Dubai/Jakarta/Toronto: The Pakistani government’s strategy to transition its financial system towards sharia compliance is likely to drive the Islamic finance industry to surpass USD100 billion by 2027, Fitch Ratings says.
Progress has been most notable in banking, where policy direction has become clearer, and regulators have stepped up oversight of the conversion and supported expansion of the Islamic banking branches of conventional banks. However, progress remains uneven, and achieving the target of a fully sharia-compliant financial system by 2028 will require much faster development, including for sukuk, takaful and Islamic non-bank financial institutions (NBFIs).
The State Bank of Pakistan has established a high-level committee to oversee the transformation of conventional banking into Islamic banking, and introduced various directives. We expect the conversion of conventional branches into Islamic branches to continue. Islamic banks’ share of sector financing rose sharply to 38.2% by end-1Q26, from 25.5% in 2024, driven mainly by the Islamic banking branches of conventional banks. In 2025, total net advances by Islamic banking institutions grew by 40% yoy, led primarily by these branches. Net advances by conventional banks fell 21.8% yoy.
The rise in Islamic banks’ deposit market share has been slower, reaching 28.5% of industry deposits at end-1Q26 (2024: 24.9%), indicating more mixed depositor acceptance. Deposits at Islamic banks expanded by about 40% yoy in 2025, compared with about 20% yoy growth at conventional banks. Since 2025, the State Bank of Pakistan has required all Islamic banks to pay profits on their Pakistan rupee saving deposits, making them more competitive for customers. Previously, Islamic banks were exempt from paying a minimum rate of return on savings deposits, while conventional banks were required to do so.
The role of Islamic banking branches of conventional banks is also becoming more significant. At end-1Q26, these branches accounted for 42.8% of total Islamic banking institution assets (2024: 34.4%), with the rest held by fully Islamic banks.
Growth potential for Islamic banking remains substantial. Pakistan has one of the world’s largest Muslim-majority populations, yet overall banking penetration remains low. The World Bank says only about 27% of the adult population had a bank account in 2025, among the lowest rates globally. Recently established digital Islamic banks could help support greater financial inclusion.
The government continues to diversify its funding, and not to issue only sukuk or other sharia-compliant instruments amid large external funding needs. In 2026, Pakistan issued US dollar bonds and panda bonds externally, and sukuk accounted for only about 4% of debt capital-market issuance in 1H26 (1H25: 6%). In July, the government appointed a consortium of international banks to execute its sukuk and bonds programme over the next three years. The government adopted a hybrid sukuk structure in 2026 which could support greater sukuk supply. The sovereign also issued its debut rupee green sukuk in 2025. Fitch rates Pakistan’s only US dollar sukuk at ‘B-‌’‌.
Progress in other segments of Islamic finance has also been mixed. Sharia-compliant NBFIs held about 36% of total NBFI industry assets at end-2025, down from 39% in 1H24. Sharia-compliant syndications remained dominant in Pakistan’s syndications market, accounting for around 70% of the outstanding amount at end-1H26, although activity was limited during 1H26. Takaful accounted for 15% of insurance industry premiums at end-2024 (2023: 12%) but remained the least penetrated segment of Pakistan’s Islamic finance industry.
“We estimate Pakistan’s Islamic finance industry at more than USD90 billion at end-1H26, led by Islamic banking assets (58%), followed by outstanding sukuk (29%), sharia-compliant NBFI assets (10%), Islamic syndications outstanding (3%), and takaful (below 1%).”