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How are they fairing?

May 06 - 12, 2002

The use of credit cards is slowly taking shape and direction in Pakistan, which less than a decade ago used to be a strictly cash-only society. Today, such globally accepted credit cards as MasterCard and Visa are issued by many foreign as well as domestic banks and the number of users, though still comparatively small, has been on a constant increase.

Credit cards have replaced cash to a great extent in the developed world. Their wide acceptance at the neighbourhood grocery shops, drug stores, restaurants, airlines, hotels, petrol pumps, convenience and departmental stores make it possible for the people to carry the least cash on their persons. Depending on individual credit limit there is hardly anything that credit cards cannot buy in the developed world from pizza delivery to your home to buy one of thousands of items offered by hundreds of companies on the line. And that too from the comfort of your very home.

Creating credit is the primary function of the banks and they primarily do it by lending the money. In the modern world credit card is the most widely used form of personal credit to facilitate consumer financing offering not only immense convenience to the users but also helping the banks and financial institutions to enhance their profitability. In addition, it helps the growth of industry and trade by boosting purchasing power of the people even if they don't have liquid cash. Furthermore credit card offers a unique sense of security by carrying less cash on their persons.

The cash-less economies in the developed world has helped eased burden on the cash to save millions in reprinting costs. It has also helped the banks to create immense credit to fuel industrial, economic, cultural and social activities for the greater benefits for the national economies.

The history of credit cards in Pakistan dates back to over 20 years when the now nationalized banks, Habib and United, introduced credit cards. However, due to extremely limited acceptance, mostly at petrol pumps, neither the banks nor the card holders benefited from the scheme. However, the liberalization of the economy in the early 1990s by the then Nawaz Sharif government made a foreign bank to introduce real credit cards in the country with a much wider acceptance. Since then many other foreign and domestic banks have also started issuing Visa and MasterCard credit cards which enjoy a much wider acceptance locally as well as globally.

The credit card culture is gradually taking root in Pakistan as their acceptance continues to rise. While it is true that cash still remains the most widely accepted mode of transactions the credit card use is also on the rise, thanks to the innovative campaigns launched by the issuing banks. However, a number of factors still hinder the growth of credit card penetration in a top sixth most populated nation of the face of the earth.

The biggest detriment to the use of credit card in Pakistan, which according to an estimate houses no more than 800,000 credit card users, is the mutual lack of trust between the banks and the card holders, or prospective card users. In a society where cash has reigned supreme for decades credit cards are seen by a large segment of the society more as a status symbol than the easy credit that it is. It is this attitude which resulted in the massive abuse of the credit card in the initial years by a people who had no education how not to abuse the credit. In addition, the undocumented economy made it easy for the unscrupulous elements to get the credit cards issued and then ran away with the money without having any fear about the negative credit rating which no sane consumer in the developed world can afford to indulge in.

On the other hand, the undocumented economy makes it easy for the unscrupulous elements to abuse their credits with intention never to pay their debts to start with at considerable financial loss to the issuing banks. The initial bad experience made the banks all the more strict to issue the credit cards after scrutinizing the credentials of the prospective credit card holder through a fine-comb to reduce their risks. This, however, has resulted in prohibitive qualifying criteria for issuing credit cards. To reduce their losses even further all the banks issuing credit cards in Pakistan charge a non-refundable processing fee on all credit card applications in addition to annual and user fee plus a hefty penalty on late payment of monthly installment.

This lack of trust has resulted in slowing down the issuance of credit cards thus failing to create economies of scale in this particular sector of consumer finance despite an immense demand in the country. This has also stopped the banks to create credit by lending out money vide credit cards unlike their counterparts in the developed world where plastic money is widely accepted as a mode of transaction. In turn, the banks are deprived of supplementing their incomes from the use of credit cards.

