KARACHI: The State Bank of Pakistan (SBP) said the country’s financial system remained stable and resilient during calendar year 2025, supported by easing inflation, improving macroeconomic conditions, and strong capital buffers in the banking sector.
In its annual Financial Stability Review 2025 released on Tuesday, the central bank said the overall financial sector expanded by 15.1% during the year, while financial depth — measured through the assets-to-GDP ratio — rose to 67.1%.
According to the report, risks to financial stability moderated during the year as inflation fell within the SBP’s target range and economic activity continued to recover amid “well-calibrated policy measures.”
The SBP also highlighted an improvement in foreign exchange reserves, attributing the increase to a contained current account deficit and strategic dollar purchases from the interbank market.
The review noted that Pakistan successfully completed reviews under the IMF’s Extended Fund Facility (EFF) as well as arrangements under the Resilience and Sustainability Facility (RSF) during the year.
The banking sector remained the key driver of financial sector growth, with banks’ balance sheets expanding 17.8% year-on-year, largely due to higher investment in government securities.
While advances declined on a yearly basis by December 2025, the SBP said this was primarily because of the higher base created by the previous year’s ADR-linked tax policy. Adjusted for this effect, advances recorded “decent growth” in line with improving macro-financial conditions.
Asset quality indicators also improved during the year. The ratio of non-performing loans (NPLs) to gross loans declined to 6.1% in December 2025 from 6.3% a year earlier, while provisioning coverage improved to 107.7%.
The central bank said the sector’s solvency position remained strong, with the capital adequacy ratio increasing to 20.8% by end-December 2025, well above regulatory requirements.
Islamic banking institutions recorded their highest-ever branch expansion during the year and maintained strong capital buffers, according to the review. Meanwhile, microfinance banks continued to face stress, though aggregate losses narrowed due to ongoing recapitalisation and restructuring efforts.
The SBP said financial markets, including money, forex and equity markets, functioned smoothly during the year despite some volatility driven by geopolitical tensions and global trade tariff uncertainties. The equity market posted substantial gains, while forex market sentiment remained stable.
The review also highlighted steady performance in financial market infrastructures, noting the continued rise of digital transactions. The SBP pointed to initiatives such as PRISM+, QR-code payments through Raast, and the transition to a T+1 settlement cycle by NCCPL as major developments during the year.
Looking ahead, the central bank warned that uncertainty stemming from the Middle East conflict could create challenges for financial stability. However, it maintained that strong capital cushions, supervisory frameworks and stress test results indicated the banking sector — particularly large systemically important banks — remained resilient even under severe shock scenarios.
