Consumer Financing in Pakistan Issues & Challenges _PROJECT
-
Upload
farman-memon -
Category
Documents
-
view
129 -
download
0
Transcript of Consumer Financing in Pakistan Issues & Challenges _PROJECT
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 1
ACKNOWLEDEGEMENT
First off All, Thanks to Almighty ALLAH for providing me the strength, courage,
direction and skills to learn, acquire knowledge and the ability to accept and meet
challenges.
Secondly, especially thanks to BIZTEK, Who has always provided quality education &
provided support to this project at all levels. I would like to appreciate all those people
who give their precious time to conduct interview. I would like to express my sincere
gratitude to my Supervisor Dr. Noor Ahmad Memon. Who had given me this topic &
his believe in me that I could perform this task efficiently. Also thanks for his support &
guidance.
I would also like to thank my family members, who were always there to support me,
for their contribution in every aspect to make this report. Special thanks to their moral
support, financial support, accessories, transport facility, which they have given me to
complete this report efficiently.
Finally, I hope this project will be beneficial for the student to come in BIZTEK after us.
Once again I would like to thank all those who have been involved directly or indirectly
in this project.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 2
INSTITUTE OF BUSINESS AND TECHNOLOGY
ABSTRACT SUBMITTED BY: Rizwan Ali
DISCIPLINE: MBA (Banking & Finance)
TITLE OF PROJECT REPORT: Consumer Financing In Pakistan: Issues and Challenges MONTH OF SUBMISSION: November, 2010
NAME OF COURSE INSTRUTOR: Dr. Noor Ahmed Memon
ABSTRACT This study is the result of research undertaken by Consumer Rights Commission of
Pakistan (CRCP) and The Asia Foundation (TAF). It presents a critical analysis of the
regulatory framework for consumer financing, emerging issues from micro and macro
standpoints, and the nature and magnitude of consumer grievances. Drawing on
secondary data sources and user surveys, the study is one-of-its kind as it covers all
main consumer financing products including credit cards, car financing and leasing,
personal loans, and house financing. It provides evidence-based proposals for
designing and implementing strategic and practical interventions to strengthen the
regulatory mechanism for strengthening the consumer-financing sector in Pakistan.
I can hardly overemphasize the significance of this study, given the unprecedented
growth in consumer financing over the last few years. On one hand, consumer
financing has made significant contribution in terms of increased consumption and
investments, and on the other hand, it tends to jeopardize the competitiveness in
economy. The fact that Pakistan has one of the highest interest rate spread in the
world indicates that competitiveness in the banking sector is very poor. In recent
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 3
years, the spread has exceeded 7% on the average. This situation calls for reduction
in operational costs and effective exercise of regulatory powers to determine
reasonable rate of returns for the banks as well as the depositors. In addition, the
growth in consumer financing is creating inflationary pressure on the economy. The
study urges the decision makers to take practical steps for realigning the consumer
financing sector in line with macroeconomic discipline.
The study also concentrates on issues in consumer awareness on banking terms and
conditions, policies, rules, and regulations as a critical factor in securing financial
rights. As the consumer-financing portfolio is increasing, unsolicited banking,
processing delays, service inefficiencies, unauthorized debits, etc. are emerging as
main problems for the users of consumer financing products.
Better consumer education and improved access to information are central to address
these problems, in addition to strengthening the regulatory framework.
I hope that the readers would find this study useful and interesting. It is expected that
the recommendations would attract the civil society organizations and the policy
community to take outcome-oriented initiatives for reforms in regard to banking
regulations and public grievances in the baking sector in general, and in consumer
financing, in particular.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 4
01. INTRODUCTION 1.1 Introduction Over the last seven years, Pakistan’s banking sector has robustly engaged in
consumer financing by unleashing a variety of products such as credit cards, auto
loans, housing finance, and personal loans, etc. The unprecedented growth of
consumer financing is largely attributed to the liberal economic policies attuned to the
principles of free market economy, and huge liquidity available to the banks in the
aftermath of 9/11. This environment prompted many banks to make their pie of profits
bigger by selling consumer financing products through tactical and persuasive
strategies, even where no genuine demand existed. As a result, supply-driven
approach and aggressive marketing have further catalyzed the boom. From a
macroeconomic standpoint, consumer financing has considerably 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. In tandem with this development, a number of problems and
challenges have emerged with adverse effects on the national economy as well as the
individual consumers. At the macroeconomic level, the boom in consumer financing
has demonstrated strong inflationary impact despite stringent monetary policies.
