The changing nature of Pakistani savings habits

There are almost one million mutual fund accounts owned by individuals in Pakistan, and the average account has more than one million rupees in it. The aggregate numbers of individuals saving through mutual funds, or directly investing in the stock market, are still tiny, but after decades of stagnating, they are finally beginning to rise again, and that has implications for the economy, and for the country’s financial institutions.

First, a look at some of the headline numbers: the mutual fund industry has seen absolutely explosive growth over the past few years, with assets under management (AUM) increasing 7 times during the fiscal years between 2019 and 2025 (fiscal year ends June 30), with industry-wide AUM hitting Rs3.8 trillion ($13.6 billion) as of June 30, 2025, according to data from the Mutual Funds Association of Pakistan (MUFAP).

What makes this data more impressive is the degree to which it is reliant not just on financial institutions and corporations utilizing mutual funds for short-term parking of cash, but by individuals for long-term savings. During that same period, the total number of individuals who have mutual fund accounts increased from 243,000 to 669,000, a rise of 175%. Those individuals own about 936,000 accounts as of the end of fiscal year 2025, with total assets in those accounts of Rs1.16 trillion, which puts the average balance in each account at Rs1.24 million (Rs12.4 lac).

Of the individuals who do own mutual funds, the average amount they hold in mutual funds across all their accounts comes out to Rs17.4 lac in 2025, more than doubling from just Rs8.4 lac in 2019.

The numbers on the stock exchange side are smaller, but still rather impressive. The total number of individuals with brokerage accounts has crossed 500,000 recently, and was languishing around 204,000 in 2019. The recent run up in the stock market no doubt pulled in some investors from the sidelines.

These numbers are still a tiny fraction not just of the total population, but also of the relatively small middle class in Pakistan.

But they represent the beginnings of what is likely a very important shift in behaviour: the use of financial instruments for long-term savings, something that only happens in a society that is beginning to develop trust in its own rule of law, and long-term economic future.

In this story, we will first look at how Pakistanis have historically saved, and why this new behaviour represents a serious shift, where in the global spectrum of financial behaviour Pakistan belongs, and why Pakistani banks are sleeping on what is likely their biggest long-term opportunity.

 The history of savings and investments

Let us first define the two terms: saving is what happens when you decide not to spend money you have earned, and instead set it aside. Investment is the next step: taking that money that you decided not to spend, and instead putting it to work in some form of asset that you hope will appreciate in value over time, or else start generating income for you.

Historically, Pakistanis have saved very little, and invested even less, because until very recently, incomes across the entire economic spectrum were simply too low for there to be any meaningful amounts left over after the most basic of consumption was done at the end of the month. But as more and more of the country’s households move out of a subsistence level existence, the capacity to save is increasing across society, and that, in turn, is producing savings at a scale that is about to hit a tipping point (more on that later).

So when it came to investing, most Pakistani households have not had much to invest to begin with, and what little they had, they put in three asset classes as ancient as time: cattle, land, and gold. Of these, gold has always been a purely price appreciate play: the only way to make money off gold is to sell it for more than you bought it. Cattle are an income generating asset: two goats can produce more goats that can then be sold and create and income generating stream. A cow and bull can generate more cows, and some milk to be sold.

Land could go either way: if it was farmland, it could help generate income right away (within one year, at least). If a house, it might generate some rent. It could also be a speculative plot, not in use now, but perhaps in a growing area that might cause its value to grow over time and be sold for more than it was bought for.

For nearly all of our history, this was pretty much the menu of options for most people. Gujratis and Chiniotis might invest in the working capital of businesses owned by their extended families, some clans in Sindh and Punjab might invest as lenders to farmers in their local area, but these were relatively small exceptions.

One thing they all had in common: a bare minimum reliance on paperwork, or trust of anyone who you do not already trust. Even the land usually involved buying in an area where one’s extended clan could help offer some degree of protection.

Here is how little the part of the world that is now Pakistan cared for financial institutions: at Partition, there were hundreds of small, unregulated banks that were almost all owned by Hindu families that migrated to India after independence. To have had so many banks disappear overnight would have caused a major financial crisis in any country today, but you may notice that any older relatives who ever tell Partition stories never mentioned a financial crisis. There probably was one, but not nearly as disruptive as one might be today.

In theory, bank accounts represent a way to start saving, though as we will note later, that is not how they are used in Pakistan, or really most parts of the world.

