EVERY time interest rates rise in Pakistan, a familiar chorus emerges from industrial lobbies, chambers of commerce and TV experts: investm­e­­nt will collapse, industry will die, and growth will disappear unless the State Bank immediately cuts rates ‘in the national interest’. The argument is pre­­sented as self-evident. Cheap loans equal growth.

At first, this sounds reasonable. Businesses need money to build factories, buy machines, and expand. If borrowing money is cheap, companies can invest more easily. But such framing hides a much bigger issue ignored for years. There are two main ways to raise money for investment. One is by borrowing from banks, ie debt financing. The other is by putting in their own money or widening ownership — selling shares to investors. Both methods help companies raise money yet they create very different kinds of businesses and economies, shaping not only investment but also control, governance and distribution of wealth.

In Pakistan, business owners seek cheap bank loans, but avoid selling shares to the public, raising uncomfortable questions: why is equity participation narrow and often speculative despite decades of the ‘capital market development’ rhetoric? Why are ordinary savers expected to accept low returns on their savings so companies can keep borrowing cheaply? A deep structural issue has silently shaped Pakistan’s long-term productivity, corporate culture and growth path: the unshakable reliance of the private sector on borrowing to finance capital investment instead of injecting additional equity from its own resources or by raising equity from markets.

For decades, the playbook for corporate success in Pakistan hasn’t changed; it has been passed down through generations of tightly controlled family conglomerates. The formula is simple: offer real estate or heavy machinery as collateral, secure low-cost bank loans and expand the domestic footprint without any significant dilution of family ownership or control. Raising money by selling shares introduces outsiders who then demand transparency, sharing of profits, etc. Hence, their preference for debt over equity.

For decades, the playbook for corporate success in Pakistan hasn’t changed.

This system has worked very well for them because Pakistan has historically had very low real interest rates. A real interest rate means the interest rate after subtracting inflation. In Pakistan, real interest rates have often stayed below two per cent for long periods. For tightly held family-controlled businesses, this environment has created a golden arbitrage opportunity. The logic is not irrational, with the State Bank’s collateral-anchored prudential framework serving as a facilitator. Cheap bank credit (reinforced by the tax deductibility of interest payments) is far less expensive than the cost of raising equity from a broad-based ownership which would dem­and dividends, a role in decision-making and a seat at the board table. Sponsors of closely held companies have, therefore, done what any ratio­nal actor would do — maximise leverage, minimise equity dilution and protect their hold on ownership.

Add to it our experience of early efforts to develop industry through cheap credit followed by non-seizure of collateral. This was interpreted as credit being both cheap and not necessarily involving serious recovery attempts.

Banks have also found it safer and easier to lend money to large, asset-rich companies, which offer adequate collateral. They have no incentive to develop sophisticated credit-scoring mechanisms for SMEs or asset-light startups. Both sides of this arrangement are acting rationally. Since the cost of bank credit has historically been lower than the expected return demanded by equity investors, the capital market has remained weak and shallow, lacking depth and liquidity. Sponsors only list when absolutely necessary, keeping the free public float small and corporate governance highly centralised within family boards. Across the border, in India, more than 50pc of the shares of their large conglomerates are held by non-family members.

The nation’s top companies have no genuine desire to list; if they do, they offer the bare minimum public float required by regulations. When the cost of bank credit is lower than the cost of equity, listing on the stock exchange is not viewed as an opportunity, a tool for capital formation, but a burden. They dislike the extra rules, public scrutiny and transparency requirements that come with public ownership. Consequently, corporate governance remains a family affair, and market capitalisation as a percentage of GDP is abysmally low.

This is not to suggest that borrowing itself is bad. Debt is an important part of modern finance. Businesses everywhere use loans to grow. The problem comes when companies rely too heavily on debt. Highly indebted companies become vulnerable when interest rates rise, when the currency weakens, or when economic growth slows. Equity financing works differently. When a company raises money through shares, the risks are spread among shareholders instead of being concentrated in bank loans.

Equity financing also changes how companies behave. Businesses become more transparent because shareholders want proper information and there is greater pressure to improve productivity and profitability. Critics may argue that higher equity requirements could discourage investment by raising financing costs. But our long history of cheap borrowing has not created globally competitive industries anyway; instead, it has often protected inefficient businesses, encouraged concentration of wealth within a small number of family groups and speculative asset accumulation.

Pakistan desperately needs to change. To foster a resilient corporate sector capable of global expansion, Pakistan must transition from a debt-driven corporate model to an equity-first model. The State Bank, the SECP and economic policymakers must jointly use their regulatory muscle to incentivise a shift towards a higher equity-to-debt ratio — one that requires a meaningful skin in the game from sponsors. If large corporations borrow less from banks and raise more money through the stock market, banks would have more funds available for smaller businesses and farmers, creating broader economic growth.

Pakistan’s old model has reached its limits. Despite a population of 245 million, the domestic market alone lacks the effective aggregate purchasing power to help companies grow into global firms. Even firms with a dominant position will have to venture abroad to grow by acquiring established firms and securing global distribution networks in larger markets. It has become a structural necessity. For this, they will require international capital, which demands equity.

Nadeem ul Haque is former VC PIDE and deputy chair of the Planning Commission.

Shahid Kardar is a former governor of the State Bank of Pakistan.

Published in Dawn, May 31st, 2026