Private-sector lending in Pakistan continues to suffer as banks avoid risky borrowers due to lengthy, unpredictable and often unsuccessful loan recovery processes. While the financial sector looks strong from a distance, this unresolved structural flaw is stalling wider economic growth.
Banks avoid borrowers they can’t confidently pursue
Banks in Pakistan say lending to small firms, farmers, consumers and informal enterprises feels like stepping into quicksand. If a borrower defaults, the chance of timely recovery is slim, and litigation can drag on for years.
Two short lines help set the tone.
So, rather than face uncertain court outcomes, many institutions lend heavily to government entities. Sovereign exposure guarantees repayment, creates easy returns and bypasses courtroom delays.
Bank executives privately admit they see no commercial logic in extending large volumes of unsecured private loans. One senior banking official described the system as “a maze where everyone hopes a default never happens, because once it does, recovery becomes a marathon.”
A quick one-liner: risk is everywhere except in government paper.
The country’s non-performing loan ratio stands at 7.4%, significantly higher than levels considered healthy for a diversified banking sector. That raises the cost of credit and makes banks even more cautious.
Legal bottlenecks discourage private-sector credit
Pakistan does have a loan recovery law — the Financial Institutions (Recovery of Finances) Ordinance, 2001 — but its effectiveness depends heavily on implementation. Banks say borrowers frequently secure stay orders, take advantage of procedural loopholes and file multiple suits to delay enforcement.
Short paragraph: these tactics stall the process long enough to make recoveries impractical.
Even when courts issue decrees, repossessing pledged assets may take years. Administrative agencies often move slowly, and the backlog of cases makes timely creditor protection close to impossible.
One small sentence: justice is slow, and finance hates delays.
Banks argue that certainty matters more than anything else. A predictable system helps them lend more widely. Without it, they prioritise transactions that do not involve courtroom risk, effectively shutting the door on millions of potential borrowers.
Why banks prefer the government
Across Pakistan, commercial banks have grown comfortable with a lending portfolio heavily skewed toward sovereign instruments. Treasury bills and government bonds deliver steady returns and almost zero legal conflict.
Short pause: no lawyers needed, no repossession drama.
That means private-sector credit is increasingly sidelined. Small manufacturers, dairy farmers, homebuyers, shopkeepers and entrepreneurs remain underserved, even as domestic deposits continue to rise.
Meanwhile, state-owned banks absorb more stress because they have implicit government backing. They can handle loan losses better than private lenders. Independent banks however operate without such cushions.
This dynamic widens the credit gap between large corporations and grass-roots borrowers. Major firms with collateral and established reputations still access formal banking channels, while everyday borrowers remain shut out.
Bullet points help clarify why private banks hesitate:
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Court enforcement is slow and uncertain
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Stay orders delay repossession
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Multi-year litigation ties up capital
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Asset seizure is bureaucratic and unpredictable
A one-sentence bridge: lending without workable enforcement feels like lending blindfolded.
A system that keeps bad loans growing
State Bank of Pakistan data shows more than Rs622 billion in problematic domestic loans, concentrated in some of the country’s biggest banks. National Bank of Pakistan and United Bank are among the firms most exposed.
Even though banks maintain high capital buffers, the drag created by slow recovery reduces risk appetite. It becomes safer to avoid new lending rather than wait years for a dispute to end.
Short line: liquidity is locked, not recycled.
The prolonged nature of litigation increases NPL volumes and erodes balance-sheet strength over time. Even a well-rated borrower becomes unattractive if the bank cannot confidently recover funds after a deterioration in financial health.
What alternatives might fix the recovery trap?
Industry analysts suggest that Pakistan take inspiration from Sri Lanka’s Parate Execution framework, a mechanism that allows non-judicial foreclosure. In simple terms, banks can repossess collateral without full court proceedings, sharply cutting recovery timelines.
Short one-sentence thought: faster foreclosure means faster recycling of capital.
Sri Lanka’s model has been credited with reducing loan-recovery delays, unclogging court systems and stabilising bank liquidity. Advocates say a similar approach in Pakistan would encourage lending beyond government clients.
Banks have pushed for a structured, time-bound process that preserves fairness while limiting procedural abuse. Some want specialised financial tribunals with statutory deadlines and digital tracking so cases don’t disappear into a black hole of paperwork.
Two short lines to reset tone.
That’s because lenders don’t just need laws; they need enforcement that feels real.
If banks expect that a default can be resolved inside months rather than years, lending will expand dramatically. SMEs could receive more working capital. Agriculture could finally access long-term finance. Households could enter mortgage channels without prohibitive rates.
Private-sector stagnation has a wider economic cost
Small enterprises generate local employment, produce goods and services, and benefit regional economies. But without financing, thousands of firms stay informal and under-capitalised.
Short pause: no credit means no growth.
Banks keep absorbing deposits, but instead of converting them into private loans, they cycle them back into government debt. The state benefits, while the productive economy struggles.
This structure slows domestic industrialisation, pushes entrepreneurs into informal lenders, and discourages innovation. Financial disconnection eventually hurts consumption, job creation and GDP momentum.
Analysts say a healthier lending culture requires one foundational fix: reassurance that the legal system protects creditors and enforces contracts without endless delay.
One tiny beat: capital must feel safe to be useful.
The status quo is unlikely to change soon
Legal reform in Pakistan is complex. Dozens of stakeholders — courts, regulators, provincial bodies, land registrars and law enforcement agencies — sit across the process. Aligning them will not happen overnight.
Yet banks insist that ignoring the enforcement gap will continue forcing them into a narrow portfolio dominated by government lending. That has long-term consequences for national competitiveness.
Short final reflection: a financial system cannot thrive if lending feels riskier than saving.
Until meaningful changes are delivered, Pakistan’s underserved borrowers — farmers, SMEs, shopkeepers, young families — will continue struggling to access formal finance. Banks will continue shielding themselves with sovereign debt.
