The State Bank of Pakistan (SBP) has warned that ongoing uncertainty due to the Middle East conflict could create downside risks for Pakistan’s financial stability, potentially driving inflation, putting pressure on the external account, and hindering economic growth.
In its 2025 Financial Stability Review (FSR), the SBP stated that although recent macroeconomic stability offers a positive outlook, uncertainty surrounding the Middle East conflict may still pose risks.
The central bank noted that a prolonged and widespread conflict could keep oil prices elevated for an extended period and disrupt global supply chains. As a result, inflationary pressures could rise again, and the external account might come under stress, which could affect economic growth momentum.
The SBP also highlighted that its Systemic Risk Survey conducted in January 2026 showed that independent experts identified geopolitical risk as the most significant threat both currently and over the next six months. This risk could spill over into Pakistan’s banking and financial sector.
However, the SBP emphasized that the banking sector remains well-prepared to absorb severe shocks, supported by strong financial buffers and effective supervisory and crisis management frameworks that have successfully handled past macroeconomic challenges.
According to the report, the banking sector, especially large systemically important banks, demonstrates resilience and is capable of withstanding even severe shocks over a three-year horizon, based on recent stress tests.
The FSR evaluates the performance and risks across banks, microfinance banks, development finance institutions, non-bank financial institutions, insurance, and financial markets.
The report noted that Pakistan’s financial sector grew by 15.1% in 2025 while maintaining operational and financial resilience. Financial depth improved, with the assets-to-GDP ratio rising to 67.1%, and overall risks to financial stability declined during the year.
The banking sector continued its steady performance, with balance sheets expanding by 17.8%, mainly due to increased investments in government securities. Although advances declined year-on-year by December 2025, largely due to the high base effect from the previous year’s ADR-linked tax policy, adjusted figures show reasonable growth aligned with improving macro-financial conditions.
Improved deposit mobilisation reduced banks’ reliance on borrowing. Asset quality also strengthened, as the ratio of non-performing loans (NPLs) to gross loans dropped to 6.1% from 6.3% the previous year. Net credit risk remained low, supported by increased provisioning coverage, which reached 107.7%, and a credit portfolio largely composed of rated borrowers with stable profiles.
After-tax profits increased, though profitability indicators moderated due to volume-driven earnings. The sector’s solvency remained strong, with the capital adequacy ratio rising to 20.8% by December 2025, well above regulatory requirements.
Islamic banking institutions recorded their highest-ever branch network expansion and sustained growth, supported by low credit risk, stable earnings, and strong capital buffers. Microfinance banks, while still under stress overall, significantly reduced their losses due to ongoing recapitalisation and restructuring efforts.
The report also observed mixed performance in the non-bank financial sector. Development finance institutions saw a contraction in assets, while non-bank financial institutions expanded steadily. The insurance sector maintained strong performance.
Finally, the SBP noted that the non-financial corporate sector improved its debt servicing capacity due to lower financing costs resulting from an easing monetary policy stance. However, the sector still faced revenue pressures and weaker earnings. Despite this, large borrowers maintained sound creditworthiness and repayment capacity throughout 2025.
