Bridging the gap: capital markets and the crisis in banking

Pakistan’s capital markets have seen gradual improvements, but several challenges persist: Market Liquidity and Volatility, Investor Confidence, Regulatory Reforms, and Product Diversification. As Pakistan struggles with economic turbulence, the importance of a well-functioning financial ecosystem cannot be overstated. While much attention has rightfully been placed on macroeconomic indicators like inflation and fiscal deficits, two fundamental aspects of financial health are frequently overlooked in the national discourse: the development of capital markets and the deepening crisis within our banking sector. Capital markets serve as vital engines for economic growth. They channel funds from savers to businesses and infrastructure projects, providing a platform for wealth generation and risk diversification. Yet, in Pakistan, these markets remain shallow, illiquid, and underutilized. Market capitalization remains low as a percentage of GDP, investor participation is minimal, and corporate listings are declining instead of increasing. This stagnation is a result of several interconnected factors. Regulatory complexity, weak investor protections, lack of financial literacy, and limited technological integration all deter participation. Moreover, the dominance of a few institutional investors, coupled with minimal retail engagement, restricts the breadth and depth of the market.  On the other side of the coin, our banking sector—traditionally the backbone of financial intermediation–is showing cracks under pressure. Pakistan’s banking sector faces several structural issues: Non-Performing Loans (NPLs), Liquidity Risks, Digital Banking Infrastructure, Financial Inclusion and Operational Costs. High exposure to government securities has turned banks into passive collectors of sovereign debt rather than active lenders to the private sector. The result is a credit-starved economy where entrepreneurship and industrial expansion are throttled by a lack of access to finance. Non-performing loans (NPLs) and governance issues within public sector banks further exacerbate the problem. While private banks tend to fare better, their lending remains concentrated in low-risk areas, driven by a profit-maximizing ethos rather than a developmental one. Furthermore, the regulatory environment often prioritizes compliance over innovation, discouraging new financial products and services that could serve the unbanked and underbanked populations. So, what is the way forward? First, Pakistan must reinvigorate its capital markets by streamlining regulatory procedures and incentivizing listings on the Pakistan Stock Exchange (PSX). Tax incentives for newly listed companies, better enforcement of corporate governance norms, and efforts to boost transparency will all help attract both domestic and foreign investors. Second, the Securities and Exchange Commission of Pakistan (SECP) and the State Bank must work in tandem to create a holistic financial development strategy. Fintech integration should be accelerated, not only to bring more people into the formal economy but also to introduce innovative investment platforms that appeal to younger, tech-savvy investors. Third, reform in the banking sector is imperative. Banks must be encouraged—if not compelled—to diversify their loan portfolios away from government debt and towards productive sectors of the economy. Enhanced credit risk assessment tools, credit guarantees for SMEs, and digital onboarding for small borrowers could unlock vast segments of latent economic potential. Pakistan’s financial sector is at a crossroads, with opportunities for growth tempered by significant challenges. Addressing issues like NPLs, liquidity risks, and digital infrastructure gaps is crucial for fostering a more robust and inclusive financial system. Continued regulatory reforms and investment in technology will be key to unlocking the potential of both the capital markets and the banking sector. We can conclude by saying that the capital market and banking sector are not two separate silos; they are intertwined components of a single financial ecosystem. Neglecting one while attempting to reform the other is a strategy doomed to fail. It is only through a sane, balanced, forward-thinking approach that Pakistan can mobilize its financial resources for sustainable and inclusive growth.