Personal and auto loans, for example, have resulted in increased demand for
consumer goods, expansion of road networks, and imports of petroleum products.
From a consumer’s standpoint, a whole plethora of issues has emerged as a result o
unfair profit-earning strategies of banks in absence of consumer awareness about
terms and conditions, rules, and regulations, etc. In this context, Consumer Rights
Commission of Pakistan (CRCP) has undertaken this research with financial support
of The Asia Foundation.
The main objective is to map and highlight the emerging issues and challenges
associated with consumer financing.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 5
The emphasis rests on identification of weaknesses in regulatory framework from a
consumer perspective within broader macroeconomic context. This chapter introduces
the concept, rationale, objectives, methodology and limitations of the study.
The term ‘consumer financing’ refers to any kind of lending to consumers by the
banking sector and financial institutions. In simple words, it is a type of service that is
designed to provide the individuals with necessary finance for personal purchases
ranging from buying a car, shopping purchases, to buying a house. The concept of
consumer financing is based on the need for an institutional arrangement that
provides consumers with financing support to enhance their consumption and, as a
result, improve their standards of living.
In this study, CRCP has used the term ‘consumer financing’ as it is defined in the
Prudential Regulations for Consumer Financing (PRCF) of the State Bank of Pakistan
(SBP). According to the Regulations, consumer financing means “any financing
allowed to individuals for meeting their personal, family or household needs”.2 Thus,
corporate or commercial consumers are excluded from this definition.
1.2 Purpose of the Study 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 research the past,
present & future of consumer banking will be analyzed.
1.3 Research Objectives This report 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.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 6
Main Objectives:
Comparison of services by local & foreign banks.
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.
Scope & Limitation
Issues like, problems in consumer banking due to which some banks temporarily stop
consumer financing, why some banks haven’t implemented full fledge consumer banking
and what are the opportunities in consumer banking & its effect on economic
development will be analyzed.
Keeping in view the growth of consumer financing and emergence of issues and
challenges associated with it, CRCP has developed this study using a consumer lens.
The main objectives are to present an objective and fair mapping of the public
concerns and regulatory weaknesses related to consumer financing and insurance
services in Pakistan.
Prescribe solutions to address the missing links in regulation and consumer
education so that legally enforceable financial rights of the citizens could be
promoted and protected;
Provide thoroughly researched evidence for designing and implementing strategic
and practical interventions to strengthen the regulatory mechanism for addressing
the grievances in consumer financing and related insurances services;
Help identify the spheres, both from macro and micro finance standpoints, where
consumer education and awareness are lacking;
Propose an agenda for reforms on which civil society organizations and the policy
community could follow-up for outcome-oriented initiatives for reforms in consumer
financing regulations, consumer education, and public grievance redress
mechanism.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 7
1.4 Research Methodology This study is based on literature review, primary data collected through surveys of
borrowers and banks, information collected from key informant interviews and short
stories on selected issues. In the following paragraphs, a brief description of each of
these methods is provided.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 8
02. LITERATURE REIVIEW A comprehensive literature review was undertaken at the initial stage of the research.
This included a critical review of relevant rules, regulations, guidelines and policies of
SBP. Main documents reviewed included
(i) Prudential Regulations for Consumer Financing,
(ii) Guidelines for Standardization of ATM Operations,
(iii) Guidelines for Dealing with Customer Complaints,
(iv) Credit Information Bureau Rules
(v) Regulations,
(vi) The Financial Institutions (Recovery of Finances) Ordinance, 2001,
(vii) Payment Systems
(viii) Electronic Fund
Transfer Act, 2008. In addition, complaints redress procedures of banks,SBP,
Banking Courts, and Banking Ombudsman were also reviewed. In addition to
the regulations, guidelines, policies, etc., secondary sources including research
papers, reports, publications, and articles developed by various institutions and
individual authors were also consulted to substantiate the findings of the study.
