Pakistan formally brings start-ups into SME financing framework

The State Bank of Pakistan (SBP) has formally introduced a separate category for start-ups under its revised Prudential Regulations for SME Financing, marking a policy shift aimed at improving access to formal finance for early-stage businesses. However, experts said the move alone is unlikely to significantly increase bank lending without broader reforms to address lending risks.

For the first time, the central bank has defined start-ups as businesses operating for up to five years and in the early stages of development, bringing a segment that has largely remained outside conventional bank lending into the regulatory framework.

The revised regulations also expand the definition of small and medium-sized enterprises (SMEs) by increasing annual turnover thresholds. Micro enterprises are now defined as businesses with annual sales of up to PKR 30 million. Small enterprises are those with annual sales exceeding PKR 30 million and up to PKR 400 million, while medium enterprises are defined as businesses with annual sales above PKR 400 million and up to PKR 2 billion.

Analysts said the higher turnover thresholds are expected to expand the number of businesses eligible for SME financing. However, they described the formal recognition of start-ups as the most significant reform because it gives banks a regulatory basis to develop financing products tailored to early-stage companies that have historically struggled to access credit.

Despite the regulatory changes, experts cautioned that banks may remain reluctant to lend to start-ups without additional reforms, including stronger risk-sharing mechanisms, expanded credit guarantee schemes and incentives to support financing for young businesses with limited collateral and operating histories.