The State Bank of Pakistan has introduced a separate category for start-ups under its revised Prudential Regulations for SME Financing, a policy shift that could reshape access to formal finance for early-stage businesses across the country. For the first time, the central bank has defined start-ups as businesses operating for up to five years and in early stages of development, formally recognising a segment that has long sat outside conventional bank lending frameworks. The move follows broader amendments to the Prudential Regulations for SME Financing, which revised SME turnover thresholds alongside introducing the new start-up category, with micro enterprises now defined as having annual sales up to 30 million rupees, small enterprises above 30 million to 400 million rupees, and medium enterprises above 400 million to 2 billion rupees.
While the revised turnover thresholds are expected to bring a larger number of businesses within the SME framework, experts believe the start-up recognition represents the more consequential change, giving banks a regulatory basis to develop financing products tailored to businesses that have traditionally struggled to access credit. Ahmed Ali Siddiqui, Founding Director of the IBA Centre for Excellence in Islamic Finance and head of Shariah Compliance at Meezan Bank, said the revised definition aligns the regulatory framework with Pakistan’s economic realities and should improve access to formal finance, enable investment, and support business expansion and employment generation. He said the framework also creates opportunities for Islamic banks to expand Shariah-compliant financing through asset-backed and partnership-based solutions suited to the needs of early-stage enterprises, though he stressed that the initiative would need to be paired with dedicated start-up financing programmes, cash flow-based credit assessments, credit guarantee mechanisms, and stronger collaboration among banks, regulators, incubators, and venture capitalists to translate into meaningful outcomes.
Kapeel Kumar, Founder of The Founder’s Space, described the move as a significant regulatory milestone, noting that the previous absence of a formal definition had left start-ups in a regulatory grey area that made it difficult for banks to categorise high-growth but high-risk businesses. He cautioned that the new classification does not automatically guarantee higher credit flows, since banks remain largely tethered to collateral-based lending practices, but said it establishes the groundwork needed for banks to eventually design start-up-specific products. Kumar described the five-year window as a pragmatic starting point given that it covers the so-called valley of death phase when most young businesses struggle to survive, while suggesting that Pakistan may eventually need a longer recognition period for research-intensive ventures with extended development cycles.
To convert the regulatory change into practical financing outcomes, Kumar called for a government-backed credit guarantee scheme in which the state would absorb part of the default risk, encouraging banks to lend against future cash flows rather than physical collateral. He also proposed a start-up-first procurement policy under which a share of government digital transformation contracts would be awarded to local start-ups, providing the kind of early market validation needed to attract further investment, alongside expanding regulatory sandboxes beyond fintech into sectors such as logistics, agriculture, and education. Kumar argued that Pakistan’s more fundamental challenge lies not in incubating start-ups but in retaining them, pointing to complex capital movement regulations, inconsistent tax policies, and infrastructure bottlenecks as factors pushing founders to relocate to hubs such as Dubai and Singapore to scale their businesses. Both experts agreed that while the revised SME definition modernises Pakistan’s prudential framework, its ultimate success will depend on whether banks, regulators, and policymakers can translate this recognition into practical financing solutions for the country’s start-ups.
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