Failure and Success of consumer finance in Pakistan.

Byline: SADAF

Rapid growth in the consumer finance portfolio of the banking sector in recent times has generated a preceding debate, substantially critical of its alleged part in converting consumption-less financially literate customers. This story aims to explore some of these perceptions, the present data in perspective, while taking into account the high perceptivity of these loans to add interest rate dynamics. Notably, the banking sector in Pakistan is under-leveraged by global standards and emergent risks are well-managed by the banking sector.

In the early period when the concept of banking wasn't well known, people, generally in rural areas used to borrow money from unlicensed lenders on partial terms and at an emulsion interest of veritably high rate. Farmers had to adopt money from landlords to meet their financial requirements, which were primarily driven by the interest of lenders. Hardly, they could repay the loan during their continuance due to the high rate of compound interest. Still, over the recent decades, a large number of foreign bank branches operating in the country have been offering a variety of financial products; with the expansion and growth of the banking industry, which touched off an openness to particular loans, have instated the consumer finance market.

Achievement

Consumer finance is an established financial product across the globe, particularly in mature economies, where it constitutes a significant portion of banks' lending portfolios. Emulating the experience of various foreign banks that had a head-start in this area, domestic private banks have exhibited remarkable adeptness in adopting new procedures for credit risk assessment, setting up the requisite policy and collections units, and upgrading the scope of their IT-based systems. In doing so, they successfully introduced several innovative products for the individual consumer segment.

Providing access to purchasing power to the middle-class consumer has been the most significant achievement of this product class. Not only have people been able to raise their standard of living by purchasing various consumption goods, which were previously treated as luxuries in reach of only a few, demand for these goods has also led the manufacturing sector to expand its capacity, such that both backward and forward linkages have contributed to the expansion in economic activities. Banks' auto loans product and loans for consumer durable, for instance, have been instrumental in this aspect. Though still small in proportion, the rising demand for mortgage finance reflects the individual consumer's need and financial capacity to acquire private ownership of housing units. Hence in promoting their consumer financing products, banks have played their due role in promoting economic development in the country.

Admiration

From the banking sector perspective, consumer loan history is fairly now about 10 to 15 years and includes schemes similar as auto loans, credit cards, house loans, and particular handling finance by the loaning enterprises and by some institutions. Over the last ten years, Pakistan's banking sector has mainly promoted consumer finance by unleashing a wide range of products. This unknown growth of consumer finance is largely attributed due to the profitable policy liberalization attuned to the principles of free market economy, and a vacuity of huge liquidity to the banks in the aftermath of 9/11. In the Pakistani banking sector, still, the elaboration of the consumer loan portfolio is further a recent phenomenon, as banks have traditionally concentrated on advancing to the corporate sector and public sector entities. While many prominent foreign banks took the lead in introducing credit cards during the mid-90s, their accomplishment was limited to the top league of salaried class and businessmen.

Alternatively, a combination of other factors is responsible for the widespread popularity of consumer loans in recent times the financial liberalization process over the last decade or so, has led to the creation of a banking system that is largely possessed and operated by the private sector, and is free to allocate resources to respond the market demand. Secondly, the influx of liquidity in the banking sector since FY02 motivated banks to outreach its venture into preliminarily untapped areas, and third, the easy financial policy station of the central bank from FY02 to FY05 provided customers flexible financing options with competitively lower rates than before...