Pakistan’s Islamic finance industry set to surpass $100bn by 2027

August 20, 2026 (MLN): Pakistan’s transition towards a Shariah-compliant financial system is expected to push the country’s Islamic finance industry beyond $100 billion by 2027, Fitch Ratings said.

According to the ratings agency, progress has been strongest in the banking sector, where policy direction has become clearer and regulators have stepped up efforts to oversee the conversion of conventional banking operations while supporting the expansion of Islamic banking branches.

However, Fitch noted that progress across Pakistan’s broader Islamic finance industry remains uneven, and achieving the target of a fully Shariah-compliant financial system by 2028 will require substantially faster development in areas including sukuk, takaful and Islamic non-bank financial institutions (NBFIs).

The State Bank of Pakistan (SBP) has established a high-level committee to oversee the transformation of conventional banking into Islamic banking and has introduced several directives to support the transition.

Islamic banking institutions accounted for 38.2% of total sector financing at the end of the first quarter of 2026, up sharply from 25.5% in 2024, Fitch said. The increase was driven largely by the rapid expansion of Islamic banking branches operated by conventional banks.

During 2025, total net advances by Islamic banking institutions grew by around 40% YoY, mainly supported by these branches, while net advances by conventional banks declined by 21.8% YoY.

Growth in Islamic banks' share of industry deposits, however, has been comparatively slower. Their share reached 28.5% at the end of 1Q26, compared with 24.9% in 2024, indicating relatively mixed acceptance among depositors, according to Fitch.

Deposits at Islamic banking institutions increased by approximately 40% YoY in 2025, compared with around 20% growth at conventional banks.

Since 2025, the SBP has required all Islamic banks to pay profits on Pakistan rupee savings deposits, making them more competitive for customers. Previously, Islamic banks were exempt from paying a minimum rate of return on savings deposits, unlike conventional banks.

Fitch further highlighted the growing importance of Islamic banking branches operated by conventional banks. These branches accounted for 42.8% of total Islamic banking institution assets at the end of 1Q26, compared with 34.4% in 2024, with the remaining assets held by fully-fledged Islamic banks.

The ratings agency said Pakistan's Islamic banking sector continues to offer significant growth potential, supported by the country's large Muslim-majority population and low level of banking penetration.

Citing World Bank data, Fitch noted that only around 27% of Pakistan's adult population had a bank account in 2025, placing the country among those with the lowest banking penetration levels globally. Newly established digital Islamic banks could help expand financial inclusion.

Meanwhile, the government continues to maintain a diversified funding strategy rather than relying exclusively on sukuk and other Shariah-compliant instruments, Fitch said, amid substantial external financing requirements.

Pakistan issued US dollar bonds and panda bonds during 2026, while sukuk accounted for only around 4% of debt capital-market issuance during the first half of 2026, compared with 6% in the corresponding period last year.

In July, the government appointed a consortium of international banks to execute its sukuk and bond programme over the next three years. Fitch said the government's adoption of a hybrid sukuk structure in 2026 could support greater sukuk issuance.

The sovereign had also issued its debut rupee-denominated green sukuk in 2025. Fitch currently rates Pakistan's only US dollar sukuk at 'B-'.

Progress across other segments of Islamic finance has remained mixed. Shariah-compliant NBFIs accounted for around 36% of total NBFI industry assets at the end of 2025, down from 39% in the first half of 2024.

Meanwhile, Shariah-compliant syndications continued to dominate Pakistan's syndications market, representing around 70% of the outstanding amount at the end of 1H26, although activity remained limited during the period.

Takaful accounted for 15% of total insurance industry premiums at the end of 2024, up from 12% in 2023, but remained the least penetrated segment of Pakistan's Islamic finance industry.

Fitch estimated Pakistan's Islamic finance industry at more than $90bn at the end of 1H26, led by Islamic banking assets, which represented 58% of the total. Outstanding sukuk accounted for 29%, followed by Shariah-compliant NBFI assets at 10%, Islamic syndications at 3%, while takaful represented less than 1%.

The ratings agency expects the continued shift towards Shariah-compliant finance, particularly the expansion of Islamic banking, to support the industry's growth beyond $100bn by 2027, although further progress in sukuk, takaful and Islamic NBFIs will be crucial to meeting Pakistan's 2028 target.

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