Consumer Financing: Dilemma For

banks in
PAKISTAN

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Table of Contents

Executive Summary

Section 1 INTRODUCTION

1.1 Background
1.2 Purpose
1.3 Objective
1.4 Study plan

Section 2 INDUSTRY OVERVIEW

2.1 Banking Industry of Pakistan

2.2 State Bank of Pakistan
2.3 Products / Services in Banking Sector
2.4 Consumer Banking: Globe at Glance
2.5 Consumer Banking in Pakistan
i. Auto loans
ii. Home Loans
iii.Personal Loans
iv. Credit-Debit Cards
v. Deposit Accounts
vi.Wealth Management
vii.E-Banking
2.6 SBP prudential Regulation for Consumer Financing
2.7 Credit Information Bureau (CIB)
2.8 Contribution of Consumer Banking in Economic Development
i. Overview
ii. Consumer Financing & Economic Growth
iii. Implication for Economy
2. Brief Overview of some local & foreign bank
i. MCB
ii. UBL
iii. FBL
iv. Citibank
v. RBS
vi. ABL

Section 3 REASEARCH METHODOLOGY

3.1 Strategy for Data collection

3.2 Primary Data Collection
3.3 Secondary Data Collection

Section 4 ANALYSES AND FINDINGS

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4.1 Opportunities
4.2 Challenges
4.3 Problems faced by borrowers
4.4 Future prospects of Consumer Banking in Pakistan

Section 5 CONCLUSIONS

5.1 Conclusion

Acronyms

ATM Automatic Teller Machine

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 CIB Credit Information Bureau

CWR Credit Worthiness Report

DFI Development Finance

Institutions

MCB Muslim Commercial Bank

SBP State Bank of Pakistan

PRCF Prudential Regulations for Consumer Financing

NBFI Non-bank financial institutions

EXECTIVE SUMMARY
The banking sector in Pakistan has been robustly engaged in consumer financing over the last
seven years by unleashing a variety of products. The excess liquidity in banks due to high inflow of
remittances stimulated the banks to get into this business. Since then, it has swelled at an

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unprecedented growth rate. The consumer loans reached Rs.325 billion during 2006, whereas till
June 2007, they further increased to Rs.354.4 billion. The banking sector is earning record profits
by charging unrealistic and exceptionally high interest rates. As a result, despite considerable ratio
of non-performing loans, the annual profitability of banks has reached 76% on annual basis over
the last few years. In recent months, deceleration trends are on the rise consumer financing due to
increasing loan default and use of credit worthiness information by the banks. From the
macroeconomic standpoint, consumer financing has significantly contributed to economic
turnaround of Pakistan by stimulating consumption and investments. There has been a phenomenal
increase in private consumptions due to easy availability of credit from banks. However, in tandem
with this development, the manner in which consumer financing is being delivered has seriously
jeopardized the Competition factor in economy.
The most important issue is that Pakistan has one of the highest interest rate spread in the world.
An analysis of the interest rate behavior in Pakistan reveals that the spread has vacillated between
5.95% and 9.58% during the period from 1990 to 2005. In recent years, the spread has exceeded
7% on the average. High interest rate spread indicates that competitiveness in the banking sector in
Pakistan is either absent or is very poor. A cartel-like behavior in banks appears to have taken
place within the policy space provided to the banks by the State Bank of Pakistan.
This issue is largely attributable to weak regulation of interest rates despite that the State Bank has
the powers to control the spread through monetary policy. While non-operating loans and high
administrative Costs could be considered as the major reasons in countries where spread Is high,
these cannot be said true of Pakistan because banks are earning Huge profits at the cost of savings
of the depositors. High interest rate Spread is damaging the competitiveness in economy in general,
and in the financial sector in particular. The SBP should exercise its Powers to determine
reasonable rate of returns for the banks as well as the depositors. As a matter of priority, interest
rate spread should be reduced, at least, to the level of average spread in the South Asian region.
Another critical issue is that almost all consumer loans are on the basis of variable mark up, which
has reduced the loan servicing capacity of the borrowers due to progressive increase in the rates. In
addition, the growth in consumer financing has put great inflationary pressure on the economy.
Acquisition of easy bank credit by the household consumers has spurred the demand for many
essential and luxury items. Ultimately, the increase in demand has not only escalated the prices of
essential items, but has also stimulated hoarding and black-marketing thus multiplying the
problems for poor consumers. In fact, proliferation of loans has given rise to new development
challenges. For instance, the need for new roads in metropolitan cities is directly linked with
growth in auto loans provided by the banks. From a consumer perspective, consumer financing has
been helpful in improving the quality of life of the people who have the capacity of servicing the
loans. However, there is mounting evidence that this capacity is deteriorating due to high spread
and variable interest rates on loans. Depositors are not getting due returns due to high difference
between lending and deposit interest rates. Further, the volume of consumer complaints is rising
day by day due to processing delays, service inefficiencies, hidden charges, and poor disclosure
practices.
Lack of consumer education on banking terms and conditions, policies, rules, and regulations is
also a critical factor in securing financial rights. As the consumer financing portfolio is increasing,
quality of related banking services is becoming a serious issue. Processing delays, service
inefficiencies, unauthorized debits and non-compliance with requirement of providing monthly
bank statements are few examples of poor quality of banking service.

