Key drivers include tax reforms, declining interest rates, and strategic banking policies deposits in Pakistan’s banking sector have witnessed a staggering decline of PKR 1 trillion within just over a month, a shift attributed to stringent tax policies targeting non-filers, falling interest rates, and strategic banking manoeuvres.
Deposit Drop
According to the State Bank of Pakistan (SBP), bank deposits, which stood at PKR 31,145 billion on November 30, fell sharply to PKR 30,129 billion by January 3 a notable PKR 1,016 billion decrease. This substantial drop reflects multiple systemic pressures reshaping the banking landscape.
Key Factors Behind the Decline
1. Tax Amendment Act 2024
The anticipated approval of the Tax Amendment Act 2024 by the National Assembly has created uncertainty among account holders, especially non-filers. Once passed, this legislation will:
- Restrict non-filers from maintaining or opening standard current, savings, and investor portfolio accounts, limiting them to basic “Asaan” accounts.
- Cap the cash withdrawal amounts for non-filers.
- Prohibit non-filers from purchasing or registering vehicles, transferring immovable properties beyond certain thresholds, and trading government securities.
Such stringent measures have driven non-filers to withdraw funds, fearing penalties like account freezing and limited access to banking facilities.
2. Declining Interest Rates
Another critical factor is the sharp reduction in interest rates, which have dropped from a record 22% in 2023 to 13% in early 2025.
- The average deposit rate in June 2024 was 18.26%, but by November, it declined to 13.49%, discouraging savings.
- With lower returns on deposits, account holders increasingly opt for alternative investment avenues, further reducing bank inflows.
3. Advance-to-Deposit Ratio (ADR) and Taxation Policies
Banks have also shifted their approach to deposits due to ADR-linked taxation.
- By the end of November, the sector’s ADR stood below 40%, prompting banks to lend aggressively while discouraging fresh deposits to mitigate heavy taxation of up to 16% on government securities.
- Awais Ashraf, Director of Research at AKD Securities, noted that banks prioritise ADR management to avoid incremental taxation.
Additionally, Abdul Azeem, Head of Research at Al Habib Capital, highlighted that banks strategically reduced deposits in December to counter anticipated taxation if ADR levels remained below 50%.
Rising Tax Burden on Banks
The government’s decision to raise the overall tax rate on banks to 44%, albeit with a planned annual reduction of 100 basis points, has further squeezed profit margins, intensifying the impact on deposit mobilization strategies.
Implications for the Banking Sector
This PKR 1 trillion decline in deposits underscores the fragility of Pakistan’s financial system amidst tightening regulations and economic adjustments.
- Banks face the dual challenge of balancing taxation with deposit growth while navigating an environment of declining interest rates.
- For depositors, limited incentives to save in banks could shift funds toward alternative investment options, impacting liquidity in the financial system.
As the government finalizes the Tax Amendment Act 2024, the banking sector must prepare for further structural changes that may redefine savings and lending dynamics. The question remains: Can the sector adapt swiftly enough to restore depositor confidence?
