KARACHI: Conventional banks have significantly altered their lending pattern to the private sector, extending nearly five times more financing through their Islamic banking branches than a year earlier instead of through conventional lending.
Most conventional banks have found Islamic banking more profitable, as it allows them to offer lower returns to depositors than conventional banking. This preference for Islamic banking has been reshaping the dynamics of Pakistan’s banking sector. As a result, Islamic financing and assets have been growing at a much faster pace than those of conventional banking.
According to the latest data released by the State Bank of Pakistan (SBP), lending to the private sector by the Islamic banking branches of conventional banks surged to Rs795.5 billion during FY26 (from July 1, 2025 to June 26, 2026), compared to just Rs153bn in FY25.
The trend suggests that conventional banks have increasingly recognised Islamic banking as a more profitable business model. Banking experts say one of the reasons is that Islamic banks generally offer lower returns to depositors and investors than conventional banks.
Islamic branches of commercial banks extend Rs795.5bn in private sector financing
In contrast, lending to the private sector through the conventional operations of these banks declined sharply from Rs405.7bn in FY25 to Rs139bn in FY26, reflecting a significant shift in lending strategy.
Meanwhile, full-fledged Islamic banks were relatively cautious during FY26, with their lending to the private sector falling to less than half of the previous year’s level. Their financing stood at Rs214.5bn up to June 26, 2026, compared to Rs518bn in FY25.
Although the entire banking sector posted substantial profits in calendar year 2025, Islamic banks remained at the forefront. One Islamic bank alone paid around Rs100bn in taxes to the national exchequer.
The Pakistan Banks Association recently said the banking industry pays more than Rs1 trillion in taxes annually, making it the country’s highest tax-paying sector.
Despite rapid digitisation boosting banks’ profitability, the sector has yet to play the role of a catalyst for economic growth. Overall lending to the private sector improved to Rs1.149tr in FY26 from Rs823bn in FY25. However, with Pakistan striving to accelerate economic growth, the economy requires a much 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 the move could enable the government to mobilise greater liquidity from the public, while compelling banks to deploy more of their excess funds into lending to the private sector.
Published in Dawn, July 15th, 2026