What Is The Banking Industry Thinking?

Banking in Pakistan is at a crossroads. For too long, the industry has been entrenched in inefficiency, with sluggish adoption of digital tools, crippling regulatory hurdles, and a persistent reliance on outdated financial systems. The economy’s dependence on banks as the primary avenue for growth has only compounded these issues. The reality is stark: Pakistan’s financial infrastructure is far from ready to compete in an increasingly digital, competitive, and globalized marketplace.

But it seems the industry is self-aware of its problems. The question is, are they going to do anything about it? The signs are positive. 

On February 24-25, 2025, the Pakistan Banks Association (PBA) convened the first-ever Banking Summit in Karachi. It was billed as a milestone for the country’s banking sector—a rare chance for industry leaders to meet face-to-face with policymakers, discuss the future of finance, and confront the urgent challenges facing Pakistan’s economic health. However, as speakers lined up to extol the virtues of a sector long seen as a lifeline for the country, the true tone of the event was anything but celebratory.

The reality of Pakistan’s banking system was laid bare. Panelists, government officials, and financial experts did not mince words: Pakistan’s banking sector is suffering. Growth has stagnated, financial inclusion remains a challenge, and the economy is burdened by unsustainable debt. The question looming over the summit was clear: can the banking industry find a way to modernize, adapt, and lead Pakistan into a new economic order?

A Flawed System in Crisis

The summit opened with a sobering assessment from Mr. Zafar Masud, Chairman of the Pakistan Banks Association. He highlighted a disconcerting reality: while the banking sector has indeed become the largest tax-paying industry in the country, contributing an estimated Rs. 700 billion in taxes this year, the financial system’s capacity to stimulate real growth is severely limited. Banks are funding the majority of the government’s budget deficit, but this is not a sustainable model. More concerning was Masud’s admission that 74% of private sector lending in Pakistan goes to large corporations, while just 5% flows to small- and medium-sized enterprises (SMEs), which are the lifeblood of any economy.

Moreover, while Pakistan’s banks employ around 200,000 people, Masud’s acknowledgment that the sector must become more inclusive and serve the wider economy was a tacit admission of its failings. The industry has failed to reach the vast majority of Pakistan’s population, particularly those in rural areas or from lower-income backgrounds. As the country’s population grows, so does the disconnect between financial services and the people who need them the most.

As the summit progressed, it became clear that digital banking is the key to bridging this gap. Yet, even here, Pakistan lags behind. Only 20% of transactions in the country are digital—an embarrassing statistic compared to regional neighbors. Despite the rise of mobile banking during the COVID-19 pandemic, the cash-on-delivery (COD) culture and an estimated Rs. 9.5 trillion in cash circulation continue to hold back progress. The summit participants, however, offered little more than optimistic projections. There was talk of expanding e-KYC (electronic Know Your Customer) systems, digitizing more services, and pushing for greater financial inclusion. But it was evident: these were not the revolutionary ideas the banking sector so desperately needs.

A New Economic Order—and Pakistan’s Chance

The global economic landscape is shifting. The summit’s international speakers, many of them experts from the US, Europe, and emerging markets, were unanimous in their assessment: the old order, driven by trade, efficiency, and competitive advantage, is collapsing. The new order, dominated by nationalism, protectionism, and an emphasis on state power, is already taking shape. Pakistan, historically a passive participant in global trade, has a unique opportunity to carve out a niche for itself in this emerging era. But only if it can overhaul its financial sector and align itself with the new geopolitical and economic realities.

The United States has already begun turning inward, a trend that began with President Trump’s tariffs on China and has only deepened since. Europe is also recalibrating, with nations looking to shield themselves from the economic power struggles between the US and China. This rising nationalism is leading to a fragmentation of the global economy—and Pakistan must adapt quickly or risk being left behind.