This thesis is a part of my Masters of Business Administration degree. The
purpose of this thesis is to explore and analyze the potential of Consumer
Banking in Pakistan and to find out the challenges & opportunities faced by
Consumer Banking Industry. In this research comparison of consumer financing
products and the problems faced by borrowers and lenders have also been
identified.
Consumer finance was backed by the SBP to give boost to economic growth
through demand-pull pressure. Various instruments of consumer finance have
attractions for consumers for reasons that are dictated by personal desires,
income constraints, paying capacity, social needs and access to getting loans.
Rising interest rates, spiraling service charges and deterioration in quality of
service are bringing down the demand for personal loans, credit cards and auto
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 9
financing. Consumer banking is facing new challenges as a result of interest
hikes.
The real beneficiaries of consumer finance are the people who did not have
capacity to purchase expensive household items in a single go but could afford
them because of consumer finance, the commercial banks that have been
earning large interest and huge returns on their investment in consumer finance
and the economy that got impetus for growth. Local banks are preferred by
people for general banking services because of their low charges and wide
branch network but for consumer banking people prefer foreign banks because
of their good customer service and wide range of facilities. Despite of so many
changes in consumer financing regulations bank’s customers are still facing
hidden charges problem, difficulty in getting consumer loans and not highly
satisfied by tenure of consumer loans. Due to lack of awareness many
problems are faced by the banks customers and the industry growth rate is
declining.
Banks should take steps to promote consumer banking in such a way that the
awareness if consumer banking services could be increased and the industry
could boost at a high rate. New services need to be introduced and services
and banks charges & markup rates should be reduced. In case economy is to
sustain growth through consumer finance as one of the important factors of
growth, then income inequalities should be bridged and income level be
increased to develop paying capacity of large number of consumers.
The State Bank has removed restrictions imposed on nationalized commercial
banks for consumer financing. The positive experience of auto financing gives a
lot of hope that the middle class of this country will be able to access consumer
durables through bank.
SBP Initiatives for Financing: State Bank of Pakistan established, in September 2007, a dedicated infrastructure and Housing Finance Department
(IHFD) to enhance the access of financial services for development of
infrastructure sectors by creating enabling environment for investors & lenders
and by adopting international best practices.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 10
Regulation for Housing Finance: Banks / DFIs shall determine the housing
finance limit, both in urban and rural areas, in accordance with their internal
credit policy, credit worthiness and loan repayment capacity of the borrowers.
At the same time, while determining the credit worthiness and repayment
capacity of the prospective borrower, banks / DFIs shall ensure that the total
monthly amortization payments of consumer loans, inclusive of housing loan,
should not exceed 50% of the net disposable income of the prospective
borrower.
Regulation for Credit Cards: The banks / DFIs should take reasonable steps
to satisfy themselves that cardholders have received the cards, whether
personally or by mail. The banks / DFIs should advise the card holders of the
need to take reasonable steps to keep the card safe and the PIN secret so that
frauds are avoided.
Regulations for Auto Loans: The vehicles to be utilized for commercial
purposes shall not be covered under the Prudential Regulations for Consumer
Financing. Any such financing shall ensure compliance with Prudential
Regulations for Corporate / Commercial Banking or Prudential Regulations for
SMEs Financing. These regulations shall only apply for financing vehicles for
personal use including light commercial vehicles also used for personal
purposes.
Regulation for Personal Loans: The loan secured against liquid securities
shall, however, be exempted from this limit. The loans against the securities
issued by Central Directorate of National Savings (CDNS) shall be subject to
such limits as are prescribed by CDNS / Federal Government / State Bank of
Pakistan from time to time.
