Financial sector expands, stability improves in CY25

May 06, 2026 (MLN): Pakistan’s central bank has reported a strong and resilient performance of the country’s financial sector in 2025, with overall growth of 15.1% and declining risks to stability, according to its latest Financial Stability Review (FSR).

The review highlights improved macroeconomic conditions, easing inflation within target range, rising foreign exchange reserves, and successful completion of key international financing program reviews, all of which supported financial system stability during the year.

It notes that financial depth improved, with the assets-to-GDP ratio rising to 67.1%, reflecting a strengthening financial system.

The broader macroeconomic environment also showed progress, as policy measures helped stabilize inflation and sustain economic momentum. Foreign exchange reserves increased significantly, supported by a controlled current account deficit and strategic interventions in the interbank market, said a press release issued.

Financial markets including money, foreign exchange, and equity segments remained largely stable and functional throughout the year.

However, market volatility increased slightly, mainly due to strong gains and fluctuations in the equity market amid global trade uncertainties and geopolitical tensions. In contrast, the foreign exchange market remained relatively calm.

The banking sector continued to demonstrate steady performance, with its balance sheet expanding by 17.8%, primarily driven by investments in government securities.

While advances declined year-on-year due to a high base effect from last year’s tax policy, underlying credit growth remained healthy when adjusted for this factor. Deposit growth improved, reducing banks’ reliance on borrowings.

Asset quality strengthened during the year, as the ratio of non-performing loans (NPLs) to gross loans declined to 6.1% from 6.3% a year earlier.

Provisioning coverage improved further to 107.7%, indicating low net credit risk. Additionally, a significant portion of lending remained concentrated among well-rated borrowers with stable credit profiles.

Profitability increased in absolute terms, though key profitability ratios moderated due to volume-driven earnings. The sector’s solvency position remained robust, with the capital adequacy ratio rising to 20.8%, well above regulatory requirements.

Islamic banking maintained strong growth, expanding its branch network to record levels while sustaining solid earnings and capital buffers. Meanwhile, microfinance banks remained under pressure but showed improvement, with losses narrowing as recapitalization and restructuring efforts began to take effect.

Performance across the non-bank financial sector was mixed. Development finance institutions saw a contraction in assets, whereas non-bank financial institutions recorded moderate growth. The insurance sector continued to perform strongly.

The non-financial corporate sector also showed improved debt-servicing capacity, supported by lower financing costs due to monetary easing. Despite some pressure on revenues and earnings, large borrowers maintained sound creditworthiness and repayment capacity.

Financial market infrastructures operated smoothly, supported by rising digital transactions. Key initiatives included the launch of PRISM+, expansion of QR code-based payments under RAAST, and the transition to a T+1 settlement system.

Looking ahead, the report warns that geopolitical risks, particularly tensions in the Middle East, could pose challenges to financial stability. However, it emphasizes that strong capital buffers, effective regulatory frameworks, and positive stress test results indicate that the banking sector especially major institutions remains well-positioned to withstand potential shocks over the next three years.

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