Leaking fountainhead, dry pond

Picture a garden fountain. Water rises from the spout, spills over the rim, and gathers in a pond below, where it nourishes the plants around it. Now imagine the spout leaks before the water reaches the pond. The fountainhead still runs. The plants still wait. But the pond stays dry, and nothing grows.

It is an honest picture of one of Pakistan's deepest puzzles: why our banks, awash with deposits, struggle to lend to the firms and households that would actually grow the economy with the industry advances-to-deposit ratio in the vicinity of 40%, among the lowest in the region.

This is not a story about blame. It is a story about plumbing. Two upstream leaks – narrow taxation and distortive tariffs – explain why so little water reaches the productive pond. Both reflect structural realities accumulated over decades, and both can be fixed.

The first leak is a tax base too narrow to feed the state. The informal economy commands over 40% of GDP and employs nearly 72.5% of the non-agricultural workforce, according to Smeda-ILO research. The direction, however, is encouraging. The tax-to-GDP ratio, though predominantly rate-driven, crossed into double digits at 10.6% for the first time in over a decade. The fiscal deficit narrowed to 5.4% of GDP from 6.8%. Registered filers grew from 4.5 million to over 7.2 million. These are real, hard-won gains. But the medium-term goal of 13% by 2028-29 still falls short of the 15% threshold the World Bank associates with sustained growth.

Until the taxation gap closes, the fiscal deficit must be financed by the banks. Roughly 86% of last year's deficit was sourced from the banking system. When the state is the largest borrower in the room, productive, private borrowers are crowded out by definition.

The deeper constraint, though, is not liquidity. Our banks have deposits. The constraint is information. Millions of viable borrowers do not exist on paper. An undocumented economy is, by definition, an unobservable one, and banks are trained to lend against what they can see on paper. A generation of enterprise is therefore locked out of formal credit, not because it is unworthy, but because it is invisible. Underwriting an unobservable borrower is harder, riskier, and difficult to price.

There are encouraging signs. Private sector credit grew over 15%, and SME financing alone doubled in the last two years, both in borrowers and amounts. But the share of credit flowing to the productive economy still falls well short of its contribution to GDP.

The second leak is a tariff regime that subtly subsidises inefficiency. The Ministry of Commerce's own National Tariff Policy 2025-30 records the effective applied average tariff falling from 10.6% in 2018-19 to 6.7% by 2023-24, welcome, but still an outlier in the region. Higher input costs squeeze exporters' margins, weaken their cash flows, and erode the very metrics on which banks underwrite. A firm that cannot price competitively abroad cannot generate the predictable receivables that make it bankable at home. Merchandise exports have stagnated at $32 billion while regional peers doubled theirs. Phased tariff rationalisation, like Asean countries, is among the cheapest reforms available.

Put plainly, the same firms that need bank credit also need a tariff environment that makes them creditworthy. When the upstream pillars are misaligned, banks rationally retreat to sovereign financing, which offers a guaranteed coupon, operational simplicity, and capital efficiency, while the productive economy goes thirsty. None of this is to be blamed on any single policymaker, party, or institution. It is the cumulative weight of choices made over many years, by many hands, often under genuinely difficult conditions. What it asks for now is a coordinated direction of travel, one that several recent reforms have already begun.

Fixing the leaks requires five connected reforms. First, widen the tax net through documentation, digitisation, and risk-based enforcement, so the state's claim on bank balance sheets steadily diminishes. Second, phase tariff rationalisation predictably, so producers can plan and adjust. Third, deepen capital markets and non-bank finance, so sovereign borrowing has alternatives to the banking system. Fourth, shift from collateral-based to cash-flow-based underwriting, so firms are judged on what they earn rather than what they own. Fifth, invest in human capital, where Pakistan's 1.7% of GDP on education and 1.2% on health remain well below international benchmarks.

The connective tissue across all five is data. Pakistan has over 190 million mobile connections. Raast, the instant payments rail, is processing transactions at scale, while bulk payments route through 1Link. Every digital payment, landholding, utility bill, and wallet top-up is a credit signal. Stitched together, these can replace the paper documentation we lack.

Alternative credit scoring, already powering inclusive finance in Punjab under government schemes, on the lines of Kenya, India, and Indonesia, must become the default rather than the experiment. Closing that digital gap in agriculture alone would transform rural incomes. Mortgage financing, below 1% of GDP, would create construction demand, formalise titles, and give banks a productive long-duration asset. None of this is novel. What has been missing is execution at scale, and that is only possible once digital data is accessible. Establishing a Financial Data Exchange (FDX) is the fundamental first step.

A country cannot grow what its banks will not water. Close the upstream leaks, and the pond fills on its own.

The writer is the Chairman of the Pakistan Banks' Association