Another major detriment to the growth of credit card culture in the country is that this particular segment remains highly unregulated by the central bank, the State Bank of Pakistan. The Bank has not come up with wide-ranging policies to regulate the credit card business in the country failing to protect the interests of both the issuing banks and the cardholders. While the issuing banks are charging as high a compound rate as 35 per cent per annum on the credit card plus the non-refundable processing fee, annual fee and user fee the central bank has failed to regulate the credit card business to the discomfort of both the issuing banks and the cardholders.

Talking to PAGE chairman of Banking and Insurance sub-committee of Chamber of Commerce and Industry, Karachi, Imran Ismail, lamented about the highly uneconomical and unregulated credit card business. "Not only the credit card are accepted by a fraction of outlets in the country but even at the businesses where they are accepted the majority of retailers demand an extra 3 per cent commission on top of the bill to cover their bank charges associated with the card. This practise on the part of the outlets at the expense of credit card users discourages the credit card use by the cardholders. I have repeatedly mentioned this problem to the bank whose credit cards I use but to no avail. Even paying for the petrol through credit cards is expensive compared to using cash as pumps charge 50 paisas extra on each litre if you pay the bill through credit cards.

"It is surprising that almost all US fast food franchises operating in the country don't accept credit cards issued by the foreign banks due primarily to the fact that they say that the banks credit their accounts after 15 days contrary to claim made by the banks that they credit the merchant accounts within 3 days."

Imran said that all the banks issuing credit cards in Pakistan are basically offering the same credit cards, charging more or less similar rate of interests in a market which reels from low credit card acceptance. "They are all charging similar non-refundable processing, annual and user fee offering little choice to the cardholders in terms of acceptance, interest, convenience and benefits. What's even more worrying is that many leasing companies have find it fit to copycat the banks issuing credit cards to charge a similar amount of Rs 2,000 non-refundable processing fee from unsuspecting people. Some of these leasing companies do not ever lease any amount of money to the people and are just ripping off the people by making a cool Rs 2,000 in processing fee per application."

Imran feels that "plastic money will take another 10 years to come to Pakistan due primarily to restricted use, limited acceptance and slow growth of credit cards. The absence of regulations has rendered credit card operations and use more like a hit-and-run operations rather than the organized and convenient mode of business that credit card use should has been."

He stressed that the State Bank of Pakistan should better regulate the credit card business to help fuel the real inherent potential that it offers. "At present the banks are charging a high penal interest of Rs 2,000 per month on late payment of installments which is discouraging the growth of the credit card use in the country. The central bank should also strictly monitor the credit card business to ensure ethical business practices, such as the non-banking practise such as non-refundable processing fee."

It is imperative, he said, that the domestic banks should introduce purely local credit cards which unlike their globally accepted counterparts are used to facilitate rupee-only transaction within the country. "These credit cards can be used as a charge card exclusively for domestic use and can help give a boost to local industry, trade and business by pumping in the much needed consumer finance for many industries which are barely surviving for want of demand. This would also help educate the people about the importance of credit and beneficial use of credit cards without abusing the privilege for the credit card industry of the country."


According to US Department of Trade in the year 2000-01 the wholesale and retail trade accounted for Rs 493.6 billion compared to Rs 442.4 billion in 1999-00. It also said that there are approximately 200,000 retail outlets in Pakistan of which one-fourth or 50,000 are located in the major cities of which only between 300-500 are very large while the biggest number of them over 75,000 are categorized as very small.

Only a negligible portion of these retail outlets, and that too in the very large category, are accepting the credit cards in the country leaving the immense portion of the business to the cash customers. It is easy to see that with increased credit card use the banks can help increase their profitability greatly by enhancing the purchasing power of the people who can not afford to buy many household and home appliance on cash. It also highlights the benefits which the local industry, trade and business will derive from instant credit and economies of scale that it will create.

