The State Bank of Pakistan (SBP) has announced a reduction in the average Cash Reserve Requirement (CRR) for all banks to 5%, with a daily minimum requirement of 3%, as part of its efforts to support credit expansion to the private sector.
In a circular issued on Tuesday, the central bank said that the revised CRR will come into effect from January 30, 2026. The new requirement will apply to all scheduled banks operating in the country, including Islamic banks and Islamic banking branches. SBP added that all other instructions regarding reserve maintenance will remain unchanged.
The Cash Reserve Requirement refers to the portion of banks’ deposits that must be maintained with the central bank and cannot be utilized for lending or investment. By lowering this requirement, the SBP is enabling banks to deploy a larger share of their deposit base toward financing economic activity. The move is generally aimed at easing liquidity conditions within the banking system and encouraging higher credit flows to the private sector.
According to the central bank, the decision has been taken in light of an improved macroeconomic environment. Recent stability in key economic indicators has provided room for policy support measures designed to stimulate economic activity while maintaining financial sector stability. The reduction in CRR signals the SBP’s confidence in the resilience of the banking system and its ability to manage liquidity effectively.
With the revised average CRR, banks will have additional funds available for lending, which could help improve access to credit for businesses and individuals. This is particularly relevant for the private sector, where increased availability of financing can support investment, expansion, and working capital needs. Small and medium enterprises, which are often more sensitive to liquidity constraints, are expected to benefit from improved credit conditions.
The inclusion of Islamic banks and Islamic banking branches under the revised CRR framework ensures uniformity across the banking sector. By applying the same reserve requirements, the SBP aims to maintain a level playing field and allow all segments of the banking industry to benefit equally from enhanced liquidity.
Market participants view the reduction in CRR as a positive step for the banking sector, as it is likely to ease funding pressures and improve banks’ capacity to extend financing. Lower reserve requirements can also help improve banks’ profitability by allowing them to deploy a greater portion of their resources into income-generating assets.
However, analysts note that while the measure increases liquidity, its ultimate impact on credit growth will depend on other factors as well. These include demand for loans from the private sector, banks’ risk appetite, and prevailing interest rate conditions. In addition, broader economic confidence and business sentiment will play a role in determining how effectively the additional liquidity translates into higher lending activity.
Overall, the SBP’s decision to reduce the Cash Reserve Requirement reflects a supportive monetary stance aimed at facilitating private sector credit growth. By keeping other regulatory instructions unchanged, the central bank appears focused on striking a balance between encouraging economic activity and preserving financial system stability, as the economy continues to navigate a gradually improving macroeconomic landscape.
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