Company Raj to Debt Raj—VIII Who finances production?

Part VII distinguished borrowing to build from borrowing to survive. The distinction applies equally inside the economy. A financial system can mobilise savings to finance farms, factories, technology, housing and small enterprises. It can also become an efficient mechanism for transferring private savings to government. Pakistan increasingly confronts the second problem.

The State Bank of Pakistan (SBP) has described it with unusual clarity. Persistently large fiscal deficits, inadequate external inflows and weak non-bank financing have created a strong “sovereign-bank nexus”. Banks can earn substantial returns from government securities instead of undertaking the harder work of assessing private borrowers. SBP identifies this crowding-out as a leading reason Pakistan has one of the lowest private-credit-to-GDP ratios among peer economies.

World Bank data put domestic credit to Pakistan’s private sector at only about 10.7 percent of gross domestic product in 2025. This is not merely a banking statistic. It tells us something about the structure of development. An economy cannot continuously demand higher productivity from farmers and firms while denying them patient capital.

The banks are not villains in this story. They respond to incentives. When the sovereign is a large, regular borrower offering comparatively attractive risk-adjusted returns, purchasing government paper is rational. Lending to a small manufacturer, tenant farmer or new exporter requires information, monitoring, collateral assessment and tolerance of business risk. Debtocracy changes not only the state’s balance sheet. It changes the allocation of national savings.

Recent numbers show improvement, but also the scale of the unfinished task. The Finance Division reported that by end-August 2026 small and medium enterprise (SME) finance had reached Rs. 1.067 trillion, serving about 324,000 borrowers and accounting for 9.9 percent of domestic private advances. 

Agricultural finance stood at Rs. 1.268 trillion for about 3.39 million borrowers, or 10.9 percent of private advances. These are welcome gains. They do not alter the structural question: why must productive sectors compete with a chronically borrowing sovereign for the savings of their own economy?

An old European experiment provides a useful counterpoint. Rabobank did not begin as a giant international bank. In the late nineteenth century Dutch farmers and horticulturists who struggled to obtain credit formed local credit cooperatives. Savings from members and communities financed farmers at reasonable rates. Local institutions later created central organisations to provide scale and support. The financial institution grew around the productive community rather than requiring that community to fit a distant bank’s collateral model.

This history matters more than the Rabobank name. The lesson is institutional: information can be local, risk can be shared, savings can be pooled, borrowers can participate in governance and finance can follow the cash cycle of production.

Rabo Partnerships now carries parts of that approach into emerging markets through equity investment, advisory services, blended finance and partnerships with local financial institutions. Its present Asian footprint includes China, India, Indonesia and the Philippines. Pakistan is not listed. That fact should not be converted into an unsupported claim that Pakistan formally invited Rabobank and was rejected, or that a particular government “failed to bring” it. The evidence before us does not establish that history. The more useful question is why Pakistan has not built—or attracted—an equivalent institutional structure for affordable productive finance.

India offers a current example. Rabo Partnerships has invested in Avanti Finance, a technology-led non-bank financial company providing affordable, hyperlocal credit to smallholder farmers. Avanti works through cooperatives, financial-service providers and agricultural SMEs. By 2024 it had reached more than 800,000 households and 350,000 smallholders. The model uses technology to reduce transaction costs but does not confuse digitisation with development. Technology serves a credit institution designed around the farmer.

Another Rabo partnership in India combines satellite data, location intelligence and credit analytics to help banks assess agricultural cash flows and reduce dependence on land collateral. This addresses the familiar problem of the viable producer who lacks the conventional security demanded by a commercial bank.

Pakistan does not start from zero. It has Zarai Taraqiati Bank Limited, microfinance institutions, the Punjab Provincial Cooperative Bank Limited, commercial-bank agricultural lending and an expanding digital payments infrastructure. The SBP recorded agricultural credit disbursements of Rs. 2.577 trillion in fiscal year 2024-25, with the outstanding agricultural portfolio reaching Rs. 995 billion and borrowers rising to 2.9 million.

