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Consumer financing gaining strength

Published on 23rd Feb, Edition 8, 2015


A kind of service, providing persons with the needed finance to make personal purchases varying from buying a car to a house is identified as consumer financing. It is arranged into different types of products. Personal loans are provided for the payment of goods, services and expenses and comprise running finance and revolving credit to individuals. The idea of consumer financing is to provide consumers with financing support to increase their consumption and to boost their standards of living.
Consumer financing in the past has significantly contributed to economic turnaround of Pakistan by accelerating consumption and investments. There has been a phenomenal increase in private consumptions due to easy availability of credit from banks.

Consumer financing was introduced for the first time in Pakistan around 1990 by Citibank (a foreign bank) and it instantly turned out to be an extensive success. Seeing this success, many local as well as other foreign banks introduced cost effective financing schemes for all and sundry in Pakistan. These schemes were so tempting that people started availing them without knowing the negative impact.
Pakistan’s banking sector in the past years has productively engaged itself in consumer financing by introducing different products such as credit cards, auto loans, housing finance, and personal loans, etc. The robust growth of consumer financing in the previous years in the first place was ascribed to the flexible economic policies set to the principles of free market economy, and huge liquidity available to the banks in the aftermath of 9/11.

Banks at that time have played their strategic role in promoting economic development in the country. In the last twenty years three eminent foreign banks took the lead in introducing credit cards in the banking sector. But unfortunately this was limited to the top bureaucrats and businessmen. Later on the task of consumer financing was triumphantly taken by top Pakistani banks. They provided the facilities of consumer financing to both the middle class and the higher salaried class. They also contributed in augmenting the standard of living of the middle class, which is the back bone of any economy.
These banks hired the qualified professionals who worked day and night in developing brand and establishing identities for their product. Aggressive marketing and innovative continued at an accelerating pace. Consumer finance was encouraged by the State Bank of Pakistan to boost the economic growth through demand- pulls pressure.

There was lethargic growth in consumer financing for the past years. Consumer financing, after having grown very fast till 2008, became inactive, and even turned negative between 2008 and 2011, because of low economic growth and banks’ reluctance to it to contain bad loans. But from 2012, there was some improvement. Banks dared to make new consumer loans, realizing that years of no or low activity in this area was affecting the growth of their interest income.

Every sector of consumer financing from credit card to car purchasing in Pakistan witnessed a sharp decline during the fiscal year 2009-10. The overall consumer financing declined by Rs50 billion, or 17 percent, during the year under review over the previous fiscal year. The outstanding stock of consumer loans fell to Rs244 billion in 2009-10 against the Rs294 billion in 2008-09.

The data showed that even well-advertised credit card business also fell significantly. The loans under the credit card declined to Rs28 billion from Rs35 billion the previous year. The profitable credit card business, which has a great influence in developed and developing economies, failed to get substantial headway in the domestic market.

The car purchasing was the second highest attraction for the consumers but the outstanding loans in this particular sector showed an abrupt fall during the last couple of years. The outstanding loans for car purchasing fell to Rs64 billion till June 30, 2010. The same was Rs78 billion in 2009 and Rs105 billion in 2008. Loans for house building under the consumer financing dropped to Rs54.5 billion from Rs61 billion the previous year. In the fiscal year 2008, it was Rs66 billion. The private sector performed much below the expectation in the last fiscal year while the overall economy remained under pressure owing to rising inflation, higher cost of production and unpopular agreement with the IMF.


Subsequent to the 2013, democratic general election the people anticipated economic improvement and that encouraged banks to enhance their consumer financing. The Expected Economic Conditions Index went up three consecutive times between November 2013 and May 2014, showing people’s overall cheerfulness about the economy’s future. Banks responded to the positive feelings and consumer financing saw a significant increase primarily on the back of credit extended for the purchase of vehicles.
Significant growth was witnessed in consumer loans during July-March, 2013-14, as it increased to 9.8 percent against 4.2 percent registered in the same period of financial year 2012-13. Consumer financing start gaining strength since November 2012 and continued its upward trend during July- March, 2013-14. Consumer durables registered a dramatic growth of 88.2 percent in credit expansion followed by 17.8 percent growth in auto and 13.9 percent in personal loans. It is appropriate to mention here that increased growth in auto finance is largely owing to the auto finance facility actively marketed by leading Islamic banks.

In making personal loans, most banks judge the credit worthiness of borrowers by their monthly income levels, and set ceilings accordingly. Sometime back, the NBP introduced its ‘Cash n Gold’ scheme, which offered up to Rs35, 000 in personal loan against each 10 grammes of net contents of gold (in the form of jewellery or gold bars). The interest rate under the scheme was also a bit lower than the going rate on personal loans, and that has made this scheme a huge success.

Habib Bank’s acquisition of the consumer loan portfolio of Citibank in April 2013 also made an impact on consumer financing trends. The taking over of this clientele, by a large network bank like HBL, has made local banks’ competition fiercer. ‘Salary Plus,’ an overdraft facility for HBL account holders (also launched in April 2013), and similar schemes of other banks continue to enlarge personal loan volumes.
The marked decline in consumer financing in the past was also owing to the increase in policy interest rate by the SBP amid fears of rising inflation rate. This move was widely criticized by businessmen and economists and is not a cure to curb the price-hike.

Interest rate in Pakistan averaged 12.48 percent from 1992 until 2015, reaching an all-time high of 20 percent in October of 1996 and a record low of 7.50 percent in November of 2002.The State Bank of Pakistan cut its key interest rate for the second straight meeting by 100 bps to 8.5 percent in January, citing lower inflationary pressure due to falling oil prices.

Bankers are of the opinion that consumer financing will contribute a bigger part of profits of the banking industry with the recovery of economy. The major macroeconomic indicators have improved further since the last monetary policy decision of November 2014. CPI inflation and its expectations continue to follow a downward trend with some exception. In the last two months of November and December 2014 trade deficit declined. Furthermore, considerable foreign exchange inflows have contributed in maintaining an upward direction in foreign exchange reserves.

It may be here clearly mentioned that while the recent drop in international oil price has induced low inflation and improved trade outlook. The speed and intensity, with which the inflation has come down and continues to recede, can induce expectations of rather low inflation, which may induce additional consumption. Thus, the recent reduction in domestic commodity prices may lead to further reduction in interest rate and increase consumer financing from commercial banks.

The State Bank should implement a favorable policy, which enhances the access of consumer financing products to the fixed and deprived sections of the society by keeping the interest rates at a nominal level. This would consequently help boost business activities and growth in the country. The Commercial banks must introduced any innovative financing for improving the economic and social lot of the majority of the people who are working in the private companies with low fixed income and with no security.


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