Jan 24 - 30, 20

Lending to the business and industry and consumer finance are the two main planks of any developing economy. A systematic upsurge in private sector credit affords a strong foothold to the business, trade and industry on the one hand and strengthens the middle class by augmenting its disposable income for use in social uplift programs on the other.

During an affordable interest rate regime, Pakistan's consumer financing started to take wings giving a flip to the economy.

The effect was profoundly felt by the real estate and automobile markets. Our orthodox group of economists started to raise alarm on the growing size of consumer finance, which recorded a maximum level of Rs369.176 billion in December 2007 - slightly over four per cent of our GDP.

The succeeding years brought in their fold an array of destabilizing events, both of political and economic nature. Guided by these domestic developments and global financial crisis, the state bank resorted to its monetary policy tightening tactics, putting its reliance on tight money supply and a swiftly (and repeatedly) jacked up interest rate that hit the ceiling of 15 per cent.

The consumer community, which was yet learning to get benefits of the changed financial and economic scenario, was taken aback and then pushed to the wall known in the financial sector as 'default'.

The orthodox group of economists had a reason to gloat as their prophecies of "doom" were fulfilled.


MONTH-END 2010 2009 2008 2007 2006
June 244.810 294.313 359.408 348.433 297.776
December 228.488 265.893 326.068 369.176 327.026

The consumer finance fiasco was more the result of a swiftly hiked interest rate and banking sector's greed that set a marketing trap for the uninitiated community of consumers without caring for the compliance of the cannons of prudent loaning, the syndrome that triggered US subprime mortgage catastrophe.

The size of consumer finance was in fact immaterial as it was simply negligible. It is the culture of underrating the importance of this critical segment of a developing economy that has stood in the way of an equitable distribution of national wealth. Consumer finance helps in creating assets, both tangible and financial, which in turn play an important part in the social uplift of nations. The brief, bright moments of consumer financing era that our nation witnessed until the middle of 2008, brought a marked change in the lives of middle class people who, guided by a sense of prudence, improved their asset position by building a home or purchasing a car to solve their housing and transport problems.

Presently, consumer finance is just two percent of Pakistan's GDP. How do we compare it with the size of US consumer finance, which is roughly equal to the US government debt. And, those interested in economic stats must be knowing that the US government debt is around 95 per cent of its GDP.

Annual Review, a nonprofit scientific publisher, reports in one of its studies on financial economics: "With such an expansive definition, it should be clear that consumer finance is a substantial element of the financial sector. Using the United States as an example, one can get a sense of the magnitude of consumer finance sector as a driver of the economy.

The Federal Reserve's Flow of Fund data are a commonly used source for aggregate statistics. According to the latest numbers (2009 Q1), households held $64.5 trillion in assets, with 37.5 per cent ($24.2 trillion) of these funds held in tangible assets (mostly real estate) and $40.3 trillion in financial assets. In aggregate, households held $14.1 trillion in liabilities, mostly home mortgages ($10.5 trillion) and consumer credit ($2.5 trillion, primarily in credit cards).

The intent here is not to compare two economies that are literally polls apart. The aim is to highlight the lack of awareness about the dynamics of consumer finance. We can never think of raising the size of consumer finance to the levels attained in the developed economies, but we can at least talk in terms of a perceived level of 5-10 per cent of GDP. The high interest rate regime, government's flexing of muscles in the credit arena and banking sector's new-found aversion to risk taking, all have combined to choke the flow of credit to the private sector and discourage consumer credit activism. The SBP data on credit classified by borrowers proves the point.


Credit to government sector 2,695 2,427 2,140 2,002
Of which: By SBP 1,279 1,188 1,081 1,144
By scheduled banks 1,416 1,239 1,059 858
2. Credit to non-government sector 3,510 3,311 3,377 3,163
Of which: By SBP 29 29 26 26
By scheduled banks 3,481 3,282 3,351 3,137
Of which: To PSEs 419 420 453 351
To NBFIs 119 113 142 134
To private sector 2943 2,749 2,756 2,652
Of which: consumer finance 228 245 266 294
Total (1+2) 6,204 5,738 5,517 5,165

The imbalances in credit allocation show the weakness of our economic and financial systems giving rise to a number of anomalies, briefly discussed hereunder:

1. Continuous rise in lending to government, both by SBP and scheduled banks, has crowded out private sector on the one hand and driven banks away from their core function of risk-taking for the sake of economic growth on the other.

2. Inefficient public sector enterprises are competing for bank borrowings with NBFIs and private sector putting NBFIs, particularly leasing and modaraba companies, in a position of perpetual liquidity crunch. In addition, these enterprises are eating into private sector credit allocations.

3. Banking system is driving common person's money away to the elite segments of the society government and high-profile borrowers. Consumer finance, which restores the flow of national wealth to those segments of society where it belongs - the masses particularly the middle and lower middle classes - is shrinking with the each passing year.

The Annual Review study maintains, "Some finance academics argue that the field of finance is defined by whether the activity affects asset prices. Even by this narrow definition, consumer finance deserves a prominent place in the field of financial economics and in business schools. Curiously, it has a small footprint in both and as Campbell notes, suffers from lack of status. Why?" In our case, consumer finance has virtually no footprints and no status.