Islamic finance essentially developed on the principles of trade, partnerships, risk taking, and sharing profit and loss. Small businesses, therefore, were not only encouraged, but made significant part of the commercial landscape. The objective being to support involvement of the larger majority in commercial enterprise to help communities evolve as progressive entities.
Small and Medium Enterprises (SMEs) undoubtedly form the backbone of Pakistan’s economy. Accounting for nearly 40% of GDP and employing close to 80% of the non-agricultural workforce, SMEs are engines of resilience, inclusion, and innovation. Yet despite their scale and importance, access to finance remains one of their most persistent challenges. Pakistan’s SME financing ecosystem encompasses a diverse range of funding mechanisms, including debt, equity, and venture capital – delivered through multiple channels such as commercial banks, leasing companies, microfinance banks, the Pakistan Stock Exchange’s GEM Board, angel investors, and venture capital firms. However, each channel continues to grapple with distinct operational challenges.
As per latest figures from The Pakistan Credit Rating Agency, SME debt financing continued its upward trajectory, reaching PKR 520.6 billion as of September 2025, compared to PKR 478.37 billion in September 2024, marking a year on year increase of around 8.8%. In parallel, microfinancing extended to Micro and Small Enterprises (MSEs) has sustained growth momentum, with the sector’s gross loan portfolio crossing PKR 185 billion by mid 2025, despite rising portfolio risk and repayment pressures. The average loan ticket size expanded further to PKR 468,000, reflecting both inflationary adjustments and the sector’s gradual shift toward higher value products. Policy support, including the government’s January 2025 decision to triple the SME loan limit from PKR 500,000 to PKR 1.5 million, has reinforced access to credit, particularly for women led enterprises[].
Despite this growth, the persistently low average loan size, remaining below Rs. 500,000, highlights that microfinancing in Pakistan predominantly serves micro enterprises, with limited penetration into the small enterprise segment.
Islamic finance, fortunately, by its very nature, is anchored in the real economy and promotes risk-sharing over risk transfer, discourages speculative activity, and encourages asset-backed, value-generating transactions. Hence it becomes a catalyst for SME growth.
A notable example within Pakistan’s evolving Islamic banking landscape is Faysal Bank, which has repositioned itself as a fully Islamic bank with a strong emphasis on SME enablement. Faysal Bank Limited continues to deepen its outreach to SMEs by offering structured, Shariah-compliant financing solutions that address both access and affordability challenges faced by small businesses across the country. Through supply chain financing, the Bank enables SMEs to access credit on the strength of established parent or corporate entities, supported by mechanisms such as letters of comfort, assignment of receivables, and cash-flow routing arrangements. Complementing this are a wide range of Islamic financing products—including Murabaha for asset-based working capital, Istisna and Tijarah for manufacturing and trade needs, Salam for agriculture-linked financing, and Running Musharakah for flexible working capital participation. Together, these solutions reflect Faysal Bank’s commitment to empowering SMEs in Pakistan by aligning ethical banking principles with practical, growth-oriented financial support.
Instruments such as Musharakah, Mudarabah, Murabaha, Ijara, and Diminishing Musharakah that are structurally better suited to SME needs. For SMEs, this means financing that understands cash-flow realities rather than merely balance sheets. It enables entrepreneurs to expand operations, invest in equipment, and enter new markets without the burden of interest-based obligations that can stifle early-stage growth.
As per the State Bank’s Islamic Banking Bulletin, Pakistan’s Islamic banking industry sustained strong momentum in Q1 2025, further cementing its role in the national financial system. Total assets increased by PKR 440 billion to PKR 11,510 billion by March 2025, while deposits grew more robustly by PKR 513 billion to PKR 8,419 billion. On a year-on-year basis, assets and deposits expanded by 24.6 percent and 22.5 percent, respectively[].
Financing rose by an impressive 23.4 percent YoY to PKR 4,020 billion, and net investments grew by 23.1 percent to PKR 5,422 billion, crossing the PKR 5 trillion milestone for the first time, signaling rising demand for Shariah-compliant financing and investment solutions, as per media reports.
Islamic banking assets accounted for 21.1 percent of the overall banking sector, with deposits commanding a higher share of 25.4 percent. The sector contributed 30.5 percent of total banking financing and 16.4 percent of total investments, highlighting its expanding systemic significance. Physical outreach also strengthened, with Islamic Banking Branches increasing to 6,093 (19.5 percent YoY growth) and Islamic Banking Windows rising to 2,651, reflecting a strong 38.4 percent YoY expansion.
Pakistan’s Islamic banking industry now commands a significant share of the banking sector. This growth is not just numerical; it reflects rising trust among businesses and individuals seeking ethical and Shariah-compliant financial solutions. SMEs, particularly family-owned and faith-conscious enterprises, increasingly see Islamic banking as a natural partner.
However, scale alone is not enough. The real impact lies in how Islamic banks design SME-focused ecosystems, combining financing with advisory services, digital tools, and capacity-building initiatives. This integrated approach transforms banks from lenders into long-term partners.
To truly unlock SME potential, Islamic finance needs to continue to extend beyond balance sheets via:
Digital enablement to reduce transaction costs and improve access, supply-chain financing to integrate SMEs into larger commercial networks, encourage women-led SME financing to address one of Pakistan’s most underutilized growth levers, and ensure alignment of green financing with ethical principles.
Banks embracing this ecosystem will be expanding their portfolios and also contributing meaningfully to economic stability and social impact. The objective is to understand that Islamic finance is not merely a parallel banking system, it is a development philosophy rooted in fairness, partnership, and real economic activity. In a country like Pakistan, where SMEs drive employment and innovation, Islamic finance can serve as a powerful catalyst for inclusive grow.
