The Pakistani banking sector has demonstrated remarkable resilience and expansion, with its total balance sheet growing by 17.8 percent during the calendar year 2025. According to the newly released Financial Stability Review (FSR) by the State Bank of Pakistan, this growth marks a notable acceleration compared to the 15.8 percent increase recorded in the previous year. The comprehensive report, which evaluates the performance and risk profiles of banks, microfinance institutions, and non-bank financial entities, suggests that the sector is navigating a complex economic landscape by pivoting toward secure investment strategies and robust liquidity management.
A central theme of the CY25 review is the banking industry’s heavy reliance on government securities as a primary driver of asset growth. The FSR reveals that the share of investments within the overall asset mix surged to 62 percent, up from 55.5 percent a year earlier. This shift indicates that commercial banking operations in Pakistan are increasingly centered around sovereign papers, providing a low-risk environment for financial institutions. While this strategy offers stability, it also highlights a continued trend where banks prioritize government lending over private sector credit, largely due to the perceived risk profiles of non-governmental borrowers in the current market.
On the funding front, the sector witnessed a significant rebound in deposit mobilization. Deposits grew by 24.7 percent in CY25, effectively reversing the sharp slowdown experienced during the 2024 calendar year. This influx of capital has bolstered the liquidity profile of banks, with treasury securities now representing nearly 58.6 percent of the total asset base. These securities benefit from an active secondary market, allowing banks to manage their daily liquidity requirements with high efficiency. Furthermore, the credit risk remains contained as a substantial portion of bank loans—approximately 62 percent—is concentrated among highly rated corporate and commercial borrowers.
Profitability within the sector remained positive but faced headwinds from an evolving tax landscape. The State Bank reported that after-tax earnings grew by 11.2 percent, a performance largely driven by the sheer volume of assets. However, profit margins were slightly tempered by rising fiscal obligations, as the effective tax rate on pre-tax profits climbed to 54.3 percent from 52.9 percent the year prior. Despite these tax pressures, the solvency of the banking sector remains exceptionally strong. The Capital Adequacy Ratio (CAR) improved to 20.8 percent by the end of 2025, significantly exceeding both domestic benchmarks of 11.5 percent and international standards of 10.5 percent.
The Islamic banking segment continues to be a standout performer, significantly outpacing conventional banking for the second year in a row. Islamic Banking Institutions (IBIs) expanded their footprint to represent 23 percent of the total banking sector assets by the end of CY25. Supported by the highest branch expansion in the history of the segment, IBI assets grew by 30.7 percent. This growth was fueled by a double-sided expansion in both investments and financing, underpinned by strong deposit growth. As the financial ecosystem matures, the continued momentum of Islamic finance suggests a fundamental shift in consumer and corporate preferences toward Shariah-compliant solutions within Pakistan’s digital and physical banking infrastructure.
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