Insights into Pakistan’s banking Sector

Discussions on Pakistan's economic outlook, priority sector financing, digital payments, and the role of digital banks are pivotal in shaping the nation's future and its banking industry. As the economy evolves, these themes highlight the need for innovation, inclusivity, and sustainable growth. Digital transformation is driving change, with priority sector financing addressing underserved areas and digital payments revolutionizing financial interactions. The emergence of digital banks brings heightened expectations for financial inclusion and tech-driven solutions, underscoring the transformative potential of these initiatives for Pakistan's progress.

Economic Trends and Banking Growth

In the first half of calendar year 2024 (H1CY24), Pakistan's banking sector demonstrated resilience amid challenging economic conditions. Total assets grew by 11.5%, reaching PKR 51,687 billion, driven primarily by investments in government securities. However, this growth rate was slower than the 14.0% recorded in the same period of 2023, largely due to a deceleration in public sector advances. Islamic Banking Institutions (IBIs) also saw a 7.7% growth in their asset base during H1CY24, marking the lowest first-half growth rate in four years. As a result, IBIs' share in the overall banking sector's asset base declined from 19.4% in December 2023 to 18.7% in June 2024, with their deposit share dropping from 23.2% to 22.6% over the same period.

Figure 1

Assets Composition of Banks:

The broader financial sector, which includes 5 public, 22 private, and 4 foreign banks, experienced significant growth. The overall asset-based sector expanded by 29.5% in 2023-24, with total assets rising from PKR 10,568 billion to PKR 46,364 billion. Investments grew by 53%, and financial sector assets increased by 27%, highlighting the banking sector’s capacity to adapt to economic fluctuations (SBP 2024).

Figure 2

Investment and Advance Net

Digital Banking and Payment Trends

Digital transformation has emerged as a game-changer for Pakistan’s banking industry, significantly improving financial inclusion and customer convenience. The rise of digital transactions has led to a shift in consumer behavior, with mobile and internet banking transactions witnessing a sharp increase. According to the State Bank of Pakistan (SBP), electronic banking transactions surged by 23.6% in 2024, reflecting greater adoption of digital financial services.

The introduction of digital-only banks in Pakistan marks a significant shift in the financial landscape. SBP has issued five digital banking licenses, signaling a move toward a more tech-driven banking model. Digital banks are expected to address financial inclusion gaps by providing easier access to banking services, particularly in rural and underserved areas.

Additionally, fintech companies and digital payment solutions, such as Raast—Pakistan’s first instant payment system—are revolutionizing the payment ecosystem. Raast has significantly increased financial accessibility by enabling seamless peer-to-peer transactions with lower costs. This initiative aligns with global trends where digital payments are replacing traditional banking methods.

Priority Sector Financing

A key focus for Pakistan’s banking sector is scaling priority sector financing, particularly for agriculture, small and medium enterprises (SMEs), and housing. The government, in collaboration with SBP, has introduced various policy measures to encourage lending in these critical areas. However, access to credit remains a challenge, as commercial banks often prioritize corporate lending due to lower risk and higher returns.

Despite this, agricultural financing witnessed a 16.3% increase in 2024, driven by policy incentives and targeted lending schemes. Similarly, SME financing has gained momentum, with banks leveraging digital platforms to streamline loan disbursement processes. The

implementation of credit guarantee schemes and interest rate subsidies has played a crucial role in boosting lending to these sectors.

Islamic Banking: Growth and Challenges

Islamic banking has become a significant segment in Pakistan, serving a large portion of the population seeking Sharia-compliant financial solutions. Over the past decade, Islamic Banking Institutions (IBIs) have expanded their market share, playing a key role in promoting financial inclusion and offering ethical banking alternatives. However, recent economic challenges have slowed their growth momentum.

In 2024, IBIs represented 18.7% of the banking sector's total assets, marking a slight decline from previous years. This slowdown is linked to economic instability, reduced consumer spending, and regulatory complexities. The asset base of IBIs grew by 7.7% in the first half of 2024—the lowest first-half growth rate in four years—due to weaker economic conditions and a slowdown in public sector advances.

Looking ahead, industry experts remain optimistic about the future of Islamic banking. Rising demand for ethical, interest-free financial products is expected to fuel a recovery in the sector. As IBIs continue to support financial inclusion, their ability to navigate economic challenges and adapt to regulatory changes will be essential for maintaining growth and relevance in Pakistan's evolving banking landscape.

Regulatory and Cybersecurity Challenges

The banking industry faces various challenges, including regulatory compliance and cybersecurity threats. As digital banking gains traction, the need for robust cybersecurity measures has become more pressing. Cybersecurity breaches and fraudulent activities pose significant risks to the banking sector, necessitating stronger regulatory frameworks and advanced technological safeguards.

SBP has introduced stringent cybersecurity guidelines, requiring banks to adopt enhanced data protection mechanisms. The adoption of artificial intelligence (AI) and blockchain technology is expected to strengthen security measures and improve transparency in digital transactions.

Economic Outlook and Future Prospects

Pakistan’s economy is dealing with issues like rising foreign debt, inflation, and currency depreciation. Econometric models, such as regression and ARDL analysis, have identified a significant negative relationship between GDP growth and inflation rates, highlighting the long-term consequences of rising costs and debt servicing.

Even with these economic pressures, the banking sector remains a crucial pillar of financial stability and economic development. Strengthening digital infrastructure, fostering innovation, and enhancing financial accessibility will be key to securing long-term success for Pakistan’s banking industry.

Conclusion

Pakistan's banking sector stands at a pivotal moment, balancing growth opportunities with economic and regulatory obstacles. While the sector has demonstrated resilience through asset expansion and advancements in digital banking, continued focus on financial inclusion, cybersecurity, and priority sector financing will be vital for sustainable growth. With the increasing adoption of digital banking, the emergence of digital-only banks, and fintech-driven innovations, the sector is on the cusp of transformation. By embracing technological advancements and strengthening regulatory frameworks, Pakistan’s banking industry can navigate economic fluctuations and solidify its role in the financial ecosystem.