Research Analyst
Nov 15 - 21, 2010

Pakistan has witnessed phenomenal growth in consumer financing products and services over the last seven years. Most of the commercial banks are involved in consumer lending through one or more financing modes, as it has become very lucrative business due to high spread and interest rates. Pakistan has one of the highest interest rate spread in the world. In recent years, the spread has exceeded seven per cent on the average and the interest has also increased which is 13.5 per cent.

In Pakistan, almost all consumer loans are on the basis of variable markup rates. The increase in consumer financing has come with many challenges facing the national economy as well as the individual borrowers.


Consumer Financing 294,313 277,622 244,810 236,520
For house building 61,222 59,609 54,500 53,122
For transport i.e. purchase of car etc. 78,151 73,814 64,199 61,044
Credit cards 35,533 33,828 28,280 26,868
Consumers durable 420 357 211 237
Personal loans 115,981 106,983 94,776 91,875
Other 3,006 3,031 2,844 3,374
(Outstanding position at the end of month)

Currently, consumer financing has been helpful in improving the quality of life of the people who have the capacity of servicing the loans. However, there is mounting evidence that this capacity is deteriorating due to high spread and variable interest rates on loans. Depositors are not getting due returns due to high difference between lending and deposit interest rates. As the consumer financing portfolio is increasing, quality of related banking services is becoming a serious issue. Processing delays, service inefficiencies, unauthorised debits and non-compliance with requirement of providing monthly bank statements are few examples of poor quality of banking services.

In spite of these, car financing has the second largest share in total consumer financing portfolio in Pakistan. According to SBP, 30.36 per cent of consumer financing comprised of car financing and leasing products by mid 2007. During the same period the total number of auto loan borrowers has exceeded 0.26 million. From a macroeconomic standpoint, the growth in car/auto loans had put great pressure on the economy by increasing the demand for extension of road networks as well as fuel imports. In fiscal year 2008, the annual growth of car loans had decreased to 6.6 per cent from 8 per cent in 2007 (July to January. The deceleration is attributed to increase in prices of locally manufactured cars. Increasing ratio of car loan default is also a critical factor in moving the banks to adopt a cautious approach.

During June 30, 2010, the outstanding loans for car purchasing fell to Rs64 billion. The same was Rs78 billion in 2009 and Rs105 billion in 2008. Despite fall in the loans for car purchasing, the prices of cars went up due to high demand and short supply, a policy adopted by the local car producers due to their monopolistic domination in the market. The purchasing of cars on cash has increased mainly due to higher liquidity in agriculture sector as growers got much higher prices for their cash crops like sugarcane, wheat, and rice during last couple of years.


In the present scenario, there are two types of car loans being offered by the banks: car leasing and car financing. Car financing is a type of loan in which car is registered under the name of borrower and is mortgaged to the bank as long as the consumer pays off the amount borrowed from the bank. In case of car lease, the car is registered in the name of the bank and the original papers are also in the name of the bank. Most of the banks offer car financing instead of leasing.


Every segment of consumer financing from credit card to car purchasing in Pakistan has witnessed a sharp contraction during the last fiscal year 2009-10. The overall consumer financing plunged by Rs50 billion, or 17 per cent, during the year under review over the previous fiscal year. The outstanding stock of consumer loans fell to Rs244 billion in 2009-10 against the Rs294 billion in 2008-09. Moreover, the credit card business also shrank significantly. The loans under the credit card had fallen to Rs28 billion from Rs35 billion from the previous year. The lucrative credit card business, which has a great influence in developed and developing economies, failed to get significant space in the domestic market. Most of large domestic banks and foreign banks had been involved in this business. However, recently the highest numbers of complaints were against the credit card business.

Higher volume of loans given under the consumer financing was of personal loans, which also witnessed sharp decline. The stock of personal loans reduced to Rs94 billion in 2009-10 from Rs115 billion in 2008-09. Loans for house building under the consumer financing dropped to Rs54.5 billion from Rs61 billion the previous year. Consumer durables were the poorest among the different segments of consumer financing as the outstanding loans were just Rs211 million in 2009-10 as against Rs420 million in 2008-09 and Rs499 million in 2007-08.


In Pakistan, the consumer financing has significantly contributed to economic turnaround by stimulating consumption and investments. The private sector performed much below the expectation in the last fiscal year while the overall economy remained under pressure owing to rising inflation, higher cost of production and increase of interest and spread rates. Further, the volume of consumer complaints is rising day by day due to processing delays and poor disclosure practices.