Nadeem-ul-Haque
Pakistan has spent decades looking for growth. We have tried industrial policies, subsidies, development plans, special economic zones, concessional loans, and countless IMF programs. Every new government promises investment. Every finance minister promises stability. Yet one of the most important engines of modern economic development barely figures in our economic debate: financial markets.
We have banks. Plenty of them. We have bankers occupying influential positions in economic policymaking. We have a stock exchange that regularly celebrates spectacular increases in its index. But where are the financial markets that discover entrepreneurs, finance new businesses, fund innovation, and allow promising firms to grow? And where are the markets that will allow citizens opportunities to grow and plan for their lives through facing risks that they face.
A profitable banking sector is not the same as a developed financial system. Pakistan has confused the two for far too long.
How the rich countries grew
Economic history tells an interesting story. Modern capitalism did not develop through factories and technology alone. Financial innovation was equally important.
Seventeenth-century Amsterdam developed securities trading, sophisticated credit arrangements, and markets that allowed merchants to raise capital beyond their personal fortunes. Britain followed with banks, insurance, government debt markets, and eventually a growing securities market. Railways, canals, shipping, and large industrial enterprises required capital on a scale that family savings could not provide.
America went further. Its vast railway networks were financed through bonds and shares sold to investors. Later came large corporations, investment banks, pension funds, and eventually venture capital. Much of America’s technological leadership emerged in an environment where new ideas could find investors willing to finance uncertain ventures.
Consider Silicon Valley. Banks did not create Apple, Intel, Google, or the modern technology industry by lending against property. Entrepreneurs found equity investors prepared to lose money on unsuccessful projects in the hope that a few would succeed spectacularly.
Not every country followed the American model. Germany and Japan relied more heavily on banks, while South Korea used directed credit and development finance. But successful industrialization consistently required institutions that mobilized capital for productive investment. The financial arrangements differed. Their economic purpose did not.
What economists discovered
Joseph Schumpeter recognized this connection over a century ago. Economic growth, he argued, comes from entrepreneurs introducing new products, technologies, and ways of doing business. Finance gives them command over resources they do not already own.
Modern research has reinforced his insight. Raghuram Rajan and Luigi Zingales showed that industries needing outside finance grow faster in countries with more developed financial systems. Ross Levine’s extensive research established that finance can contribute to growth by improving the allocation of capital, not merely increasing savings.
Another important study by Asli Demirgüç-Kunt, Erik Feyen, and Levine found that as countries become richer, securities markets tend to become more important relative to banks.
The message is simple. Development requires moving money toward new opportunities. A financial system should not merely preserve existing wealth. It must help create new wealth.
Banks are not enough
This distinction is especially important because banks and financial markets perform different functions.
Banks take deposits, operate payment systems, provide working capital, and make loans. They must protect depositors and remain financially sound. They inevitably take credit risks, but these must be carefully managed.
A startup developing a new technology is different. It may fail. Indeed, most ambitious experiments carry substantial uncertainty. Such ventures should ordinarily be financed by investors who knowingly accept the possibility of losing their capital.
That is what equity markets, venture capital, private equity, and other risk-bearing institutions do. They spread risk among willing investors. Successful entrepreneurs gain access to capital without having to belong to wealthy families or provide property as collateral.
Banks should protect deposits. Financial markets should make productive risk-taking possible. A modern economy needs both.
Pakistan’s missing financial system
Now consider Pakistan.
According to the State Bank’s FY2025 annual report, private-sector credit amounted to just 8.7 percent of GDP under its reported definition. The advances-to-deposits ratio stood at only 36.3 percent. In other words, bank lending was little more than a third of deposits.
Where does much of the money go? Into government securities.
An IMF study in 2024 found that Pakistani banks held the world’s highest proportion of government securities relative to total banking assets. It estimated sovereign securities at around 60 percent of assets, more than three times the emerging-market average.
This is a remarkable financial structure. The government borrows heavily. Banks lend to the government. Government securities provide substantial interest income. And the system continues.
