KARACHI: The impressive growth of non-bank financial institutions (NBFIs), hailed by the State Bank of Pakistan (SBP) in 2024, has quickly unravelled as liquidity exited the sector during the first five months of the current fiscal year.

Despite repeated SBP exhortations and government encouragement, banks have withdrawn liquidity from NBFIs. The liquidity had been pumped in at the end of calendar year 2024 to avoid a tax imposed by the government on banks.

The latest SBP data shows that NBFIs received no fresh lending from banks during July-November. Instead, the sector witnessed net debt retirement of Rs340 billion.

Banks had earlier pumped a record over Rs1 trillion into NBFIs to avoid an incremental tax in case of failure to raise the advance-to-deposit ratio (ADR) to 50 per cent by the end of 2024. The SBP’s report noted that the influx of liquidity exceeded the total stock of credit to NBFIs by 130pc.

Banks retire Rs340bn after ADR-related liquidity spike last year

However, the Financial Stability Review 2024 commented that “after a challenging year in CY23, the non-bank financial institutions exhibited impressive growth in CY24 amid the improving macroeconomic and financial conditions”.

The growth was broad-based, with significant contributions from both the asset management and lending segments, the report said. The surge was largely driven by the central bank’s pressure on banks to take the ADR to 50pc before December 2024.

The SBP’s Review 2024 further said that, along with improving economic and financial conditions, the inflow of funds from the banking sector to the NBFI sector also contributed to its growth. The easing of financial conditions also led to a revival in the lending segment in 2024, which had experienced a slowdown in 2023, it added.

“The performance of NBFIs will depend upon the evolving domestic and geopolitical economic conditions,” the same report noted. However, the latest data suggests that the higher liquidity seen in 2024 was a temporary phase, as per the banks’ aim of avoiding the tax.

The State Bank has been urging banks to lend more to small and medium enterprises (SMEs) and NBFIs to help kick-start an economy moving at a much slower pace than the country requires.

Mutual funds posted significant growth of 98.9pc in 2024 compared to 41.8pc in 2023, lifting their share in the NBFIs’ overall asset base to 71.5pc in 2024 from 64.7pc a year earlier.

The increase in assets was broad-based in terms of growth rate; however, in volume terms, the main contributions came from conventional money market funds and Islamic income funds.

“The major thrust in growth came towards the end of the year as the ADR-related tax policy seemed to divert a substantial amo­unt of funds from the banking sector towards the NBFI industry. This is supported by the fact that around 88.6pc of the total increase in mutual fund as­­sets was in the banks’ associated AMCs (asset management companies),” the SBP report said.

Published in Dawn, December 5th, 2025