SBP Declares Local Banks Now ‘Ready for Economic Shocks’ After 15% Growth

Pakistan’s financial sector expanded by 15.1 percent in 2025, a major improvement in stability as deposits increased, bad loans declined, and banks strengthened their capital position, according to the State Bank of Pakistan’s latest Financial Stability Review (FSR) 2025.

The central bank reported that the country’s financial system maintained operational resilience despite global uncertainties, with financial depth improving as the assets-to-GDP ratio rose to 67.1 percent while overall risks to financial stability eased during the year.

The review covers commercial banks, microfinance banks, development finance institutions, non-bank financial institutions, insurance companies, financial markets, and financial market infrastructures, along with the non-financial corporate sector.

According to SBP, domestic macroeconomic conditions improved during 2025 as inflation fell within the central bank’s target range and economic activity gained momentum.

Foreign exchange reserves strengthened due to a contained current account deficit and strategic dollar purchases in the interbank market. Pakistan also successfully completed reviews under the IMF’s Extended Fund Facility alongside progress under the Resilience and Sustainability Facility.

SBP observed that financial markets operated smoothly without major disruptions. Market volatility increased slightly due to strong equity market gains and geopolitical developments, but foreign exchange market sentiment remained stable.

The banking sector showed steady performance throughout the year. Banks’ balance sheets expanded by 17.8 percent, largely driven by higher investment in government securities. Although advances declined year-on-year due to the high base effect from last year’s ADR-linked tax policy, adjusted figures indicate credit growth aligned with improving economic conditions.

Deposit mobilisation improved significantly, reducing banks’ reliance on borrowings. Asset quality strengthened as the non-performing loans ratio declined to 6.1 percent in December 2025 from 6.3 percent a year earlier. Provisioning coverage rose to 107.7 percent, keeping overall credit risk contained.

After-tax profits increased, though profitability indicators moderated because earnings growth was driven mainly by higher volumes. The banking sector’s capital adequacy ratio improved to 20.8 percent, remaining well above regulatory and international minimum standards.

Islamic banking institutions recorded their largest-ever expansion in branch networks while maintaining strong capital buffers and stable earnings performance. Microfinance banks continued to face challenges but posted a notable reduction in losses as recapitalisation and restructuring measures began to take effect.

Performance across the non-bank financial sector remained mixed. Development finance institutions experienced a contraction in assets, while non-bank financial institutions recorded steady growth. The insurance sector maintained strong performance during the year.

The debt-servicing capacity of the corporate sector improved due to lower financing costs following monetary policy easing, although firms faced revenue pressures and slower earnings growth. Large corporate borrowers maintained sound repayment capacity and creditworthiness.

Financial market infrastructures demonstrated operational resilience, supported by rapid growth in digital transactions. Key policy initiatives included the launch of PRISM+, expansion of QR code payments under RAAST, and successful implementation of the T+1 settlement system by the National Clearing Company of Pakistan Limited.

Looking ahead, SBP warned that geopolitical uncertainty, particularly tensions in the Middle East, could pose risks to financial stability. However, strong capital buffers, supervisory frameworks, and crisis-management systems are expected to help the banking sector withstand potential shocks. Stress test results indicate that Pakistan’s banking system remains resilient even under severe economic stress scenarios over the next three years.

The central bank reiterated its commitment to maintaining price and financial stability while supporting sustainable economic growth.