By Azam Tariq

China’s targeted approach to financing small and medium enterprises (SMEs) offers valuable experience for Pakistan as it seeks to expand affordable credit, strengthen productive sectors and enable smaller businesses to play a larger role in job creation, exports and industrial growth, experts say.

China has continued to prioritize SME financing through structural monetary policy tools. According to a report published by Xinhua, China’s official news agency, the People’s Bank of China (PBOC) injected around 2 trillion yuan (approximately $292 billion) in medium- and long-term funds during the first quarter of 2026 to support economic activity and targeted sectors. Outstanding loans to science and technology SMEs rose 20.9% year-on-year by the end of March, while financing to the private sector, agriculture-related industries and service consumption increased by 5.4%, 6.7% and 5.4%, respectively.

In Pakistan, SME financing remains a key pillar of private-sector development. According to the State Bank of Pakistan’s latest SME Finance Review, outstanding SME financing stood at Rs584.44 billion at the end of March 2025, accounting for 5.63% of total domestic private-sector financing. The number of SME borrowers reached 203,139.

To improve access to credit, the SBP has introduced several targeted initiatives. Under the SME Asaan Finance (SAAF) Scheme, eligible businesses can obtain financing of up to Rs10 million at a markup rate capped at 9% per annum. The government also provides first-loss portfolio risk coverage ranging from 30% to 50%, depending on the size of the loan.

Speaking to Wealth Pakistan, Dr Abedullah, an independent consultant and former Chief of Research at the Pakistan Institute of Development Economics (PIDE), said Pakistan could significantly improve SME access to affordable financing by adopting a more targeted and inclusive credit strategy.

He noted that high interest rates, strict collateral requirements and limited financial outreach continue to constrain the growth potential of SMEs.

“The government and the central bank should expand concessional financing for productive sectors, strengthen credit guarantee programmes and promote digital and branchless banking, particularly for small businesses operating in rural areas,” he said.

Dr Abedullah stressed that simplifying loan procedures, improving financial literacy and supporting women- and youth-led enterprises would help broaden financial inclusion. He added that credit programmes should be linked with technical assistance, market access and innovation incentives to improve the productivity and competitiveness of SMEs.

He said China’s experience demonstrates the importance of directing credit towards priority sectors such as technology, manufacturing, agriculture and SMEs through close coordination between the central bank and commercial banks.

Drawing on that model, he suggested that Pakistan establish sector-specific credit windows for export-oriented SMEs, climate-smart agriculture, renewable energy projects and value-added industries. Targeted refinancing facilities, performance-based incentives for banks and long-term financing mechanisms, he said, could help channel funds into productive investment rather than speculative activities.

Dr Muhammad Jehangir Khan, Associate Professor and Director of the Centre for Sustainable Futures (CSF) at PIDE, told Wealth Pakistan that Pakistan’s SME sector continues to face a persistent financing gap due to high collateral requirements, interest rate volatility and weak credit infrastructure.

He said a robust credit guarantee mechanism, under which the government partially underwrites SME loans, would help reduce lending risks for banks and encourage greater financing to small businesses. He also recommended expanding SBP refinancing facilities beyond exporters to include domestic SMEs.

According to Dr Jehangir, digital credit scoring could gradually reduce reliance on collateral-based lending, particularly for asset-light enterprises. Alternative data sources, including Raast transaction records, Federal Board of Revenue (FBR) tax data and telecom usage histories, could help create credit profiles for firms with limited banking records.

He further emphasized the need to strengthen credit bureaus, recapitalize SME Bank and Zarai Taraqiati Bank Limited (ZTBL), and promote cluster-based lending in industrial centers such as Sialkot and Faisalabad to reduce transaction costs and improve credit outreach.

However, he cautioned that China’s success is underpinned by strong state institutions, extensive data infrastructure and effective policy coordination.

“Pakistan should adapt the lessons from China according to its own economic realities rather than attempting to replicate the model wholesale,” he said.

The experts agreed that Pakistan can draw an important insight from China’s experience: SME financing should be targeted, data-driven and closely aligned with productivity-enhancing activities. They said affordable credit, credit guarantees, digital scoring systems and sector-specific refinancing mechanisms could help small businesses transition from survival mode to expansion, supporting employment, exports and sustainable economic growth.

Credit: INP-WealthPk