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Size of consumer finance pie remains small

As the Government of Pakistan (GoP) remains the biggest borrower that also offers lucrative return on its risk-free securities, the high risk consumer finance pie size remains small. The share of corporate finance remains substantial because of the absence of financial institutions that can offer medium and long term funds. A deeper probe also shows that the key beneficiaries of consumer finance remain high net worth clients and employees of corporate sector. Banking sector experts are of the consensus that there is an urgent need to establish housing finance companies because buying a housing unit at full cash payment has become too difficult.

Talking about housing finance is need of the time because it is long term financing, which is outside the mandate of commercial banks. The reason is most obvious because over 90% of the deposits of commercial banks are of around one year tenor. This technically renders commercial banks unfit for venturing into housing finance. The argument put forward by banks is, “If the GoP is justified in persuading commercial banks to invest in Pakistan Investment Bonds (PIBs) of 10, 20 and 30 tenor, there should not be any restriction on them on offering mortgage finance. However, ways have to be found to bring down interest/mark up rate charged on housing finance to make it more affordable. This can’t be done unless the GoP soliciting soft-term loans from multilateral donors by offering sovereign guarantees.

Another area needing massive financing is public transport. The harsh reality is that Pakistan has one of the worst public transport systems in the world. If one looks at Karachi alone, highly depleted buses and minibuses can be seen plying on roads, with people sitting on rooftops. CNG rickshaws may offer an alternative, but their growing numbers is becoming a major source of traffic jams and on top of all these are too prone to fatal accidents. These rickshaws may be suitable for short distance but allowing them to operate on 50 to 80 kilometers round trip is penalizing the passengers. Most of the drivers are not the residents of Karachi and also don’t have valid driving license. The number of CNG rickshaws in Karachi has grown in geometrical progression, because of informal financing. Soft-term loans were offered for the purchase of rickshaws during the regime of President Pervez Musharraf but the scheme was discontinued after his departure.

The latest car sale data suggests that overwhelming majority of vehicles is sold under lease/hire-purchase arrangement. The biggest beneficiaries of this scheme are the employees of the commercial banks themselves and the employees of corporate sector. In the past these companies used to provide ‘company maintained cars’ but have bid farewell to the policy. Banks feel comfortable in offering auto finance loans/car leasing because the employers themselves take the responsibility of deducting the installment at source and/or ensuring that the employee does default on payment. As recovery remains as high as 99% financial institutions remain more than willing to give car to more employees. Initially, only new cars were financed but now up to 5-year old vehicles are leased.

 

While number of cars and motorcycles in increasing geometrical progression in Karachi, buses and minibuses are vanishing at a very fast rate. This phenomenon can be attributed to two key factors: 1) buying long chases buses without financing has become almost impossible in the absence of any financing arrangement and 2) buses and mini uses are finding it difficult to compete with CNG rickshaws. The residents have come up with a solution at their own by operating contract buses/minibuses/high-roofs. These operate on two options: 1) carry students of specific school/college/university or 2) follow a designated route and any one could take a ride. This facility is mostly used by school going children, female workers and corporate employees. The number of air-conditioned vehicles is on the increase because of the harsh climate and high pollution in the city. Interestingly, passengers are willing to pay high charges as they also want to get rid of driving on congested roads and poor parking facilities near the offices.

However, increasing number motorcycles, CNG rickshaws are becoming a major source for traffic jams. The city needs long chaises buses that can carry up to 100 passengers. In the past City District Governments had brought air-conditioned CNG busses on roads but soon those were vanished. In the past two financing schemes were offered for the public transport, but both proved disastrous for the financial institutions. Having burnt their fingers financial institutions have learnt a bitter lesson of not to participate in any public transport financing scheme initiated by the government.

According to the experts, these schemes were good but highly mismanaged. Bank employees made tons of money and got vehicles at very soft term loans. However, ‘touts’ made a fortune, the list of their misdeeds is very long but the most common sins were: 1) taking money for opening a bank account, 2) submitting fake identity cards, 3) handing over of vehicles to those who even didn’t have valid driving licenses, 4) allowing cars to move on roads without comprehensive insurance, 5) non-payment of installments and 6) failure to repossess vehicles.

It may not be out of context to briefly talk about loans being disbursed to the farmers. For the current financial year the central bank has fixed an indicative target of one trillion rupees, which is still too paltry keeping in view the size and importance of agriculture sector in the economy of Pakistan. Analysts have two objections on this scheme: 1) the beneficiaries are mostly feudal lords as small farmers don’t have ownership title of land and 2) significant percentage of borrowed amount is used for buying luxury cars/vehicles and properties in the urban areas. Those who doubt the validity of this statement must check: 1) increase in area under cultivation, 2) improvement in yield of different crops and 3) reduction in borrowing by farmers from informal lenders.

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