Pakistan’s banking sector continues to outperform the wider economy, but this strength masks a long-standing structural weakness: the country’s ineffective loan recovery system. Banks prefer lending to the government instead of the private sector because recovering loans through courts is slow, uncertain and often unsuccessful.
Read More: Pakistan’s Loan Recovery Crisis Hurts Banks and Borrowers
Senior banking officials say weak enforcement mechanisms, legal loopholes and delays in court processes make private-sector lending highly risky. With cases dragging on for years, banks worry that any default may become a long-term financial burden rather than a recoverable loss.
Public-sector banks can absorb some of these setbacks due to state backing, but private banks do not have that safety net. As a result, they avoid lending to small businesses, farmers and consumers, deepening the credit gap across the economy.
The consequences are evident in Pakistan’s high non-performing loan (NPL) ratio, which stands at 7.4pc — significantly above global benchmarks. State Bank data shows the country’s major banks collectively hold more than Rs622bn in domestic bad loans, with the National Bank of Pakistan and United Bank among the most exposed.
Although Pakistan has a dedicated loan recovery law — the Financial Institutions (Recovery of Finances) Ordinance, 2001 — experts say its implementation remains weak. Borrowers often obtain stay orders, file multiple suits and exploit procedural loopholes to delay repayment. Even after courts issue decrees, repossession of assets can take years due to administrative bottlenecks.
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Some analysts argue that Pakistan should adopt a mechanism similar to Sri Lanka’s Parate Execution model, which allows non-judicial foreclosure and significantly reduces recovery timelines. They believe such reforms could encourage banks to lend more to underserved sectors.
Until meaningful changes are made, banks are likely to continue prioritising government lending, leaving SMEs, farmers and homebuyers with limited access to finance and stalling broader economic growth.