Pakistan’s banking sector contributes heavily to national development, faces challenges

Pakistan’s banking sector remains a cornerstone of the nation’s economic development, contributing significantly to tax revenues, employment, and financial inclusion, according to a recent address by Zafar Masud, Chairman of the Pakistan Banks Association (PBA). However, the sector faces challenges as it navigates a rapidly changing global economic landscape and addresses domestic criticisms.

Tax Contributions and Employment

The banking sector is the highest tax-paying industry in Pakistan, contributing PKR 644 billion in taxes as of December 2023. These funds directly support national infrastructure, public services, and economic programs.

Additionally, the sector employs over 200,000 people, making it one of the largest employers in the country. The State Bank of Pakistan (SBP) is pushing for 20% female participation in the workforce, aiming to create a more inclusive banking environment.

Economic Support and Challenges

Banks play a critical role in financing the government’s budgetary deficit, with 99.8% of the deficit for fiscal year 2024 being funded by the banking sector. This support is essential for debt monetization, foreign exchange management, and maintaining reserve stability.

However, the heavy reliance on banks for government financing has limited the availability of credit for the private sector, which is crucial for economic growth and innovation.

Digital Transformation and Financial Inclusion

The rise of digital banking is transforming the sector, with e-commerce payments and digital transactions seeing significant growth. The SBP has introduced initiatives like RAAST, an instant payment system, and Asaan Mobile Accounts to promote financial inclusion. Despite these efforts, cash remains dominant in the economy, with the cash-in-circulation ratio still higher than in regional economies like India and Bangladesh.

Support for SMEs and Agriculture

Small and medium enterprises (SMEs) and agriculture, which contribute 40% and 23% to GDP respectively, receive only a small fraction of private sector credit. High levels of undocumented economic activity and lack of formal credit histories make lending to these sectors risky for banks. Informal credit sources remain prevalent due to fewer documentary requirements, further complicating the situation.

Islamic Banking Transition

The SBP has mandated a full transition to Islamic banking by 2027, in line with a Federal Shariah Court ruling. Banks are actively working on converting conventional branches and financial structures to comply with Shariah principles. However, government support, particularly in issuing asset-light Sukuk, is crucial for a smooth transition.

Future Outlook

The PBA is focusing on strengthening ties with the government, fintech companies, and global institutions to address challenges like circular debt and remittance optimization. The association is also advocating for structural reforms to reduce the fiscal deficit and enable more private-sector financing.

“We are committed to fostering a resilient, inclusive, and forward-looking banking industry,” said Masud. “The Pakistan Banking Summit will be a platform to drive transformation and collaboration within the sector.”

As Pakistan’s banking sector continues to evolve, its role in national development remains pivotal, but addressing structural challenges and embracing digital transformation will be key to sustaining growth and inclusion.