The untapped market



Mar 10 - 16, 2003





Acquisition of consumer durables and vehicles, even residential properties under the hire-purchase arrangements is common globally. However, the concept was not common till recently in Pakistan. Leasing companies and Modarabas were the first to undertake this initiative. After the instructions from the central bank to the commercial banks to allocate a specific of their total credit extension under consumer financing, there seems to be a big boom.

Initially commercial banks were a little reluctant to undertake this activity, though part of their mandate, due to lack of sufficient legal cover. However, this was merely an excuse because the demand for funds was always more than the supply. Commercial banks were contended with extension of credit under working capital financing arrangement. Bulk of their investment was also in government securities offering very high rate of return. Therefore, they were not keen in undertaking consumer financing.

After 9/11 situation has changed altogether. Commercial banks are suffering from 'surplus liquidity' crisis. With the reprofiling of Pakistan's external debt and reduction in government borrowing, bulging deposits and lower credit offtake banks are sitting on tonnes of money. Due to the policy of the State Bank of Pakistan, to lower the interest rates, the return on government securities has also gone down substantially. Therefore, most of the financial institutions had no option but to enter in consumer financing. It offers very attractive return to the financial institutions.

The orthodox bankers do not approve commercial banks undertaking consumer financing activity. Their disapproval is based on the potential mismatch of demand and supply for funds. Many banking sector analysts attribute this attitude to the bad habits, easygoing, of bankers who do not either want to take pains of finding credible borrowers or are shy to assume risk. They still love to extend credit against collateral, because in case of default the easy recourse is available, though they may not succeed in recovering the amount for years.

The banking sector analysts also believe that 'working capital experts' of banks are not capable of undertaking consumer financing. Credit extension under working capital is based on the historical data of the client. Whereas, consumer financing is based on future income generating capacity of the clients and their debt settling habits. Since it is difficult to quantify/ascertain the two, the risk-shy bankers just avoid it.

However, many bankers strongly believe that small borrowers are prompt and in time in settling their liabilities. In case they default, their default is circumstantial. Whereas, many big borrowers are habitual defaulter and knowing the weakness of the system take the full advantage, rather exploit the situation. Most of the small borrowers cannot acquire funds from commercial banks only due to the condition of providing collateral.



One of the factors encouraging the big borrowers to commit default has been the inadequate legal cover available to the financial institutions for repossessing the assets of defaulters. However, many banking sector experts believe that there has been always sufficient legal cover available but banks hardly asserted their right. They always avoid filing recovery suit, knowing that some irregularity are often committed at the time of approval of disbursement or the lack of sufficient collateral.

According to analysts, "Mohib Textile is a glaring example of the banking history of Pakistan. When the sponsors defaulted it was also found that many irregularities were committed at the time of disbursement of funds. Most of the lenders were keen in making out of the court settlement. However, only one financial institution insisted on filing a recovery suit. The suit changed the whole complexion of the case and the unit was ultimately sold off." Since then the situation has improved substantially. Many amendments have been made in the existing laws and new laws have been promulgated, including the Takeover Law and the law regarding 'bouncing' of cheque.

With the changing market complexion and creation of enabling environment a number of commercial banks have signed Memorandum of Understanding (MoUs) with local vendors of consumer durables. The range of products available under consumer financing includes domestic appliances and office equipment. Under the prevailing arrangement, there are three types of partners: 1) manufacturers, 2) vendors and 3) financial institutions. Each player has a defined role and without the active participation of any of the partners the system cannot work effectively and efficiently. The responsibility of each player relates to its core activities.

Manufacturers, while co-branding campaigns with financial institutions, get the advantage of achieving higher economies of scale. They have the responsibility to ensure regular supply, quality, after sales services. Vendors have to ensure proper display, pricing and sales staff. Financial institutions have to provide financing through well documented programme and undertake adequate promotional activities. If each player actively and efficiently discharge its due responsibility, only then all the players can reap the benefits.

