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Pakistan needs thorough due diligence in consumer financing

Pakistan needs thorough due diligence in consumer financing

Banks should be more supportive for the masses and for corporate industry growth
An exclusive interview with Mr. Barkatullah Lone – Chairman, GB International Economic Forum

Profile:
Mr. Barkatullah Lone is Chairman of GB International Economic Forum and is associated with a FMCG Group as CFO in a GCC county. He is a Chartered Management Accountant and Chartered Certified Accountant from UK, Chartered Global Management Accountant from the USA, Gold Medalist Management Accountant and Public Finance Accountant from Pakistan plus he holds Master’s Degree in Economics and LLB from Karachi University. He has been associated with the corporate sector in Finance and Audit profession at various positions. Simultaneously with his job career, he has been appearing at various TV channels as Economic Analyst for the last five years. His analysis is telecast by various TV channels telephonically since he is settled abroad at the moment. His articles on Economy and Finance are also published in various reputed magazines.

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had an exclusive conversation with him regarding consumer financing in particular. The excerpts are as follows:

The State Bank of Pakistan (SBP) has increased the key interest rate by 25 basis points to 6% in stark contrast to market expectations. The central bank jacked up the interest rate after maintaining the status quo for 20 months. The rate had stood at a four-decade low of 5.75% since May 2016. It was in double digits at 10% in the first half of fiscal year 2012-13 before inflationary pressures started easing. This recent increase of 25 basis points in interest rate after twenty months has been due to the recent fall in the value of rupee against dollar and slight increase in inflation, though inflation is still under 6%. The other factor which has compelled the central bank to increase its rate is global oil prices as we all know that the oil prices have shown an upward trend in the last six months touching now to around $70 per barrel which had touched to $28 somewhere in the year 2015.

In my opinion, this move by SBP is timely and for the benefit of Pakistan economy as too much easing of monetary policy causes excessive circulation of currency in the market which causes increased consumer spending resulting an increase to inflation. It is a financial principle that an ease in monetary rate motivates consumer to finance more and spend more since the funds he gets are available at more lower financial cost. Thus, a lower rate helps in boosting the growth of industries like automobile. Let’s recall the era of Pervez Musharraf when interest rate had been lowered (though not as much as we have experienced in the last twenty months), roads got filled with cars in just few years. We can see a big boom in the auto industry of Pakistan in the year 2016 and 2017 as well because interest rate in most of these two years has remained the lowest in the last 42 years.

Personal loans are provided to individuals for the payment of goods, services and expenses. Auto loans include any loans used to purchase a vehicle for personal use. The loans borrowed to purchase vehicles for commercial or corporate use is not included in this category. Housing finance includes the loan which is provided to individuals for the purpose of purchasing or improving a residential house, or apartment, or land. This category also includes loans for a combination of housing activities such as loans for purchase of land plus construction. Credit cards include any card, which a customer can use to borrow credit from a bank. Credit cards include recharge cards, debit cards, Stored Value Cards (SVC), and Balance Transfer Facility (BTF). Corporate Cards are not included in this category. Until the early 1990s, consumer financing was not offered by commercial banks. Credit cards were offered to only a selected band as a convenience for bill payments and not for financial support. In 2001, excess in liquidity of the banks due to high inflow of remittances in the 9/11 aftermath and low interest rates motivated banks to enter into consumer financing business. As a result, banks aggressively promoted consumer financing-credit cards, auto loans, house financing and personal loans with least documentation. This all resulted to luxurious spending by the consumer and the banks had to crack a hard nut while recovering these loans.

 

Keeping in view the experience of consumer financing from 2001 till 2007, banks have been very cautious in lending consumer financing in the last three years despite the fact the interest rate has touched the lowest in 42 year history of Pakistan in the last two years. I feel that consumer financing in a society like Pakistan needs thorough due diligence where people know how to spend but least bother how to return.

An ordinary Pakistani gets benefits from the banking sector directly and indirectly. Direct benefits include getting financing facility for buying a home or a car which he/she may not be able to buy from the savings. Indirect benefit includes the job opportunity that an ordinary Pakistani gets in the corporate sector of Pakistan when the banking industry finances the expansion of different industries. If we see both these benefits, an ordinary Pakistan has been able to fulfill his dream of buying a house or a car through financing from banks as the banks have financing it from 2001 till 2007 and then from 2014 till now. On the other hand, an ordinary Pakistani has not benefited from banking sector indirectly as the banking sector has never played a supportive role in the expansion of corporate industry by lending loans thus generating employment to the ordinary masses since the banking industry has lent more than 90% of its loan portfolio to the government for financing budget deficit due to which our economy has not been able to generate jobs for the increased population.

Almost all consumer financing products are of appealing to the consumers but house financing and auto financing are the most popular two products that the consumers happily take the risk of taking loan. As most of Pakistan population is either lower middle class or lower class that can hardly make both ends meet and therefore buying a house or a car is always a dream for them but they fulfill this dream through bank financing and paying the bank monthly installments from their limited income.

Performance of banking sector in Pakistan has been phenomenal not only in the year 2017 but for the last fifteen years. But all this performance has not contributed to the economic growth of Pakistan. Banking industry has enriched its employees and shareholders but not public at large as the industry has always invested more than 90% of its loan portfolio in government treasury bills and other instruments for financing budget deficits thus drying out the entire corporate industry. State Bank of Pakistan should make regulations as such that the banks are compelled to finance industry and reduce risk-free investment in government securities.

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