KARACHI: The rapid expansion of Pakistan’s non-bank financial institutions, celebrated by the State Bank of Pakistan (SBP) in 2024, has reversed sharply as liquidity exits the sector during the first five months of the current fiscal year. Despite repeated policy encouragement from both the central bank and the government, banks have pulled back substantial liquidity from NBFIs, marking a complete shift from the aggressive lending seen at the end of 2024.
According to the latest SBP statistics, NBFIs received no new lending from banks between July and November. Instead, the sector saw a net debt retirement of Rs340 billion, signalling a swift withdrawal of funds. This stands in stark contrast to the previous year, when banks injected over Rs1 trillion into NBFIs to avoid an additional tax tied to the advance-to-deposit ratio (ADR). Banks were required to push their ADR to 50 percent by December 2024, and failure to do so would have triggered an incremental tax burden.
The liquidity influx was so large that, according to the SBP’s Financial Stability Review 2024, the amount banks channelled into NBFIs exceeded the total existing stock of credit to the sector by 130 percent. This temporary liquidity wave had powered what the central bank described as impressive sectoral growth during 2024. The report highlighted that NBFIs recovered significantly from a challenging 2023 as macroeconomic and financial conditions improved, supported by both asset management companies and lending institutions.
The SBP noted that easing financial conditions, coupled with the ADR-driven push from banks, led to renewed activity in the lending segment in 2024. Many institutions that had faced slower credit activity in 2023 experienced a revival. However, the central bank also cautioned that the performance of NBFIs would remain sensitive to shifting domestic and geopolitical factors. The latest reversal makes it increasingly clear that the liquidity boom of 2024 was a one-off event linked closely to taxation policy rather than long-term sectoral expansion.
Banks have historically been urged to extend more credit to small and medium enterprises and NBFIs in order to stimulate economic activity. Yet the new data shows that once the ADR compliance period ended, banks rapidly retired their positions, prioritizing balance sheet adjustments over continued sectoral support.
Mutual funds recorded some of the strongest outcomes during 2024, posting growth of 98.9 percent compared to 41.8 percent in the previous year. Their share in the overall NBFI asset base rose sharply to 71.5 percent from 64.7 percent. The increase was broad-based, but the largest volume gains came from conventional money market funds and Islamic income funds, showing strong investor and institutional preference for low-risk and Sharia-compliant options.
The SBP highlighted that the majority of this expansion occurred toward the end of the year, precisely when banks were redirecting funds to avoid the ADR-related tax. Nearly 88.6 percent of the total rise in mutual fund assets was reported by banks’ associated asset management companies, reinforcing the impact of policy-driven liquidity movements rather than organic market behaviour.
As FY25 progresses, the sector now faces renewed uncertainty, with its earlier momentum significantly weakened by the withdrawal of bank funds. The reversal underscores how sensitive NBFI activity remains to regulatory shifts, liquidity cycles, and compliance-driven financial strategies.
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