Pakistan Banking Perspective 2025, a comprehensive report by KPMG Taseer Hadi & Co., sheds light on the evolving dynamics of Pakistan’s banking sector, set against the backdrop of both global economic challenges and the nation’s own complex financial landscape. The report captures the resilience of the banking sector amidst shifting macroeconomic conditions, touching on critical aspects such as the projected economic slowdown, the ongoing transition toward digital banking, and the implementation of Islamic banking principles by 2028.
The global economic outlook for 2025 is far from optimistic, with significant downside risks threatening growth prospects. Trade tensions between the United States and China have escalated, and global policy uncertainty is expected to reduce growth to 2.8% in 2025, a downward revision from previous forecasts. The International Monetary Fund (IMF) has revised Pakistan’s GDP growth forecast to 2.6% for the same year, with a gradual recovery to 3.6% anticipated in 2026. This economic backdrop places additional pressure on Pakistan’s financial markets. While inflation has started to decline, expectations of further interest rate cuts are emerging, likely spurring private credit growth and business activity. However, this easing of monetary policy could also fuel increased demand for imports, putting strain on exchange rate stability.
Despite these global uncertainties, Pakistan’s banking sector continues to demonstrate notable resilience. The sector recorded an 8.2% growth in profits, supported by a 14.9% increase in total assets and a 7.9% rise in deposits, reflecting continued public trust in the banking system. However, the rise in Non-Performing Loans (NPLs) by 12% signals the underlying challenges the sector faces, particularly as it adapts to the new Expected Credit Loss (ECL) model under IFRS. This regulatory shift demands that banks adopt more proactive measures to manage credit risk. Furthermore, the banking sector is grappling with the dual pressures of lower interest rates, which are prompting deposit outflows, and rising compliance costs as new regulations take hold. Amid these challenges, banks are under increasing pressure to innovate, with customers demanding digital solutions that reflect the latest technological trends.
The Pakistan Banking Perspective 2025 report highlights another critical issue: the impending transformation of Pakistan’s banking system to comply with Islamic banking principles. The 26th Constitutional Amendment mandates the elimination of interest (Riba) by January 1, 2028, and this shift has significant implications for the entire financial sector. Banks are required to realign their operations and strategies to comply with Islamic law, a move that presents both opportunities and challenges. The transition requires addressing complex issues, such as the need for Shariah-compliant government funding and the treatment of earnings from conventional banking operations. Success in this transition will hinge on the timely support of the State Bank of Pakistan (SBP), the government, and religious scholars who will guide the process.
One of the most transformative trends discussed in the report is the rise of digital banking in Pakistan. The SBP has set the stage for a digital banking revolution, aimed at disrupting traditional banking models and expanding financial inclusion. The framework laid out by the SBP emphasizes the importance of partnerships, scalable technology, and a customer-first approach. Digital banks, with their ability to offer convenient, tech-enabled financial services, are positioned to reshape the banking landscape. However, the success of digital banking hinges on the sector’s ability to execute regulatory frameworks effectively, turning ambition into tangible results. The growth of digital banking is expected to increase access to financial services for underserved populations, helping to bridge the financial inclusion gap in the country.
Additionally, the report notes the significant milestone of Pakistan’s adoption of IFRS 9, which introduces a forward-looking model for credit risk management. The shift from an incurred loss model to the Expected Credit Loss (ECL) framework is a major step for Pakistan’s banking sector, requiring banks to reassess how they approach credit risk and adjust their pricing models accordingly. While this transition has been challenging, Pakistan’s banking sector is relatively aligned with regional averages in its ECL ratios, suggesting that the industry is adapting to these new standards effectively. This change, while necessary for aligning with international standards, also ensures greater resilience in the face of economic instability and global uncertainty. In sum, the Pakistan Banking Perspective 2025 report underscores the dynamic and evolving nature of Pakistan’s banking sector. While the country faces significant global and domestic challenges, there are numerous opportunities for growth, particularly through digital banking and the ongoing shift toward Islamic banking. The resilience of the banking sector, despite macroeconomic headwinds, demonstrates the strength and adaptability of Pakistan’s financial institutions. As the industry continues to evolve, its ability to innovate and adjust to regulatory changes will be key to ensuring sustained growth and stability in the years leading up to 2025.
Source
https://assets.kpmg.com/content/dam/kpmg/pk/pdf/2025/04/Pakistan-Banking-Perspective-2025.pdf
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