By Farooq Awan

Pakistan’s non-bank financial sector recorded a 10.3% growth in assets in 2025, reflecting a mixed performance across different segments, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report indicates that the growth followed an exceptionally high expansion of 80% in the previous year, which was driven by a one-off shift of funds from the banking sector to non-bank financial institutions (NBFIs) due to policy changes. In 2025, the sector’s growth normalized as those temporary factors subsided, resulting in moderate expansion.

Within the sector, mutual funds continued to dominate, accounting for around 66.3% of total NBFI assets. However, their growth slowed significantly to 2.2% compared to the previous year, largely due to a high base effect following strong inflows in late 2024. While money market funds decelerated and income funds contracted, equity funds showed strong expansion, supported by the robust performance of the stock market during the year.

The lending segment of NBFIs performed relatively better, growing by 21.5% in 2025. This improvement was supported by easing financial conditions and gradual recovery in economic activity, which increased demand for credit among businesses and individuals. Lower interest rates toward the latter part of the year also contributed to improved lending dynamics.

The report highlights that the interconnectedness between the banking sector and NBFIs remained contained and well-managed, reducing systemic risk concerns. Despite the flow of funds between sectors in previous periods, regulatory oversight and risk management practices ensured stability in financial linkages.

In contrast, Development Finance Institutions (DFIs) experienced a contraction in their asset base during the year, reflecting a continued decline in exposure to government securities and borrowings. However, advances by DFIs rebounded significantly, indicating a shift toward lending activities as economic conditions improved.

The SBP noted that the overall performance of the non-bank financial sector reflects ongoing adjustments in response to changing economic and policy conditions. While some segments experienced slower growth due to normalization effects, others benefited from improved macroeconomic conditions and increased market activity.

The sector continues to play an important role in diversifying Pakistan’s financial system by providing alternative channels for investment and financing. The presence of NBFIs, mutual funds, and DFIs helps broaden the financial landscape and reduces reliance on traditional banking institutions.

Despite the moderate growth, the report suggests that further development of the non-bank financial sector will require continued policy support, improved regulatory frameworks, and efforts to deepen capital markets. Strengthening these areas will help enhance the sector’s contribution to financial stability and economic growth.

Maintaining balanced growth across different segments of the financial system remains important to ensuring resilience and supporting long-term economic development.

Credit: INP-WealthPk