After years of stagnation and missed targets, small and medium enterprise (SME) financing recorded its strongest year in recent memory, with outstanding loans reaching Rs691 billion by June 2025, surging 40.7 per cent, or nearly Rs200bn, compared to the previous year. To put this in context, the average annual increase in the last decade has been just 11pc.

But compared to volumes, even this looks modest. By FY25, the number of SME loans scaled to 276,593, up 57pc to clock in at their highest level on record. In absolute terms, it represents an increase of over 100,000 new borrowers, a feat that hasn’t been achieved in aggregate even over the course of the last decade.

So what changed to let the credit break through at last? In hindsight, one can give plenty of explanations, not least the macroeconomic stabilisation. After touching historic highs of 22pc, the policy rate finally returned close to its mean and thus probably saw a revival in SME financing. While this may contain a degree of truth, the rationale falls short because even when the interest rates were under 6pc, such growth wasn’t visible.

After all, non-SME loans only rose 11.4pc in FY25, despite facing the same tailwinds. As a result, the share of SMEs in private sector financing reverted to its 10-year mean of 6.6pc, albeit with wide variation across industries. On one end of the spectrum, wholesale and retail trade had outstanding loans of Rs713bn, of which 37pc went towards SMEs, the highest for any major grouping. Towards the polar end, only 5pc of the Rs5.5tr manufacturing loans belonged to SMEs.

The National SME Policy 2021 had set a target of Rs800bn in financing for 700,000 borrowers by FY23; two years past that deadline, we have yet to achieve either goal

The composition of financing has also shifted in encouraging ways. Fixed investment now accounts for over two-fifths of SME financing at Rs305.61bn, suggesting that businesses are not just seeking working capital to survive but seeking longer-term loans for equipment and capacity.

Notwithstanding the recent progress, if you zoom out a little, the picture becomes less impressive. To begin with, the National SME Policy 2021 had set a target of Rs800bn in financing for 700,000 borrowers by FY23.

Two years past that deadline, we have yet to achieve either goal. Benchmarking against regional peers makes this clearer. According to World Bank Enterprise Surveys, just 2.1pc of firms in Pakistan report having access to bank loans or lines of credit, while the South Asian average sits at 31.6pc.

To address this, the state authorities have tried quite a few things, most popular being subsidised capital. Over the last decade, we have witnessed multiple iterations of refinance schemes for various strategic goals, with at least three targeted towards SMEs, each learning from the previous one.

Most recent was the SME Asaan Finance scheme, providing risk coverage to participating banks, alongside 1pc refinancing while capping the markup at 9 pc borrowers. It sweetened the deal with a government of Pakistan risk coverage ranging from 40–60pc, based on the loan amount, valid for four years.

Amid a slow start due to macroeconomic challenges, total borrowings from SBP under the initiative reached Rs30.7bn across 8,039 accounts by FY25. However, due to the International Monetary Fund programme, direct refinancing on the SBP balance sheet is now being phased out, and any such priority sector will be covered through subsidies from the Ministry of Finance.

Important in their own right, such interventions will not address the root cause of the lack of financing. Firstly, we lack reliable data on SMEs, including their geographic and sectoral distributions. While the recent Economic Census by the Pakistan Bureau of Statistics is certainly welcome in this regard, there is a need to be both more granular and consistent with such exercises.

Secondly, most products remain focused on the traditional sectors while high-growth verticals, such as technology, renewable energy, and other business services, stay outside the radar of financial institutions, which are typically ill-equipped to assess their risk appropriately.

One way to address this problem is through more proactive participation of relevant industry associations, including group guarantee models that have found success in markets like Bangladesh.

More importantly, financial institutions need to rethink how they approach lending, which for SMEs is mostly inbound in nature. That means the borrower itself will come to the branch and seek credit, go through hoops of documentation and due diligence checks before receiving any approval.

Alternative scoring models allow them to be more proactive in both identifying the right customers and assessing their risk better, which needs to be embraced more aggressively. It’s hard to overemphasise, but this bit will be crucial even for truly realising the potential of Raast person-to-merchant because credit, not just payments, will be the key attraction for small businesses to make the switch.

The writer is the co-founder of Data Darbar and works for the Karachi School of Business and Leadership

Published in Dawn, The Business and Finance Weekly, December 1st, 2025