The private sector in Pakistan borrowed a record Rs1.9 trillion from banks during the first half of FY25, marking an extraordinary 265% surge compared to the same period last fiscal year. This unprecedented growth reflects a combination of economic adjustments and strategic responses by financial institutions.
According to the latest data released by the State Bank of Pakistan (SBP) on January 7, 2025, banks maintained a robust lending approach despite challenges such as subdued economic growth and lingering political uncertainty. The steep decline in interest rates, however, played a pivotal role in fueling this borrowing surge.
Since June 2024, the SBP has reduced its policy rate by a cumulative 900 basis points, bringing it down to 13% from a historic high of 22%. This dramatic monetary easing followed a significant deceleration in inflation, which reached a seven-year low of 4.1% in December 2024. The lower interest rates offered a much-needed reprieve to the private sector, making financing more accessible and encouraging investment.
The record-breaking lending was also influenced by regulatory pressures. Banks accelerated advances in December 2024 to avoid a potential 15% incremental tax tied to maintaining a 50% advance-to-deposit ratio (ADR). This policy move compelled financial institutions to ramp up their lending activities significantly by the year’s end.
Data from the SBP highlights that conventional banks led the lending surge, advancing Rs1.112 trillion to the private sector during July-December FY25, a significant increase from Rs230 billion in the same period last year. Islamic banks also saw a notable rise in lending, disbursing Rs733 billion compared to Rs236 billion in the previous year. However, the Islamic branches of conventional banks remained relatively modest contributors, advancing Rs61.5 billion versus Rs55 billion during the same timeframe.
Non-Bank Financial Institutions (NBFIs) were another major beneficiary, with banks channeling a record Rs1.354 trillion into NBFIs during the first half of FY25, up from Rs485 billion in the same period last year. This strategic move was primarily aimed at meeting ADR requirements while diversifying lending portfolios.
The government’s borrowing strategy also played a role in shaping the credit landscape. By relying on long-term treasury bills and Pakistan Investment Bonds with yields below maturity amounts, the government allowed banks greater flexibility to extend credit to the private sector.
Despite the surge in lending, the decline in interest rates has created a trade-off for banks, potentially denting their income margins. However, the private sector continues to benefit from lower borrowing costs, which could translate into increased economic activity and investment opportunities.
Looking ahead, falling inflation rates may open the door for further monetary easing in upcoming policy reviews, potentially creating an even more conducive environment for private-sector borrowing. For now, the Rs1.9 trillion lending milestone underscores the critical role of the banking sector in supporting Pakistan’s economic recovery amid evolving fiscal and monetary dynamics.