The oldest financial instruments for formal investing in this part of the world were life insurance policies, issued by small companies beginning with Christian Mutual in 1847 and Indian Life in 1892. The Government of India created the National Savings Bureau in 1873 to channel domestic Indian savings to finance infrastructure construction in the British Raj, and that institution helped raise some money for the British Indian contribution to the war effort during both world wars.

The Bombay Stock Exchange was created in 1875, and some traders from that exchange moved to Karachi after Partition and helped set up the Karachi Stock Exchange in 1948. And the government of Pakistan set up the National Investment Trust (NIT) in 1962 that created the country’s first mutual fund. The private sector did not create its first mutual fund until AKD Investments’ Golden Arrow Selected Stock Fund in 1983. The first open ended mutual fund – what is normally thought of as a mutual fund – created by a private sector entity was JS Abamco’s Unit Trust of Pakistan, launched in October 1997.

All of these remained tiny parts of the Pakistani economy, used by a few thousand people in total for nearly the entirety of the country’s history. Even during the Musharraf-era stock market boom, the number of individuals who had stock brokerage accounts never crossed 100,000 people.

So what is changing now? And will this trend continue moving in this direction, or is this a blip that will end up not meaning much?

 Banks vs non-banks

In most economies in the world, Pakistan included, the banks are the most important financial institutions, both in terms of total assets and the number of individuals and businesses served. This might lead one to think that bank accounts are an instrument of savings and investments, but this view is mostly wrong: bank accounts enable the initial act of saving (leaving money unspent on consumption) but they are not unto themselves an investment.

This basic fact is one that most Pakistani bankers do not understand. Indeed, if one were to administer a basic financial literacy test to the management committees of every single bank in Pakistan, it is very likely that nearly all of them would fail.

How do we know this? Because all of them seek to develop “wealth management” divisions and affluent client strategies that all depend on deposit accounts at their core, not realizing that building a long-term relationship with affluent clients – or offering wealth management solutions to even higher net-worth clients – is not about deposits at all.

The proof lies in the data of how bank accounts in Pakistan are used, which is how they are used in nearly the whole world: as a means of transacting, not as a venue for savings.

Here is one data point about Pakistani bank account holders’ behaviour that illustrates this point: the average balance in a bank account owned by an individual in Pakistan in 2024 was Rs154,598. That number in 2011 was Rs132,038. Over that 13-year period, during which inflation averaged 9.9% per year, the average amount held in an individual-owned bank account increased by just 1.2% per year.

Yes, that is correct: the purchasing power of the average balance in bank accounts held by individuals in Pakistan went down over the course of the nearly a decade and a half.

In other words, the average Pakistani is not using their bank account to save. They are simply using it to conduct their transactions, and whatever amount that gets left over after they are done spending on consumption does not stay in their bank account but is instead moved out to a non-banking savings instrument.

And the pace of this moving out from the bank account appears to be accelerating (because the purchasing power of the average balance is going down) right as the non-banking financial services sector such as mutual funds and stock brokerage accounts appear to be gaining popularity.

The reasons are somewhat obvious: a current account at bank has a 0% nominal return, and after accounting for inflation, a significantly negative real rate of return. Savings accounts are slightly better, but in most years, they still offer negative real rates of return.

So it makes sense to use bank accounts only for current transaction needs, where inflation is less of a consideration, and leave the need for investment – where beating inflation is of paramount importance – to other investment vehicles, not deposit accounts.

Of course, not all of it is going into mutual funds or the stock market, and indeed most of it is likely going into real estate. But that is part of the point: banks are the country’s primary financial intermediary, but the entire industry is single-mindedly obsessed with deposits – which are not how the overwhelming majority of Pakistani wealth is stored.

If the country’s wealth is going to be channeled towards productive investments, it is that non-deposit part of the wealth that needs to be moved into financial instruments. In previous articles, we at Profit have estimated that bank accounts constitute perhaps 3% of the total wealth in the country. Yet bank CEOs view mutual funds and other non-banking financial instruments as competing against their highly profitable deposit product, rather than a means for them to capture a greater portion of the 97% of the country’s wealth that is not kept in bank accounts.

 Deposit vs non-deposit financial products

Here is the thing to remember about the Pakistani financial system: the majority of assets managed by non-banking financial institutions (NBFIs) are in NBFIs owned by the banks. Nearly all of the largest asset management companies are bank-owned, and the asset management companies account for the overwhelming majority of NBFI assets.

