Introduction
In Pakistan, limited access to banking finance is perhaps one of the key factors which are preventing private businesses in achieving their actual potential. However, in terms of credit availability to this segment, Pakistan lags far behind other regional economies.
Domestic Credit to Private Sector by Banks a percentage of GDP as of 2015 in China mounts to 155 percent, in India 52 percent, Bangladesh 43 percent, Turkey 75 percent and 111percent in Vietnam. Whereas, this ratio is only 15 percent in Pakistan. Moreover, the flow of credit is usually tilted largely towards government securities and somewhat towards big businesses which is why small businesses are usually deprived of credit availability.
This trend leads to questions like: Why are private businesses unable to get enough credit from the banking sector? Why does the banking sector hesitate in giving credit to this important segment of the economy? Is the regulatory framework in the country conducive for private enterprises or not? This analysis attempts to answer these questions.
We begin with an overview of some of the major factors which are hindering the flow of credit towards the private sector and highlight some major constraints in the demand and supply of formal credit. The later section sheds light on the credit market regulatory framework.