Section 1.0 INTRODUCTION

1.1. Background

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In Pakistan all banks & DFI’s works under the supervision of the State Bank of Pakistan, the four
major sectors in which SBP has divided banks operations are Corporate, SME, Agriculture and
Consumer. SBP provide regulations according to which all banks should work & continuously
keep a track that banks are complying through the regulations or not.

1.2. Purpose

In recent years, Consumer Banking has made tremendous progress and has played a positive role
in boosting the economy and in meeting the needs and requirements of the consumers. Whether
large or small bank, multinational or local, each one of them is geared towards making its mark
in an already competitive environment that is the outcome of consumer banking. The growing
economy and further improvements in the level of household income have created many
opportunities for consumer banking. In this case the past, present and future of consumer banking
will be analyzed.
1.3. Objective

This case will give an overview of the problems in current system of consumer banking from
the point of view of both borrowers & lenders and explore the upcoming opportunities in the
area of consumer banking. Main Objectives would be;
➢ Problems in current system of consumer banking
➢ Solution for problems faced by lenders & borrowers
➢ Exploration of opportunities in future
➢ Role of consumer banking in Economic Development

1.4 Study Plan

Section – 2.0 of this case is totally based on secondary data consist of an overall
view of Pakistan Banking Industry, consumer banking in Pakistan and brief introduction of
few banks which are selected for data collection. Section 3.0 consists of methods used for
data collection. While analysis and findings are included in section 4.0 and section 5.0
comprises of recommendations and conclusions.

Section 2.0 INDUSTRY OVERVIEW

2.1 Banking Industry of Pakistan

Banking sector of Pakistan has under gone a significant transformation in the recent years and
has also acted as a catalyst in the revival of the economy. Many privatization, acquisitions
and mergers took place during the last few years which started form privatization of Muslim
Commercial Bank and from time to time Allied Bank Ltd, United Bank Ltd and Habib Bank
Ltd were also privatized by the government. These years also witnessed the acquisition of
Union Bank by Standard Chartered Bank and recently Muslim Commercial Bank acquires
Royal Bank of Scotland. All these privatization, acquisition and mergers resulted in high
foreign investment in Pakistan and improved performance of the banking industry while it
has also helped banks to gain more market share in short span of time.
The market of banking in Pakistan has dominated by large commercial banks. Foreign banks
have been in operation for a long time as well, but their business is concentrated wit large
multinational clients.

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Pakistan has a highly developed financial sector consisting of public & private commercial
banks, DFI, leasing companies, mutual funds, Islamic venture capital fund companies. The
commercial banks have assets of over one trillion rupees of about 80% is held by domestic
banks.

2.2 State Bank of Pakistan

The State Bank of Pakistan (SBP) is the central bank of Pakistan. The State Bank of Pakistan
Act 1956, with subsequent amendments, forms the basis of its operations today. The
headquarters are located in the financial capital of Pakistan, Karachi with its second
headquarters in the capital, Islamabad.
The State Bank of Pakistan looks into a lot of different ranges of banking to deal with the
changes in economic climate and different purchasing and buying powers.

