The private sector stopped borrowing from conventional banks and instead repaid loans during the first half of the current financial year, as businesses increasingly turned to Islamic banking for financing, according to central bank data.
Figures released by the State Bank of Pakistan show that businesses obtained Rs. 708 billion in financing from the Islamic banking system between July and January 16, while retiring Rs. 120 billion worth of loans from interest-based banks during the same period.
Financing by Islamic banking branches of conventional banks rose sharply to Rs. 467 billion, up by 834 percent compared with just Rs. 50 billion in the corresponding period last year, reflecting a significant shift in borrowing patterns.
At the same time, financing by full-fledged Islamic banks stood at Rs. 241 billion during the period, compared with Rs. 678 billion in the same months of the previous financial year, as Islamic banking branches of conventional banks captured a larger share of new demand.
In contrast, conventional banks recorded a net retirement of Rs. 120 billion by the private sector, even though these banks had extended Rs. 638 billion in credit during the same period last year.
Banking analyst Ibrahim Amin said the industry is steadily transitioning from interest-based banking to Sharia-compliant financing, driven by relatively lower financing rates and growing confidence in Islamic banking products.
He said conventional banks, which have wider branch networks than Islamic banks, are increasingly directing customers toward their Islamic banking branches and windows as part of the broader shift toward Sharia-compliant operations.
According to Amin, marketing strategies and incentives are also being used to encourage customers to move to Islamic financing, a trend expected to continue as competition among Islamic banks and Islamic windows intensifies.
The government has set a target to convert the interest-based banking system into a Sharia-compliant system by the end of 2028, in line with a ruling by the Federal Sharia Court.
SBP data shows that Pakistan’s Islamic banking industry currently comprises six full fledged Islamic banks and 15 conventional banks offering Sharia-compliant services through dedicated Islamic banking branches.
Recently, the government reduced export refinance rates to 4.5 percent, while the central bank also lowered the Cash Reserve Requirement to improve liquidity in the banking system.
