By Hasan Salahuddin

Pakistan’s financial sector recorded a robust expansion in 2025, with total assets increasing by 15.1%, reflecting improved macroeconomic stability, stronger policy coordination, and enhanced resilience across key financial institutions, according to the State Bank of Pakistan’s Financial Stability Review 2025. The growth marks a continuation of the recovery momentum following a period of economic stress, as easing inflation, better fiscal discipline, and strengthening external indicators created a supportive environment for financial sector development.

The report indicates that the overall asset base of the financial sector expanded significantly during the year, while financial depth — measured as assets relative to GDP — also increased, highlighting the sector’s growing role in the economy. A combination of declining inflationary pressures, improved investor confidence, and strengthening foreign exchange reserves contributed to a more stable financial landscape. The SBP noted that its timely and calibrated monetary policy measures, along with the government’s fiscal consolidation efforts, played a key role in stabilizing the macroeconomic environment and reducing systemic vulnerabilities.

The banking sector remained the primary driver of this growth, accounting for nearly 80% of the financial sector’s total assets. Banks demonstrated steady performance throughout 2025, supported by strong earnings, improved risk management practices, and a well-capitalized structure. Asset quality indicators showed improvement, with non-performing loans remaining contained, while liquidity conditions stayed comfortable due to a strong deposit base and active secondary markets for government securities. The sector also maintained capital levels well above regulatory requirements, reinforcing its ability to absorb potential shocks.

According to the review, risks to financial stability declined during the year, as reflected in the Financial Sector Vulnerability Index, which showed a downward trend. This improvement was driven by better macroeconomic fundamentals, enhanced regulatory oversight, and stronger financial buffers within the banking system. Stress testing exercises conducted by the central bank further confirmed that the banking sector is capable of withstanding adverse scenarios over the medium term, including potential external and domestic shocks.

At the same time, the SBP highlighted that financial markets remained broadly stable, while digital financial services continued to expand, supporting financial inclusion and improving access to financial services across the country. The central bank also continued to strengthen regulatory frameworks in key areas such as cybersecurity, climate risk, and digital banking, ensuring that the financial system remains resilient in a rapidly evolving environment.

Despite the positive developments, the report cautioned that external risks remain, particularly those linked to geopolitical tensions, global commodity price volatility, and potential disruptions in international financial markets. These factors could pose challenges to the sustainability of economic recovery if not managed carefully. However, the SBP expressed confidence that Pakistan’s financial system is now better positioned to navigate such risks, supported by prudent policies, improved macroeconomic indicators, and stronger institutional capacity.

Overall, the Financial Stability Review 2025 underscores that maintaining macroeconomic stability, continuing structural reforms, and strengthening financial sector oversight will be critical to sustaining growth and ensuring long-term financial stability in Pakistan.

Credit: INP-WealthPk