- Shariah-compliant banking grows steadily, expanding access, ethical finance, and innovative products nationwide
According to the State Bank of Pakistan (SBP), the Islamic banking industry in Pakistan maintained its robust growth momentum during the third quarter of 2025, further reinforcing its position within the financial landscape. Since its inception in the early 2000s, Islamic banking has seen significant expansion, operating under Shariah principles that prohibit interest (riba) and promote ethical financial practices.
| Islamic Banking In Pakistan: Profitability Ratios (%) | ||||
|---|---|---|---|---|
| Particulars | Sep-24 | Jun-25 | Sep-25 | Overall Banking Industry |
| Profit before tax (PKR billion) | 381.0 | 210.7 | 305.0 | 1207.0 |
| ROA before tax | 5.4 | 3.6 | 3.4 | 2.8 |
| ROE before tax | 69.7 | 47.2 | 44.8 | 45.7 |
| Operating Expense to Gross Income | 34.1 | 42.1 | 45.0 | 44.9 |
SBP has actively supported the sector through regulatory strategies and supportive frameworks. Islamic banking offers multiple benefits, including risk-sharing, ethical investments, and financial inclusion for both Muslims and non-Muslims. Innovative products such as profit-and-loss sharing accounts, Sukuk (Islamic bonds), and Takaful (Islamic insurance) have enhanced the sector’s appeal. The industry has contributed to economic stability and increased access to finance in rural and underserved areas, while consumers continue to favour Islamic banks for their transparency and ethical standards.
The future of Islamic banking in Pakistan appears promising, with ongoing modernisation and technological integration. Expanding product offerings and raising awareness are key growth drivers.
| Islamic Banking In Pakistan: Liquidity Ratios (%) | ||||
|---|---|---|---|---|
| Ratios | Sep-24 | Jun-25 | Sep-25 | Overall Banking Industry |
| Liquid Assets to Total Assets | 51.5 | 52.3 | 54.3 | 66.6 |
| Liquid Assets to Total Deposits | 67.0 | 67.7 | 69.8 | 105.2 |
| Financing to Deposits (Net) | 42.8 | 42.3 | 41.7 | 35.6 |
| Liquidity Coverage Ratio (LCR)* | 248.4 | 246.4 | 234.6 | 231.5 |
| Net Stable Funding Ratio (NSFR)* | 206.6 | 213.2 | 209.3 | 183.3 |
| *The ratios represent full-fledged Islamic banks only | ||||
As of the end of September 2025, SBP recorded that total assets of Islamic banking institutions (IBIs) increased by Rs 337 billion, reaching Rs 12,681 billion, while deposits rose by Rs 317 billion, totalling Rs 9,850 billion. On a quarter-on-quarter (QoQ) basis, assets and deposits recorded growth rates of 2.7 percent and 3.3 percent, respectively. Financing portfolios showed solid QoQ growth of 1.9 percent, reaching Rs 4,109 billion, while net investments rose by 5.7 percent to Rs 6,276 billion. These figures reflect strong demand for Shariah-compliant financing and investment avenues, contributing to the sector’s growing financial depth.
In terms of market positioning, Islamic banking assets accounted for 21.6 percent of the overall banking sector, while deposits captured a higher share of 26.5 percent. Financing contributions reached 31.1 percent, with investments comprising 17.1 percent of the total banking industry, highlighting Islamic banking’s expanding footprint. These trends underscore not only consistent growth but also deeper integration into Pakistan’s banking landscape.
The steady improvement in financial indicators and the widening branch network demonstrate the sector’s resilience and growing consumer demand. Liquidity ratios showed a positive shift during the review period. Liquid assets to total assets increased to 54.3 percent, and liquid assets to total deposits rose to 69.8 percent, reflecting a stable liquidity position. Meanwhile, the financing-to-deposits (net) ratio reduced to 41.7 percent, signalling a more conservative approach by IBIs.
Capital ratios also showed modest improvement. The capital-to-total-assets ratio remained at 7.5 percent, indicating stability, while the (Capital – Net NPAs) to total assets ratio increased slightly to 7.7 percent from 7.6 percent, signalling a stronger capital buffer after accounting for non-performing assets. Capital adequacy ratios improved for both Islamic Banks (IBs) and Islamic Banking Branches (IBBs), rising to 20.5 percent and 31.4 percent, respectively, from 20.4 percent and 30.3 percent in the previous quarter.
Profitability also increased, with profit before tax rising to Rs 305.0 billion by September 2025 from Rs 210.7 billion in June 2025. Return on assets (ROA) before tax slightly decreased from 3.6 percent in June 2025 to 3.4 percent in September, while return on equity (ROE) dropped from 47.2 percent to 44.8 percent during the same period. Operating expenses also increased, with the operating expense-to-gross-income ratio reaching 45.0 percent in September 2025 compared to 42.1 percent in June, indicating that managing operational efficiency remains critical for sustaining long-term growth.
A closer examination reveals that IBs posted profit before tax growth of 43.9 percent, rising from Rs 143.4 billion in June 2025 to Rs 206.2 billion in September 2025. IBBs showed similar trends, with a 46.6 percent QoQ profit increase. ROA before tax remained higher for IBs at 3.7 percent, compared to 3.0 percent for IBBs, demonstrating consistent profitability across the sector.
The sector’s ongoing success is underpinned by consumer confidence, robust regulatory oversight, and a commitment to Shariah-compliant ethical practices. Its expansion into rural and previously underserved areas highlights its role in enhancing financial inclusion, while innovation in products such as Sukuk and Takaful attracts a wider audience, including non-Muslims.
Conclusion
The government of Pakistan has set ambitious plans to make the country a global hub for Islamic finance, attracting foreign investment and fostering sustainable economic growth. Challenges remain, including limited awareness among some population segments and the need for skilled professionals to support the sector’s continued expansion.
Overall, Islamic banking is poised for sustained growth, playing a pivotal role in Pakistan’s economic development and diversification of the financial sector. Its increasing share of assets, deposits, and financing underscores the importance of ethical finance in the modern economy, reflecting both resilience and long-term potential for innovation.