Pakistan Faces Credit Access Gap as Millions Remain Outside Formal Lending System: Report

A report by The News Pakistan estimated that formal credit penetration among small and medium-sized enterprises in the country is around 5 per cent, a level significantly below that of several other regional and emerging markets.

Limited access to formal financing can restrict the ability of micro, small and medium-sized enterprises (MSMEs) and other underserved borrowers to expand their businesses, create employment and contribute more significantly to economic activity.

Traditional lending practices can create additional barriers. Banks and other financial institutions often require borrowers to provide extensive documentation, collateral and established banking records, while physical visits to branches can make access more difficult for people living in remote areas.

Limited financial awareness can further complicate the process, particularly for borrowers who have little or no previous experience with formal financial institutions.

Technology-based lending models are increasingly being explored as a way of addressing some of these limitations. According to industry reports cited in the report, artificial intelligence-based lending tools can reduce operational costs by between 20 and 70 per cent in targeted areas and potentially lower default rates by as much as 30 per cent.

Digital lenders can also use alternative data, including transaction histories, to assess borrowers who may not have conventional credit records. Such information can provide lenders with insights into a customer's income, cash flow and ability to repay, potentially enabling faster and more customised financing decisions.

Pakistan-based easypaisa Digital Bank is one example of this approach. The digital bank uses transaction data through products such as easyCash and Merchant Cash Loans to provide financing to individuals and small businesses, including customers who may have limited access to conventional banking services.

However, expanding digital credit on a wider scale would require more than technology alone. The report highlighted the importance of stronger digital infrastructure, greater financial literacy, consumer protection and effective data governance.

Closer coordination between regulators, traditional banks, fintech companies and telecommunications providers could also be important as digital lending expands.

The increased use of alternative data in credit decisions will additionally require robust risk-management systems and explainable lending models. Such safeguards can help ensure that efforts to broaden access do not compromise responsible lending standards or expose consumers to inappropriate financial products.

For Pakistan, the challenge is therefore increasingly about ensuring that viable borrowers can access formal financing efficiently and securely, rather than simply increasing the overall amount of credit available.

Broader access to formal payments, savings, insurance and credit could strengthen household and business financial resilience while supporting entrepreneurship and economic activity, particularly among groups that remain underserved by the traditional financial system.