Pakistan’s digital lending industry has reached an important regulatory crossroads. The debate is ostensibly about interest rates: should the existing cap on nano loans be reduced to protect vulnerable borrowers from excessive charges?
The instinct is understandable, but the real question is more complicated. At what point does consumer protection through price controls begin to exclude the very consumers regulation is intended to protect?
Much of the controversy arises from annualising the daily charge on a nano loan. A rate of 0.75 per cent per day can produce an alarming annualised number of approximately 274pc. But nano loans are not one-year loans. Their maximum tenor is currently 90 days and, according to industry data, the average first-time loan lasts around 25 days.
Consider a borrower taking Rs4,000 for 25 days. At 0.75pc per day, the cost is Rs750, or 18.75pc of principal. That is still expensive credit and should not be trivialised. But describing it principally through a 274pc annualised number can create a misleading picture of what the borrower actually pays.
Pakistan needs a pathway from expensive, high-risk first borrowing towards cheaper mainstream finance
There is another important protection already in place: aggregate recoveries — including markup, fees and penalties — are capped at 100pc of principal. A borrower therefore cannot indefinitely accumulate charges.
Why not simply lower the daily cap?
There are certainly arguments for doing so. Lower prices leave more money with borrowers, reduce the danger of vulnerable consumers becoming dependent on expensive short-term credit and force lenders to improve efficiency. A lower ceiling may also discourage business models dependent upon repeat borrowing rather than genuine financial inclusion. But price controls have consequences.
The economics of lending Rs4,000 to somebody with little or no formal credit history are very different from lending to an established bank customer. Digital lenders incur customer-acquisition, technology, know-your-customer (KYC) verification, funding, servicing and collection costs. Most importantly, they absorb substantial first-loan credit losses.
Industry estimates suggest a first-time borrower can generate a loss of approximately Rs4,902, which was calculated as customer acquisition cost minus cost of funds and default. This is partly because bad debt during the first borrowing cycle is around 21pc. More than 80pc of such customers were previously unbanked. At the existing 0.75pc daily ceiling, the industry estimates that the initial loss can be recovered after approximately 1.8 repeat loans. At 0.50pc, that rises to around 8.9 repeat loans.
Industry estimates suggest a first-time borrower can generate a loss of approximately Rs4,902 owing to higher bad debts
If lenders cannot recover the cost of acquiring and underwriting a new customer over a realistic customer lifetime, rational lenders will not necessarily provide the same loan more cheaply. They may simply stop lending to higher-risk first-time customers, which would be a perverse outcome for financial inclusion.
The people most affected would be borrowers without salary slips, collateral or established credit histories — precisely those for whom nano lending can provide an entry point into formal finance. The industry estimates that first-time borrowers constitute 15-20pc of its portfolio.
There is also the question of where unmet demand goes. People borrowing Rs5,000 because of an emergency do not cease needing Rs5,000 because a regulator changes a pricing rule. If regulated lenders withdraw, some demand may migrate towards informal and unregulated lenders where KYC, disclosure, complaint resolution and consumer protection can be considerably weaker.
This does not mean the existing cap should remain untouched forever. The better approach may be to move from a blunt, uniform ceiling towards differentiated pricing. A new borrower with no repayment history represents considerably greater risk than a customer who has successfully repaid five loans. Why should both necessarily be priced identically?
One possible structure would be to retain the existing 0.75pc daily ceiling for loans up to Rs15,000, particularly for first-time borrowers, while introducing a 0.70pc ceiling above Rs15,000. Customers establishing good repayment histories and verified affordability could progressively move towards 0.60-0.65pc. This creates a credit ladder which Pakistan desperately needs.
Borrow responsibly, repay on time and demonstrate affordability, and the customer should receive lower pricing, larger limits and longer tenors. The industry has also proposed increasing the single-loan limit from Rs50,000 to Rs100,000, aggregate limits from Rs100,000 to Rs200,000 and maximum tenor from 90 to 180 days.
Regulation must simultaneously protect consumers and preserve access. These objectives are not contradictory. The regulator should insist on transparent pricing, prohibit hidden charges, monitor repeat borrowing, enforce affordability assessments and punish abusive collection practices. But it should also recognise the economics of serving customers whom traditional financial institutions have historically ignored.
Pakistan does not merely need cheaper nano credit. It needs a pathway from expensive, high-risk first borrowing towards cheaper mainstream finance. The objective should therefore not be to produce the lowest possible regulatory cap. It should be to create the lowest sustainable price while expanding responsible access.
That distinction could determine whether millions of Pakistanis graduate into the formal financial system — or are pushed back outside it.
The writer is the chairman of the Pakistan Fintech Network
Published in Dawn, The Business and Finance Weekly, September 21st, 2026
