Govt Secures Rs1.275 Trillion Islamic Financing to Ease Power Sector Debt Crisis
In a significant step to address Pakistan’s mounting power sector liabilities, the federal government has finalized term sheets with 18 commercial banks for a Rs1.275 trillion ($4.5 billion) Islamic finance facility, officials confirmed on Friday. The move is aimed at tackling the country’s growing circular debt and restoring liquidity in one of its most financially strained sectors.
Circular debt—comprising unpaid bills, subsidies, and legacy costs—has long crippled Pakistan’s power sector, resulting in supply disruptions, discouraged investment, and persistent fiscal pressures. Addressing this issue has become a key benchmark under Pakistan’s ongoing $7 billion loan programme with the International Monetary Fund (IMF).
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Khurram Schehzad, adviser to the finance minister, told media that the loans would be extended through Islamic financing principles. The deal involves major local banks including Meezan Bank, HBL, UBL, and the National Bank of Pakistan.
The financing is structured at a concessional rate of 3-month KIBOR minus 0.9%, a formula endorsed by the IMF, making it significantly cheaper than existing liabilities. Some of the current debts, such as overdue payments to Independent Power Producers (IPPs), carry surcharges as high as KIBOR plus 4.5%.
“This arrangement provides breathing room without adding to the public debt,” said Federal Minister for Power Awais Leghari. “It will be repaid in 24 quarterly installments over six years, with annual repayments capped at Rs323 billion.”
The government estimates total repayments over the six-year term to remain within Rs1.938 trillion.
Apart from addressing immediate liquidity concerns, the deal aligns with Pakistan’s longer-term objective of transitioning toward a fully interest-free banking system by 2028. Islamic finance now makes up about 25% of the country’s total banking assets.
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