2.3 Products/ Services in Banking Sector

Some major services in banking industry of Pakistan:

1. Current Accounts
2. Foreign Currency Accounts
3. Merchant Services
4. Remittance Service
5. Investment Banking
6. SWIFT Service
7. ATM’s
8. Pay Orders
9. Demand Draft

2.4 Consumer Banking: Globe at Glance

The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered
by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with
major adverse consequences for banks and financial markets around the globe. The crisis,
which has its roots in the closing years of the 20th century, became apparent in 2007 and has
exposed pervasive weaknesses in financial industry regulation and the global financial
system. The crisis hit a key point when Lehman Brothers and other important financial
institutions failed in September 2008.
The crisis can be attributed to a number of factors pervasive in both housing and credit
markets, factors which emerged over a number of years. Causes proposed include the
inability of homeowners to make their mortgage payments, due primarily to adjustable rate
mortgages resetting, borrowers overextending, predatory lending, speculation and
overbuilding during the boom period, risky mortgage products, high personal and corporate
debt levels, financial products that distributed and perhaps concealed the risk of mortgage
default, monetary policy, international trade imbalances, and government regulation (or the
lack thereof).
The International Monetary Fund(IMF) estimated that large U.S. and European banks lost
more than $1 trillion on toxic assets and from bad loans from January 2007 to September
2009. These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were
forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF
estimated that U.S. banks were about 60 percent through their losses, but British and Euro
zone banks only 40 percent.

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Slump in real estate sector caused huge losses to UAE banks that financed property
developers, construction contractors and suppliers. What compounded the impact of the
slump was the multiplier effect, selling goods and services on credit to each other and all
suppliers borrowing from banks; this led to a long chain of loan defaults.
The success stories of innovative lending techniques like group-based lending
(Grameen model), self-help groups (Indian model), solidarity group (Latin American model),
community-based organization (village model) and other approaches results in a paradigm
shift in lending methodologies to small farmers/borrowers. The Grameen bank of
Bangladesh, Bank for Agriculture and Agricultural Cooperatives (BAAC) Thailand, and
Bank Rakyat Indonesia (BRI) has evolved the most successful agri/rural sustainable financial
institution models.

2.5 Consumer Banking in Pakistan

Consumer banking which is one of the fastest growing sectors of Pakistan Banking Industry
is also now major interest point for the banks. Initially the consumer banking sector was only
focused by the foreign banks but its efficiency & profitability attracted others to come
towards this business but still the major share of consumer banking in Pakistan is in the hands
of foreign banks.

In a generic sense, institutional arrangements that provide consumers with financing support
to enhance their consumption and as a result thereof, improve their standards of living should
fall within the broad definition of consumer finance. For the past 50 years commercial banks
had completely ignored consumer finance as an activity to some extent.

The major types of consumer banking services are:

1. Auto Loans

In Pakistan auto loans are purchase of brand new or used, imported or local cars for
private/public use. Auto financing and auto leasing both facilities are offered by most of the
banks. Salaried persons/Self Employed Professionals/ Business Persons who meet the terms
and conditions to qualify for the finance are eligible for the loan. Some banks are also
offering both variable rate & fixed options for auto loans. The average market rate for auto
loans is 15.49%.

2. Home Loans

The loans taken for Buying, Building or Removing of house/land are classified as home
loans. For home loans both variable rate & fixed rate options are also available. The
maximum duration offered by banks for home loans is generally twenty years that’s why
banks conveniently give loans to permanent employees of any firm to ensure strong
repayment ability. The average market rate for home loans is 14.40%.

3. Personal Loans

Personal Loans are generally unsecured type of loans but in certain cases when the amount of
personal loans increases the normal limit its remaining potion must be secured. Personal
loans include loans for the purpose of education, marriage, purchase of consumer durables,

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furnishing, traveling, etc. generally the limit for personal loans is between Rs.100,000 to
Rs.10 million approx.

