June 1 - 7, 2009

While writing review on Pakistan's economy most of the critics term high population of the country a snag, whereas multinational and transnational companies consider it a boon. The data about consumer spending in the US not only creates bullish/bearish sentiments but also affect global prices of crude oil. Therefore, it is necessary that the local experts should also change their mindset and try to boost consumer spending which will automatically increase demand for consumer, durable, and capital goods.

Many of the orthodox economists oppose the concept of consumer finance because they believe this pledges future income and reduce savings of people. However, the supporters of consumer finance say that financing allows the people to use the products, which most probably they cannot afford to buy in cash. It also allows them to get possession by making a down payment and pay the balance in easy installments. They have to pay the financing cost.

For centuries economists have been saying that spending a rupee by an individual has snowball effect. Therefore, people are encouraged to spend more. However, it does not mean living beyond limits. Many of the critics say that consumer finance and proliferation of credit cards is like octopus which first catches its prey and ultimately swallows it. However, others say that only the week falls prey but all those who are careful and manage their borrowing prudently succeed in avoiding the threat effectively and conveniently.

One of the recent examples of consumer financing driving any sector is automobile industry. Availability of finance boosted annual car sales almost four times to around 200,000. However, as the banks started turning down financing requests, sales reduced to almost half. Reduction in sales has not only affected income of the assemblers but led to closure of manufacturing units of parts and accessories, rendered thousands of workers jobless and pushed them below the poverty line.

Another, but may be less pertinent example is financing of public transport. One sees buses or vans running on roads in cities and small towns which are not fit and that too are overloaded. This often results in fatal accidents in which precious lives are lost. In Pakistan's history, spread over six decades only a few attempts were made to extend credit to the public transport. However, mess-up with the schemes, extension of credit without proper scrutiny and documentation and acquiring of insurance cover from the weakest players ultimately became a nightmare for the financing institutions. This forced them to stay away from extending credit to public transport and the result is unworthy vehicles plying on the roads.

Limited availability of housing finance/mortgage finance has resulted in proliferation of slums. For decades only one housing finance company was operating in the public sector. Efforts were made to induct private sector in this business. However, in the absence of appropriate credit lines they charged high interest rate, which soon pushed the players out of the business. The result is hike in the prices of residential units, sky rocketing price of real estate and house rent becoming unaffordable.

According to some sector experts various factors are reasons for the lack of focus of financial institutions on the consumer financing. Among these worst is the habit of people of not making timely payment of the installments. Some of the borrowers consider it their inherent right to borrow but consider paying installment a sin. The record of corporate borrowers is also not enviable. Therefore, the financial institutions consider investing in government securities a better option pay less attention on corporate finance and the least on consumer finance.

According to people to begin with financial institutions are least interested in consumer finance. To make their job easier they charge colossal financing cost to keep borrowers away. While the average lending rates for corporate finance are Kibor plus 3% consumer financing is done around 20%. It is often difficult to find the exact rate because of many hidden costs. Realistically speaking the borrowers end up paying nearly 36%.

Historically, bigger the institution lower has been the cost. Most of the commercial banks have been earning an average spread of 7.5%. The payout to depositors had been pathetically low to the extend that Dr. Shamshad Akhtar one of the past governors of State Bank of Pakistan had to make payment of 5% return to depositors mandatory.

Ironically, in the absence of DFIs and shrinking number of NBFCs, commercial banks have become provider of medium and long term finance, housing and trade finance. This has been done with the blessing of the central bank, which has been pleading the case of universal banking. However, the system has not yielded the desired results. There is growing consensus among the experts that commercial banks should be confined to their original mandate and let the NBFCs and DFIs undertake medium and long term financing. However, supporters of universal banking believe that availability of various types of financial services under one roof would not only be beneficial for the clients but also help in cutting costs.

Irrespective of which channel of disbursement is used, reduction in consumer financing rates is a must. Reduction in cost cannot be achieved without containing delinquencies. A credit can be saved from becoming delinquent by improving credit appraisal and picking up quality borrowers.

Quality of life cannot be improved and GDP growth rate cannot be accelerated without boosting consumer finance. Only those oppose consumer finance who does not want the haves not to be the beneficiary of the financial institutions. However, it is the responsibility of the government and the central bank to ensure inclusion of all in the prevailing financial system of the country.


Meezan Bank Limited (MBL) and Asian Development Bank (ADB) recently signed a Trade accord in order to facilitate the opening of Letters of Credits. Under the agreement, the Asian Development Bank would indirectly confirm Meezan Bank Letter of Credit.

ADB would effectively act as a guarantor for import LC's established by Pakistani businessmen, thereby facilitating Pakistani trade transactions. The facility would provide much needed support to Pakistani 'importers' in these challenging times for the global economy.

The agreement was signed by Mr. M. Saleem Khan, Regional Manager-North and Mr. Mustafa Rabbani, Area Manager, Islamabad on behalf of MBL and Mr. Rune Stroem, ADB's Country Director signed on behalf of ADB. Meezan Bank Limited is the largest and fastest growing Islamic Bank of Pakistan with its branch network of 166 branches in 40 cities across Pakistan.