In a major step toward stabilising the country’s troubled energy sector, the government has secured a Rs1.275 trillion ($4.5 billion) Islamic financing facility through agreements signed with 18 commercial banks, officials confirmed on Friday. The funds will be used to address the growing circular debt crisis that continues to strain Pakistan’s power sector and broader economy.
According to Khurram Schehzad, Adviser to the Finance Minister, the financing—structured under Islamic principles—comes at a concessional rate of 3-month KIBOR minus 0.9%, a formula endorsed by the International Monetary Fund (IMF). The debt will be repaid over six years in 24 quarterly instalments, and officials have clarified that it will not be added to the public debt ledger.
The funding arrangement comes amid Pakistan’s efforts to fulfil requirements under its $7 billion IMF programme, which has prioritised structural reforms in the power sector due to its massive fiscal burden and poor financial health. Circular debt—arising from unpaid power bills, subsidies, and inefficiencies—has discouraged investment, disrupted energy supply, and weighed heavily on public finances.
Power Minister Awais Leghari noted that the facility will replace higher-cost liabilities currently owed to Independent Power Producers (IPPs), which include late payment surcharges as high as KIBOR plus 4.5%, and legacy debts priced slightly above market benchmarks.
Major banks participating in the financing include Meezan Bank, Habib Bank Limited (HBL), National Bank of Pakistan (NBP), and United Bank Limited (UBL). The government is expected to allocate approximately Rs323 billion annually for loan repayments, with the total repayment capped at Rs1.938 trillion over six years.
This deal also aligns with the state’s broader push to transition to an interest-free banking system by 2028, a goal actively supported by the State Bank of Pakistan. Islamic finance now constitutes around 25% of the country’s total banking assets—a share expected to rise as demand grows and regulatory frameworks evolve.
The agreement marks a crucial step in managing Pakistan’s energy-sector liabilities while promoting Shariah-compliant financial practices, as the country attempts to balance its reform commitments with economic and social realities.
