Pakistan banks profitable from government financing: IMF report

February 04, 2025 (MLN): The banking sector in Pakistan has remained profitable, largely driven by its focus on financing the government's fiscal deficit, according to the IMF report titled "The Sovereign-Bank (Central Bank) Nexus in Pakistan."

Treasury operations have become profit centers for banks, with reduced interest in extending credit to the private sector.

Holding sovereign bonds provides regulatory benefits, funding advantages, and operational efficiencies, while low demand from the private sector for investment funding in a high-interest-rate environment further limits banks' lending activity, the report added.

Pakistani banks have significantly lagged behind their global peers in lending to the private sector, with most borrowing directed toward funding working capital.

By the end of 2023, banks' exposure to the government was three times greater than their exposure to the private sector.

While banks' balance sheets remain healthy and profitable due to zero-risk weights on government securities, there is a risk that their valuation and liquidity could deteriorate rapidly under stress scenarios, the report notes.

The current banking landscape in Pakistan offers little incentive to attract depositors due to ample liquidity, low interest rates, and a regulatory framework that makes utilizing deposits less profitable.

As a result, banks have shifted their focus from savings accounts to current or Islamic banking accounts, discouraging small savers and limiting the growth of bank deposits.

The banking system also suffers from low penetration, high demand for physical currency, and a lack of incentives for saving in banks, the report highlighted.

This, coupled with extended periods of political and economic instability, has led to a large portion of funds remaining outside the banking system, undermining potential deposit funding.

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