Most companies in Pakistan do not provide credit to distributors as a matter of policy. In turn, the distributors generally sell on strict cash basis to the retailers. However, many smaller distributors often do provide credit to retailers but the volume of such transactions remain relatively insignificant. On the other hand Pakistan's wholesale market is fairly well developed and there are about 1,000 to 1,500 wholesalers constituting this segment of the distribution network. Karachi is the major distribution center for wholesale goods. Approximately one-fifth of the wholesalers give discounts to their customers and the 30-90 day credit is a common practise. However, due to limited financial resources the retailers in Pakistan generally sell on cash-only basis and thus consumer credit in Pakistan remains an insignificant portion of the total commercial credit. This further highlights the importance of developing a credit-based economy to enhance industrial, trade and commercial activities in Pakistan. Even foreign companies selling industrial and capital goods often sell directly to the end user or, if the market is fairly large, they appoint one major distributor who sells to a sub-distributor or directly to the end users.

There are about 44 banks operating in the country of which 25 are domestic while 19 are foreign. The 25 Pakistani commercial banks have over 7,000 branches nationwide collectively and account 78 per cent of the total commercial bank assets. This once again highlights the need for the introduction of a local credit card to facilitate rupee-only transactions within the country.

The 19 foreign commercial banks have a 78 branches nationwide collectively. These foreign banks are allowed to engage in a full range of banking activities and many of them also issue credit cards. Till June 2000, three US banks operating in Pakistan namely Citibank, American Express Bank and Bank of America accounted for 7 per cent of all commercial bank assets. In July 2000, Bank of America sold its local operation to the Union Bank. The remaining foreign banks operating in the country are branches rather than wholly-owned subsidiaries. Citibank, the pioneer of credit card and car financing schemes in Pakistan is the largest foreign bank operating in Pakistan.

The fact that the foreign banks are being much more selective in choosing their customers to enjoy a quality-client-base also highlights the strict acceptance procedure they adhere in issuing the credit cards. While Citibank, the pioneer of consumer financing in Pakistan becoming the first commercial bank in the country in 1993 to offer a comprehensive automobile loan scheme as well as individual mortgages, still leads the credit card business but the market is growing slowly.

Consumer banking, by and large, remains still largely undeveloped in Pakistan. There is no tradition of lending to small individual consumers while the purchases of such high-priced necessities as housing, automobiles and electronics goods are generally made on strict cash-only basis. While the foreign banks enjoy sufficient portion of the lucrative business in the corporate sector enough to absorb their limited credit reserves the domestic banks, particularly the three large nationalized banks namely National, Habib and United, have not succeedee to take the benefit of the immense demand of consumer finance in the country. While its true that high interest rates plus the high start-up costs are the major detriment discouraging the initiatives in the consumer finance what is more troubling is the fact that these huge domestic banks never ever made any plans whatever to capture this lucrative market in the greater interest of the people and the industry, trade and businesses.

Certainly the domestic banks all along have been in an advantageous position to understand the demands and difficulties related to consumer finance to introduce low limit credit cards to finance purchase of household items and home appliances. Certainly they understood the needs and demands of the consumer credit in the country as they have their own roots here. However, no real efforts were made by the domestic banks to tap the immense potential of consumer finance the major portion of which still remains unserved as yet. Only one domestic commercial bank, the Muslim Commercial Bank, has taken a strong initiative to introduce consumer finance products such as credit cards which can be used at one of its ATM outlets nationwide, the biggest chain of ATMs by any bank in the country. The foresight has helped the MCB to take a lead to better its profit and productivity which today gives its an edge over other local banks and a power to reckon with even by its foreign counterpart.

However, all is not lost as consumer finance market in Pakistan still remains a virgin market able to absorb products which are easy to get and affordable to have. As stated above credit card use still remains limited in the country as only a negligible number of retail outlets accept it and as the interest rates still remains much too high.

With right planning and affordable products consumer financing has a bright future in Pakistan which still remains more or less a virgin market and where there is a great demand for it. The central bank can play an important role to better regulate the credit card sector to protect the interest of the banks and cardholders alike. Credit card use need not be seen as unaffordable or uneconomical instruments. Instead they should be seen as instruments to help create a culture of credit for the overall good of the people and the banks.