs82 billion more than they took. Lending to non-bank finance companies rose almost six-fold, to Rs1.46 trillion.

Then the banks went to court, and the industry negotiated the tax away for a flat 44 percent rate, stepping down to 42. In the first half of 2025 advances shrank by about 15 percent. By June, SBP’s own review put the ratio at 35.3 percent, the lowest since 2014.

Much of the late-2024 surge was window dressing. Concede it; it changes nothing. Banks found takers for over a trillion rupees in a single quarter when their income from government paper was threatened, and lost interest the moment the threat lifted. Borrowers did not suddenly become visible. The incentive changed, and the banks had the clout to change it back.

What depth means

Masud and I agree that Pakistan leans too heavily on banks. We disagree on why, and that turns on what financial depth means.

The usual ratios are bad enough. World Bank data put bank credit to the private sector at about 24 percent of GDP in 1990, 29 percent in 2008, and 17 percent in 2020. SBP’s narrower measure was 8.7 percent in FY2025. Stock market capitalisation was 17.3 percent of GDP last year, below its 2007 level. Pension assets, on Masud’s own count, are under one percent of GDP.

But ratios are symptoms. A deep system gives savers many roads to borrowers, and borrowers many roads to savers. Leasing and housing finance companies, credit funds, a corporate bond market, venture capital, pension funds that want long paper, fintech lenders pricing risk from payments data: each competes with banks for deposits and for borrowers. That competition is what narrows spreads and creates instruments. Depth and competition are the same thing.

Count the roads in Pakistan. A saver has a bank, National Savings, a money-market fund usually owned by a bank and sold in its branch, or plots, gold and dollars. A firm borrows from a bank or not at all. The market is not shallow and incidentally bank-centred. It is shallow because it is bank-centred.

The bargain

Behind this sits a bargain. A government that borrows heavily needs a captive pool of savings. A central bank under fiscal dominance cannot hold inflation and the rupee by ordinary means alone. Its rules are justified on prudential and anti-money-laundering grounds, and many are needed. But whatever the intent, the effect is to push as much of the country’s money as possible through banks, where it can be seen, priced and steered. The state gets cheap, dependable funding. SBP gets its levers. The banks get protection.

The numbers show who sits at the centre. At end-June 2025 banks held Rs38.7 trillion of the Rs46.6 trillion in government securities, or 83 percent. That month their investments, overwhelmingly government paper, exceeded their entire deposit base: Rs36.6 trillion against Rs35.5 trillion.

The protection starts at the door. Since 2013 a new commercial bank has needed at least Rs10 billion of capital, the same bar for a small specialist lender as for a national bank. The last new commercial bank I can find is the Bank of China, licensed in 2017 to serve CPEC. Digital banks were meant to be a cheaper way in. More than forty firms applied and five were chosen in January 2023. Nearly four years on, three are running, and only one, Raqami, is genuinely new. HugoBank was allowed a limited pilot only this August.

Exit is managed as tightly. Banks here do not fail; they are absorbed. Silkbank, with negative equity of Rs13.9 billion, was folded into UBL in March 2025. The foreign banks Masud cites as proof of an open market were each bought by an incumbent: RBS by Faysal, HSBC by Meezan, and both Barclays and Citi’s consumer book by HBL, the largest bank of all. Every exit makes an incumbent bigger.

Everyone else is routed through a bank. Only primary dealers bid at government auctions, and nine of the ten for 2026-27 are banks. E-money wallets may hold money but cannot lend it or pay a return on it, and their funds sit in banks. Lending NBFCs cannot take deposits, so they borrow from banks. Exchange companies must settle through banks, and SBP told the big banks to open exchange companies of their own; 12 of 36 are now bank-backed. Even the mutual fund boom Masud celebrates runs through banks: eight bank-affiliated managers hold about 75 percent of assets, and some 70 percent of the money sits in money-market and income funds, largely government paper in another wrapper.

Each of these rules has a defence. Together they leave no road that does not pass a bank. That is the field. Bankers did not stumble onto it. They helped build it, and they are its first beneficiaries.

(Part II: who pays for it, and what should change.)

Copyright Business Recorder, 2026