AFFORDABLE INTEREST RATE DRIVES CONSUMER FINANCE

THE DECLINE IN CONSUMER FINANCE IS ALSO MAINLY SHIFT IN BANKS' PREFERENCE TO INVESTMENT IN GOVERNMENT SECURITIES FROM LENDING TO PRIVATE SECTOR

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

Oct 8 - 14, 20
12

Around the world governments follow policies which are either aimed at enhancing supplies or creating additional demand. Both the policies have their merits and demerits but following a proactive approach with stringent monitoring helps in achieving the desired results. However, in Pakistan the government often fails in defining the key objectives to be achieved and also following home grown policies. In fact policies are often driven by the lenders, particularly the lender of last resort, IMF

For many years the State Bank of Pakistan (SBP) followed 'Tight Monetary Policy' to curb inflation, which proved counter products. Experts have been of the view that Pakistan suffers from cost pushed inflation therefore, keeping interest rate high proves counterproductive. The other key issues facing Pakistan are 1) political uncertainties and 2) ongoing war on terror (which is often termed proxy US war). On top of all the agreed payments under CSF are not released in time and in full. Experts say these payments don't take care of the damages caused to Pakistan's economy.

Some experts say that during Musharraf- Shaukat era GDP growth rate of Pakistan was almost three times the prevailing rate. One may say that the west has suffered a lot due to subprime loan crisis, which also spilled over to many countries, but Pakistan was not the victim of the same. In fact in post 2008 period the country suffered from governance crisis.

Though, circular debt is often held responsible for the prevailing energy crisis, it is also the outcome of bad governance. The level of mismanagement can be gauged from the fact that the country has more than 24,000MW installed capacity but actual generation hovers around 12,000MW. Poor capacity utilization increases cost of generation, which in turn increases cost of virtually every product.

In a booming economy people have ample cash flow to buy goods at differed payment. Financial institutions also enjoy comfort because their cash flow also remains strong. However, when economy experiences downturn, delinquencies increase, cash flow is disturbed and higher provisions made affects overall profitability of financial institution. This is exactly what Pakistan has been suffering from in post 2008 era. It may be true that the conditions have not been very conducive but the real problem is absence of a home grown plan, aimed at minimizing the impact of adversities.

One just can't abstain from referring to prevailing energy crisis again and again, which has plunged Pakistan's GDP growth rate. As people suffer from uncertain future, they tend to spend less. When non-performing loans start growing financial institutions also become reluctant in extending loans for the purchase to consumer durables. The most obvious exhibit is financial institutions going into hibernation, some just closing down consumer finance department or just working with a skeleton staff to follow up recoveries rather than extending new financing. Housing finance also caming to grinding halt.

Despite increase in overall revenue collection, Pakistan continues to suffer from mounting budget deficit, mainly because of indiscriminate spending by the elected representatives. Two of the expenses are proving unbearable: 1) expensive cars, mostly bullet proof, being purchased for the elected representatives and 2) billions of rupees being spent on the security of elected representatives and police officials.

As the government suffers from cash crunch, the axe first falls on Public Sector Development Program (PSDP). This is not specific to the incumbent government but the successive governments in Pakistan have been doing this. The issue became even graver with the present government because it has been relying heavily on external inflows. With the drying up of this lifeline it has to not only resort to higher local borrowing but also curtail PSDP outlays.

Usually PSDP is a source of employment and also provides impetus to various industries, particularly construction sector. It is estimated that a booming construction sector supports more than 40 other industries. The other benefit of large PSDP is that sale of consumer goods also increases. In Pakistan GST is charged on almost every item, which enables the government to improve its revenue collection.

In many countries the governments keep the interest rate on consumer finance low. This on one hand improves the quality of life of people and on the other hand helps in boosting sale of cars, motorcycles, home appliances, office equipment and even houses. When financial institutions slow down consumer finance, sales of these items go down considerably.

While consumer finance was booming Modarabas and leasing companies were also doing thriving business. With the shift in lending policies of the commercial banks, leasing companies suffered from acute cash crunch and virtually stopped underwriting new leases. At one time over two dozen leasing companies were operating in Pakistan but at present number of active companies has reduced to less than half a dozen. Most of these entities faced precarious situation when banks suspended credit lines.

The number of active Modarabas has also declined to around 20. Financial health of Modarabas is relatively better as compared to the leasing companies because they distribute 90% of their income among the certificate holders and qualify for exemption from paying income tax. If this exemption is withdrawn Modarabas companies could also be in deep trouble.

Some of the financial sector experts say that unless non-banking financial institutions (NBFIs) become self sustaining consumer finance will continue to face bleaker outlook. However, others believe that commercial banks are thriving only because these have become 'financial super markets'. Some quarters believe that entry of commercial banks in consumer finance business gives them an edge over NBFIs. Banks enjoy two advantages: 1) lower cost of funds and 2) greater out reach.

Thriving consumer finance business of Meezan Bank, Pakistan's largest Islamic bank, makes it a perfect say study for all those who are involved in this type of business. The generational perception is that Meezan Bank charges even higher financing cost, but consumers are willing to pay this. It is because all those who wish to keep their lives free from 'Riba' are often willing to pay higher cost. However, it is believed that Meezan bank is thriving only because it has a strong deposit base, relatively lower delinquency ratio and above all willingness of clients to pay higher cost.