4. Credit-Debit Cards

Credit Cards mean cards which allow a customer to make payments on credit. Supplementary
credit cards are considered part of the principal credit card. Initially only foreign banks were
offering credit cards in Pakistan but now many local banks is also offering credit card facility.
Credit card is covered by three networks VISA, Master Card & American Express. Debit
cards are accepted at all ORIX Network in Pakistan and it can also be used as ATM cards

5. Deposit Accounts

All the commercial banks are offering different kinds of deposit accounts these account
varies from customer to customer and fill the need of every type of customer. Few of the
accounts provide high interest while some pay low interest & some don’t pay any interest.
Some major categorizes of deposit accounts are;

• Current Accounts
• Saving Accounts
• Foreign Currency Accounts
• Business Accounts
• Term Deposits Accounts

1. Wealth Management

Wealth management is a new kind of service introduced in consumer banking sector now a
days. It covers all aspects of securing future of bank’s customers; it includes insurance, tax
advisory, financial consultancy, investments plans etc. However, since this service is mainly
offered by few foreign banks that why bank’s customers don’t have any idea about Wealth
Management Service. Almost all the banks are offering insurance services to some of their
customers but the concept of wealth management is not behind it.

2. E-banking

To facilitate its customers all banks local & foreign are offering high technological e-banking
services. These services let the banks customers to perform many banking activities easily
without any restriction of time & place. Some of the major e-banking services provided by
the banks are;

• Phone banking
• Internet banking
• Plastic cards
• Online banking
• Mobile banking
• ATM

2.6 SBP prudential Regulation for Consumer Financing

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The SBP issued Prudential Regulations for Consumer Financing (PRCF) in the last quarter of
2003, and came into effect on January 1, 2004. Previously, prudential regulations were
designed for a predominantly public sector banking system and geared towards wholesale and
commercial banking. The objective of PRCF is to carefully monitor and supervise the
consumer financing activities of the banks and DFIs by limiting their exposure in terms of
equity, devising predefined criteria for the financial institutions undertaking this activity, and
encouraging self regulation through more transparency and greater disclosure. In this respect,
disclosure requirements have been prescribed by the SBP.

2.7 Credit Information Bureau (CIB)

CIB was established as a part of Banking Surveillance Department in 1992 by the SBP under
Section 25(A) of Banking Companies Ordinance, 1962. The Bureau is a repository of credit
information of borrowers. The member lending institutions provide credit data of their
borrowers to the bureau which consolidates, updates, and stores the same and provides this
information to its member institutions in the form of credit worthiness reports (CWR). CIB
aids financial institutions to make well informed credit decisions in timely manners
minimizing the credit risk.
All banks, DFIs, non-bank financial institutions (NBFIs), Modarabas and microfinance banks
operating in Pakistan are members of the CIB.

2.8 Contribution of Consumer Banking in Economic Development

Overview:
In Pakistan, consumer finance despite rapid growth during initial period of 2-3 years has
started declining. During past few years the domestic consumer finance emerged as one of
the key factors to boost economic growth despite its comparatively low share of 14% in the
total private sector credit compared to its share in other countries like India and Indonesia
where it stands at 24% and 30% respectively.

Consumer Financing & Economic Growth:

Lending through credit cards, personal loans, auto loans, loans for durables and housing
finance emerged main streams of consumer finance. They shaped domestic demand and
lending strategy by the banking sector in quite subtle ways. Consumer finance also brought
social change through higher circulation of money and relaxation of income constraints for
borrowing particularly among those middle class segments that were eager to become part of
growing economy and keen to benefit from economic growth.

Implications for Economy:

Consumption is the key to economic growth for one simple reason that its sets pace for
production of commodities and manufacturing of goods of different sorts. The dilemma of

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managers of national economy over the years was to execute a well defined strategy of
economic growth along with taking measures to bring structural changes in economy through
prudent administration, fiscal and monetary.
Developed economies register growth because of domestic consumption and exports. These
twin factors guarantee their economic survival in this highly competitive world. In Pakistan,
exports are growing slow and consumption is fuelled by financially strong segments of
society who totally depend upon remittance sent by their relatives working abroad, profits
earned through speculative investment and as beneficiaries of expansionary fiscal policy
pursued by the government.

