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Surging consumer financing help promoting Islamic, modaraba sector reach

Consumer financing has seen a surge in the last two fiscal years primarily due to a big jump in auto loans and to some extent expansion of mortgage finance.

Banks had made net consumer financing of Rs31.2 billion in 2014 and Rs31.3 billion in fiscal year 2015. This was equal to 10.5 percent and 17.3 percent of their net lending of Rs298 billion and Rs180 billion to private sector businesses (PSBs) in the last two fiscal years respectively. In the first seven months of this fiscal year, banks made Rs4 billion worth of net housing loans against Rs14 billion auto loans. The reason for this is many announcements of mega housing projects.

Greater demand for mortgage finance in near future as part of money circulating outside the banking system is being pumped into real estate development.

Restoration of peace and order in Karachi is encouraging real estate developers to offer new housing schemes for different categories of middle income groups. Till the end of the last fiscal year in June 2015, net new housing loans totaled about Rs1 billion. Compared to this, net auto loaning, which makes up the bulk of consumer finance, stood close to Rs10 billion.

A surge in housing loans seen during this fiscal year is strong enough to keep up growth trend in overall consumer financing even if auto loans face a weaker demand in near future. Consumer finance will grow cautiously because economic growth is expected to pick up pace. Mega housing projects are coming up and urbanization and public likeness for better lifestyle is creating demand for consumer finance.

An expansion in housing loans seen during this fiscal year is strong enough to keep up growth trend in overall consumer financing even if auto loans face a weaker demand in near future.

The recently announced auto policy can measure on their business in two ways. In the short run, may be a fall in consumer financing because only a section of people using imported cars will seek auto loans.

In the long run, when there is a gradual rise in imports of expensive cars and when local auto industry absorbs the policy shock or new auto units come up, there will be a surge in consumer financing.

Auto loans make a large part of consumer financing. The new policy is aimed at balancing the protection level enjoyed by local assemblers and encouraging cheaper imports and entry of new car makers. In this context it is necessary that banks examine this policy from their business point of view.

Bankers point out that in spite of a good growth in housing and auto loans, overall consumer financing in fiscal year 2015 remained weaker than in fiscal year 2014 due to decline in loans for purchase of consumer durables and personal loans made to individuals.

In this case the banks can distribute either housing loans more aggressively or continue to keep the current balance between auto and housing finance.

Habib Bank Ltd Credit card business is gathering pace and there, too, banks can exploit more of the potential by being more user-friendly and by further rationalizing interest rates.

Consumer financing via credit cards is also gathering momentum with net financing volumes having risen by Rs1 billion each in fiscal year 2014 and fiscal year 2015 and by Rs1.1 billion in the first seven months of fiscal year 2016.

In recent years, the Federal Investigation Agency has detected and closed down some outlets of parallel banking in Karachi and in Punjab.

All informal financing cannot be eliminated as long as the economy remains least documented and our banks fail to realize that they need to simplify loaning procedures to attract seekers of personal loans.

Economy was growing at 10 percent a year, more than three times the rate of overall global economic growth while the on-line spending scaling up consumer finance in Pakistan.

The interest rate is 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.

The State Bank of Pakistan (SBP) expects a significant increase in credit demand from private sector borrowers. The State 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.

The State Bank of Pakistan (SBP) has revised the Prudential Regulations for Consumer financing with an aim to promote consumer financing in sustainable and fair manner while ensuring financial stability of the banks/DFIs. The revised regulations provide more discretion in decision making to banks/DFIs in line with their dynamic business environment.

It may be mentioned here that SBP periodically reviews its regulatory framework in order to align it with changing business environment and international best practices.

It said that under these regulations, amongst others, banks/DFIs are advised to develop common glossary of Important Terms and all banks will use these important terms in their loan documentation.

Banks/DFIs have also been advised to initiate assessments for introduction of differentiated loan pricing in all consumer financing products, which inter-alia should be sensitive to loan product characteristics, borrowers’ risk assessment, timely regular repayments and exemplary behavior.

In a bid to streamline informal lending channels, the Securities and Exchange Commission of Pakistan (SECP) has allowed the Moradabad sector to extend consumer financing. More members are likely to join later to expand its scope.

The SECP expects the centre will promote Islamic finance and improve the outreach of the Modaraba sector to unexplored areas.

The centre is the first of its kind and will be followed by similar facilities to be established in other locations.

The centre will help ordinary customers obtain Islamic financing facilities to buy motorcycles on more affordable terms than the informal sector.

Net consumer financing that remained negative not long ago is now soaring.

There was a phenomenal net increase of Rs46.5billion in consumer financing in the first half of this fiscal year (July-Dec 2016). This amount is far higher than that of consumer financing Rs33 billion in fiscal year 2016

Banks are more open and confident now in accommodating consumer loan demands.

The bulk of the demand in first half came from two sources: auto loans and personal loans though mortgage loans and credit cards had been main conduits of consumer lending in the recent past. Auto loans are a continuing trend.

Consumer financing remained negative for two consecutive years, in fiscal year 2011 and fiscal year 2012.In terms of volumes, the big boost came in fiscal year 2014.

In the last two years it remained almost intact, in terms of volumes, and we see a phenomenal rise again during this year.

Consumer financing still dominate their credit portfolios too heavily and SME loans remain only a small fraction of their portfolio-mix.

Owners and managers of a large number of SMEs have a deeper craving for Shariah-compliant financial services than large businesses and companies.

The conventional banking system has done little to satisfy the borrowing needs of SMEs, thereby making way for Islamic banks to fill the gap.

For boosting SME financing, Meezan Bank has partnered with Karandaz, a private company established by UK’s DFID and the Bill and Melinda Gates Foundation to promote access to finance for small businesses.

This arrangement, along with a large network of branches, has helped the bank reach out to SMEs in semi-urban and rural areas.

Dubai Islamic Bank is taking advantage of its expertise in product development and has been making efficient use of Murabaha, Wakala and Istithmar, etc, to meet working capital requirements.

For the financing of SMEs’ long-term fixed capital needs, a different range of products with innovative versions of Musharaka and Ijarah are being offered.

According to an IFC study, the potential financing needs of un-served and under-served SMEs in Pakistan is $3.8 billion or close to Rs400 billion.

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