Private sector lending slumps at 22%

Pakistan's banking sector lending to the private sector stands at a mere 22% of total assets as of March 2026. This highlights a growing disconnect between financial institutions and the broader economy, with banks increasingly operating as primary financiers for the government rather than engines for industrial and consumer growth.

Data compiled by Optimus Capital Management indicate that total banking assets have surged to approximately Rs60 trillion, yet this growth is decoupled from traditional productive lending. Instead, the sector is characterised by record?high leverage, with the assets?to?equity ratio (excluding surplus) climbing to a historic 18 times. This means that for every rupee of equity, banks are carrying 18 rupees in assets, the vast majority of which are now parked in government securities rather than being used for private enterprise, which is the growth engine in any economy. "Absence of private credit allows banks to push leverage to historic highs," noted Maaz Azam, Research Head at Optimus Capital.According to the World Bank, India and Bangladesh maintain private credit?to?GDP ratios of approximately 50% and 40%, respectively.

The pivot away from the private sector is largely driven by the perceived "risk-free" nature of government debt. In a high?interest?rate environment with persistent economic uncertainty, banks find it more efficient to funnel liquidity into Pakistan Investment Bonds (PIBs) and treasury bills.

Unlike private lending, which requires rigorous credit assessment and carries significant risk weightage, thereby affecting a bank's capital adequacy, lending to the state carries virtually no credit charge. This allows banks to push their leverage to historic highs without the regulatory friction that typically accompanies a surge in corporate or retail loan portfolios, Azam explained. Perhaps more concerning for long?term economic stability is how this asset growth is being funded. In other economies, banks rely on customer deposits to fuel their lending activities. However, the current model of Pakistan's banking sector is wholesale borrowing, which now accounts for a staggering 27.1% of total banking assets, or over Rs16 trillion.

Much of this liquidity is being provided by the State Bank of Pakistan (SBP) through open market operations (OMOs). Essentially, a circular flow of capital has emerged: the central bank provides liquidity to commercial banks, which then use those funds to purchase government debt. While this ensures that the government's fiscal deficit is funded, it effectively "crowds out" private borrowers, who find credit either unavailable or prohibitively expensive.

One might wonder why such a complex process is necessary instead of the government borrowing directly from the central bank. The answer lies in IMF restrictions that prohibit direct government borrowing from the SBP to prevent "hidden inflation". This has created a circular flow where the SBP provides liquidity to commercial banks, which then lend to the government – a practice that has pushed banking leverage to a historic high.

The "absence of private credit" is not merely a banking metric; it is a symptom of a stalling industrial sector. Without access to credit, businesses cannot expand, modernise or innovate. The retail sector is equally affected, with minimal demand or supply for home loans, auto financing or personal credit lines.

Even as the economy shows minor signs of stabilisation, private sector credit growth remains "very little" relative to the overall money supply. This lack of credit penetration acts as a structural brake on GDP growth, as the banking sector prioritises the ease of government financing over the complexities of economic development.

Analysts warn that this high?leverage, low?private?credit model creates a fragile banking ecosystem. With 27.1% of assets funded by borrowing, any sudden shift in central bank liquidity or a change in government fiscal policy could leave the sector exposed.

Furthermore, the inefficiency within the sector allows banks to maintain high profitability through sheer leverage and interest income from the state, reducing the incentive to compete for deposits or improve service quality for the general public.