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Consumer financing growth and issues

Financial experts have identified the key issues hitting the growth of consumer financing in Pakistan. These issues include the high interest rate, high inflationary impact, unsolicited financing, deteriorating quality of services, lack of consumer education, poor information disclosure practices, intimidating recovery practices, loosing competitiveness in international trade, and weaknesses in regulatory framework.

Consumer financing has emerged out as one of most prolific aspects of banking in Pakistan. Consumer financing products include credit cards, personal loans, auto loans and housing mortgage. It not only contributes towards facilitating the life patterns of consumers, but it also proves to be a source of improvement for the image of banks. Banking sector witnessed unprecedented growth after 2001 due to low interest rate and product innovation in consumer financing. A need is however felt to strengthen the regulatory mechanism for strengthening the consumer financing sector in the country.

The monetary policy announced in November by State Bank of Pakistan (SBP) kept the policy rate unchanged at 5.75 percent. According to the central bank, the year-on-year Consumer Price Index (CPI) inflation rose to 4.2 percent in October 2016 from 1.6 percent in October 2015, while the average inflation during the first four months of the current fiscal year was more than double the same period last year. The CPI inflation has been following a rising trend after bottoming out in October 2015, with sporadic seasonal diversions, according to the SBP. It said, “This anticipated rise is explained by stability in commodity prices against earlier sharp decline, phasing out of second-round impact of oil prices, and some uptick in domestic demand”.


It is a fact that, tight monetary policy of central bank has been the most important factor hampering growth of consumer financing in the country. The central bank’s tight monetary policy made the money more costly for the businesses, which ultimately turned into defaults. Critics say that the government by raising interest rates is creating hurdles in the growth of business environment in the country.

Banks generally find it easy to lend money to large corporate sector, while the medium and small size business entities have been paying much higher interest on borrowing. The private sector has been a victim of government’s borrowing from the banking system, which deprived the private sector of using the funds for growth of the economy. The central bank’s tight monetary policy has been one of the key reasons behind the private sector’s falling demand for credit. The increased interest rate has made doing business increasingly expensive. Over the last two financial years, the private sector credit off-take from the schedule banks showed negative growth amid slowdown in the domestic economic activity.

High interest rates ever undermined economic growth. The government’s heavy reliance on banking system for financing need is the key risk factor in achieving the basic objective of the financial system in the country.

The private sector has borne the brunt of required adjustment in the economy and the government has considerably crowded out the private sector both through reduced availability and price of credit. The government borrowings from the central bank have deteriorated the currency-to-deposit ratio of the banking system. The uninterrupted borrowing from central bank and scheduled banks caused an expansionist monetary growth and increased currency in circulation, which has accelerated inflation making it difficult for the economic managers to control the fiscal deficit. The frequent money injections by the central bank to settle liquidity issues of the banking system are an indirect borrowing from the central bank, which has the same inflationary effect as borrowing from the central bank.

Analysts believe that cutting interest rates to 3 to 4 percent will produce multiple benefits for all economic sectors, as it will lower the cost of doing business, give a strong boost to production activities, provide easy credit and loaning facilities to consumers, promote better investment and exports and generate more tax revenue for the government.

The expansion in private sector credit will only increase when the real economic activity gains momentum. A challenging economic and business environment continues to affect the growth of banking industry in Pakistan.

Deteriorating asset quality and high interest rates are likely to continue to hold back credit growth over the coming months. The non-performing loans (NPLs) have reached all time high. Surge in the NPLs pose a challenge for the banking industry in the country. The NPLs of the banking industry witnessed a rapid increase since calendar year 2007. The NPLs compel the banks to adopt cautious approach towards advancing of loans.

The consumers’ awareness on banking terms and conditions, policy, rules and regulations is a critical factor in securing financial rights. The government cannot promote efficient and effective competition in the country without protecting the rights of the consumers. Awareness for consumers’ financial rights may be given through holding various seminars and conferences on the issue. Pakistan is a third world country where consumer rights are generally neglected. Consistent efforts are needed to ensure protection and welfare of the consumers. The consumer pressure groups must be formed in the country with an aim of consumer protection.

A few years ago, the State Bank of Pakistan amended certain provisions of Prudential Regulations for Consumer Financing. Under the revised Regulation, banks/DFIs shall ensure that overall credit card and personal loan limits, both on secured as well as on unsecured basis, availed by one person from all banks/DFIs in aggregate should not exceed Rs 5,000,000, at any point in time, subject to the condition that the overall unsecured/clean facilities on account of credit card and personal loan of that individual do not exceed Rs2,000,000.

The central bank has also amended Regulation R-3 by adding a new provision which states, “Banks/DFIs may waive the requirement of 50% debt burden in case a credit card and personal loan is properly secured through liquid assets with minimum 30% margin. The central bank recently directed the banks, development finance institutions (DFIs) and micro- finance banks (MFBs) to develop and implement their own frame- work on fair treatment of the consumers.

The central bank underlined the financial consumer protection, its significance, global developments and bank’s own expected role vis-a-vis the financial consumer protection. The SBP has already issued several market conduct instructions for banks in its endeavor to foster financial consumer protection across the industry , but it has been noticed that financial consumer protection is perceived to be limited to complaint handling only. For dissemination of the real connotation of financial consumer protection, the State Bank had to issue the recent directive entailing the meaning of financial consumer protection and the conduct expected from banks and DFIs for the advocacy of financial consumer protection.

The government should come up with a regulation framework to ensure consumers rights in the country. A comprehensive strategy needs to be devised for consumer protection in Pakistan.

Such a strategy should cover all areas including formulation of legislation, awareness creation, provision of information, setting of quality standards and redress of grievances.

The Islamabad Consumer Protection Act was the first step taken in this direction in 1995 and it should be extended to all the four provinces. The consumers’ courts must be established and empowered to protect the rights of the consumers. The presence active consumer courts in every district of the country could check the gross violation of consumer rights across the country.

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