CONSUMER FINANCING: OVER RS370BN CREDITED TO PRIVATE SECTOR IN 2004-05

The excess liquidity in the market arose due to heavy amount received in the form of remittances after 9/11.

By SYED MUJTABA ZAFAR 
& ZEESHAN A KHAN
July 25 - 31, 2005

Consumer financing provides individuals the necessary financing for personal purchases ranging from buying a car, shopping purchases to buying a house.

Consumer financing is the best way of utilizing the excess liquidity as the higher return enables the financial institutions to earn money. And at the mean time it brings access to those consumer durables of which middle-class can only think of.

Consumer financing in Pakistan is not an old story. The sector was highlighted after 2001, when different schemes for consumers were initiated. However, the 9/11 incident proved to be the pouring factor for starting consumer financing in Pakistan. The excess liquidity in the market arose due to heavy amount received in the form of remittances after 9/11. With such high liquidity position, commercial banks started providing loans for consumer durables. Watching overwhelming response, others financial institutions also lined-up and entered the business.

Over the last few years consumer financing has grown very rapidly in Pakistan.

Consumer financing is available on a number of products like credit cards, auto loans, home loans, educational loans, marriage loans, business loans and agricultural loans, etc. Several schemes have been launched by different commercial banks to attract consumers, which paid off genuinely. People have warmly welcomed the different schemes for they are getting credit at mesmerizing terms. The statistics show that over Rs370 billion have been credited to private sector in the year 2004-2005, of which consumer loans include credit for the acquisition of automobiles (Rs 32.6 billion), personal loans (Rs 27.4 billion), housing finance (Rs 14.0 billion), and credit cards (Rs 3.2 billion). Presently, as many as 24 banks are offering housing finance to a large cross section of society.

YEAR

CREDIT TO PRIVATE SECTOR
(RS BLN)

AS % OF GDP

1999-2000

18

0.5

2000-01

49

1.2

2001-02

53

1.2

2002-03

168

3.5

2003-04

325

5.9

2004-05*

370

5.7

*July-March 2005.

Automobiles and the electronic durables have become the main source of attraction for consumers through consumer financing. Out of Rs 370 billion of the total bank credit to the private sector in the year 2004-2005, the automobile had a share of Rs 32.2 billion that shows the inclination of consumers towards automobile sector in the consumer financing. It is being estimated that during the last two years almost 75 percent of the automobile sale has been through consumer financing.

Any move to boost private consumption has a much larger impact on the GDP growth than any other factor. Hence central bank has taken a series of measures to boost consumer financing. The re-structuring of Khushali Bank, SME Bank and HBFC reflects the government's intentions in this regard. The Micro-Finance Sector Development Programme (MSDP) of the government has also expanded. So far, the government is primarily supporting personal loans for small businesses. The strategy is to give boost to small businesses and create employment opportunities. On the other hand, the government is also supporting house financing through HBFC.

Leasing companies and Modarabas are also supporting consumer financing along with commercial banks. Performance of both kinds of institutions is reflected in the following table.

All Figures are in Rs Million

 

Leasing Companies

Modarabas

 

2002

2003

2004

2002

2003

2004

No of Companies

30

28

24

9

7

7

Paid up Capital

7,572

7,424

8,143

2,542

2,368

2,316

Retained Earnings

3,105

3,290

3,619

896

1004

1,266

Investment in Lease Finance

39,889

35,677

44,429

7,386

6,541

7,789

Investments

11,143

13,041

15,243

1,142

961

891

Borrowings

37,109

36,285

48,872

5,365

3,219

4,075

Revenues

7,692

7,273

7,048

3,180

2,988

2,877

Net Profit

192

1,211

1,843

382

506

447

Financial Charges

5,113

3,906

2,868

689

393

271

Operation Expenditure

2,270

1,861

2,109

2,105

2,083

2,165

Taxation

160

116

228

3

6

5

Cash Dividend

116

295

517

355

275

322

Total Assets

58,831

62,637

74,403

10,638

8,468

9,559

The positive impact of consumer financing is that it has multiplier effect. Production units, banks, dealers, etc are associated with it. Hence, we can say that consumer financing has supported the current economic growth rate of 8.4%.

The consumer-led growth policy adopted by the State Bank has paid off as Pakistan maintained a growth rate of 8.4% in 2004-2005. But in the mean time this consumer-led growth policy has affected the poor man badly as the inflation rate went up to 9.4% record high. The excess liquidity in market had contributed in the form of demand pull inflation. To cope with inflation, the State Bank has now adopted tight monetary policy. This policy will lead to higher interest rates and low liquidity position. Thus we hope that consumer financing will maintain its current growth rate only and a very high boost in the sector is not expected in future.