Islamic bank financing in Pakistan has surged by more than 800 percent during the first half of the current financial year as the private sector moved away from interest-based loans, according to new data released by the State Bank of Pakistan (SBP). Businesses not only increased borrowing from Islamic banks but also repaid Rs. 120 billion to conventional banks, highlighting a major shift in borrowing preferences.
SBP figures show that between July and January 16, the private sector obtained Rs. 708 billion in financing from the Islamic banking system. During the same period, loans from conventional banks saw a net retirement of Rs. 120 billion, reversing last year’s borrowing trend.
Islamic banking branches of conventional banks recorded the strongest growth, with financing jumping to Rs. 467 billion, up from just Rs. 50 billion in the same period last year an increase of 834 percent. Meanwhile, full-fledged Islamic banks provided Rs. 241 billion, down from Rs. 678 billion a year earlier, as Islamic windows of conventional banks captured a larger share of demand.
Banking analyst Ibrahim Amin said the trend reflects a steady transition from interest-based lending to Sharia-compliant financing, driven by comparatively lower financing costs and growing trust in Islamic banking products.
“Conventional banks are actively steering customers toward their Islamic branches, supported by marketing incentives and wider branch networks,” Amin said, adding that competition in the Islamic banking segment is expected to intensify further.
The shift is also aligned with government policy. Pakistan aims to fully convert its banking system to Sharia-compliant operations by 2028, following a ruling by the Federal Sharia Court. Currently, the Islamic banking industry includes six full-fledged Islamic banks and 15 conventional banks offering Islamic services.
To support business activity, the government recently cut export refinance rates to 4.5 percent, while the SBP lowered the Cash Reserve Requirement, improving liquidity across the banking system a move that further supports Islamic financing growth.