Why the SBP removed (most of) the MDR, and what it means for Pakistan’s banking sector

For nearly two decades, the State Bank of Pakistan has required conventional banks to pay savers a minimum return on most rupee savings accounts. The rule was born of a straightforward diagnosis: Pakistan’s largest banks had enough market power, captive customers and low-cost branch networks to pay depositors meagre returns while earning wide spreads on loans and government securities.

The central bank has now concluded that at least some depositors no longer need that protection.

In a circular issued on July 6, the SBP substantially narrowed the scope of the minimum deposit rate, or MDR. From August 1, the floor will apply only to deposits held by individuals whose monthly average account balance is Rs10 million or less. Deposits belonging to private limited companies and trusts will become exempt regardless of size, as will the portion of an individual’s deposits above the Rs10 million threshold.

The move follows an earlier relaxation announced in November 2024, when the SBP exempted financial institutions, public-sector enterprises and public limited companies from the MDR with effect from January 2025. Together, the two decisions mean that the regulated minimum return is being transformed from an economy-wide pricing rule into something closer to a consumer-protection measure for smaller retail savers.

That distinction matters. A corporate treasurer with several billion rupees to place, a trust with professional advisers or a wealthy individual with more than Rs10 million in cash is presumed to have alternatives and bargaining power. An ordinary household with Rs100,000 in a savings account is not.

The official explanation is that these larger and more sophisticated investors now have easier access to higher yielding government securities through InvestPak, the SBP’s digital government bond investment platform. Since such investors can buy Treasury bills and other government instruments directly, the central bank argues, banks should no longer be compelled to offer them a rate linked to the policy corridor. The same circular describes the two measures — the launch of InvestPak and the narrowing of the MDR — as a way to diversify the investor base for government securities while preserving competitive returns.

There is, however, another explanation: the measure is also compensation.