Farooq Awan

Pakistan’s Islamic banking, SME, and agricultural finance segments recorded exceptional growth in FY25 as supportive regulation and improving macroeconomic stability encouraged credit expansion across productive sectors, the State Bank of Pakistan reported in its Governor’s Annual Report 2024-25.

The SBP said loan disbursements to agriculture increased 16.3 percent, surpassing annual targets, while outstanding SME financing rose 41 percent alongside a 57 percent jump in the number of SME borrowers. These advances reflected lower borrowing costs following a 1,100-basis-point reduction in policy rates and a revival in business confidence. Improved liquidity in banks, combined with tax incentives linked to lending ratios, spurred competition for private-sector credit.

Islamic banking institutions also expanded strongly during the year. Their asset base and deposits grew at double-digit rates, supported by alignment with international Islamic-finance standards and consumer preference for Shariah-compliant products. The SBP continued to promote this segment through updated prudential guidelines and efforts to enhance liquidity-management instruments compatible with Islamic principles. The report said Islamic banking now constitutes a significant and fast-growing share of Pakistan’s total banking assets.

The central bank emphasized that expansion in these priority sectors advances multiple policy goals: employment generation, rural development, and financial inclusion. Through its Banking on Equality initiative and targeted credit lines, the SBP directed banks to extend greater financing to women-led SMEs and smallholders. This resulted in broader geographic dispersion of credit, especially in Punjab and Sindh’s agrarian belts.

Agricultural lending rose across sub-sectors, including livestock and farm-mechanization. The SBP noted that improving input availability and increasing demand for modern equipment contributed to higher credit uptake. Meanwhile, SME lending benefited from easing inflation, stable exchange rates, and government procurement activity that boosted orders in manufacturing and services.

The report cautioned, however, that sustaining this pace will require continued reforms in collateral management, credit-information systems, and risk-sharing mechanisms. The SBP plans to upgrade refinancing facilities and enhance data collection on SME and agri-finance flows to evaluate performance accurately. It said the FY25 experience demonstrates that credit growth can coexist with financial stability when accompanied by prudent oversight.

According to the SBP, Islamic-finance promotion, small-enterprise empowerment, and rural-credit facilitation are mutually reinforcing components of Pakistan’s inclusive-growth framework. Their success, the report added, strengthens the resilience of the overall financial system and diversifies the economy’s credit base beyond government borrowing.

Credit: INP-WealthPk