WASHINGTON: Amid weak regulations and poor credit reporting systems, formal credit to the private sector in Pakistan has declined both in absolute and relative terms over the past few decades, says a State Bank of Pakistan report, ‘Private Credit Bureaus: Enhancing Credit Penetration by Addressing Information Asymmetries’.
Based on the private sector credit to GDP ratio, Pakistan slipped to the bottom of the World Bank’s developing and emerging economies Index (2019) that comprises 19 countries, down three notches from its position a decade ago. The central bank study revealed this in a special section as part of The State of Pakistan’s Economy third quarterly report for the fiscal year 2021.
The authors argue that Pakistan has introduced reforms and regulations to increase access to finance, which helped banks improve their profitability, but market failure in the form of information asymmetries was the reason why commercial banks were averse to lending to the underserved segments, such as housing, agriculture, and SMEs. Because of the weak credit reporting system, lenders (banks) find it difficult to distinguish between good and bad borrowers. The government’s increasing debt requirement, on the other hand, added to the problem. To put this in context, consider the following statistics: SME financing in Pakistan declined from just under 20% in 2005 to less than 5% in 2020, while the overall net budgetary borrowing in the same period rose from under 10% of the GDP to a third of it.
Citing the major reason for low credit penetration in Pakistan, the authors say information asymmetries or lack of quality data sharing in credit markets prevents efficient allocation of finance and restricts overall credit penetration in the economy. “This is particularly disadvantageous to low-income individuals and micro, small, and medium enterprises who lack sufficient collateral or credit history,” they add.
