Pakistan’s Islamic finance industry set to surpass $100bn by 2027

Pakistan’s transition towards a Shariah-compliant financial system is expected to push the country’s Islamic finance industry beyond $100 billion by 2027, according to Fitch Ratings. Progress has been strongest in the banking sector, where policy direction has become clearer and regulators have stepped up efforts to oversee the conversion of conventional banking operations while supporting the expansion of Islamic banking branches. However, Fitch noted that progress across Pakistan’s broader Islamic finance industry remains uneven. The State Bank of Pakistan (SBP) has established a high-level committee to oversee the transformation of conventional banking into Islamic banking and introduced directives to support the transition. Islamic banking institutions accounted for 38.2% of total sector financing at the end of the first quarter of 2026, up sharply from 25.5% in 2024. During 2025, total net advances by Islamic banking institutions grew by around 40% year-over-year, mainly supported by these branches, while net advances by conventional banks declined by 21.8% year-over-year. Growth in Islamic banks' share of industry deposits reached 28.5% at the end of 1Q26, compared with 24.9% in 2024, indicating relatively mixed acceptance among depositors. Since 2025, the SBP has required all Islamic banks to pay profits on Pakistan rupee savings deposits, making them more competitive for customers. The SBP’s efforts have led to Islamic banking branches accounting for 42.8% of total Islamic banking institution assets at the end of 1Q26, up from 34.4% in 2024. Fitch highlights the sector’s growth potential, driven by Pakistan’s large Muslim-majority population and low banking penetration (only around 27% of adults had a bank account in 2025). New digital Islamic banks could further expand financial inclusion. Meanwhile, the government maintains a diversified funding strategy, issuing US dollar bonds and panda bonds while sukuk accounted for only around 4% of debt capital-market issuance in the first half of 2026. The sovereign issued its debut rupee-denominated green sukuk in 2025. Fitch estimates Pakistan’s Islamic finance industry at over $90 billion at the end of 1H26, with Islamic banking assets leading at 58%. Sukuk accounted for 29%, while Shariah-compliant NBFI assets and takaful represented smaller shares. Fitch expects continued growth in Shariah-compliant finance, particularly Islamic banking, to surpass $100 billion by 2027, though progress in sukuk, takaful, and Islamic NBFIs will be crucial to meeting the 2028 target.