Banks in Pakistan are generally not structured to serve widely dispersed small-ticket borrowers. Lending money to smallholder farmers and small enterprises scattered across the country is often considered too risky and costly; no wonder their access to formal banking credit remains constrained.

However, digital technology is changing this even if its adoption by traditional commercial banks is slow. Both small and medium enterprises (SME) finance and agriculture credit have posted phenomenal growth during the last fiscal year.

According to the State Bank, SME financing jumped nearly 41 per cent to Rs690.98 billion in FY25 from Rs491bn the previous year. The number of borrowers has also surged by almost 56pc to 276,593. Likewise, the finance ministry says that agriculture credit rose by 16.3pc to Rs2.58 trillion from Rs2.21tr, with the number of borrowers growing by 9pc to 2.95 million.

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The growth in SME and crop financing is inseparable from the rise of digital banking. Without digital tools, the sheer number of borrowers, the speed of processing, and the scale of disbursements we see today would simply not have been possible.

‘The previously stagnated base of credit offtake is now expanding, which will encourage many banks to step into these spaces more actively, using technology to lend more aggressively’

“Digitisation of the entire lending process, starting from loan application and customer verification to credit underwriting and approval to disbursement and recovery, is dismantling the structural barriers that have long kept formal credit out of the reach of millions of small farmers and businesses,” Zafar Masud, the Bank of Punjab (BOP) president, muses.

State Bank data shows the BOP has emerged as an industry leader in both segments. “Scaling up agriculture and SME finance through conventional methods is impossible; no such attempt would have succeeded,” observes BOP Chief Digital Officer Nofel Daud when discussing the BOP’s small farmer and entrepreneur schemes under the Kisan Card and Karobar Card, respectively.

In the first crop cycle, the bank approved nearly 550,000 loans amounting to Rs55bn. Of these, around 392,000 borrowers spent nearly Rs37bn for farm inputs. The recovery rate stands at 96.4pc, well above the industry average. “In the case of both agriculture and SME loans, we have added about 55-60pc of first-time borrowers, between 500,000 and 600,000, to our existing pool of customers,” says Mr Masud, who is also the chairman of the Pakistan Banks Association.

“These borrowers now have a credit history, which opens the door for them to access other loans from banks. The previously stagnated base of credit offtake is now expanding. It will encourage many banks to step into these spaces more actively, using technology to lend more aggressively,” he explained.

But digitalisation of lending is not just about a customer-facing portal; it requires rethinking the entire lending chain. “The real breakthroughs lie in the back end: in credit approval and underwriting processes that represent genuine market-first innovations. By automating credit approvals and disbursements, we have been able to expand lending safely and at scale,” says Mr Daud.

In the case of the Kisan Card scheme, the entire process from application to approval and disbursement is fully digital, eliminating the need for physical interaction with the bank. Farmers need only visit a designated centre once to collect their card. The small business loan scheme follows a different path, with the Karobar Cards delivered directly to borrowers’ business addresses.

“This contrast underscores an important lesson: digital lending models must adapt to the realities of different categories of borrowers: what works for urban entrepreneurs might not work for farmers — and vice versa. Digital models must be flexible enough to adapt to the realities of each borrower segment,” notes Mr Daud.

Innovation in lending is not just about speed and access; it is equally about risk management to ensure that digital lending expands sustainably. In the digital era, no institution can bear the full cost of building every capability on its own. Nor is there any guarantee of achieving the desired results or the speed required to stay competitive.

The smarter path is to leverage proven, ready-to-use solutions available off the shelf. That is why collaboration and strong external partnerships are essential to digital lending strategies. “The technology requirements were such that we knew from the beginning we couldn’t have pulled this off without our network of external partners such as fintechs, government registries like the National Database & Registration Authority, the meteorological department, the Punjab Land Revenue Authority and credit bureaus, which provide data and information necessary to verify borrowers and approve loans,” says Daud.

“With the Karobar card, we introduced psychometric testing and analysis, developed by a British firm, to gauge both a customer’s genuine need for credit and their likelihood of repayment in a way traditional banking cannot. We are now working with a Singapore-based firm that has global experience in digital lending and a portfolio of 80m customers to train and refine our AI [artificial intelligence]-driven credit decision models.

While digitalisation is a promising endeavour, the reality calls for support at the highest level, without which scaling any current efforts remains dim. Mr Masud admits, “It is the combination of digital infrastructure and the government that has enabled us to expand financing in these segments.”

The bigger challenge in expansion in SME and agriculture credit is not technology but its adoption. As Mr Daud puts it: “Pakistan has the necessary infrastructure: the rails, the hardware, the platforms and so on. The constraint lies not in capacity but in how banks use it. For banks, the task ahead is clear: to make digital not just available, but indispensable.”

Published in Dawn, The Business and Finance Weekly, October 6th, 2025