By Moaaz Manzoor

Pakistan’s financial depth increased to 67.1% of its GDP in 2025, reflecting the growing size and importance of the financial sector in supporting economic activity, according to the State Bank of Pakistan’s Financial Stability Review 2025. The rise indicates a broader expansion of financial assets relative to the overall economy and signals improving intermediation capacity of financial institutions amid stabilizing macroeconomic conditions.

The report highlights that the increase in financial depth was driven by a significant expansion in the financial sector’s asset base, led primarily by the banking system, which continued to dominate the landscape with the largest share of assets. The strengthening of financial depth also points to improved availability of financial services and a gradual deepening of markets, which are essential for sustainable economic growth and efficient allocation of resources.

The SBP noted that the improvement came at a time when macroeconomic stability was gradually taking hold, with inflation easing into the target range and external sector pressures subsiding. A build-up in foreign exchange reserves, a manageable current account deficit, and improved investor confidence created a favorable environment for financial sector expansion. These developments were further reinforced by coordinated fiscal and monetary policies, which helped stabilize key economic indicators and reduce systemic risks.

Greater financial depth improves an economy’s ability to mobilize savings and channel them into productive investments. In Pakistan’s case, the rise in financial depth reflects stronger institutional capacity and an expanding role of formal financial channels in economic activity. The report suggests that this trend is also linked to increased use of digital financial services and policy efforts aimed at promoting financial inclusion, which have broadened access to banking and financial products across different segments of the population.

The banking sector played a central role in this expansion, with strong deposit growth and increased investment activity contributing to overall asset growth. While lending activity moderated due to policy and base effects, the broader financial system continued to benefit from improved liquidity conditions and stable funding sources. A well-capitalized banking system with adequate buffers has further supported confidence and enabled continued expansion.

At the same time, non-bank financial institutions and the insurance sector also contributed to the overall increase in financial assets, although their share remained smaller compared to banks. The SBP emphasized that continued development of these segments is important for diversifying the financial system and reducing reliance on traditional banking channels over the long term.

Despite the positive trend, the report cautions that sustaining financial deepening will require continued policy focus on structural reforms, financial inclusion, and development of capital markets. External risks, including geopolitical tensions and global financial volatility, may also affect the pace of financial sector growth if not managed effectively.

Overall, the increase in financial depth to 67.1% of GDP underscores the strengthening of Pakistan’s financial system in 2025, highlighting improved stability, enhanced intermediation, and a more prominent role of financial institutions in supporting economic growth.

Credit: INP-WealthPk