Private sector borrowing from commercial banks declined sharply during the first half of fiscal year 2025-26, underscoring weak credit demand despite a substantial easing in monetary policy. According to the latest monetary aggregates released by the State Bank of Pakistan, private sector credit plunged by 79 percent during July–December FY26, reflecting subdued business activity and cautious investment sentiment across the economy.
SBP data shows that private sector borrowing amounted to Rs395 billion in the first half of the current fiscal year, compared with Rs1,871 billion recorded during the same period last year. The steep decline has occurred even as the central bank aggressively reduced the benchmark policy rate from 22 percent to 10.5 percent over the past year in an effort to stimulate economic growth and encourage lending.
Despite the significantly lower interest rate environment, businesses have largely refrained from taking on fresh loans. Analysts suggest that persistent economic uncertainty, weak demand conditions, and concerns over future profitability have dampened appetite for expansion and capital investment. As a result, lower borrowing costs alone have not been sufficient to revive private sector credit growth.
The slowdown is further evident in lending trends at conventional banking branches. During the first half of FY26, the private sector recorded a net retirement of loans amounting to Rs143 billion. This stands in stark contrast to the same period last year, when businesses borrowed Rs1,076 billion from conventional banks. The reversal indicates that many firms are prioritizing balance sheet consolidation and debt reduction rather than pursuing new borrowing.
Private sector borrowing from Islamic banks also witnessed a notable decline during the period. Credit extended by Islamic banks fell to Rs201 billion in July–December FY26, compared with Rs733 billion in the corresponding period of the previous fiscal year. This drop suggests that the slowdown in credit demand has affected both conventional and fully Islamic banking institutions.
However, a contrasting trend emerged within Islamic banking branches of conventional banks. Private sector borrowing through these branches increased sharply to Rs337 billion, up from Rs62 billion in the same period last year. This growth points to a gradual shift toward Shariah-compliant financing options within the conventional banking framework, even as overall credit demand remains weak.
The divergent trends highlight changing preferences within the private sector, where businesses appear more inclined toward Islamic financing structures offered by conventional banks. Nevertheless, the overall contraction in private sector credit signals broader challenges facing Pakistan’s economy, including low business confidence, subdued industrial activity, and cautious corporate planning.
Economists note that while monetary easing has improved liquidity conditions, structural issues and uncertainty continue to weigh heavily on investment decisions. Factors such as energy costs, taxation concerns, and global economic pressures are also influencing borrowing behavior. Without a sustained improvement in business sentiment and economic stability, credit growth is likely to remain under pressure.
The sharp fall in private sector borrowing during the first half of FY26 underscores the limitations of interest rate cuts as a standalone policy tool. It suggests that a broader set of economic and structural measures may be required to restore confidence, stimulate investment, and revive credit expansion in Pakistan’s economy.
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