Prevalence of uncertainty in consumer finance.

Byline: Khalil Ahmed

Consumer finance is in inverse proportion to discount rate. There is no denying that low discount rate all over the globe is an indication of spike in consumer finance. Low discount rate undoubtedly underpins the consumer financing opportunities substantially both in developed as well as developing and even in the rickety economies. Decisions are taken by the central banks in liaison with the finance ministry all over the world to decelerate discount rates to substantiate economic growth during trying times which holds true in particular during the preceding two years of the pandemic.

The policy interest rate in Pakistan was 13.25% in November 2019 prior to the outbreak of coronavirus. However with the emergence of Covid-19, there was a drastic curtailment from 13.25% to 7%in a short span of time from March 2020 to June 2020 in order to deepen the momentum of economic growth. The central bank did not hike the discount rate for quite some time i.e. 15 months until recently with the trivial increase of 25 basis points effective from October 1, 2021. Even with this increase the discount rate at 7.25% is rather low to underpin consumer finance business.

Ideally consumer finance should witness an unprecedented growth in the given situation when the policy interest rate is 7.25% however taking stock of the inflationary pressures in the wake of exorbitant food prices and the unemployment woes with 16% uneducated and 24% graduates suffering from unemployment, one could gauge that consumer finance would be abysmal during the current fiscal year in Pakistan.

Auto financing being the largest component of consumer finance may witness a steep decline in the wake of spike in prices and also owing to certain government decisions to discourage less consumption of the imported fuel which in essence is wreaking havoc on the current account of the economy. It is staggering to know the sheer volume of housing and construction finance which has taken precedence by virtue of the government policies. Banks have almost met their target of disbursement so far and it is expected that there might be robust growth in this type of consumer finance during the current fiscal. Users of the credit card seem to be shying away vis-a-vis the preceding years. The distinct decline in...