Consumer Financing in Pakistan
By:
Javeria A. Cheema
Sabahat Nasir
Samia Arif
Consumer Financing: Overview
What is “consumer Financing”?
“Any financing allowed to individuals for meeting their
personal, family or household needs.
Type of service that is designed to provide the individuals
with necessary finance for personal purchases ranging from
buying a car, shopping purchases, to buying a house.
The concept of consumer financing is based on the
need for an institutional arrangement that provides
consumers with financing support to enhance their
consumption and, as a result, improve their standards of
living.
Growth of Consumer Financing
in Pakistan
Until the early 1990s, consumer financing was not offered by
commercial banks
Credit cards were offered to only a selected band as a convenience
for bill payments and not for financial support
In 2001, excess in liquidity of the banks due high inflow of
remittances in the 9/11 aftermath and low interest rates
motivated banks to enter into consumer financing business
As a result, Banks aggressively promoted consumer financing-
credit cards, auto loans, house financing and personal loans with
least documentation
Unprecedented growth rate over the last 7 years
According to SBP:
2006 Rs.72.4 – Rs.325 Billion
2007 Reached Rs.354.4 Billions
Categorized into 4 types
Personal loans: loans provided to individuals for the
payment of goods, services and expenses,
Auto loans: Auto loans include any loans used to purchase a
vehicle for personal use. The loans borrowed to purchase
vehicles for commercial or corporate use are not included in
this category.
Housing Finance: Housing finance includes the loan, which is
provided to individuals for the purpose of purchasing or
improving a residential house, or apartment, or land. This
category also includes loans for a combination of housing
activities such as loans for purchase of land plus construction.
Credit Cards: Credit cards include any card, which a customer
can use to borrow credit from a bank. Credit cards include
charge cards, debit cards, Stored Value Cards (SVC), and
Balance Transfer Facility (BTF). Corporate Cards are not
included in this category.
Banks are making abnormal profits after the emergence of
consumer financing.
Regulatory Framework for
consumer financing
State Bank of Pakistan (SBP) regulator of all banks and Development
Finance Institutions (DFIs)
For redress of consumer grievances comprises of both administrative and
judicial institutions.
Banks are obligated to clearly disclose
Margin Requirements
no limits are placed on the margin requirement
SBP has restrained banks from charging any “Insurance Premiums”
Banks are not allowed to finance older than 5 years cars and must keep
the customer informed of payment schedules and any changes
Issues and Challenges from
Consumer Perspective
1. High Interest Rate:
In Pakistan the spread has vacillated between 5.95%
and 9.58% during the period from 1990 to 2005.
2. Variable Interest Rate
According to the annual report of the banking
ombudsman, in Pakistan almost all consumer loan are on the
basis of variable mark up rates.
3. Increasing Inflationary impact
Acquisition of easy bank credit by the household
consumers has spurred the demand for many essential
and luxury items.
Cont’d…
4. Deteriorating quality of service
As the consumer financing portfolio is increasing quality of related bank
services is becoming a serious issue.
5. Lack of consumer education
The technical documents prepared by the banks affects the financial
rights of uneducated customers. Table No.2
6. Poor information disclosure practice
There is no law in Pakistan, which entitles the consumers to access
information from the private banks as a legal right.
Cont’d
7. Intimidating recovery practices:
Banks recovery team reaches the borrower house to pressurize
them for payment of dues without any legal authority
Weaknesses in regulatory framework:
The banks formulates their own policies and procedures which
suits their interests best
9. Unsolicited Financing
Aggressive marketing campaigns launched by the banks
are targeting the costumers and encouraging them to
purchase a loan or credit.
Source: Consumer financing in Pakistan: Issues,
Challenges, and way Forward published by CRCP
Social & Economic Impacts of
Consumer Financing
Increased consumption > increased output / Inflationary Pressure
(Demand-Pull Inflation)
Increased dependence on foreign loans
Lack of infrastructure to absorb and manage the increased
number of cars on the road due to easy auto financing
Spending beyond their means behavior results in burdening the
economy and society
Negative Saving-Investment gap as a result of spend now, save
later behavior in developing nations
It’s beneficial for those who have the prerequisite responsibility,
maturity and financial literacy to manage their finances.
Conclusions &
Recommendations
High Interest rate spread should be reduced to increase
competition in the banking sector
SBP Regulations regarding consumer financing should be
enforced strictly to decrease the high profit margins of the banks
at the expense of the depositors
Unsolicited financing should be discouraged to avoid
unnecessary private consumption at the cost of consumer savings
SBP should bind banks to explain ALL applicable charges on
consumer loans before signing the contracts
Consumer Education:
comparative information should be made available
Latest copy of terms, conditions, & schedule of charges should
be provided to applicants in the language of their
understanding
Question-Answer Session
