By Abdul Ghani

Pakistan's Islamic banking industry has continued to expand its footprint across the financial sector, strengthening its position ahead of the country's planned transition to a Riba-free financial system after 2027.

According to the Post-2027 Financial System in Pakistan strategy paper, available with Wealth Pakistan, Islamic banking has become an increasingly important component of Pakistan's financial system, reflecting its growing outreach and role in serving businesses and consumers seeking Shariah-compliant financial services.

The document states that Pakistan currently operates a dual financial system in which conventional and Islamic financial institutions function side by side. The parallel system, introduced in the early 2000s, was designed to provide individuals and businesses with the choice to conduct financial activities through either conventional or Shariah-compliant institutions, according to their commercial requirements and religious preferences.

According to the strategy, the Islamic banking industry now accounts for 28 percent of total banking deposits, 38 percent of financing and 23 percent of the banking sector's total assets, underlining its growing contribution to Pakistan's financial landscape.

The document notes that the industry comprises seven full-fledged Islamic banks and 16 conventional banks offering Shariah-compliant services through dedicated Islamic banking branches. As of December 2025, the Islamic banking industry's total assets stood at Rs14.467 trillion, while deposits reached Rs11.037 trillion, reflecting sustained expansion in the sector.

The broader banking sector also continued to expand its outreach. Pakistan's banking industry comprises 33 banks, including public-sector, private-sector and foreign banks, among them three digital banks that have recently commenced operations. The branch network of banks and microfinance banks reached 20,214 by the end of December 2025, with the strategy noting that continued branch expansion and wider use of alternate delivery channels are improving financial intermediation and expanding access to financial services across the country.

The strategy highlights the resilience of Pakistan's banking system despite periods of macroeconomic stress and policy uncertainty. It states that the sector has continued to provide uninterrupted credit and financial services during several economic disruptions while remaining sound and well capitalised. According to the document, the banking sector's Capital Adequacy Ratio (CAR) stood at 20.8 percent as of December 2025, comfortably above both domestic and international minimum regulatory requirements. Provisioning coverage also exceeded 100 percent, while profitability remained healthy.

The Islamic banking industry has also maintained strong financial health. According to the strategy paper, Islamic banks recorded a non-performing financing (NPF) to gross financing ratio of 2.4 percent, indicating satisfactory asset quality and relatively limited credit risk. Provisioning coverage remained above 100 percent, while increased investment in Sukuk strengthened liquidity across the industry.

The document further states that Islamic banks maintained a Capital Adequacy Ratio of 17.5 percent by the end of 2025, well above the minimum regulatory requirement. It notes that the industry's financial soundness indicators have remained robust and, in several respects, stronger than those of conventional banks, contributing positively to the overall stability of Pakistan's banking system.

According to the strategy, the banking sector dominates Pakistan's financial system, accounting for approximately 79.3 percent of total financial sector assets, equivalent to Rs63.231 trillion. Overall, entities regulated by the State Bank of Pakistan represent around 83 percent of total financial sector assets, underscoring the central role of banks in financial intermediation, payment systems and international trade.

The strategy says the continued growth of Islamic banking provides a strong institutional foundation for Pakistan's post-2027 financial system. It notes that the sector's expanding market share, sound financial indicators and increasing operational capacity are expected to support the country's gradual transition to a Shariah-compliant financial architecture while maintaining stability across the broader financial system.

Credit: INP-WealthPk