SBP aims for 75pc banking coverage by 2028, urges banks to expand credit to SMEs

KARACHI: Jameel Ahmad, the Governor of the State Bank, has urged banks to diversify their portfolios beyond government lending and focus on enhancing financial depth, as sustainable economic growth cannot be attained with low levels of private credit.

While speaking at the Pakistan Banking Summit on Tuesday, he pointed out that the ratio of banks’ credit to the private sector relative to GDP has dropped to 8.4 percent by fiscal year 2024, which is nearly half of what it was in 2004, and said Pakistan’s ratios for bank deposits and private-sector credit to GDP were among the lowest in comparison to its peer nations.

In a rebuttal to the prevalent notion that government borrowing is hindering private sector financing, Ahmad highlighted that in some countries, despite significant government borrowing from commercial banks, the private sector still commanded a considerable share of the financial sector’s portfolio.

Currently, approximately 74 percent of bank lending in Pakistan is allocated to well-established sectors, whereas a mere 5 percent is directed towards small and medium enterprises (SMEs).

This discrepancy underscores the pressing need for banks to re-evaluate their strategies, the SBP governor stated and expressed hope that with a more stable economy in the future, government borrowing would be reduced, allowing the banking sector to enhance lending to the private sector, particularly for SMEs and the agricultural industry.

The governor also recognised the banking sector’s contribution to improving bank account accessibility, which has risen from 47 percent of the adult population in 2018 to 64 percent today.

The gender gap in account ownership has likewise narrowed, decreasing from 47 percent to 34 percent.

The State Bank aims to raise bank account coverage to 75 percent of the adult population and bring down the gender gap to 25 percent by 2028.

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Achieving these ambitious targets will necessitate the financial sector to improve the depth, breadth, and quality of its services.

To meet these objectives, Ahmad proposed utilising artificial intelligence, digitisation, and financial innovation. The summit unveiled the eKYC (Electronic Know Your Customer) initiative, meant to replace manual processes with a secure, digital framework, which aligns with these aims.

Highlighting the government’s commitment to digitisation, Ahmed said that over 800,000 merchants now accepted Raast QR code payment solutions, with an aim to on-board at least two million merchants by the year’s end.

Echoing the sentiments of the SBP governor, Finance Minister Muhammad Aurangzeb called on banks to enhance lending for the SME sector. He pointed to examples of smaller financial institutions that have shifted from collateral-based lending to cash-flow-based models and encouraged banks to explore opportunities in underserved areas, particularly within the SME and agricultural sectors.

Conversely, the banking sector presented its own perspective at the summit, portraying itself as a beleaguered industry often misunderstood by stakeholders and policymakers. The heavy burden of taxation, which adversely affects the general population, seems to weigh most heavily on banks.

The summit repeatedly underscored the crucial role of the banking sector in fostering economic growth while also bringing attention to the industry’s grievances.