Growing activity but the quantum hasn't reached the desired level


Oct 27 - Nov 02, 2003






Lately most of the commercial banks have ventured into consumer finance. They provide funds for the purchase of consumer durables, computers, automobiles and even housing. However, when compared with advances, it does not come to any significant percentage of the total quantum of funds disbursed by the banks under the head of consumer finance. It raises one question, are the consumers not ready to avail this opportunity? Or the banks don't feel comfortable in venturing into this type of business.

The overwhelming perception is that consumers may be ready to exercise this option but the financial institutions are reluctant. Their reluctance can only be attributed to the prevailing system and to lack of expertise and infrastructure to deal with a large number of small clients. Most of the banking sector experts believe that unless some alternate system for credit evaluation, disbursement and installment collection is evolved, the banks will remain shy.

At present consumer financing being undertaken by the banks can be dividend into a few core categories 1) consumer durables, 2) office equipment, 3) automobiles and 4) housing. To be precise only, the first two fall in the category of consumer finance. Automobiles are covered either through leasing or auto loans, being undertaken by leasing companies and mobarabas or separate divisions within financial institutions. Housing finance is still mostly confined to two companies, namely House Building Finance Corporation (HBFC) and International Housing Finance Limited (IHFL). Some of the banks are also in the business of housing finance by their criteria for lending is very stringent and they prefer to confine their activity to their niche market only.

To cope up with the changing market complexion and take advantage of enabling environment a number of commercial banks have signed Memorandum of Understandings (MoUs) with local vendors of consumer durables. The products available under consumer finance include a wide range of domestic appliances. Under the prevailing arrangement, there are three key 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.

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.

Manufacturers and financial institutions follow co-branding campaigns to achieve economies of scale. Manufacturers have the responsibility to ensure regular supply, quality, after sales services at competitive rates. Vendors have to ensure proper display and sales staff to assist the buyer. Financial institutions 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 addition of substantial financial charges. The mark-up rates charged on hire-purchase agreements were significantly higher in the past.

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.

Since the average lending rates have come down significantly during the last three years, the mark-up rates being charged on consumer finance have also been reduced. However, many sector experts believe that spread is high. The higher mark-up rates can also be attributed to lower volume. When leasing companies started underwriting leases of vehicles, the rate was almost double the prevailing interest rates. 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 finance business attains substantial size, average rates also go down.

The average mark-up rate being charged by commercial banks on consumer finance, for consumer durables, range from 7 to 12 percent. The tenure usually ranges from 6 to 36 months. The tenure of auto finance/loan ranges from 3 to 5 years. Housing finance is offered for periods ranging from 5 to 20 years. The amount of loan and monthly installment is calculated on the basis of salary and other financial obligations, if any. The average installment should not be more than one-third of monthly salary.

Many consumers say, "Looking at the prevailing interest rates in the country the mark-up rates being charged by the financial institution seem exorbitantly high. We are even willing to pay the rates but the banks also demand other collateral, which is beyond comprehension. It appears that bankers want to play a very safe game. But they should also remember that the collateral may not be of any consequence, if a customer wish to be a defaulter', willingly. Disposal of the collateral to recover the amount may cost more than the residual value of the asset acquired under consumer finance."

However, many banking sector experts say, "The culture of habitual defaulters has prevailed in this country for decades. People love to borrow but hardly seem to be ready to discharge their obligations in time and in full. Unless a culture of 'ready to stand my commitment' develops in our society every one will continue to suffer. The bankers know that there can be circumstantial defaulters and also hedge this risk, but overcoming the risk of habitual defaulters is unmanageable."

Though many bankers are reluctant to accept, the fact is that small borrowers are most prompt in discharging their obligations, most of the habitual defaulters are big fish.

According to market analysts the biggest hurdle in consumer finance is the prevailing mind set of bankers. However, they cannot be blamed for this because for decades the banks were in 'sellers market'. Many customers used to approach them and they were choosy. It is only during last few years that they find themselves in 'buyers' market. Though, they are learning to survive in the changed environment but also finding the adjustment process a little difficult.


It is believed that unless the central bank makes it mandatory for the banks to disburse a minimum percentage of the total deposits under consumer finance, the situation cannot be improved. Most of the banks are extending about 95% of the credit under 'short-term lending' having tenure of less than a year. Bulk of it being disbursed as working capital and trade finance. A large number of banks were also reluctant in extending agricultural loans. The situation was so worse that some of the banks were ready to pay the penalty but were not ready to extend loans to farmers. Therefore, the central bank should stop following persuasive policy and make it mandatory for banks to disburse at least 2% of their deposits under consumer finance.

One may argue that the policy may be seen a contravention of 'free market policy'. The banks have a right to disburse credit under any head and to any one. The central bank should not force the banks to undertake any specific business. However, this is a very weak argument based on two facts. First, most of the banks are drawing bulk of their income from investing in government securities and rate of return on these securities has gone down to very low level. Therefore, a prudent option is to force the banks to enter into other high yielding ventures, if they are willing to do this at their own. Second, the suggested percentage is also very nominal. Banks can afford to even completely write off the total amount. However, there will be no need at all to write off the whole amount because total amount cannot become bad debt.

