Small and Medium Enterprises (SMEs) are vital for job creation, economic growth, provision of goods and services and poverty alleviation in a country. They are considered the backbone of a country’s economy. According to global data, in the majority of countries, the formal and informal SMEs make up over 90 per cent of all businesses, 60–70 per cent of total employment and 50 per cent of GDP. Despite their important economic role, the SME sector struggles to access formal financial services. According to a report, approximately 130 million or 41 per cent of formal SMEs in low and middle-income countries faced credit constraints before the COVID-19 pandemic and the SME finance gap was estimated at US$ 5 trillion. This sector can play a critical role in the long-term recovery from the COVID-19 pandemic, especially in developing countries.This sector holds immense importance in Pakistan’s economy. According to Pakistan’s Economic Survey 2020-21, approximately 3.25 million SMEs account for nearly 90 per cent of all the businesses are operating in Pakistan. This sector holds approximately 40 per cent and 25 per cent of the country’s annual GDP and exports respectively. However, one of the major hindrances in the financial inclusion of SMEs is that approx. 97 per cent of SMEs are undocumented and operating under individual ownership as an informal sector. The COVID-19 was a massive shock to Pakistani SMEs with 87 per cent of SMEs reporting a negative impact of the pandemic on their business operations and 45 per cent of SMEs having to temporarily close their businesses. The Government of Pakistan acknowledges the significance of the SMEs sector and is making efforts to provide a level-playing field for businesses by devising policies that are favourable to the financial inclusion and growth of the SMEs. The SBP has also issued the “SME Asaan Finance (SAAF) scheme” on August 16, 2021, to fulfil the financing requirements of the SMEs. Since SMEs generally have trouble accessing adequate finance, the financial costs of greening can be particularly tough. The SMEs sector of Pakistan needs to undergo a green transformation to achieve environmentally, socially and economically sustainable development in the future. Based upon the economic importance of this sector, the development of eco-friendly or Green SMEs is pertinent for realizing the vision of a “Clean and Green Pakistan.” The SMEs, due to their small and flexible nature, are more suited to pioneer green innovations and contribute to green growth, especially in local and emerging markets that may be neglected by large corporations. Policy interventions for supporting Green SMEs are required to overcome the major barriers in the sustainable development of this sector through knowledge-sharing, raising environmental awareness, enhancing financial support, supporting skill development and skill formation, improving market access and providing tax rebates. The SME sector in Pakistan suffers from fear and hesitancy in using financial services due to low knowledge levels and difficulty in arranging collaterals. Since SMEs generally have trouble accessing adequate finance, the financial costs of greening can be particularly tough on SMEs. Integrating the element of environmental sustainability in the SMEs sector can synergize this important economic sector with SBP’s Green Banking initiatives. The SBP can launch low-interest green financing schemes, under the umbrella of Green Banking, for environmentally friendly SMEs such as renewable energy production, smart metering, building retrofitting, green supply chain activities, eco-friendly channel financing, manufacturing units and waste recycling. Pakistan’s SMEs sector can undergo green transformation under the circular economic model through green financing re-manufacturing, repair, maintenance, recycling and eco-design businesses. Green financing can also be provided for the development of sustainable agricultural value chain activities such as the establishment of Electronic Warehouses for the storage of various commodities as collateral through which an Electronic Warehouse Receipt (EWR) system can be implemented across the SME sector. SBP can launch a low-interest green financing scheme for the development of EWR and Green Warehouses in order to ensure economic and environmental sustainability in SMEs connected with the supply chain industries. Green Warehouses and EWR can play an important role in overcoming the shortage of safe storage facilities of different products through an effective public-private partnership. Existing SBP’s financing schemes for SMEs, such as the SME Asaan Finance (SAAF) scheme, PM Kamyab Jawan program, Kamyab Pakistan Program and the Housing and Construction Finance schemes can be transformed into green finance programmes. Recently, the Prime Minister of Pakistan, Mr Imran Khan, launched interest-free financing, worth PKR 407 billion, for youth, women and farmers and the construction of low-cost houses and starting a small business. If this initiative is targeted towards eco-friendly startups or Green SMEs, it can result in the robust growth of Pakistan’s green industries and environmental sustainability. Green financing can also be extended towards the Small and Medium-sized construction industry and allied businesses under the Naya Pakistan Housing Scheme like the financing of zig-zag brick manufacturers, green cement manufacturers, green warehouses and eco-friendly logistics companies. SBP can provide green financing to Green SMEs on the same pattern as the “SME Asaan Finance” scheme, not requiring any collateral and having the risk covered according to the financing amount. Similarly, government bodies like the National Energy Efficiency and Conservation Authority (NEECA) may boost the efforts of ensuring environmentally and socially sustainable economic growth for Pakistan’s SMEs sector by creating awareness regarding energy efficiency measures and promoting energy efficiency based projects in collaboration with SBP. The SBP can also collaborate with the Small and Medium Enterprises Development Authority (SMEDA) for the development of Pakistan’s Green SMEs sector through Green Financing. The effective adoption of environmentally friendly business operations by the SME sector of Pakistan depends upon green capacity building among the SME sector and the concerned stakeholders. This can be achieved by inculcating green management knowledge among students across all educational levels. The SBP may provide stakeholder training and awareness sessions regarding green businesses practices at the university level to ensure green education. The Green SME sector can play the role of an important cog in the attainment of the United Nations – Sustainable Development Goals (UN-SDGs) 2030. The development of Pakistan’s Green SME sector is vital for the green and inclusive growth of this country. A green growth that can achieve economic gains without sacrificing the health of the natural environment. The writer works as a Chief Manager-Green Banking Officer at Bank AL Habib Limited. He can be contacted at aasimalibukhari@yahoo.com