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Consumer Finance
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Consumer Financing in Pakistan
By:
Haris Mehmood
Umair ShakeelShahid Aslam
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Definition
The division ofretail banking thatdeals with lendingmoney to
consumers. This includes a wide
variety ofloans, including creditcards, mortgage loans, and auto
loans.
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KEY PLAYERS
United Bank LimitedHabib Bank LimitedBank Al Habib LimitedBank IslamiBurj BankModarbas Companies.
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Categorized into 4 types
1. Personal loans: loans provided to individuals for thepayment of goods, services and expenses,
2. Auto loans: Auto loans include any loans used to purchase avehicle for personal use. The loans borrowed to purchase
vehicles for commercial or corporate use are not included inthis category.3. Housing Finance: Housing finance includes the loan, which is
provided to individuals for the purpose of purchasing orimproving a residential house, or apartment, or land. Thiscategory also includes loans for a combination of housing
activities such as loans for purchase of land plus construction.4. Credit Cards: Credit cards include any card, which a customer
can use to borrow credit from a bank. Credit cards includecharge cards, debit cards, Stored Value Cards (SVC), andBalance Transfer Facility (BTF). Corporate Cards are notincluded in this category.
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Growth of Consumer Financing in
Pakistan
Until the early 1990s, consumer financing was not offered bycommercial banks
Credit cards were offered to only a selected band as aconvenience for bill payments and not for financial support
In 2001, excess in liquidity of the banks due high inflow ofremittances in the 9/11 aftermath and low interest ratesmotivated banks to enter into consumer financing business
As a result, Banks aggressively promoted consumer financing-credit cards, auto loans, house financing and personal loans withleast documentation
Unprecedented growth rate over the last 7 years
According to SBP:
2006 Rs.72.4 Rs.325 Billion
2007 Reached Rs.354.4 Billions
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Banks are making abnormal profits after the emergence ofconsumer financing.
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Issues and Challenges from
Consumer Perspective
1. High Interest Rate:In Pakistan the spread has vacillated between 5.95%and 9.58% during the period from 1990 to 2005.
2. Variable Interest Rate
According to the annual report of the bankingombudsman, in Pakistan almost all consumer loanare on the basis of variable mark up rates.
3. Increasing Inflationary impactAcquisition of easy bank credit by the household
consumers has spurred the demand for many essentialand luxury items.
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Contd4. Deteriorating quality of service
As the consumer financing portfolio is increasing quality of related bankservices is becoming a serious issue.
5. Lack of consumer educationThe technical documents prepared by the banks affects the financialrights of uneducated customers. Table No.2
6. Poor information disclosure practiceThere is no law in Pakistan, which entitles the consumers to accessinformation from the private banks as a legal right.
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Contd
7. Intimidating recovery practices:
Banks recovery team reaches the borrower house to pressurize
them for payment of dues without any legal authority
8. Weaknesses in regulatory framework:The banks formulates their own policies and procedures which
suits their interests best
9. Unsolicited Financing
Aggressive marketing campaigns launched by the banks
are targeting the costumers and encouraging them topurchase a loan or credit.
Source: Consumer financing in Pakistan: Issues,
Challenges, and way Forward published by CRCP
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Social & Economic Impacts of
Consumer Financing
Increased consumption > increased output / Inflationary Pressure(Demand-Pull Inflation)
Increased dependence on foreign loans
Lack of infrastructure to absorb and manage the increased
number of cars on the road due to easy auto financing
Spending beyond their means behavior results in burdening theeconomy and society
Negative Saving-Investment gap as a result of spend now, save
later behavior in developing nations
Its beneficial for those who have the prerequisite responsibility,maturity and financial literacy to manage their finances.
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Conclusions & Recommendations
High Interest rate spread should be reduced to increasecompetition in the banking sector
SBP Regulations regarding consumer financing should beenforced strictly to decrease the high profit margins of the banksat the expense of the depositors
Unsolicited financing should be discouraged to avoidunnecessary private consumption at the cost of consumer savings
SBP should bind banks to explain ALL applicable charges onconsumer loans before signing the contracts
Consumer Education: comparative information should be made available Latest copy of terms, conditions, & schedule of charges should
be provided to applicants in the language of theirunderstanding
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Question-Answer Session
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