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
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
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
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
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.