In a notable shift within Pakistan’s banking sector, financing from commercial banks to the private sector has surged by an impressive 263% during the current financial year. This sharp increase is largely attributed to the recent decline in interest rates, coupled with the banking sector’s strategies to balance their advance-to-deposit ratios (ADRs).
According to data released by the State Bank of Pakistan (SBP), credit extended to the private sector by banks jumped to a substantial Rs. 563 billion between July and March 7 of the current financial year. This is a remarkable leap from Rs. 155 billion reported in the same period the previous year. The impressive 263% increase in financing highlights a strong recovery in the credit market, driven by favorable monetary policies and demand from the private sector.
Among the different types of banks, Islamic banks have emerged as the leaders in providing credit to the private sector. They have collectively extended Rs. 416 billion in financing, representing an incredible growth of 288%, or Rs. 309 billion, compared to the previous year. This significant rise underscores the growing preference for Islamic banking products and services, which are increasingly gaining traction among borrowers seeking alternative financing options. Additionally, Islamic banking divisions within conventional banks have also contributed to the trend, providing Rs. 104 billion in credit, reflecting a robust growth of 236% or Rs. 73.1 billion.
On the other hand, conventional banks have provided the lowest financing to the private sector, lending Rs. 42 billion during the same period. While this figure is comparatively smaller, it still marks a 150% increase or Rs. 25.2 billion compared to last year. This suggests that conventional banks are gradually increasing their exposure to private sector credit, but Islamic banks continue to dominate the sector’s growth.
A key factor behind this surge in private sector credit is the reduction in the SBP’s policy rate, which has dropped from 20.5% to 12% in recent months. This reduction in the policy rate has led to a decrease in interest rates, making credit more affordable and attractive for businesses. As a result, the demand for loans from the private sector has risen significantly, as companies take advantage of lower borrowing costs to finance expansion and operations.
In addition to the favorable interest rate environment, banks have been working to increase their credit issuance to avoid penalties from the SBP for maintaining low advance-to-deposit ratios (ADRs). This regulatory measure has incentivized banks to ramp up their lending activities, ensuring they remain compliant with the central bank’s guidelines while benefiting from the growing demand for private sector credit.
While the corporate sector and large entities have been the primary beneficiaries of this increased financing, other segments, such as small and medium-sized enterprises (SMEs), agriculture, and the consumer sector, have seen comparatively lower levels of financing. This highlights a gap in credit distribution that could pose challenges for broader economic growth if not addressed.
Looking ahead, analysts believe that the continuation of stable economic conditions and favorable macroeconomic indicators, particularly the low policy rates, could result in further increases in credit uptake by the private sector. The trend of increased financing is seen as a positive development for the economy, especially if it leads to expanded business activity and increased investment in various sectors of the economy.
This surge in private sector financing reflects the growing confidence in Pakistan’s banking sector, signaling potential opportunities for businesses and financial institutions alike.