In short, the banks do not need to choose between deposits and non-deposit products. Nearly all of them offer both. But the problem for the banks is that they are staffed – and in some cases, led – by financially illiterate management that cannot understand the difference between a deposit and a non-deposit financial product.

Most astoundingly, they tend to think of them as competing products. A bank earns a net interest margin of 6-8% on every rupee brought into the bank in the form of deposits, but would earn between 1-2% in management fees on a mutual fund. To them, it makes sense focus on generating more deposits rather than trying to invest in the infrastructure to get more investments in mutual funds.

While on a theoretical level, they understand that the mutual fund helps them capture a part of the 97% of non-deposit wealth held by Pakistanis, as a practical matter, they have chosen to go after deposits to the exclusion of all else.

Indeed, to be a banker in Pakistan right now (and for the last two decades) has essentially been one long carry trade: bring in low cost deposits and deploy them effortlessly into government bonds, which will guarantee that the State Bank of Pakistan – the regulator – will ask absolutely no questions about lending policy because everyone is operating under the assumption that government bonds are risk-free.

That carry trade has been enormously profitable as the banking sector’s deposits have continued to grow. While the average account balance has not meaningfully grown, the aggregate level of deposits has continued to grow, allowing the banks to maintain healthy growth trajectories while maintaining high profit margins.

That era, however, might be coming to a close.

 The end of the easy deposit flow?

It is still too early to have a definitive comment on this, but there is one data point among the more recent data release about bank deposits in Pakistan that should have Pakistani banks worried. According to Profit’s analysis of the data released by the State Bank of Pakistan, the average balance on bank accounts owned by individuals in Pakistan went down by 37% in 2025, from Rs154,598 in 2024 to Rs97,161 per account in 2025. This happened largely because the total number of accounts went up. But that, in itself, tells us something that should concern the banks.

Deposit growth in Pakistan has come largely from an expansion of the number of people in the country who re participants in the formal banking sector, a number that has risen as the formal employment share of the labour force has risen. (If you are employed in a formal setting, you need a bank account to get paid your salary. If you are employed informally, you do not need a bank account.)

But while that has been the story of aggregate growth in the sector, each individual bank has also grown by capturing share from other banks, and one of the ways this happens is through company salary accounts. Most banks insist on making it difficult for employers to pay their employees’ salaries to accounts in other banks, so employers often force their employees to open accounts at the bank that the company maintains its main corporate account.

This is partly why the number of accounts has been increasing faster than the number of individuals who own bank accounts in Pakistan. The problem is that in 2025, the pace of churn among bank accounts appeared to hit unprecedented levels: the total number of bank accounts owned by individuals went from 96.6 million to 176.6 million, a rise of about 80 million accounts.

What does that mean? The creation of 80 million new accounts in a single year means that bank accounts are more fickle than ever before, which means that the cost of acquiring new deposit accounts is about to rise sharply.

There is a reason United Bank Ltd is giving away Toyota Land Cruisers (retail cost of around Rs10 crore) to branch staff who are bringing in significant amounts of deposits: this costly bonus is about to become the norm in the banks as competition to increase their share of deposits intensifies in an industry where there is no difference between a current account at, for example, Bank Alfalah or Habib Bank.

Meanwhile, the banking customer is demonstrating through their behaviour that they value non-deposit financial instruments – which the majority of banks have the ability to provide through their own wholly owned subsidiaries.

Mutual funds are harder for banks to sell than deposits, but they are also more unique: funds offered by UBL Fund Managers are not the same as those offered by JS Investments, and one client may genuinely prefer one versus the other. There is also more room to differentiate not just on the basis of returns performance but also in fund design: the right combination of equity and fixed income may suit one client better than a generic fund.

In short, the competition among the banks is about to heat up – and get enormously costly – if they only thing they are all selling is an undifferentiated current account. One way to avoid that costly competition is to seek longer-term relationships with clients, which are likely to be easier built with products that might have lower margin, but potentially better long-term revenue potential.

But that will require the banks to think of themselves as holistic financial institutions, not just deposit-gathering machines. Alas, the post-2008 carry trade might have made them too complacent to be able to conceive of themselves as anything else.

There may yet be at least one or two banks that might pull themselves out of the current model and adopt a more holistic approach based on what the customer clearly wants. And it is entirely likely that the ones that do will be the ones that win market share.