Pakistan Secures Rs1.275 Trillion Islamic Finance Deal to Ease Power Sector Debt

In a significant move to tackle its deepening power sector crisis, Pakistan has signed term sheets with 18 commercial banks for a Rs1.275 trillion ($4.5 billion) Islamic finance facility, government officials confirmed on Friday.

The financing arrangement, secured under Islamic banking principles, aims to address the country’s mounting circular debt — a long-standing problem of unpaid power bills, subsidies, and interest-laden liabilities that have severely strained the energy sector and the national economy.

The new facility is part of Pakistan’s broader effort to meet conditions under its $7 billion loan programme with the International Monetary Fund (IMF), which has identified energy sector reform as a top priority.

Khurram Schehzad, adviser to the finance minister, told Reuters that the loans will be provided by 18 commercial banks and structured in compliance with Islamic finance principles. The facility will be priced at three-month KIBOR (Karachi Interbank Offered Rate) minus 0.9%, a concessional rate that has been agreed upon with the IMF.

“This loan will not add to the public debt,” said Power Minister Awais Leghari, adding that it will be repaid in 24 quarterly instalments over six years.

Among the participating banks are major institutions including Meezan Bank, Habib Bank Limited (HBL), National Bank of Pakistan, and United Bank Limited (UBL). The government plans to allocate Rs323 billion annually for loan repayments, with the total capped at Rs1.938 trillion over six years.

The Islamic finance facility is aimed at replacing high-cost legacy debt and reducing the financial burden of circular debt. Existing liabilities include penalties on delayed payments to Independent Power Producers (IPPs), some carrying surcharges as high as KIBOR plus 4.5%.

By restructuring through Islamic financing, the government expects to lower borrowing costs and reduce the fiscal strain on the power sector.

The deal also marks a step forward in Pakistan’s ambition to eliminate interest-based banking by 2028. Islamic finance already accounts for roughly 25% of the country’s total banking assets, and this facility further aligns with that policy direction.

Pakistan’s power sector has long been plagued by inefficiencies, theft, transmission losses, and politically sensitive energy pricing. The liquidity crunch has disrupted supply and deterred much-needed investment in infrastructure.

Officials hope that the financing arrangement will offer some breathing room and pave the way for structural reforms, ultimately stabilising the energy sector and supporting economic recovery.