While Pakistan may never have been a key player in the global economic order, it could position itself as an important regional actor. The question is: can Pakistan’s financial institutions rise to the occasion? Can they create financial ecosystems that not only serve local needs but also position the country as a leader in the South Asian region?

The Need for Structural Reforms

One of the most pressing themes of the summit was Pakistan’s staggering fiscal and current account deficits. The country’s reliance on borrowing to fund its operations has resulted in a debt crisis that shows no signs of abating. With roughly 40% of national income spent on servicing debt—one of the highest ratios in the world—Pakistan is shackled by its financial obligations. The banking sector has played a central role in this, with a significant portion of loans issued to fund government deficits. Yet, the country’s banking system lacks the necessary tools to foster innovation and growth in sectors that can drive long-term development.

Experts at the summit pointed out the need for a radical shift in policy to reverse this trend. Pakistan must expand its tax base, privatize state-owned enterprises, and overhaul its energy sector. The banking industry, they argued, must step up by focusing on productive lending to high-potential sectors like agriculture, SMEs, and housing—areas that have been largely neglected in favor of lending to large corporations.

Moreover, the country’s outdated fiscal policy needs an overhaul. Panelists emphasized the need for Pakistan to cut its dependency on foreign borrowing and improve the efficiency of its power sector. Without these structural reforms, Pakistan’s financial system will remain bogged down by unsustainable debt and stagnant growth.

Technology and the Role of AI in Transformation

The summit’s focus on digital banking revealed another key issue: technology is not just a nice-to-have, it’s a must-have. If Pakistan’s banking sector is to have any hope of modernizing, it must embrace artificial intelligence (AI), machine learning, and predictive analytics. These tools, speakers argued, have the potential to radically transform the industry, driving down costs, improving customer service, and creating new avenues for growth.

AI can be used for everything from automating customer onboarding to streamlining loan approval processes. Predictive analytics can help banks better assess risk, while machine learning can optimize lending practices. Yet, for this transformation to take place, there must be a cohesive digital strategy—and this is where Pakistan has faltered. While banks like Habib Bank and UBL are leading the charge in digital innovation, many others are still stuck in the past, with archaic systems and outdated approaches to customer engagement.

The key to success lies in collaboration. The government, regulators, and banks must work together to create a digital ecosystem that benefits all stakeholders. The State Bank of Pakistan (SBP) has already made strides in this direction, with initiatives like e-KYC and policies aimed at improving financial inclusion. However, these efforts will only bear fruit if the banking sector is willing to adopt new technologies and modernize its operations.

Climate Change and Sustainability: A New Frontier for Finance

As the summit drew to a close, a final, crucial issue emerged: the role of climate-resilient finance. Governor of the State Bank of Pakistan, Jameel Ahmed, addressed this head-on. He pointed to the disastrous floods of 2022 as a reminder of the economic vulnerabilities Pakistan faces in the face of climate change. Banks, he said, must start considering climate-related risks in their financial models, from lending practices to risk assessments.

SBP’s Vision 2028 focuses on integrating climate change into Pakistan’s financial strategy. The introduction of green taxonomies, climate risk assessments, and a renewed emphasis on sustainable investments are key components of this vision. While these steps are a positive start, they are just that—a start. The banking sector needs to embrace sustainability not just as a regulatory obligation, but as a core business strategy. The shift to climate-resilient finance will not be easy, but it is necessary for the long-term survival of the banking industry.

A Critical Juncture for Pakistan’s Banking Sector

The PBA’s Banking Summit was a wake-up call for the financial sector. Pakistan’s banks are at a critical juncture. If they continue down the same path—sticking to outdated models, failing to innovate, and neglecting key sectors of the economy—the country’s financial system will continue to stagnate. But if the banking sector can adapt, embrace digital transformation, and work collaboratively with policymakers to implement structural reforms, it has the potential to lead Pakistan toward a more sustainable, inclusive, and resilient future.

The stakes are high. The world is changing, and Pakistan’s financial system must change with it. There is no time to waste.

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