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Online spending scaling up consumer finance in Pakistan

All-time low interest rates should trigger consumer finance growth

It is certainly an impressive achievement that the digital economy has emerged as an unstoppable giant that was growing at 10 percent a year, more than triple the rate of overall global economic growth while the online spending scaling up consumer finance in Pakistan.

Although the interest rate is at four decades low, which was expected to have a booming effect on consumer finance, car and home financing, however, it could gain the momentum 2005 when there was a mad rush in demand of private loans for different segments in the economy like home finance or car financing, however, it considerably improving as compared to the bleak period some 7-8 years ago.

The State Bank of Pakistan (SBP) expects a significant increase in credit demand from private sector borrowers. The central bank said businesses likely to borrow more money in upcoming quarters than they did a year earlier as growth in manufacturing sector, better energy supplies, CPEC-related activities and soft monetary stance signaling continued growth in the economy.

Moreover, the government reliance for budgetary borrowing from the central bank may also induce commercial banks to go for alternative investment avenue of corporate lending. Banks’ advances declined to Rs5.052 billion in the third quarter of 2016 against Rs5.180 billion in previous quarter. However, the spread between lending and deposit rate is shrinking in the wake of low interest rates.

The expected credit expansion, due to its feedback effect, is likely to strengthen the deposit base –a major funding source -of the sector, according to the State Bank of Pakistan’s report. The report highlights that the asset base of the banking sector has registered a decrease of 1.6 percent during third quarter (July-September) of 2016.

Meanwhile the total assets of the banks fell to Rs15.134 billion in July-September of the current financial year from Rs15.374 billion in previous quarter. Banking sector assets stood at Rs13.518 billion in the same quarter of last year. Banks’ investments dropped 2.5 percent to Rs7.625 billion during the quarter under review.

The performance of the banking sector remains steady despite seasonal effects and shift in the government’s borrowing pattern. “Deposits of the banking sector, after observing some deceleration in recent past, have inched up 0.6 percent which is in contrast to fall of deposits usually seen in the third quarter of a calendar year,” it said. “The rise in the deposits is due to lower decline in current deposits and higher growth in saving and fixed deposits.” The fund based liquidity has remained comfortable as asset mix on the banks’ balance sheet remains tilted towards treasury investments.

The investments to deposits ratio (IDR) stands at 69.2 percent as of end September, 2016 compared with the end June 2016 level of 71.4 percent. The decline in investments to deposits ratio reflects a quarter-on-quarter drop of 3.2 percent in investments in government securities and a slight uptick in deposits.

The SBP reports the banking sector has remained in sound and stable state during the reviewed quarter. “The solvency profile of the banking sector has strengthened as Capital Adequacy Ratio (CAR) has improved to 16.8 percent, while profit after tax has stood at Rs138.9 billion for the first nine months of 2016.

The non-performing loans (NPLs) have observed marginal decline, though, NPLs to gross advances ratio has slightly increased,” it said. The ratio has inched up by 20 bps to 11.3 percent as of September 30, 2016 but entirely on account of decline in seasonal financing activity.” The coverage ratio, provisions to NPLs, has, on the other hand, improved by 30 bps to reach 82.7 percent as of September 30, 2016.

However, the dip in interest margins and rising costs has narrowed the year-to-date profitability of the banking sector. As a result, return on assets has declined 2.1 percent as compared to 2.2 percent in the second quarter of 2016 and 2.6 percent in the third quarter.


The large retirement of private sector credit in Q1-FY17 was commensurate with an extraordinary off-take during the month of June 2016. Moreover, a few large corporates also remained shy from borrowing despite the historic low interest rates. It was a positive development that the higher loan demand for fixed investment purposes, particularly for energy-related capital expenditures.

The role of private businesses for higher growth, in particular, fiscal incentives announced by the government in the FY17 budget and a historic low policy rate offer private businesses an opportunity to demonstrate that they can compete with their peers in other emerging markets and contribute to the growth momentum of Pakistan’s economy.

The State Bank of Pakistan in its First Quarterly Report for FY17 on the State of Pakistan’s Economy indicated that preliminary macroeconomic data signals a stable growth momentum during the year.

A strong growth in sugarcane and maize production, improved production of cotton, and better supplies of minor crops suggest some recovery in the agriculture growth. While acknowledging the subdued performance by large-scale manufacturing (LSM) in Q1-FY17, the report expected that the growth would gain some pace going forward, on the back of supporting policies and encouraging outlook for automobile, sugar, pharmaceuticals and construction-related sectors.

The report also noted the increase in the average headline CPI inflation from 1.7 percent in Q1-FY16 to 3.9 percent in Q1-FY17.

This increase was expected as inflation had already dipped to ultra-lows last year; further push came from supply-side factors, which included a gradual rise in international prices of some key commodities. For the full-year, the CPI inflation is expected to remain within the target of 6 percent for the year.

On fiscal side, the report noted that the decline in non-tax revenues and lower than expected tax collections, contributed towards a rise in the deficit during Q1-FY17. However, the report appreciated the marginal decline in current expenditures following the cut down in subsidies by the government. Interest payments remained unchanged as the gains realized from low interest rates were largely offset by an accumulation of public debt stock. Furthermore, the report also positively views the increase of 12.4 percent YoY in development expenditures, especially by provinces that scaled up their infrastructure spending during the quarter.

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