Pakistan’s banking sector presents a striking paradox. With over $131 billion in deposits and gross advances of only $50 billion as of June 2025, the financial system sits on enormous pools of capital.
The recent surge in private sector credit, crossing Rs1.2 trillion in the first five months of fiscal year 2026 compared to just Rs41 billion in the same period last year, might suggest a credit boom is underway. Yet this apparent expansion masks a deeper structural malaise: the money flows primarily toward short-term working capital needs, particularly for rice crop processing and trading, rather than productive long-term investments.
Pakistan’s investment-to-GDP ratio plummeted to 13.1% in fiscal year 2024, marking the lowest level in over five decades. This represents not just a cyclical downturn but a fundamental breakdown in the country’s capacity to channel savings toward productive investment. While neighboring economies build infrastructure and expand manufacturing capacity, Pakistan’s banks increasingly park their funds in government securities, which now constitute close to two-thirds of total banking assets.
This preference for government paper over private lending stems from multiple sources. Heavy budgetary borrowing by the government creates an attractive, risk-free asset class offering competitive yields. Banks can earn steady returns without the operational complexity of credit assessment, monitoring, and recovery that private sector lending demands.
A sub 40% advances-to-deposits ratio reveals how far below potential the banking system operates, even as deposits grow. The content in this publication is expensive to produce. But unlike other journalistic outfits, business publications have to cover the very organizations that directly give them advertisements. Hence, this large source of revenue, which is the lifeblood of other media houses, is severely compromised on account of Profit’s no-compromise policy when it comes to our reporting. No wonder, Profit has lost multiple ad deals, worth tens of millions of rupees, due to stories that held big businesses to account. Hence, for our work to continue unfettered, it must be supported by discerning readers who know the value of quality business journalism, not just for the economy but for the society as a whole.To read the full article, subscribe and support independent business journalism in Pakistan