Section 3 RESEARCH METHADOLOGY

3.1 Strategy for Data Collection

Data has been collected through two sources which are:

3.2 Primary Data Collection

Four local banks & three foreign banks are selected for collecting data regarding consumer
financing. These banks are;

Foreign Banks
• Citibank N.A
• Royal Bank Of Scotland
• Standard Chartered Bank Of Pakistan

Local banks
• Muslim Commercial Bank (MCB)
• Faysal Bank Limited (FBL)
• Bank Alfalah
• Habib Bank Limited

3.3 Secondary Data Collection

Secondary data has been collected from different articles, websites, news papers and journals.
For secondary data collection the main focus was on local materials while some information
on consumer banking in different countries has been collected to see the trends and new
opportunities.

Section 4 ANALYSES AND FINDINGS

4.1 Opportunities

The most preferred category for issuing consumer loans is salaried individuals & one of the
most important reasons behind this is that are more reliable and they have regular source of

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income or incase of any problem they can also be approached for any query. The two other
categories which are businessman and self-employed people are considered after
organizational employees, these two categories can also give a great business to consumer
banking industry, but suitable conditions & polices must be prepared to disburse more loans
to them.

One of new concept introduced in the area of consumer banking is Wealth Management
Service. The service is classified as an advanced type of financial planning that provides high
net worth individuals and families with private banking, estate planning, asset management,
legal resources, and investment management, with the goal of sustaining and growing long-
term wealth.

4.2 Challenges

The consumers as well as the banks are entitled to certain financial rights, which must be
protected in an institutional-cum-legal framework, which is capable to strike a balance
between rights of both entities independently. The dilemma in Pakistan is that the consumers
remain a weaker party in comparison with the banking sector, thus balancing the equation in
favor of the latter. The market-oriented vision of economic managers has served the banks
more favorably than the consumers.
The banking sector has demonstrated capacity to influence the policies, procedures and rules
in its favor, as it is better equipped with financial resources, knowledge, technology, and
lobbying with the governance machinery. This leverage is leading to emergence of a whole
range of problems and grievances, especially in relation to consumer financing, thus
negatively affecting the ability of consumers to articulate and protect their financial rights,
and access justice if these rights are violated by the banks.

4.3 Problems faced by borrowers

The major problems faced by customers in getting a consumer loan are improper guidance,
slow processing and bank statement. Whether a person is applying for auto loan, personal
loan, home loan or a credit card it must have a bank account and a good bank statement this
makes easy for a customer to get a consumer loan and also helps banks to assess its
customers better but most of the time people who apply for a consumer loan even don’t have
bank account or they are not actively using that account which makes difficult for them to get
a loan. The most actively used consumer financing product is Credit Card and one of the
major problems faced by bank’s customer on credit cards is its high interest rate, it’s very
easy for anyone to get a credit card now days because it don’t require any collateral, the only
major thing that is required by the bank to issue a credit card is a bank account with a good
balance. Generally we can specify the problem faced by borrowers into following points;

• High Interest Rate Spread:

Low interest rate spread is an important indicator of the efficiency and competition in the
financial systems and helps in economic growth through increased investments. However in
Pakistan the spread has vacillated between 5.95% and 9.58% during the period from 1990 to
2005, which points towards a cartel-like behavior of the banking sector.

If we look at the nominal and real interest rates, it becomes evident that consumers have had
suffered a great deal at the hands of banks. From 1990 to 2004, the nominal weighted average

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lending rate has always been higher than inflation rate. The banks keep the lending rate high
enough to ensure that the real lending rate is almost always positive. In recent years, the
spread has exceeded 7% on the average. The high difference between lending and deposit
rates indicates that the depositors are not getting due returns, as compared to huge profits
being earned by the banks.

Weighted Average Lending and Deposit Rates in February 2008

Source: State Bank of Pakistan, 2008

• Deteriorating Quality of Services:

As the consumer financing portfolio is increasing, quality of related banking services is

becoming a serious issue. Processing delays, service inefficiencies, unauthorized debits and
non-compliance with requirement of providing monthly bank statements are few examples of
poor quality of banking services.

Types of Consumer Complaints in 2006

• Unsolicited Financing:

Aggressive marketing campaigns launched by the banks are targeting the consumers and
repeatedly encouraging them to purchase a loan or credit card. This supply driven approach is
creating artificial consumerism on one hand, and is limiting the choices for consumers, on the
other. A car lessee, for instance, is bound to insure the car from insurance company of the
bank’s choice.