According to a banker, "Risk of potential default is always present in any type of lending. This can be minimized by thorough evaluation of client, his/her repayment ability and above all by constant monitoring. The real problem emerges when funds are extended on referral basis, without thorough investigations and monitoring is completely missing. The rule of 'carrot and stick' works the best. However, many bankers are not ready to take pain of knowing their customers. They mostly base their decision on the papers submitted by the client and hardly visit his/her office/home before disbursing funds. They only try to find out the details once a default has been committed."


Millions of people are living in Katchi Abadis in Pakistan, mostly devoid of basic necessities. The sole reason for proliferation of Katchi Abadis is lack of housing finance facility. Most of the people cannot afford to buy even a small house against full cash payment. For all practical purposes only two companies are in the business of housing finance. They are incapable of meeting the demand.

According to some analysts unless the availability of funds to these companies is increased the problem cannot be resolved. They also say, "Let us recognized the fact that commercial banks are not the appropriate entities for undertaking housing finance business. The only workable solution is that banks extend credit lines to housing finance companies and let them take care of disbursement and collection of funds.

However, housing finance companies can exercise this option only if the mark-up rates are competitive. In the past central bank had offered funds to housing finance companies but the rate was very high. Since interest rates have gone down considerably the mark-up rates for housing finance should also be curtailed.

Two parameters, Pakistan Investment Bonds and T-Bill yields can be used as the base rate by the banks for lending funds to housing finance companies. Then the companies can add another 2.5% as service charges for working out the rate to be charged from borrowers.

There is another crucial issue facing the housing finance companies, repossessing the property in case of default. The laws are inadequate and their implementation, at times, is very difficult. Unless appropriate laws are promulgated and their implementation is guaranteed housing finance companies will remain shy in extending funds to people at large.


Many bankers strongly believe that the banks should not be asked to undertake the business of consumer finance and should only stick to the core banking activity. If the government is serious in promoting consumer finance, it should facilitate creation of specialized company to undertake this business. They also show inclination towards providing seed-money as well credit lines to the specialized companies.



The government is very keen about banks undertaking housing finance business. Most of the banks have launched the scheme but only a few seem to be serious. According to a banker. "The bankers have found an easy solution. They are following an old saying, 'I scratch your back you scratch my back.' They have formed cartels whereby one bank provides loans to employees of other cartel members and vice versa. Some of them previously providing housing loans to their employees are now disbursing the amounts under the disguise of housing finance. Whatever they may be doing it is still better than doing nothing."

Most of the manufacturers have formed alliance with one or more than one bank to promote and undertake consumer finance business. The designated retail outlets also help people in completing formalities for financing. Going forward, some banking sector experts suggest that instead of banks approving credit for each individual, the manufacturers may be extended credit lines, whereby they also take the responsibility of collection of monthly installments.

However, some of the banking sector experts do not accept this strategy. They say, "Banks have the largest distribution network (branches), they also maintain accounts of clients and branch staff normally knows the customers better. Therefore, greater transparency can be achieved in approval and disbursement of funds. The concerned branch can also monitor repayment in a better manner. As the banks are going for online banking and Internet based banking, the job has become easier. However, the major breakthrough can only be achieved when commitment is there. Where there is a will there is a way."

Evolving the workable strategy should not be a problem. Consumer finance may be a new concept in Pakistan but has been in practice for ages in the developed world. The pioneers of consumer finance in Pakistan have been the foreign banks and others should try to benefit from their experience. Foreign banks also took the lead in introducing credit cards in Pakistan and now most of the domestic banks are in this business, to the extent that the domestic banks are using the infrastructure created by foreign banks.

Some of the banks that have issued credit cards, encourage cardholders to buy consumer durables using the card and then transfer the liability to easy installment option. While the cardholder saves in terms of mark-up, the maximum limit is the same as for the credit card. The only benefit for cardholder is a lower mark-up on easy installment option. Usually the mark-up rate charged on outstanding balance of credit cards ranges from 2.5 to 3 per cent, whereas in case of easy installment option, the rate being charged is around 1.5 per cent.

Credit insurance has also become a norm in banking business in Pakistan. For example credit cardholders are paying insurance premium, if they are utilizing a revolving credit by just exercising minimum payment option. This is primarily to hedge the risk in case of death of the borrower. The same strategy may also be adopted for expanding consumer finance business.


Though, banks have entered into consumer finance, its quantum is still a very small percentage of the total deposits. So far only a limited segment of population has been benefiting, which is mostly confined to urban areas. Whereas, bulk of the population living in rural areas is either not aware or does not have the access to the system.

Therefore, it is suggested that the central bank makes it mandatory for the banks to disburse at least two percent of their total deposits under consumer finance every year. On the one hand it will facilitate in improving the income of banks and on the other it help in ensuring better quality of life for people.

Historically, the banks in Pakistan have been disbursing funds as working capital loans and trade finance, and have very good expertise. However, in grossly lack the expertise in handling consumer finance.

If the government is also serious in promoting consumer finance, it should improve working environment by promulgating required laws or make amendments in existing laws for re-possessing the assets in case of default.



Last but not the least, people should give up the habit of dealing in cash and learn to receive and pay through their bank accounts. It will help in building their profile with the banks, which in turn will enable them to borrow.


(Rs in million)