Pakistani banks have become the most heavily exposed to government debt in the world, holding public debt equivalent to roughly 60 percent of their total assets, four times the global median of 14.9 percent and the highest ratio among more than 80 countries, according to a policy brief released by the Karachi School of Business and Leadership.
The findings highlight the deepening financial relationship between the government and the banking sector as Islamabad increasingly relies on domestic borrowing to finance large fiscal deficits.
Public debt has surged from Rs. 19.7 trillion in fiscal year 2016 to Rs. 80.5 trillion by fiscal year 2025, while domestic government debt holdings reached Rs. 54.5 trillion.
Of the marketable government securities outstanding, scheduled banks held about Rs. 36.8 trillion, accounting for nearly 79 percent of the total.
For banks, the attraction is straightforward. Government securities offer relatively high returns, carry a zero risk weighting under regulatory rules, and require little underwriting compared with private sector loans.
In contrast, lending to businesses consumes capital, requires provisioning against potential losses, and exposes banks to default and recovery risks. Small and medium enterprises are viewed as particularly challenging borrowers because of weak documentation, limited collateral, and thin credit histories.
The consequence is a growing shortage of credit for the private sector. Pakistan’s private sector credit stands at only about 11.5 percent of GDP, far below levels seen in regional economies such as India and Bangladesh.
The situation is especially severe for small businesses, which receive less than 10 percent of total private sector credit despite their importance to employment and economic activity. The report argues that the government’s heavy borrowing from banks has effectively crowded out financing for businesses and entrepreneurs.
The dependence on sovereign lending has also transformed banks into a lucrative source of tax revenue for the government. Following years of strong earnings from high yielding government securities, banks have faced a series of additional taxes, including higher corporate tax rates, permanent super taxes, and a one time windfall tax. According to the report, the effective tax rate on banking sector profits has climbed to around 55 percent, an unusually high level by international standards.
With banks dominating government financing, policymakers are increasingly searching for alternative funding channels that could reduce borrowing costs and free up bank liquidity for businesses.