Pakistan continues to be an exciting epicenter of Islamic finance development outside of the usual markets in Southeast Asia and the GCC ( Gulf Cooperation Council ) countries. The South Asian country is set to see the biggest per-market change in Islamic finance in the year ahead, driven by underlying constitutional changes. In October last year, the country’s parliament passed a constitutional amendment bill that requires all forms of interests, otherwise known as “Riba”, to be eliminated by the end of 2027.

Since then, there has been a committed focus by the industry to encourage Islamic finance in the country. As of March 2025, Islamic banking assets reached 11.5 trillion Pakistani rupees ( US$40.7 billion ), a 24.6% growth from a year ago, according to the State Bank of Pakistan’s ( SBP ) March 2025 Islamic Banking Bulletin.

Deposits stood at 8.4 trillion rupees, up 22.5% year-on-year, while financing and investments grew by 24.1% to 5.5 trillion rupees. This performance has elevated the sector's market share to 21.1% of total banking assets and 24.2% of deposits, inching closer to the SBP's target of 30%. The branch network expanded to 4,731 outlets ( including 171 sub-branches ), reflecting a 10.7% YoY increase, with operations spanning 138 districts.

Overall, the broader banking sector saw assets rise 14.9% to 51 trillion rupees and deposits increase 7.9% to 31 trillion rupees in 2024 ( latest full-year data ), with Islamic segments outperforming conventional ones based on SBP data. Currently in Pakistan, there are six full-fledged Islamic banks and 16 conventional banks with Islamic windows covering around 32.6% of the branch network.

“To accelerate the transition, the focus will need to be on reforming laws, contracts, and the judicial system – given the interconnected nature of the banking system with other business lines and commercial laws. Other considerations include correspondent banking arrangements,” Standard Chartered notes in its recent Islamic Finance report.

Debt strategy

In addition, the Pakistani government is pushing sukuk issuance as a debt strategy, considering that only an estimated 14% of existing debt instruments are Shariah-compliant, according to data from KPMG, highlighting the need for more compliant funding tools.

“The availability of Shariah-compliant investment options, especially as alternative to traditional investments, presents a significant hurdle for Pakistan’s financial industry. Addressing this requires collaborative efforts, the industry needs to engage in discussions with regulatory bodies and the government needs to actively facilitate the creation of new Shariah-compliant investment avenues,” highlights a KPMG research note.

Hoping to set the tone for the industry, the Pakistani government secured a landmark US$1 billion syndicated financing deal, 89% of which was structured as Islamic tranches. Backed by the Asian Development Bank and several Middle Eastern banks, the offering marked the country’s re-entry into global markets after two-and-a-half years.

Digital innovation and technology also support Pakistan’s Islamic finance market, with the SBP approving five digital bank licences, including Raqami Islamic Digital Bank and others focused on providing Shariah-compliant services. Last year, mobile banking users grew 16% YoY to 18.7 million, internet banking by 25% to 12 million, and e-wallet users by 85% to 3.7 million.

Notable launches include BankIslami's "aik", the country’s first fully digital Islamic banking experience offering Riba-free products. Meezan Bank partnered with academic institutions for Shariah-compliant training and research, while MCB Islamic Bank expanded transaction access across 1,400-plus branches. These efforts aim to boost financial inclusion, which has risen from 7% in 2014 to 35% in 2022, although women remain underserved. Microfinance services, like Akhuwat's interest-free Qarz-e-Hasan loans, further promote ethical access.

While challenges still persist in the market, including limited product diversity, knowledge gaps, and concerns about profit parity and governance in some institutions, the industry is expected to gain tailwind momentum, aided by government support and revised regulatory frameworks.