• Poor Information Disclosure Practices:

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Although PRCF require the banks to ensure transparency through disclosure, access to
information related to consumer financing remains a critical issue. A strong culture of secrecy
prevails in the banks, as they avoid providing even ordinary and insensitive data.

• Requirement of Collateral:

Small farmers which constitute 69% of rural households got only 23% of bank loans, whereas
big landlords, who represent only 4% rural households, got 42% of institutional credit. One
of the reasons for this disparity is the inability of small farmers to provide collateral to banks.

4.4 Future prospects of Consumer Banking in Pakistan

Banks are focusing more on consumer finance and their strategy is fully complemented by
the company’s marketing consumer durable. Now an individual can acquire from a mobile
phone to an expensive automobile on monthly installments if he/she can convince the lender
about regular income and repayment ability. It is a two-way traffic and both the lender and
borrower have realized their rights and obligations. Financial institutions are in the business
of lending and cannot afford delinquent loans. Similarly people desirous of improving their
lifestyle wish to continue accumulating new assets. Therefore the best practice to follow is
‘you keep me happy I will keep you happy’. Consumer financing has started slow down now.
The growth was 29% or 72.4 Billion in the first half of 2006 as compare to the total consumer
portfolio equal to Rs.325 Billion or 13.5% of the overall loans of the banking sector. The
growth has shrunk to 9% in first half of 2007. The reason for this is not the precautionary
measures taken by bank but higher rates due to which consumer are shying away from
consumer financing. The diversion of the Government borrowing from central bank to
commercial banks is also creating a crowding out impact thus leaving a little room to the
banks to remain aggressive in the area of consumer financing.

Section 5 CONCLUSIONS

5.1 Conclusions

Consumer financing has expanded in Pakistan at an unprecedented growth rate over the last
seven years. The banks have intensively capitalized upon the demand for consumer financing
and earned record profits within the generous space of credit policy provided by the State
Bank of Pakistan (SBP). This space has further motivated the banks to get into unsolicited
financing by aggressively marketing products even where no genuine demand exists. Despite
that a regulatory framework is in place, the banks appear to have failed in terms of full
compliance with SBP regulations, and in satisfying majority of their customers against
various service parameters.

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At the macroeconomic level, consumer financing has significantly contributed to economic
turnaround by stimulating consumption and investments. There has been a phenomenal
increase in private consumptions due to easy availability of credit from banks. However, in
tandem with this development, the manner in which consumer financing is being delivered
has seriously jeopardized the competitiveness in economy. A cartel-like pattern appears to
have emerged in the banks, given that interest rate spread is among the highest in the world.

Nine Year Average Interest Rate Spread of 14 Countries

Source: SBP Annual Report

Moreover, consumer financing has significant impact on inflation, which is rising sharply. In
face of the economic challenges facing Pakistan, the SBP can no longer afford to overlook
the state of poor competition in the financial sector.