Why should a bank spend time identifying entrepreneurs, evaluating unfamiliar technologies, or helping smaller firms grow when government debt offers an attractive alternative?
The result is not merely inadequate lending. It is a financial system organized around financing the state rather than discovering productive investment.
Meanwhile, the stock exchange remains small relative to the economy. At the end of 2025, only 535 companies were listed on the Pakistan Stock Exchange. Just seven new companies were listed during that calendar year.
We celebrate the KSE-100 reaching record levels. But a rising index mostly tells us what investors are willing to pay for existing shares. It does not tell us how much fresh capital businesses have raised to build factories, develop products, or employ more workers.
Corporate bond markets remain tiny. Venture capital and private equity have yet to become substantial domestic sources of finance. Mutual funds are heavily concentrated in money-market and fixed-income products. Many important asset-management companies are associated with banking groups.
Even ordinary financial inclusion is poor. The World Bank’s Global Findex shows that only 27 percent of Pakistani adults had a financial or mobile-money account in 2024. Among women, the figure was just 12 percent. Maintaining and operating conventional bank accounts can still involve significant documentation, compliance requirements, fees, and inconvenience, particularly for smaller customers.
How can we mobilize national savings efficiently when most people remain outside formal finance?
The bankers’ development failure
For more than two decades, Pakistan’s economic policymaking has drawn heavily on people trained in commercial banking and international financial institutions. Banking privatization was expected to improve financial services, competition, and credit allocation. Some improvements occurred, particularly in bank operations and payments.
But where is the corresponding development of independent capital markets?
Where are the venture funds, corporate bond markets, pension investors, investment banks, and competitive financing channels that growing businesses require?
The question is not whether individual bankers are competent. It is whether a banking-centered policy establishment has given sufficient attention to the development of finance beyond banks.
Banking groups naturally have commercial interests. Their business models should not determine the architecture of the entire financial system. Indeed, an economy in which established financial intermediaries dominate savings, investments, and policy conversations risks limiting competition from institutions with different approaches to financing enterprise.
Pakistan needs financial development, not simply more financial regulation or more banking products.
Put finance at the center of growth
Financial market development should become a central part of Pakistan’s economic strategy. Not another subsidy scheme. Not another government fund managed by bureaucrats. And certainly not another regulator looking for more powers.
Start by reducing the government’s dependence on bank borrowing. Without fiscal reform, banks will continue to find government debt more attractive than the difficult business of private lending.
Next, open the financial system to genuine competition. Independent investment banks, venture funds, private equity firms, pension managers, insurers, and securities intermediaries should be encouraged to emerge. Regulation must protect investors without making market entry expensive and cumbersome.
Develop corporate bond markets. Make it easier for growing firms to issue equity. Encourage long-term institutional savings through pensions and insurance. Create credible bankruptcy procedures and enforce shareholder rights. Investors will take risks, but they need reliable information and fair rules.
Above all, measure success differently. Stop treating the stock-market index and bank profitability as indicators of financial development. Measure new equity raised, companies entering the market, corporate bonds issued, startups financed, and households gaining access to savings and investment products.
Financial markets cannot compensate for bad taxation, unreliable energy, poor governance, or political instability. Nor should we forget the financial crises that excessive speculation and leverage can produce. Regulation and market discipline remain essential.
But without institutions willing and able to finance productive risk, economic growth will remain constrained by existing wealth, established businesses, and government borrowing.
Pakistan’s economic conversation has been dominated by stabilization for decades. We discuss interest rates, exchange rates, fiscal deficits, and IMF targets endlessly. These matter. But stabilization is not development.
Development requires new firms, new industries, innovation, competition, and the willingness to experiment. All require capital. More importantly, they require institutions prepared to finance uncertainty.
The real question is not how profitable our banks are, or how high the stock exchange has climbed. It is how many new businesses our financial system has helped create.
Until we answer that question, Pakistan will continue to have banks without having the financial markets needed for sustained economic growth.
And that may be one of the most important missing pieces of our development strategy.
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