One of the major impediments in the growth of consumer financing is the mindset of sellers and buyers. Sellers persuade the buyers to make purchases against cash by offering higher discount on cash sales. The shyness on the part of sellers has grown due to the general perception that payment from financial institutions takes longer time. Buyers also believe that deferred payment means additions of substantial financial charges. The mark up rates charged on hire-purchase agreements were significantly higher in the past, may be due to lower volume or too few sellers and too many buyers.

Another key issue has been the lengthy and cumbersome credit approval system. Financial institutions attribute this to the lack of available data about the consumers. It has been difficult to verify the authenticity of national identity cards, addresses given on the cards and actual location of the client, certification of income of the client and the credit worthiness. Since the reliability of data is low, financial institutions assume higher defaults and provisioning, all these added to higher mark up rates.



Most of the financial institutions are now actively involved in car financing. To expedite the approval system, most of the institutions have established help/credit approval desks at the leading car showrooms. This strategy has enabled both the car manufacturers and the financial institutions in achieving turnover. According to some sector experts, vehicles sold under financing arrangement have around 45 per cent share in the total sales of vehicles. It is understood that Leasing Association of Pakistan maintains the database of all the leases underwritten by its members. This database helps in avoiding cross leases, a phenomenon highlighted in the case of Mohib Textile.

Since the average lending rates have come down significantly during the last three years, the mark up rates being charged on hire-purchase agreements have also been reduced. However, many sector experts believe that spread is high. The higher mark up rates can be attributed to lower volume. When leasing companies started underwriting leases of vehicles, the rate was almost double the prevailing rate. At present the average mark up rate for car financing is around 11 per cent. Therefore, it is expected that once the volume of consumer financing business attains a substantial size and average lending rates also go down, the mark up rates will be further curtailed.


A number of banks have signed co-branding agreements, the leading institutions are Habib Bank, ABN AMRO Bank, PICIC Commercial Bank and National Bank of Pakistan. Some of the leading manufacturers entering into such agreements are LG, Samsung, Philips. Siemens, Waves, PEL and Skyflame. Inbox Business Technologies, a leading assembler of personal computers, has also signed co-branding agreement with some leading financial institutions. Some of the vendors who have also signed co-branding agreements include, Home Appliances and IMPL and National Electric Company.

PICIC Commercial Bank offers consumer financing under EASYPIC scheme. It has signed a number of MoUs with local manufacturers/vendors. The bank signed its first MoU on December 27, 2002 with Dawlance. The second MoU was signed with Samsung Electronics on January 01, 2003. It signed the third agreement with Inbox on February 03, 2003. The bank claims that it charges no processing fee and no down payment, mark up charged is low, repayment on easy terms and quick processing.

Habib Bank offers its scheme under Lifestyle co-branded with Samsung for financing of wide range of domestic appliances. The tenure of financing ranges from 12 to 36 months depending on the preference of clients. Along with the usual features of quick approval and convenient terms, full credit life insurance coverage is also offered.

CresLease has also entered into a co-branding agreement with Samsung Electronics. It demands 20 per cent deposit and lease tenure is two years.

Inbox offering high-end and reliable computer technology has entered into co-branding agreement with AMB AMRO Bank and PICIC Commercial Bank. In addition to signing up as a Citibank e-merchant, Inbox has also been made a merchant for the Citibank Smart Installment Plan (CSIP). This arrangement offers customers an easy, affordable and 'smart' way to purchase computers from Inbox.


At present consumer financing schemes offered by different banks mostly cover large cities or urban areas. Most of the clients are corporate employees, professionals and high-worth individuals. With the active promotion by the co-branding partners and extension of schemes of rural areas the market size is expected to grow.

The two key problems faced in consumer financing are authentication of client profile and repossession of assets in case of default. To overcome these problems, financing companies demand post-dated cheques for all the installments. The strategy has been yielding positive results, higher recovery rate. However, repossession of assets remains a problem.



There is a need to further reduce the mark up rates being charged. It is believed that with the growth of market size and better arrangement with manufacturers and vendors efforts will be made to reduce the mark up rates. The size of market can only grow if more and more people go for this option with a commitment to make timely payment and avoid default.