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From a consumer perspective, consumer financing has been helpful in improving the quality
of life of the people who have the capacity of servicing the loans. However, there is mounting
evidence that this capacity is deteriorating due to high spread and variable interest rates on
loans. Depositors are not getting due returns due to high difference between lending and
deposit interest rates. Lack of consumer education on banking terms and conditions, policies,
rules, and regulations is also a critical factor in securing financial rights.
In recent years the regulation for tenure and amount of consumer financing has been changed
many times but still the bank’s customers are not totally satisfied by the tenure of consumer
financing. Improper guidance, slow processing and bank statement are the major problems
faced by bank’s customers in getting consumer loans. The reason for these problems is that
people applying for consumer loans don’t have proper information about the requirements by
the banks and due to high number of applications & lengthy procedure by banks, the loan
processing is slow. Middle class wants to enjoy all the luxuries of life without taking into
consideration the impact of these luxuries financed obviously by commercial banks on their
monthly income. Very few borrowers know that the rate of interest being charges on
consumer finance by the financial institutions is too high as compared to prime interest. In
case of credit cards, despite of many changes in bank policies and strict regulations by SBP
still bank’s customers are facing hidden charges problem. Due to unclear policies and term &
condition of banks, customers are not able to know about different charges of banks and the
problem of hidden charges occurs. On the hand, although Credit Information Bureau (CIB)
provide complete and accurate information about the bank’s customer credit records but still
loans default occur in consumer financing. The problem is not with only due to false
customer records but also due to wrong policies and improper assessment by bank which
cause defaults on consumer loans. The target market for issuing consumer loans for banks is
middle class because they have the strong ability to pay off their loans. Upper class is
generally not targeted for consumer financing because they have enough resources &
purchasing power to buy any product. High markup made personal loans and credit cards the
most preferred category of consumer financing by the banks. While in terms of loans amount
the biggest category of consumer loans are auto & mortgage loans and they are preferred by
banks because they have collateral which provide security in case of any default. Auto loans
have become very trouble-some for the private banks. The rate of defaults has increased at
phenomenal rates. The cars are auctioned at lower prices which do not recover the entire
amount invested by bank. To compensate the loss caused by these auto loans private bank
charge high mark up on cars. House and car financing are safe modes of financing from the
banker’s point of view as the every rising real-estate and car prices coupled with safety
margin in the shape of down payment allow the bankers to enjoy a sound night sleep.

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 RBS

Source: SBP Annual Report

FY 07

Most of the bank’s customers prefer local banks for general banking activities this is mainly
due to large branch network, wide range of services and low service charges provided by the
local banks. But for consumer banking, customers prefer foreign banks in Pakistan; this is
due to high range of consumer banking services provided by them. Foreign banks which are
the introducer of consumer bank in Pakistan still retain the major share of consumer
financing in Pakistan. During the last five years consumer banking had witnessed a high
growth in Pakistan but its growth rate is declining now which is due to the high markup rate
charged by banks and high increase in non-performing loan (NPL) with low recovery rate.
Maintaining the critical balance between savings, investments and borrowers debt-servicing
ability is possible if input prices remain stable, affording business sustain their profitability
and interest rate remains stable. There is no denying to the fact that consumer credit within
prudent and sustainable limits is desirable for economic growth, smoothing consumption and
improving credit risk diversification. At the same time unsustainable consumer growth in
weak macroeconomic environment, ineffective prudential and regulatory framework, weak
risk management system and legal infrastructure can create systemic vulnerabilities. The
consumer finance is money lending affairs to a needy for his well beings and ultimately to
rise his living standard in the society. It is financing facilities that generally and
wholesomely support consumption and as a result improves the overall living standards of
households. Credit card is a risky mode of finance as no collateral is available to cover risk.
Perhaps this is the reason that this segment of bank finance has been allowed to operate on
the terms of the bankers without any worthwhile monitoring by SBP. The growth in our
economy has led to increasing consumption trends, resulting in the widening demand and
supply gap. However as the people of the country become more educated they have realized
the benefits and conveniences of using plastic money as a mode of payment. At the moment
less than 1% population of the country is using plastic money in Pakistan; therefore one can
put complete blame of inflation and price hike on it. Inflation in basic food items which is
11% is not directly linked to plastic money or consumer financing. Developed countries
facing rampant consumerism find plastic money most efficient and acceptable mode of
payment. The total Non-Performing Loan of commercial banks in Pakistan has touched level

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 of Rs.154 Billion which is covered by 66% provisions in 2007. The local private banks have
loan loss coverage of 63% as on June 30, 2007. And for public banks and foreign banks this

Fiscal Year
Portfolio

2007 2008

Mortgage Loans 15.5 17.6

Credit Cards 19.2 6.9

Auto Finance 8.0 6.0

Personal Loans 7.9 3.0

All 10.4 6.6

ratio stood at 74% & 86% respectively. Foreign banks in Pakistan have loan loss coverage of
86% and they have provided more than the required provisions against Non-Performing
Loan.

Share of Products in Total Consumer Financing Portfolio

Source: Banking Surveillance Department, Quarterly Performance Review

of the
Banking System. June 2007

Growth in Consumer Financing (July-January 2007 and 2008)

Source: State Bank of Pakistan Second

Quarterly Report for FY 08

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