Pakistan signs $4.5bn Islamic loan for power sector relief

Pakistan has signed term sheets with 18 commercial banks for a 1.275 trillion Pakistani rupees ($4.5 billion) Islamic finance facility aimed at easing the financial burden on its power sector.

The syndicated financing, led by Meezan Bank, Habib Bank Limited, National Bank of Pakistan, and United Bank Limited, will help settle outstanding power sector liabilities such as unpaid bills and subsidies, according to a Reuters report.

The liabilities have strained fiscal resources and disrupted the supply chain.

Power Minister Awais Leghari confirmed that the financing would be repaid in 24 quarterly installments over six years, stating that it would not add to public debt.

The government, which owns or controls much of the national power infrastructure, is grappling with a liquidity crunch with limited investment and worsened fiscal pressure.

The financing is part of a broader strategy to stabilize the sector under the conditions of Pakistan’s $7 billion program with the International Monetary Fund (IMF).

The newly structured Islamic facility carries a concessional rate of three-month KIBOR minus 0.9%, a significant improvement over existing liabilities, including surcharges of up to KIBOR plus 4.5% for delayed payments to independent power producers.

The terms have received IMF approval.

To manage repayment, the government will allocate 323 billion Pakistani rupees annually for loan amortization, with a repayment cap set at 1.938 trillion rupees over the six-year term.

The deal also supports Pakistan’s goal of transitioning to a fully Islamic financial system by 2028. Islamic finance currently accounts for roughly 25% of total banking assets in the country.

The financing follows a $200 million loan approved by the Asian Development Bank in December 2024 to upgrade power distribution infrastructure and improve electricity reliability.