Prime Minister Shehbaz Sharif’s recent appeal to commercial banks to expand lending to small and medium enterprises is a familiar refrain. For over three decades, successive governments have urged banks to direct credit towards sectors that generate employment and exports. Ambitious targets are announced, committees are formed, and plans are unveiled. Yet, the reality on the ground changes little.

The new Access to Finance Plan aims to raise SME lending’s share of private sector credit from 7 percent to 10 percent within two years and increase the number of SME borrowers from 310,000 to 750,000. These are commendable goals, but the central question remains: are banks sufficiently incentivised to make them happen? Pakistan’s estimated five million SMEs contribute nearly 40 percent of GDP, a quarter of exports, and around 80 percent of non‑agricultural employment. Despite this, only about 300,000 businesses have access to formal bank credit.

Banks often justify their reluctance by citing risk. Many SMEs lack audited financial statements, reliable cash‑flow records, and collateral. Weak legal enforcement, lengthy recovery procedures, and information asymmetry further raise the cost of lending. Cash‑flow‑based financing requires better data, specialised underwriting, digital monitoring, and relationship banking. From a commercial perspective, these concerns are not unfounded.

Yet risk alone does not explain the sector’s chronic neglect. Banks operate in an environment where lending to the government offers attractive, virtually risk‑free returns. Investing deposits in government securities requires minimal effort, incurs lower operational costs, and generates predictable profits. When institutions can earn comfortably by financing the sovereign, the incentive to develop expertise in SME or agricultural lending disappears.

This has created a banking culture content with easy profits and reluctant to undertake the painstaking work of expanding financial inclusion. Even subsidised federal and provincial lending schemes, along with State Bank first‑loss guarantees designed to reduce default risks, have failed to shift behaviour. Most banks continue to avoid SME and agricultural financing, despite evidence from a few institutions that technology, alternative data, and cash‑flow‑based lending can manage risks effectively. The reluctance reflects inertia and the lure of government securities rather than insurmountable risk.

The issue was highlighted at the Pakistan Banks’ Association’s second Banking Summit, where policymakers, regulators, and bankers acknowledged that the current pattern of credit allocation is unsustainable. The finance minister urged banks to channel more financing into sectors that generate employment, exports, and productivity. Without the growth of SMEs and other priority sectors, the economy cannot sustain long‑term expansion. If banks continue to recycle deposits into government securities while neglecting productive enterprise, they will eventually face a shrinking pool of viable borrowers.

A banking system cannot indefinitely prosper by avoiding risk and ignoring the country’s most dynamic businesses. Expanding SME lending is not just a policy target; it is a necessity for sustainable economic growth and for ensuring that Pakistan’s financial sector serves the broader national interest.