Apr 2 - 8, 20

Consumer financing is a kind of service designed to provide individuals with the necessary finance to make personal purchases ranging from buying a car to a house. It is classified into different types of products. Personal loans are provided for the payment of goods, services, and expenses and comprise of running finance and revolving credit to individuals. The idea of consumer financing is to provide consumers with financial support to increase their consumption and raise their standards of living.

Pakistan's banking sector in the past years has effectively engaged in consumer financing by introducing a variety of products such as credit cards, auto loans, housing finance, and personal loans, etc. The robust growth of consumer financing in the previous years was predominantly ascribed to the liberal economic policies set to the principles of free market economy, and huge liquidity available to the banks in the aftermath of 9/11.

Banks have played their due role in promoting economic development in the country. In the last two decades, three prominent foreign banks took the lead in introducing credit cards in the banking sector. Basically, the facility was limited to the top executives and businessmen. Later on, the task of consumer financing was successfully taken by top Pakistani banks. They provided the facilities of consumer financing to both middle class and higher salaried class. They also contributed in enhancing the standard of living of the middle class, which is the backbone of any economy.

These banks hired the best professionals who worked hard in developing brand and establishing identities for their products. Aggressive marketing and innovation continued at an accelerating pace. Consumer financing was encouraged by the State Bank of Pakistan to boost the economic growth through demand-pull pressure.

Consumer financing in the past has substantially contributed to economic turnaround of Pakistan by hastening consumption and investments. There has been an extraordinary increase in private consumptions due to easy availability of credit from banks.

After the remarkable performance of consumer financing over the past five years, it plunged by Rs50 billion or 17 per cent to Rs224 billion at the end of June 2010 as compared to Rs294 billion a year ago. Every area of consumer financing marked a decline during 2009-10. The marked decline in consumer financing is owing to the increase in policy interest rate by the SBP amid fears of rising inflation rate. This move has been widely criticized by businessmen and economists and is not a cure to curb the price hike.

Despite efforts by the State Bank to boost consumer financing, commercial banks have shown little interest to boost consumer financing. The SBP said that consumer financing, which includes credit cards, car purchasing and house building, showed negative growth since the beginning of the current fiscal year until the end of last month.

Banks have reduced their lending to private sector as they find treasury bills a profitable business having no risks. According to the State Bank, stock of consumer financing which was Rs217.6 billion in July 2011 further reduced to Rs210 billion. Banks earn profits and their profits have been increasing each year, mostly on account of investment in government papers. This situation has been prevailing for the last four years.

Loans for car purchasing have dropped as during the last eight months loan for car purchasing have declined to Rs45.4 billion from Rs50.9 billion. Credit cards business is also declining in Pakistan. The report shows the stock of credit cards business fell to Rs23.1 billion from Rs24.6 billion in July 2011. Consumer financing for house building has also declined to Rs43.2 billion in February while the stock was Rs47.7 billion in July. Trends show all section of consumer financing are facing decline. Some improvement has been witnessed in personal loans, and their stock escalated to Rs92.5 billion from Rs89.6 billion in July.

Consumer financing - auto loans, mortgages, credit cards and personal loans - has systematically been on the decline since January 2008 when it touched its peak.

The stock of consumer finance fell by a sizable 43 per cent to Rs210 billion in January this year from its peak of Rs371.27 billion exactly four years earlier. The stock of house building loans fell by 36 per cent to Rs43 billion in January this year from its peak of Rs66.55 billion in June 2008. Similarly, auto loans are down by 60 per cent to Rs45.42 billion after touching the high of Rs112.45 billion in October 2007.

The stock of credit card loans dropped by 51 per cent to Rs23 billion from Rs47 billion in November 2007 and of personal loans by 36 per cent to Rs92.5 billion from Rs147 billion. A combination of multiple factors - deteriorating economic conditions, rising cost of credit, increasing default, etc - is blamed for the negative growth in this segment.

Many banks have downsized their consumer finance sales teams while others have closed down their consumer loan divisions to avoid more defaults. On the demand side, the number of borrowers seeking consumer finance has also sharply declined because of higher credit costs, no change in incomes and job losses.

Consumer financing has no doubt played a strategic role in improving the social and economic condition of the government bureaucrats and those with cushy jobs in multinational companies. It is unfortunate that the commercial banks have not introduced any innovative financing for improving the economic and social lot of the majority of the people who are working in the private companies with low fixed income and with no security.