Banking resilient on growth, rising deposits

• Islamic banking assets grew 11.5%, raising share to 20.7% with growing customer preference.
• SME advances increased 9.5% to Rs 657 billion, supported by regulatory relaxations and schemes.
• Capital adequacy ratio rose to 21.4%, well above regulatory minimum, reflecting resilient solvency buffers.

The banking sector of Pakistan has evolved significantly since the financial liberalization of the 1990s, which allowed private sector participation and foreign investment. Over decades, it transitioned from being mainly a government instrument for economic policy to a commercially oriented, competitive sector with a larger role in economic growth and financial inclusion. The State Bank of Pakistan (SBP), as the regulator, has been central to this development, introducing Basel-compliant regulations, promoting Islamic banking, digitization, and stability measures.

By 2025, the sector is notably resilient despite global economic uncertainties including geopolitical tensions and trade tariffs impacting markets worldwide. It operates amid recovering macroeconomic conditions in Pakistan, where the inflation has dropped from double digits in late 2024 to a target 5-7% range, enabling SBP rate cuts from 22% to about 11%. These changes have improved the investment climate and credit availability, while the sector continues to be the largest contributor to government revenues and a leading employer.

During H1 2025, Pakistan’s banking sector’s balance sheet grew by 11% to Rs 59.6 trillion, mainly supported by a 25.8% increase in investments, particularly government securities. Conversely, advances contracted by 15.2%, reflecting seasonal factors, regulatory policies, and a reversal of an advance spike observed in late 2024 due to changes in tax-linked incentives on advances-to-deposits ratios (ADR).

Deposits experienced a significant 17.7% growth, particularly current deposits, driven by government fiscal operations, which boosted liquidity and lowered banks’ reliance on borrowings. The ADR fell to the lowest level since 2014 at 35.3%, indicating high liquidity but a cautious lending environment.

Islamic Banking Institutions (IBIs) maintained steady asset growth of 11.5% in H1, inching their share of sector assets and deposits to around 20.7% and 25.5%, respectively, underscoring growing customer preference for Shariah-compliant banking.

Profitability of the banking sector in 2025 has been robust. Listed banks reported a record half-year PAT of Rs 326 billion, an increase of 19% year-on-year, driven by strong net interest income (NII) growth of 22% to Rs 1 trillion. Conventional banks posted a 29% profit rise while Islamic banks faced a 13% decline, demonstrating a performance divergence.

Return on assets (ROA) rose slightly to 1.3% while return on equity (ROE) improved to 21.3%. The net interest margin (NIM) increased to 4.7%, reflecting efficient repricing of bank liabilities compared to assets amid monetary easing.

Operating costs grew by 18%, but were contained relative to income, keeping the cost-to-income ratio around a healthy 46%. The sector’s rising taxation burden now consumes over 54% of pre-tax profits, reflecting policy shifts, yet profitability remains steady due to strong earnings and cost control.

Segmental Advances and Lending Analysis

Although total advances shrank due to a reversal in lending boon of late 2024 linked to ADR tax policy, the SME sector grew steadily with increased fixed investment credit of Rs 63 billion. This is bolstered by regulatory relaxations, government schemes like the CM Punjab Asaan Karobar Card, and youth loan programs. Consumer finance revived through auto loans and credit cards, signifying stabilizing demand.

Sector-wise, large corporate firms retired Rs 2,137 billion in loans, particularly working capital. Among industries, textiles saw substantial loan retirements (Rs 312 billion), reflecting cyclical correction after previous expansion. The sugar sector reduced advances due to improved cash flows from exports and prices. Public sector financing also saw significant contraction consistent with fiscal reforms.

Asset Quality and Capital Adequacy

Despite a marginal increase in gross non-performing loans (NPL) ratio from 6.3% to 7.4% due to contracting loan volumes, the sector’s asset quality remains strong with loan loss provisions covering 106.2% of NPLs. This reflects prudent risk management under IFRS 9 provisioning standards. Net NPLs to net loans ratio remains negative, indicating excess provisions over delinquent loans, mitigating solvency risks.

Capital adequacy ratio (CAR) stood resilient at 21.4%, significantly above the 11.5% regulatory minimum. Tier 1 and Tier 2 capital grew at healthy rates, driven by earnings retention and revaluation gains in government securities. Stress tests based on severe macroeconomic shocks showed the sector’s capacity to maintain CAR comfortably above regulatory minima for two years, reflecting strong solvency buffers.

The domestic financial markets experienced elevated volatility in equity markets amid geopolitical tensions and global trade uncertainties but remained manageable due to stable currency reserves (USD 24 billion approx.). The current account surplus of $1.1 billion in H1 2025 helped reduce foreign exchange market volatility. Banking sector confidence in SBP’s regulatory oversight remains high, although geopolitical risk is cited as the top threat by systemic risk surveys.

Risks include fiscal consolidation pressures, commodity price volatility, and external trade uncertainties. Expanding the tax base, enhancing digital finance, and supporting SMEs are identified as critical to mitigating risks and supporting sector growth.

Pakistan’s banking sector is a key contributor to the national economy, holding assets close to 49% of GDP in 2024, a substantial increase from less than 20% in the early 2000s. It is the largest tax-paying sector with Rs 644 billion paid in 2023 and Rs 394 billion collected in H1 2025 alone. The sector finances government budget deficits extensively via government securities investments and advances.

The sector employs over 200,000 people across the country and actively promotes financial inclusion through new SME loan products, digital banking outreach, and microfinance. Credit to SMEs and agriculture is being prioritized to stimulate inclusive growth.

Pakistan’s banking landscape consists of conventional commercial banks, Islamic banking institutions (IBIs), microfinance banks, and specialized financial institutions. Conventional banks dominate with over 75% market share, but IBIs have grown rapidly to hold over 20% of total assets. Major banks include Habib Bank Ltd, MCB Bank, United Bank Ltd, and Al Baraka Bank among IBIs. The SBP regulates banks applying Basel III standards for capital and liquidity, promoting financial stability and resilience.

The sector is advancing digital transformation with mobile banking, fintech partnerships, and e-KYC initiatives accelerating. This has improved customer access, reduced transaction costs, and encouraged cashless transactions in urban and rural areas.

Fitch Ratings’ recent upgrade of Pakistan’s sovereign outlook has boosted banking sector confidence, expected to drive credit expansion, improve profitability, and deepen penetration. The sector anticipates further growth driven by macroeconomic stabilization, policy reforms, and enhanced risk management practices.

The author, Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at sir.nazir.shaikh@gmail.com