July 30 - Aug 5, 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 running finance and revolving credit to individuals.

The idea of consumer financing is to provide consumers with financing support to increase their consumption and to raise their standards of living.

Consumer financing was introduced for the first time in Pakistan around 1990 by Citibank (a foreign bank) and it immediately turned out to be a huge success.

Emulating this success, many local as well as foreign banks introduced lucrative financing schemes for all and sundry in Pakistan. These schemes were so alluring that people started availing them without understanding the repercussions.

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 healthy 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. This 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 back bone of any economy.

These banks hired the best professionals who worked hard in developing brand and establishing identities for their product. Aggressive marketing and innovative continued at an accelerating pace. Consumer finance was encouraged by the State Bank of Pakistan to boost the economic growth through demand- pulls 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 criticised by businessmen and economists and is not a cure to curb the price-hike.

The consumer financing role in Pakistan has been declining since the past four years due to deteriorating economic conditions, rising cost of credit and rising non-performing loans of the banks.

The overall volume of consumer financing is incessantly showing a declining trend as it is observed from the fact that during the nine months of the past financial year (July-March 2012) overall stock of consumer financing contracted by Rs8.5 billion as compared to the decline of Rs17.4 billion in the same period of the financial year.

Auto loans, mortgages, credit cards and personal loans have continuously been on the decline since January 2008. The stock of consumer finance cut down to Rs209.1 billion in March 2012 from its height of Rs371.3 billion.

Loans for consumer durables achieved a net expansion of 37.1 percent from July 2011 to March 2012 against 13.9 percent in the same period last year.

The financing for the house building remained at Rs5.20 billion against Rs5.40 billion while in terms of transportation, including purchase of car, banks disbursed Rs5.60 billion compared with previous amount of Rs10.60 billion to the consumers.

The financing under the category of credit cards fell to Rs1.70 billion during July-March fiscal year 2012 against Rs3.40 billion a year earlier. Personal loans financing accomplished Rs2.70 billion against Rs0.40 billion in the previous year.

Each category within the consumer finance section has recorded a persistent increase in the loan infection ratio for the past three years. This increase has been a mixture of increasing NPLs and declining credit to each category with the exception of consumer durables.

A latest report released by the Banking Mohtasib Pakistan (BMP) says that the unethical practices and parallel banking operations by staffers is considered one of the major reasons, which not only dampened the growth in the consumer loans, but also injured the credibility of the banking sector.

The report discloses that the number of consumer product complaints received by BMP registered at 19.3 percent in 2011.

Many banks have at present 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. There is because of higher credit costs, no change in incomes and job losses.

Despite efforts by the State Bank of Pakistan to encourage consumer financing, commercial banks have shown little interest as consumer financing has fallen further.

Banks have reduced their lending to private sector as they find treasury bills a lucrative business having no risks.

The practice of investment in government papers has been for a long time and under criticism for a long time but our banks has remained unaware. Further government has made the money costlier as it wants to spare money in the banking system for others.

For the future of consumer financing professional bankers see a cautious consumer lending based on tight standard used in the selection of borrowers. Some bankers are of the opinion that consumer financing will contribute a bigger part of profits of the banking industry with the recovery of economy.

The government should initiate effective programmes to improve the living standards of the masses.

In this context, the State Bank should implement a favorable policy which enhances the access of consumer financing products to the fixed and deprived sections of the society by keeping the interest rates at a nominal level. This would consequently help to boost business activities and growth in the country.

The Commercial Banks must 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.