Pakistan’s financial system has shown resilience in the face of ongoing economic pressures, but the International Monetary Fund’s latest Technical Assistance report signals that deep-seated governance and structural challenges threaten the sector’s long-term stability. The newly released Governance and Corruption Diagnostic Assessment outlines both the strides made by regulators and the persistent weaknesses that could compound vulnerabilities, especially as the country prepares for a wholesale transition to an Islamic banking framework by 2028.
According to the assessment, the State Bank of Pakistan has built a strong supervisory and legal infrastructure aligned with global Basel Core Principles, yet gaps in institutional independence and accountability continue to expose the financial sector to governance and corruption risks. These risks could intensify during the upcoming transformation of the banking landscape, amplifying the need for resilient oversight frameworks and transparent regulatory conduct.
The banking sector remains the dominant force in Pakistan’s financial architecture, representing nearly 49 percent of national GDP. This dwarfs the role played by microfinance institutions, non-bank financial entities, and the insurance industry. The growing footprint of Islamic banking is another significant development, now comprising approximately 19 percent of total banking assets across 22 institutions. Despite these expansions, private-sector lending remains severely constrained. Banks have heavily favored government securities, with government credit accounting for more than 60 percent of total assets. This entrenched sovereign-bank nexus is a central point of concern in the IMF analysis, as it increases systemic exposure and limits diversified credit expansion.
Although banks continue to report strong returns driven by treasury operations, the IMF warns that expected declines in interest rates could erode profitability. Compounding this, inefficiencies within Pakistan’s legal and judicial systems still restrict the growth of private lending, tightening credit conditions for businesses and households.
The report does acknowledge notable regulatory advancements. The State Bank’s implementation of Basel III standards, rollout of risk-based supervision, and development of SupTech tools for real-time risk monitoring demonstrate significant modernization. The regulator’s contribution to Pakistan’s exit from the FATF grey list and its digital bank licensing framework are further indications of reform momentum.
However, governance lapses overshadow these achievements. The absence of two Deputy Governors has limited decision-making strength at the central bank. The IMF also highlights concerns around historical ownership conflicts, the Ministry of Finance’s presence on the SBP board, and the lack of mandatory public disclosure when senior central bank officials are removed. These conditions weaken institutional independence and cloud transparency.
Corporate governance shortcomings within the banking sector also emerged in the assessment, notably around related-party lending and supervisory accountability. The IMF points out that while the SBP has broad enforcement authority, interventions in undercapitalized banks have sometimes been delayed, leaving space for stakeholder influence.
As Pakistan accelerates toward a fully interest-free banking model by 2028, the IMF underscores the scale of regulatory and operational challenges ahead. Banks will need substantial system upgrades, and the conversion of government securities into Shariah-compliant instruments will require careful planning. The central bank will be tasked with maintaining stability during this transition, ensuring that the shift does not trigger liquidity strains or operational disruptions.
To address these risks, the IMF recommends a series of reforms: amending the SBP Act to ensure independence by removing the Ministry of Finance representative, institutionalizing public disclosure for leadership changes, filling central bank vacancies, ensuring early intervention for troubled banks, refining rules on related-party transactions, and publishing supervisory objectives for greater accountability. Strengthening governance frameworks will play a pivotal role in expanding financial inclusion, energizing private-sector lending, and safeguarding the Islamic banking transition.
While Pakistan has made progress in regulatory modernization, the IMF’s findings make clear that governance weaknesses, legal constraints, and state involvement in financial oversight remain significant obstacles. With the 2028 Islamic banking target approaching, timely reforms and consistent supervision are essential to shield the financial system from destabilizing risks and build a more transparent, resilient banking environment.
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