Lower interest rates drive stronger business credit demand as Islamic banking branches record the highest lending growth
KARACHI: Commercial banks in Pakistan extended Rs1.46 trillion in financing to the private sector during fiscal year 2025-26 (FY26), representing a 35 percent increase over the previous fiscal year, as lower borrowing costs encouraged businesses to seek fresh credit, according to data released by the State Bank of Pakistan (SBP) on Wednesday.
The latest figures show that private sector credit off-take increased from Rs1.08 trillion in FY25 to Rs1.46 trillion in FY26, reflecting stronger demand for investment and working capital financing across various sectors of the economy.
Lower interest rates spur credit demand
Market analysts attributed the robust growth in private sector borrowing largely to the SBP’s monetary easing cycle during FY26.
The central bank reduced its benchmark policy rate from a historic high of 22 percent to 10.5 percent, significantly lowering financing costs for businesses and encouraging companies to expand operations, invest in new projects and strengthen working capital.
However, the SBP has since raised the policy rate to 11.5 percent in response to evolving inflationary pressures and external sector risks, a move that could temper credit growth in the months ahead.
Islamic banking branches lead lending growth
The strongest expansion in lending came from the Islamic banking branches of conventional banks.
According to the SBP data, financing extended through these branches surged to Rs833 billion in FY26, compared with Rs158 billion in FY25.
The substantial increase highlights the rising demand for Shariah-compliant financial products and the growing contribution of Islamic banking to Pakistan’s financial system.
Conventional lending weakens
In contrast, lending through conventional banking branches declined during the fiscal year.
Private sector financing by conventional branches fell to Rs280.78 billion in FY26 from Rs405.73 billion in the previous fiscal year.
Similarly, full-fledged Islamic banks recorded lower credit off-take, extending Rs339 billion in financing during FY26, compared with Rs518.3 billion in FY25.
Business confidence strengthens
The overall increase in private sector borrowing points to improving business confidence and a gradual recovery in economic activity following the easing of monetary policy.
Higher bank lending is generally regarded as a positive indicator of economic expansion, as businesses utilise financing to invest in machinery, expand production capacity, build inventories and meet operational funding requirements.
Analysts cautioned, however, that the recent increase in the policy rate could moderate the pace of private sector credit growth if borrowing costs continue to rise, although financing demand is expected to remain supported by improving economic conditions.