Informality dominates Pakistan’s economy, constraining fiscal growth, productivity and documentation. An Islamabad Policy Research Institute report estimates it at 59 per cent of GDP in FY25, spanning retail, real estate and agriculture. While this structure enables widespread employment generation, it also suppresses productivity and limits tax collection, creating distortions in fiscal outcomes.

The sheer scale of informality in Pakistan’s economy is a central reason why banks remain reluctant to extend credit to agriculture and small and medium enterprises (SMEs), even under government-sponsored schemes that lack collateral backing. “With a majority of economic activity taking place outside formal documentation channels, lenders face significant challenges in verifying borrower credentials, assessing repayment capacity and managing risk,” argues Pakistan Banks Association (PBA) secretary Mir Nejib Rahman.

In agriculture, fragmented landholdings, undocumented tenancy arrangements, and weak record-keeping further complicate due diligence. Similarly, in the SME sector, the absence of proper accounts and formal business registration limits the ability of banks to confidently deploy capital, even where policy incentives exist.

“Informality limits the shift to cash flow-based lending as borrowers often lack or withhold verifiable financial data. With little visibility on sales, inventories, assets and transactions, banks can only rely on collateral to assess risk. Consequently, credit remains concentrated among documented firms, while many viable agriculture and SME borrowers remain excluded from formal finance,” Mr Rahman observed.

Though banks are willing to extend lending to SMEs, many businesses lack the formal or audited records required by lenders to assess repayment capacity

With this backdrop, Pakistan’s banking sector is increasingly focusing on documenting the country’s largely informal economy, using digital accounts, data-sharing systems, and targeted lending initiatives to bring more individuals and businesses into the formal financial system.

Over the past several years, banks have made significant progress in expanding access to financial accounts. As of June 2025, commercial, microfinance and digital banks, along with mobile wallets, had opened about 244 million accounts, representing roughly 100m unique account holders. With an adult population of around 140m, nearly two-thirds of Pakistani adults now have access to a financial account.

This expansion has been driven largely by simplified account-opening procedures such as Asaan accounts, digital onboarding and the rapid spread of mobile wallets. These initiatives have sharply increased the number of deposit accounts and improved financial access across the country, he says.

However, this progress masks underlying weaknesses.

A large share of bank accounts in Pakistan hold minimal balances. As of September, about 134m of 178m individual accounts had Rs5,000 or less — mostly mobile wallets — with combined deposits of just Rs100m, reflecting extremely limited savings capacity. This underscores that banks still rely on a smaller pool of high-value accounts for liquidity.

Access to credit remains even more constrained; commercial banks have around 7m borrowers, while microfinance institutions serve about 8m small borrowers. “Despite a lending book of roughly Rs13 trillion, borrowing relationships are disproportionately low, exposing the limits of financial inclusion measured solely by account ownership rather than borrowing,” he explained.

Bankers argue that expanding access to borrowing is crucial not only for financial inclusion but also for documenting economic activity. “Two sectors in particular — agriculture and small and medium enterprises — remain key priorities for expanding credit and improving documentation,” Mr Rahman said, “One of the biggest obstacles is the lack of reliable documentation.”

In agriculture, he elaborated, nearly 90pc of farmers own less than 12.5 acres of land, making them smallholders with limited collateral. Many farmers also cultivate leased land, often without formal tenancy agreements that banks can verify. Although Punjab has introduced a digitised land record system that allows lenders to confirm ownership, other provinces — particularly Sindh and Balochistan — still face major verification challenges.

To address some of these gaps, the government has launched initiatives such as the Zarkhez-e programme, under which around Rs3–3.5bn has been disbursed so far to support agricultural financing. Yet clean or collateral-free lending remains difficult in the absence of any records. “Limited crop insurance, typically activated only after officially declared disasters, is another constraint. Broader area-yield coverage would better protect farmers but raises costs. Unlike India and Brazil, Pakistan cannot subsidise premiums due to IMF [International Monetary Fund] constraints, making loans unaffordable as insurance adds 4–5pc to commercial interest rates,” the PBA secretary emphasised.

The SME sector faces similar documentation challenges. “Banks are allowed to extend clean lending of up to Rs50m to an SME, but many businesses lack formal accounts or audited financial records required by lenders to assess repayment capacity.”

Bankers urge that the problem is not necessarily the absence of records. Many small businesses maintain informal ledgers or even computer records of sales and inventories. Yet they are not prepared to share that information with lenders to allow them to assess the borrower’s creditworthiness, making lending riskier.

To bridge this information gap, Mr Rahman says, work is underway on developing an SME Index: a digital sectoral scorecard designed to provide banks with regular insights into the performance of different SME segments to assess potential risks and inform their cash flow-based lending decisions.

Another major initiative under discussion is the creation of a Financial Data Exchange, a digital platform that will allow various public and private institutions to share structured customer data with banks at one place. The project is being developed in coordination with the National Database and Registration Authority, the Pakistan Digital Authority and the Ministry of IT.

“The idea is to build a national data-sharing framework similar to a digital highway, where institutions like the Federal Board of Revenue, provincial land authorities, utility companies, credit bureaus and banks holding customer information can securely exchange relevant data,” explains Mr Rahman.

Bankers believe this could significantly expand lending to both SMEs and smallholders while simultaneously encouraging greater economic documentation through these initiatives.

Parallel to these initiatives, banks are also working with the government to promote digital payments under the prime minister’s cashless economy initiative. The programme aims to bring around 2m merchants into the digital payment ecosystem by June through QR codes and other electronic payment systems. Over 1m merchants have already been onboarded.

While expanding access to accounts was the first phase of financial inclusion, the next challenge is to deepen that inclusion through credit, digital payments and data-driven and cash flow-based lending. If successful, these initiatives could gradually help document Pakistan’s vast informal economy, a step seen as essential for broadening the tax base, improving credit access and strengthening long-term economic growth.

Published in Dawn, The Business and Finance Weekly, March 23rd, 2026