The State Bank of Pakistan (SBP) has issued its annual flagship publication, the Financial Stability Review (FSR), for CY25. The FSR presents performance and risk assessments for various segments of the financial sector, including banks, microfinance banks (MFBs), development finance institutions (DFIs), non-bank financial institutions (NBFIs), insurance, financial markets, and financial market infrastructures (FMIs). It also assesses the non-financial corporate sector, a major user of bank credit.
The review highlights that the financial sector grew by 15.1 percent and maintained operational and financial resilience during CY25. Encouragingly, financial depth, as measured by the assets-to-GDP ratio, increased to 67.1 percent, while risks to financial stability subsided during the year under review. The domestic macroeconomic conditions further improved during CY25. Amid well-calibrated policy measures, inflation eased and fell within SBP’s target range, and economic activity continued to gain momentum.SBP’s FX reserves witnessed noticeable improvement mainly due to the contained current account deficit and SBP’s strategic purchases in the interbank market. Against this background, reviews under the Extended Fund Facility (EFF) and arrangements under the Resilience and Sustainability Facility (RSF) were completed.
The financial market constituents, viz., the money, forex and equity segments, functioned smoothly without any major disruption. The average volatility in domestic markets, nonetheless, witnessed an uptick– mainly driven by the equity market,t which posted substantial gains despite trade-tariff uncertainties and a few events of geopolitical tensions. In particular, the forex market sentiment remained calm. The banking sector continued to exhibit steady performance and resilience during CY25. Banks’ balance sheet expanded by 17.8 percent—driven by investments in government securities. Advances showed a YoY decline as of December 2025, mainly reflecting the higher base effect of the previous year’s ADR-linked tax policy; however, adjusting for this base effect, the advances registered decent growth in line with improvements in macro-financial conditions. With a healthy revival of deposits, banks’ reliance on borrowings subsided. Asset quality indicators improved, as the non-performing loans (NPLs)- to-gross-loans ratio declined to 6.1 percent in December 2025 from 6.3 percent last year. On a net basis, however, the credit risk remained low, as the provisioning coverage of NPLs further improved to 107.7 percent, and a large share of the credit portfolio comprised rated borrowers with a steady credit profile and an established track record.
On the profitability front, after-tax earnings posted growth; nonetheless, volume-driven earnings led to aa moderation in profitability indicators. The sector’s solvency position remained strong, with the capital adequacy ratio improving to 20.8 percent by the end of December 2025 and remaining well above the minimum international and local regulatory benchmarks. Within the banking sector, Islamic banking institutions witnessed the highest-ever expansion in their branch networks and continued their growth momentum. Along with muted credit risk and steady earnings, Islamic banks’ capital buffers remained strong. Microfinance banks (MFBs), on an aggregate basis, remained under stress, but the sector recorded a significant reduction in losses during CY25 as the recapitalization and restructuring efforts started to mature.
The review notes that the non-bank financial sector presented a mixed performance. The asset base of DFIs contracted while NBFIs grew at a decent pace. The insurance sector maintained a strong performance during the year.