The problem is less absence than fragmentation, design and reach. Pakistan has repeatedly created schemes. What it has not produced at sufficient scale is a durable ecosystem linking local knowledge, farmer organisations, savings, insurance, technology, storage, markets and patient credit.

Its own cooperative history is instructive. The SBP’s Committee on Rural Finance records the rise of cooperative agricultural credit and the creation of the Federal Bank for Cooperatives in the 1970s. That system later became associated with governance failures, and the federal institution was ultimately liquidated. Punjab’s cooperative bank survives. The lesson should not be that cooperation failed as an idea. It is that cooperative finance without sound governance, professional risk management and genuine member accountability can itself become another administrative structure.

New initiatives show that the underlying problem is finally being recognised. SBP’s National Subsistence Farmers Support Initiative provides a digital route for small and tenant farmers to seek collateral-free financing, with risk coverage and agronomic verification. The government is also piloting alternative credit scoring for SMEs. These should be judged by sustained borrower access, cost, repayment and productivity—not merely by announced disbursement targets.

A productive financial system would combine several forms rather than search for one institutional saviour: professionally governed cooperative finance; specialised agricultural and SME institutions; commercial banks capable of cash-flow lending; credit guarantees priced transparently; crop and climate insurance; warehouse-receipt finance; leasing; venture and patient equity; municipal finance; and deeper capital markets.

The state’s role is crucial, but it should change. Government should create the legal, information and risk-sharing infrastructure that makes productive lending possible. It should not absorb so much bank liquidity that lending to government becomes the financial system’s easiest business.

This connects finance directly to fiscal sovereignty. A state that persistently borrows from its banks crowds out the very firms and farms whose growth must eventually enlarge its tax base and exports. It then borrows again because growth, revenue and foreign exchange remain weak. The sovereign-bank nexus becomes another transmission mechanism of debtocracy. Escaping it requires more than lowering the fiscal deficit for one year. It requires changing what the financial system is for.

Pakistan’s ambition is now much larger. The government speaks of a US$1 trillion economy by 2035 and of export-led transformation. Such an economy cannot be financed principally through government paper, short-term working capital and periodic subsidised schemes. It requires institutions capable of financing productive risk over long horizons.

Part IX will test the trillion-dollar claim against arithmetic and institutions. What rates of investment, productivity, exports, human-capital formation and dollar-denominated growth would Pakistan actually require by 2035? And can an administrative and financial structure built around revenue extraction and sovereign borrowing deliver them? That inquiry will take us from debt management towards the larger objective of Pakistan@100: economic sovereignty through productive capacity.

References

1. State Bank of Pakistan, Annual Report 2024-25, Chapter 1, discussion of the sovereign-bank nexus, crowding out and private-sector credit.
2. World Bank, World Development Indicators, Domestic credit to private sector (% of GDP), Pakistan.
3. Finance Division, Government of Pakistan, “Finance Minister Chairs Fourth Meeting of Access to Finance Steering Committee”, September 9, 2026.
4. Rabobank, “History”, cooperative origins in Dutch farmers’ credit unions.
5. Rabobank, Rabo Partnerships: financial access for food, agriculture and rural communities in emerging markets.
6. Rabobank, “Rabo Partnerships Boosts Avanti for Financial Inclusion”, October 22, 2024.
7. Rabobank, “Alliance RP & SatSure to Drive Lending for Smallholder Farmers”, July 27, 2023.
8. State Bank of Pakistan, Governor’s Annual Report 2024-25, agriculture-finance indicators.
9. State Bank of Pakistan, Report of the Committee on Rural Finance, including the history and assessment of cooperative credit.
10. State Bank of Pakistan, National Subsistence Farmers Support Initiative under Risk Coverage Scheme for Small Farmers and Underserved Areas, 2025.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, writer, literary critic, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.