Pakistan’s financial sector continues to demonstrate broad resilience, yet the country faces deep-rooted governance challenges that could slow regulatory progress and heighten systemic vulnerabilities. These concerns surface in the IMF’s latest Technical Assistance report on the Governance and Corruption Diagnostic Assessment, which outlines both the sector’s strengths and the structural weaknesses that remain unresolved. The findings arrive at a pivotal moment for Pakistan as it moves toward a complete shift to Islamic banking by 2028, a transition that the IMF says requires a stronger institutional framework and better oversight.
The report notes that the State Bank of Pakistan has built a comprehensive regulatory structure largely aligned with Basel Core Principles. Its adoption of Basel III requirements, deployment of risk-based supervision practices, and development of SupTech tools for monitoring early risk indicators reflect meaningful progress. In addition, the central bank’s key role in helping Pakistan exit the FATF grey list and the launch of a licensing framework for digital banks demonstrate a forward-leaning regulatory posture. However, the IMF cautions that weaknesses in governance, transparency, and institutional independence continue to pose risks that could erode these gains if left unaddressed.
Pakistan’s banking system dominates the financial landscape, representing nearly half of national GDP. Islamic banking now accounts for 19 percent of total assets, with more than twenty institutions operating nationwide. Despite strong profits, much of the sector’s growth is tied to investments in government securities. The IMF highlights that more than 60 percent of banking assets are linked to government lending, creating a sovereign-bank nexus that increases financial vulnerability. At the same time, lending to the private sector remains subdued. Inefficiencies in the legal system further discourage expansion of private credit, maintaining a cycle in which banks rely heavily on government borrowing rather than productive economic lending.
Although the SBP’s supervisory capacity has strengthened, the IMF identifies governance shortfalls that require urgent correction. Two Deputy Governor positions at the central bank remain vacant, which the report says affects strategic decision-making and continuity. The IMF also flags ownership concerns connected to the SBP’s previous stakes in certain banks. Additionally, the presence of a Ministry of Finance representative on the SBP board raises questions around institutional independence, a principle considered essential for effective monetary and supervisory functions. The absence of legal provisions requiring publication of reasons for appointment or removal of senior officials further undermines transparency.
The assessment points to persistent challenges in corporate governance across the banking sector as well. Related-party transactions, supervisory accountability, and timely corrective actions remain areas needing improved oversight. Historically, interventions in undercapitalized banks have often faced delays, which the IMF says may stem from stakeholder pressures or gaps in supervisory enforcement.
The planned transition to a fully Islamic banking system by 2028 introduces additional complexities. The shift requires not only regulatory clarity but a comprehensive alignment of banking operations, financial instruments, and government securities within Shariah-compliant principles. The IMF advises that banks will need significant investments in operational restructuring, while the SBP must ensure sustained dialogue with stakeholders to prevent shocks to financial stability. The conversion of interest-bearing government instruments is expected to be one of the most challenging components, requiring a systematic approach to avoid liquidity disruptions.
To mitigate these risks, the IMF has outlined several key recommendations. These include revising the SBP Act to eliminate government representation on the central bank’s board, ensuring transparency around senior appointments, and promptly filling vacant Deputy Governor posts. The IMF further advises aligning supervisory objectives fully with Basel standards, strengthening rules governing related-party transactions and mergers, and publishing detailed supervisory objectives and annual oversight reports. Early intervention mechanisms for distressed banks are also emphasized as essential for reducing systemic risk.
While Pakistan has made meaningful strides toward a more robust regulatory environment, the IMF’s findings highlight that governance gaps, legal inefficiencies, and state influence continue to impede progress. As the country prepares for the ambitious 2028 Islamic banking conversion, reinforcing supervisory independence, improving transparency, and ensuring consistency in policy implementation will be critical to safeguarding long-term financial stability.
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