Pakistan’s banking sector faces a systemic issue of credit concentration, where a significant portion of bank loans is directed towards a small number of large borrowers. As of 2023, the country’s commercial banks reported Rs13 trillion in gross advances, with Rs3.2 trillion—or 25 percent—accounted for by the top ten exposures of each bank. This stark concentration reveals a troubling reliance on a few large clients, exacerbating risks in an already fragile financial system.
While sovereign borrowing for deficit financing is frequently blamed for the low penetration of banking credit, the issue goes deeper. Large private sector sponsor groups dominate the credit landscape, capturing a disproportionate share of advances. This phenomenon is not restricted to public sector banks; it is equally pervasive among private sector banks, underscoring its systemic nature.
The “Big-5” banks, which collectively control 45 percent of the industry’s advances, illustrate the extent of concentration. Within this group, 26 percent of total advances are allocated to their respective top ten borrowers. Allied Bank emerges as the most egregious offender, with 46 percent of its gross advances concentrated in its top ten exposures. On the other hand, MCB Bank demonstrates a more conservative approach, with only 15 percent of its advances concentrated in its top ten exposures, a figure notably below the industry average.
Public sector banks are in even worse condition. These banks, which account for 20 percent of the industry’s total advances, have an alarming 31 percent of their loans concentrated in their top ten exposures. National Bank of Pakistan, while performing better than its peers, still has 27 percent of its loan book directed towards its top ten clients, close to the industry average. However, provincial banks such as the Bank of Khyber and Sindh Bank significantly drag down the sector’s performance, with an astonishing 48 percent of their respective loan books concentrated in their top ten exposures.
Islamic banks fare no better in addressing credit concentration. These institutions account for 17 percent of the industry’s advances, yet 30 percent of their total loans are concentrated among their top ten borrowers. MCB Islamic and Faysal Bank Islamic are the worst performers in this category, with 43 percent of their advances allocated to their top ten clients. Interestingly, Meezan Bank, the largest Islamic bank contributing one-third of advances in this segment, demonstrates better diversification, with only 21 percent of its loan book concentrated in its top exposures.
Among all banks operating in Pakistan, Standard Chartered stands out as the worst performer in terms of credit concentration. The foreign-owned institution has allocated a staggering 67 percent of its gross advances—Rs95 billion out of Rs241 billion—to its top ten borrowers. This extreme reliance indicates that even multinational banks with ostensibly sophisticated risk management frameworks are not immune to the systemic flaws plaguing the local banking sector.
On the other end of the spectrum, Bank Alfalah emerges as the best performer, with only 8 percent of its advances concentrated among its top ten clients. This remarkable performance highlights that diversification is achievable, challenging the narrative that credit concentration is an unavoidable outcome of factors like crowding out or collateral adequacy. As the seventh-largest bank by loan book, Bank Alfalah’s approach serves as a case study for the industry, demonstrating that proactive risk management and a commitment to diversified lending can mitigate concentration risks.
The concentration of credit within Pakistan’s banking sector raises significant concerns about systemic risk and financial stability. A high concentration of loans among a small number of borrowers increases the vulnerability of banks to defaults, especially in an economy marked by political instability, sluggish growth, and high inflation. The situation is further exacerbated by the absence of meaningful differences in performance between public, private, and Islamic banks, pointing to a sector-wide failure to diversify lending practices.
Bankers often cite factors such as collateral adequacy and regulatory constraints as reasons for credit concentration. However, the stark disparity between the performance of institutions like Bank Alfalah and others such as Allied Bank or Standard Chartered suggests that these excuses lack merit. The ability of some banks to maintain a diversified loan book underscores the importance of robust risk management policies and a willingness to step outside conventional lending practices.
The implications of credit concentration extend beyond the banking sector. When a significant portion of advances is concentrated in a few large sponsor groups, smaller and medium-sized enterprises (SMEs)—which are critical drivers of economic growth and employment—struggle to access financing. This dynamic stifles innovation, entrenches economic inequality, and perpetuates a cycle of dependence on large corporate entities, which often enjoy favorable lending terms at the expense of broader economic development.
Addressing this issue requires a multifaceted approach. Regulators must impose stricter guidelines on credit concentration and enforce compliance rigorously. Banks must invest in strengthening their credit assessment frameworks to identify and mitigate risks associated with concentrated lending. Moreover, fostering competition within the banking sector could encourage institutions to explore untapped markets and diversify their loan portfolios.
Ultimately, the persistence of credit concentration in Pakistan’s banking sector reflects a broader challenge of governance and accountability. Banks must move beyond short-term profit motives and prioritize long-term sustainability. This shift will not only enhance the resilience of individual institutions but also contribute to the stability and growth of the broader economy. Bank Alfalah’s example demonstrates that such a transformation is possible, but it requires a concerted effort from all stakeholders to replicate this success across the industry.
As the data reveals, the issue of credit concentration is not confined to a particular type of bank or ownership structure; it is a pervasive problem that threatens the stability of the financial system. The worst offenders—whether public, private, Islamic, or foreign-owned—highlight the systemic nature of the issue, while the best performers offer a glimmer of hope for a more diversified and resilient banking sector. For Pakistan’s economy to thrive, addressing this entrenched challenge must become a top priority for policymakers, regulators, and industry leaders alike.
Comments