Key Takeaways
- Islamic banking branches of conventional banks have seen a fivefold increase in private sector lending.
- Lending through conventional operations has declined sharply, while full-fledged Islamic banks remain cautious.
- The trend highlights the profitability of Islamic banking and its potential impact on Pakistan’s economic growth.
Conventional banks in Pakistan have significantly altered their lending strategies, favoring Islamic banking over traditional methods. According to recent data from the State Bank of Pakistan (SBP), Islamic banking branches of conventional banks extended nearly five times more financing to the private sector during fiscal year 2026 compared to the previous year.
The surge in Islamic banking lending is attributed to its profitability, as it allows lower returns to depositors and investors. This shift has reshaped the dynamics within Pakistan’s banking sector, with Islamic financing and assets growing at a much faster pace than conventional banking. In FY26, Islamic banking branches of commercial banks extended Rs795.5 billion in private sector financing, compared to just Rs153 billion in FY25.
In contrast, lending through the conventional operations of these banks declined sharply from Rs405.7 billion in FY25 to Rs139 billion in FY26. Full-fledged Islamic banks were also cautious during this period, with their private sector lending falling to less than half of the previous year’s level, standing at Rs214.5 billion compared to Rs518 billion in FY25.
Despite these changes, the entire banking sector posted substantial profits in calendar year 2025. Islamic banks played a significant role, with one bank alone paying around Rs100 billion in taxes to the national exchequer. The Pakistan Banks Association recently reported that the banking industry pays more than Rs1 trillion in taxes annually, making it the country’s highest tax-paying sector.
While rapid digitisation has boosted banks’ profitability, the sector has yet to play a catalytic role in economic growth. Overall lending to the private sector improved to Rs1.149 trillion in FY26 from Rs823 billion in FY25. However, Pakistan is striving to accelerate its economic growth and requires stronger expansion in bank lending to the private sector.
Most banks—both Islamic and conventional—continue to earn the bulk of their profits by investing in government securities such as treasury bills (T-bills) and Pakistan Investment Bonds (PIBs). The government has now decided to raise funds directly from the public by allowing individuals to invest in T-bills and PIBs through dedicated accounts. There is no limit on the purchase of these domestic bonds.
Financial sector experts believe this move could enable the government to mobilise greater liquidity from the public, compelling banks to deploy more of their excess funds into lending to the private sector. This shift towards Islamic banking highlights its potential as a profitable and growing segment within Pakistan’s financial landscape.
