Pakistan's financial sector has achieved a milestone in recent years due to technological development. This development has not only made financial access easier but also opened new avenues for credit access. Now, people can access their financial accounts anytime.
DIGITAL LENDING
Pakistan's financial sector has achieved a milestone in recent years due to technological development. This development has not only made financial access easier but also opened new avenues for credit access. Now, people can access their financial accounts anytime.
These digital platforms have played a vital role in expanding access to loan facilities in the country. The availability of smartphones and the internet has brought drastic change in the digital world. As a result, people use these facilities to borrow money, and borrowing has now become part and parcel of their lives. Borrowing is very popular among the salaried class, students, and small-business owners who have difficulty obtaining loans from traditional banks and local lenders.
One can now wonder whether loan provision without any documentation is easy money or a debt trap. If it is the former, it would enhance people's living standards and open up employment opportunities; if it is the latter, it would plunge people into an abyss.
No doubt, everything has two sides. Digital lending has increased financial literacy in Pakistan. It has reduced income inequality and promoted financial inclusion. According to the State Bank of Pakistan (SBP), financial inclusion has increased to 67 per cent in 2025 from 47 per cent in 2018.
The rural population of Pakistan has very limited access to traditional banking facilities. People face difficulty in opening a bank account and its terms and conditions. Digital lending has bridged this gap and increased financial inclusion. The SBP report indicates that these digital banks have played an important role in enhancing financial literacy in Pakistan. Digital lending has enabled women to easily access credit and lowered their dependency on their male counterparts. This initiative has also improved the well-being of children.
To add to this, quick access to digital lending helps people during medical emergencies. These microfinance banks also provide loans to small and medium enterprises (SMEs). They finance their capital and expand the business vertically and sometimes horizontally. Moreover, adopting the latest technologies, such as artificial intelligence and data analytics, would increase the efficiency of fintech companies. They can access creditworthiness by analysing behavioural patterns and history.
Despite these advantages, digital lending poses a serious risk of falling into a debt trap. Easy, speedy access to loans can lead to impulsive borrowing, especially among young and uneducated people who do not fully understand the loan terms and conditions. It would also lead to conspicuous consumption and poverty. With minimal verification and no guarantor for these loans, a person can take out multiple loans simultaneously, leading to a cycle of debt. Many borrowers take out loans for conspicuous consumption rather than investing in ventures or starting new businesses.
Financial literacy is a prerequisite for financial inclusion. Without these policies and strong regulatory frameworks, the prosperity and development through digital lending will remain a mere dream
A study also found that people take out loans to repay their previous loans to avoid becoming bank defaulters. This attitude creates a flux in society. Lack of financial literacy brings people to the door of destruction. Lack of knowledge of the policy rate and the absence of financial planning add insult to the poor man's injuries. In short, this vicious cycle leads people to a debt trap and fintech companies become agents of poverty in society.
Another revelation to the public was that these fintech companies charge higher interest rates and other fees. They have no proper mechanism for consumer protection. They hide services, processing fees and late payment fines. They don’t reveal the drawbacks of borrowing to people and they lure people with flowery words and unreal possibilities. This attitude leads people into a vicious cycle and pays more than the actual amount. To further the argument, fintech companies breach individuals' privacy. They collect personal data like contact numbers and financial position and sale to other companies like marketing agencies for promotional messages and to insurance companies. Sometimes, sharing contact numbers results in scamming activities. The breach of privacy paves the way for cyberattacks and fraud.
Many suicide cases have been reported in Pakistan due to blackmail and harassment by the fintech companies. According to media reports, a 42-year-old man took his life in Rawalpindi in 2023 due to being harassed by a loan app recovery. Digital lending companies use unethical practices. The State Bank of Pakistan has taken the initiative to enhance financial literacy and inclusion, introducing measures such as the RAAST account and a digital banking system; however, digital lending regulation is still in its early stages. Consumer protection and their privacy is a serious challenge for lawmakers.
Everything has two sides, good and bad. Digital lending in Pakistan poses both threats and opportunities. It has increased financial literacy and inclusion. It boosts economic growth by lending to SMEs and empowering women. On the other hand, it puts people into a debt trap. It makes the poor poorer. It breaches privacy and paves the way for fraud and scams. It also brings people to the brink of suicide.
The future of fintech depends upon how these issues are tackled. Financial literacy is a prerequisite for financial inclusion. Without these policies and strong regulatory frameworks, the prosperity and development through digital lending will remain a mere dream. If these issues are properly addressed, the fintech companies can contribute to the country’s growth manifold.
The writer is a scholar at PIDE, Islamabad.
