Pakistan’s government is accelerating efforts to transition the country’s financial system towards Shariah compliance, a move that could push the Islamic finance industry beyond USD 100 billion by 2027, according to Fitch Ratings.
The strongest progress has been recorded in the banking sector, where government policy has become increasingly clear and regulatory oversight of the transition has strengthened. The State Bank of Pakistan (SBP) has also introduced measures to support the conversion of conventional banking operations into Islamic banking. However, the transition remains uneven, and achieving the government’s objective of a fully Shariah-compliant financial system by 2028 will require significant expansion across sukuk, takaful and Islamic non-bank financial institutions (NBFIs).
Islamic Banking Continues to Expand
The SBP has established a high-level committee to oversee the transformation of conventional banking into Islamic banking and has issued a number of directives to facilitate the process. The conversion of conventional branches into Islamic branches is expected to continue.
Islamic banking institutions increased their share of total banking-sector financing to 38.2% by the end of the first quarter of 2026, compared with 25.5% in 2024. Much of this growth has been driven by the Islamic banking branches of conventional banks.
During 2025, net advances by Islamic banking institutions increased by approximately 40% year-on-year, while net advances by conventional banks declined by 21.8%.
Islamic banks also recorded strong deposit growth. Their share of industry deposits reached 28.5% at end-1Q26, up from 24.9% in 2024. Deposits at Islamic banks grew by around 40% in 2025, compared with approximately 20% growth at conventional banks.
Since 2025, the SBP has required Islamic banks to pay profits on Pakistani rupee savings deposits, bringing their treatment closer to that of conventional banks and potentially improving their competitiveness among depositors.
The Islamic banking windows and branches of conventional banks are becoming increasingly important. At the end of 1Q26, these operations represented 42.8% of total Islamic banking assets, compared with 34.4% in 2024.
Significant Growth Potential
Pakistan has one of the world’s largest Muslim-majority populations, while overall financial inclusion remains relatively low. According to the World Bank, only around 27% of adults had a bank account in 2025.
The emergence of digital Islamic banks could therefore play an important role in expanding access to Shariah-compliant financial services and bringing previously underserved segments of the population into the formal financial system.
Sukuk Market Growth Remains Limited
Despite the government’s broader Islamic finance ambitions, the development of the sukuk market has been comparatively slower.
Pakistan continues to diversify its sources of government financing rather than relying exclusively on sukuk and other Shariah-compliant instruments. In 2026, the country issued US dollar bonds and panda bonds in international markets, while sukuk represented only around 4% of debt capital-market issuance during the first half of 2026, down from 6% in the same period of 2025.
In July 2026, the government appointed an international banking consortium to execute its sukuk and conventional bond programme over the following three years. The adoption of a hybrid sukuk structure in 2026 could help increase future sukuk issuance.
Pakistan also issued its first rupee-denominated green sukuk in 2025, marking an important development in the country’s sustainable Islamic finance market.
Islamic NBFIs and Takaful Show Mixed Performance
Growth outside the banking sector has been more varied. Shariah-compliant NBFIs accounted for approximately 36% of total NBFI industry assets at the end of 2025, compared with 39% in the first half of 2024.
Shariah-compliant syndications continued to dominate Pakistan’s syndications market, representing around 70% of outstanding syndication volumes at end-1H26, although overall activity remained limited during the first half of the year.
Takaful has also continued to expand but remains one of the least penetrated areas of Pakistan’s Islamic finance industry. Takaful accounted for approximately 15% of total insurance premiums at the end of 2024, compared with 12% in 2023.
Islamic Finance Industry Surpasses USD 90 Billion
Fitch estimates that Pakistan’s Islamic finance industry exceeded USD 90 billion at the end of the first half of 2026.
The industry is currently composed primarily of:
- Islamic banking assets: 58%
- Outstanding sukuk: 29%
- Shariah-compliant NBFI assets: 10%
- Islamic syndications outstanding: 3%
- Takaful: smaller share of the overall market
With continued regulatory support, the conversion of conventional banking operations, the emergence of digital Islamic banks and potential growth in sukuk and takaful, Pakistan’s Islamic finance industry is positioned for further expansion.
However, reaching the government’s ambition of a fully Shariah-compliant financial system by 2028 will require substantially faster development across all segments of the Islamic finance ecosystem, particularly capital markets, takaful and Islamic non-bank financial institutions.