Pakistan’s revised SME definition needs more work

In July 2026, the State Bank of Pakistan (SBP) revised the Prudential Regulations for SME financing, raising the turnover ceiling for small enterprises by 2. 7 times to Rs400 million and for medium enterprises by 2. 5 times to Rs2 billion. This is the first definitional change since 2021. The timing is deliberate, but from a policy perspective, the revised definition remains incomplete. SMEs in Pakistan are the backbone of the economy. According to SMEDA estimates, they contribute 40 percent to GDP and up to 30 percent to national exports. Yet the sector has historically received only about 6–7 percent of private-sector financing. While outstanding SME financing and the number of SME borrowers have nearly doubled between 2021 and 2026, according to reported SBP data, SME financing remains below 1 percent of GDP – well below peer economies such as India (8. 5 percent), Bangladesh (6 percent) and Vietnam (29 percent). This is a strong signal that Pakistani SMEs remain structurally underserved by the formal credit system. Not for the lack of trying. The SBP has introduced a number of policies over the years to boost bank financing to SMEs, including guarantee schemes, clean-lending initiatives, mark-up support and mandatory lending targets. This is predominantly why an effective and unified definition of the segment is fundamental. A definition with measurable parameters draws a clear line between corporates and smaller businesses, enabling the government to offer targeted regulatory support and specialized financing. Most importantly, it helps ensure that this support reaches the intended businesses without leakage. Setting a definition, however, is only half the job. There are two critical elements that are still being overlooked. First, the current definition assumes that a wholesale trader and a software firm are the same business. But different sectors operate differently. A high-volume trader can generate large turnover despite having a relatively small operation, while a manufacturer may require a much larger asset and employee base to operate. A single turnover threshold can therefore overstate the scale of a trading business while understating that of a manufacturing business. This is why most global frameworks assess SMEs using multiple parameters, including turnover, employee headcount and assets, often with thresholds differentiated by sector. Pakistan’s current definition relies on turnover alone and applies the same thresholds across sectors. A trading firm, for instance, can cross the Rs400 million ceiling on high volumes while retaining only a fraction of that amount as profit. A manufacturer with the same turnover may have significantly more capital tied up in assets and operations. A single turnover ceiling can therefore push firms out of the SME bracket even when their actual scale, measured by assets, employees or profitability, remains relatively small. Asian economies provide a useful comparison. Thailand sets its manufacturing small-enterprise threshold at twice its equivalent for trade and services, while Malaysia sets its manufacturing medium-enterprise threshold at 2. 5 times its services threshold. China similarly applies separate limits for manufacturing and retail, with the manufacturing medium-enterprise threshold set at twice that of retail. Beyond turnover, Thailand, Malaysia and China also incorporate sector-specific employee headcounts, while China additionally applies total-asset limits to differentiate sectors such as industry and construction. Second, the definition is not unified across regulators. While key regulators use SME definitions for different purposes – SBP for financial intermediation, FBR for tax policy and SECP for regulatory thresholds – the definitional difference creates administrative friction and policy misalignment. To illustrate, FBR’s SME tax concessions cut off at Rs250 million in turnover, well below the thresholds used by SBP and SECP. A firm can therefore qualify as an SME for financing and regulatory purposes while still facing higher corporate tax rates. The revised definition’s impact, therefore, will remain limited unless it is uniformly adopted across regulators. A common definition would reduce inconsistencies in financing, taxation, regulation, data collection and reporting. There should also be a formal, rules-based mechanism for periodically reviewing SME thresholds rather than relying on discretionary revisions. The latest change comes as the SBP has set fresh targets for SME lending, with ambitions to grow outstanding credit to Rs1. 5 trillion and increase the number of borrowers to 750, 000 – roughly twice the current count – by June 2028. A wider definition will expand the pool of eligible firms. Conservative estimates suggest that around Rs0. 9 trillion in financing could potentially be reclassified under the revised definition. Other factors could also support this expansion. The policy rate has fallen from a peak of 22 percent to 11. 5 percent between 2024 and 2026, while concessional schemes such as SME Asaan Finance (SAAF), which offers a fixed mark-up of 9 percent per annum, could encourage more firms to formalize and borrow from the formal financial system. The SBP’s rationale for the change is alignment with current economic realities. Prices rose by an average of 14. 4 percent annually between FY21 and FY26. On that basis, a small enterprise with a Rs150 million turnover ceiling in FY21 would need a threshold of roughly Rs303 million in FY26 simply to reflect the same level of activity. The new Rs400 million ceiling is therefore above the inflation-adjusted equivalent, suggesting that inflation was accounted for while leaving some room before the threshold becomes outdated again. The takeaway is that regulators should establish, in advance, a set of objective indicators that determine when the SME definition should be reviewed or revised. Global practices offer useful models. The European Commission, for instance, is legally required to review the monetary thresholds for SMEs at least every five years. To facilitate this, consideration may be given by the sub-committee on SME under the Access to Finance Steering Committee to review the definition and develop sector-specific thresholds. Data from FBR, SECP and SBP could be used to map how revenues, employment and assets are distributed across trading, manufacturing and services firms. This would provide an evidence base for sector-differentiated thresholds and bring the framework closer to the economic reality of Pakistani businesses. The article is co-authored by Nimra Awais & Fatima Tu Zahra, part of the Research & Insights team at Karandaaz Pakistan.

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