Pakistan’s banking sector is increasingly reliant on government borrowing to sustain profitability, with federal debt absorption reaching Rs5.9 trillion in fiscal year 2026.
This surge in public sector lending has crowded out private credit, which received only around Rs1.4 trillion during the same period, according to a senior banker cited by Dawn Business.
The disparity highlights a structural challenge for lenders: while government securities offer safe, high-yielding assets, the limited pipeline of private sector loans constrains long-term growth potential.
With private lending options remaining scarce, banks may continue to depend on state borrowing to bolster net interest margins, even as it limits their ability to support corporate expansion and small business financing.
This dynamic mirrors broader emerging-market trends where fiscal dominance pressures financial intermediaries.
In Malaysia, Finance Minister Lim Guan Eng recently urged banks to leverage record profits to extend greater relief to micro, small, and medium enterprises (MSMEs), signaling regional attention to credit allocation imbalances.