The State Bank of Pakistan has reported strong financial stability during 2025, while cautioning that uncertainties linked to the Middle East conflict could pose risks.
SBP’s Financial Stability Review for CY25 offered a comprehensive assessment of performance and risks across the country’s financial system.
According to the review, Pakistan’s financial sector expanded by 15.1 per cent, while maintaining stability and resilience. Financial depth also improved, with the assets-to-GDP ratio rising to 67.1 per cent.
Overall risks to financial stability declined as macroeconomic conditions strengthened, supported by easing inflation within the central bank’s target range and improving economic activity.
Foreign exchange reserves saw notable gains, largely due to a contained current account deficit and strategic purchases by the central bank. In this environment, programme reviews under the Extended Fund Facility and arrangements linked to the Resilience and Sustainability Facility were completed.
Financial markets—including money, foreign exchange, and equity segments—operated smoothly throughout the year. While volatility increased slightly, mainly due to strong gains in the stock market amid global trade uncertainties and geopolitical developments, the foreign exchange market remained stable.
The banking sector showed steady growth, with total assets rising by 17.8 per cent, driven largely by increased investment in government securities. Although lending declined year-on-year due to a high base effect from the previous year, underlying credit growth remained positive when adjusted for this factor. Improved deposit mobilisation reduced reliance on borrowings.
Asset quality strengthened as the ratio of non-performing loans declined to 6.1 per cent by December 2025, while provisioning coverage improved to 107.7 per cent, indicating lower credit risk. Profitability increased in absolute terms, though key ratios moderated due to volume-driven earnings. The sector’s capital position remained robust, with the capital adequacy ratio rising to 20.8 per cent—well above regulatory requirements.
Islamic banking continued its expansion, recording its largest-ever increase in branch network while maintaining strong capital buffers and steady growth. Microfinance banks, although still under pressure, showed improvement with reduced losses as restructuring and recapitalisation efforts progressed.
Performance in the non-bank financial sector was mixed, with development finance institutions shrinking in size, while non-bank financial institutions expanded. The insurance sector maintained solid growth during the year.
The report also noted improved debt servicing capacity in the corporate sector, supported by lower financing costs due to monetary easing. Despite some pressure on revenues, large borrowers maintained strong credit profiles and repayment capacity.
Financial market infrastructure remained stable and efficient, with digital transactions continuing to drive activity. Key developments included the launch of PRISM+, the expansion of QR-based payments through RAAST, and a successful shift to a T+1 settlement system.
Looking ahead, the report cautioned that uncertainties linked to the Middle East conflict could pose risks. However, strong capital buffers, effective regulatory frameworks, and positive stress test results indicate that Pakistan’s banking sector is well-positioned to absorb potential shocks over the coming years.
