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Consumer Financing in Pakistan

Consumer financing in Pakistan has grown rapidly since the early 2000s as banks aggressively promoted various types of consumer loans like credit cards, auto loans, and personal loans. However, this growth has also led to issues like high interest rates, variable rates that increase costs for consumers, and predatory practices by some banks. The document analyzes the regulatory framework, social impacts, and makes recommendations to strengthen protections for consumers and encourage responsible financing practices.

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Samia
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6K views

Consumer Financing in Pakistan

Consumer financing in Pakistan has grown rapidly since the early 2000s as banks aggressively promoted various types of consumer loans like credit cards, auto loans, and personal loans. However, this growth has also led to issues like high interest rates, variable rates that increase costs for consumers, and predatory practices by some banks. The document analyzes the regulatory framework, social impacts, and makes recommendations to strengthen protections for consumers and encourage responsible financing practices.

Uploaded by

Samia
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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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

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