This will at the same time boost the manufacturing of TVs, air-conditioners,
DVDs, washing and drying machines, deep freezers etc. in the country. Credit
and Debit Cards are also gaining popularity and the numbers of card holders
have doubled during the last two years
Prudential Regulations: The prudential regulations in force were mainly aimed
at corporate and business financing. The SBP in consultation with the Pakistan
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 11
Banking Association and other stakeholders has developed a new set of
regulations which cater to the specific separate needs of corporate, consumer
and SME financing. The new prudential regulations will enable the banks to
expand their scope of lending and customer outreach. The banks / DFIs must
clearly disclose, all the important terms, conditions, fees, charges and
penalties, which include Annualized Percentage Rate, pre-payment penalties
and the conditions under which they apply. For ease of reference and guidance
of their customers, banks / DFIs are encouraged to publish brochures regarding
frequently asked questions. For the purposes of this regulation, Annualized
Percentage Rate means as follows:
There was Multiplicity of regulatory agencies, as Pakistan Banking Council also
was also give supervisory powers as those of State Bank of Pakistan;
Nationalized commercial banks (NCBs) were used to extend credit to priority
sector) through multiple subsidized credit schemes; A complex system of Credit
Ceiling was also introduced; Ceiling and Floor son lending and deposit rates
were imposed; Banks were given Quantitative limits for credit extension; A lot of
fore controls were introduced; State Bank of Pakistan has no autonomy
regarding its operational function as it was subservient to fiscal policy; By the
end of 1980s it was hardly conducive for banks to meet the financial needs of
the economy
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 12
03. CONSUMER FINANCING 3.1 What is Consumer Financing? Consumer financing means any financing allowed to individuals for meeting their
personal, family or household needs. The facilities categorized as Consumer
Financing are given as under: Like personal loans, auto loans, house financing, and
credit cards. These finance give people to live these own choice.
All the people can not afford to achieve their desired. But they want to enjoy the life,
and then they go to banking and applying for financing. The bank takes some
necessary steps and then allow to people to enjoy the life.
Rapid growth in the consumer finance portfolio of the banking sector in recent years
has generated an ensuing debate, mostly critical of its alleged role in inducing
consumption led growth in the economy. The general perception is that consumer
finance has created problems for the less financially literate customers. The aims to
explore some of these perceptions and present data and evidence in perspective,
while taking into account the high sensitivity of these loans to increasing interest rate
dynamics. Notably, the household sector in Pakistan is underleveraged by global
standards, and emergent risks are well managed by the banking sector.
Consumer finance is an established financial product across the globe, particularly in
mature economies, where it constitutes a significant portion of banks’ lending
portfolios. In the Pakistani banking sector, however, the evolution of the consumer
financing portfolio is a more recent phenomenon, as banks have traditionally focused
on lending to the corporate sector and public sector entities. While two prominent
foreign banks took the lead in introducing credit cards in the banking sector in the mid-
‘90s, their outreach was limited to the top tier of salaried customers and businessmen.
Emulating the experience of various foreign banks who had a head-start in this area,
domestic private banks have exhibited remarkable adeptness in adopting new
procedures for credit risk assessment, setting up the requisite policy and collections
units, and upgrading the scope of their IT based systems. In doing so, they
successfully introduced several innovative products for the individual consumer
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 13
segment. On the demand side, the consumer, who previously did not have access to
bank credit without sufficient liquid collateral, responded well to these initiatives.
A combination of factors are responsible for the widespread popularity of consumer
finance in recent years: the financial liberalization process over the last decade or so,
has led to the creation of a banking system which is largely owned and operated by
the private sector, and is free to allocate resources in response to the demands of a
market based mechanism.
Secondly, the influx of liquidity in the banking sector since FY02 motivated banks to
diversify and expand their earnings base by venturing into previously untapped areas,
and third, the easy monetary policy stance of the central bank from FY05 to FY09
provided eligible customers with financing options at historically low rates to meet their
consumption demand. In this backdrop, consumer finance has emerged as one of the
most promising asset products for banks.
Providing access to purchasing power to the middle-class consumer has been the
most significant achievement of this product class. Not only have people been able to
raise their standard of living by purchasing various consumption goods which were
previously treated as luxuries in reach of only a few, demand for these goods has also
led the manufacturing sector to expand its capacity, such that both backward and
forward linkages have contributed to the expansion in economic activities. Banks’ auto
loans product and loans for consumer durables, for instance, have been instrumental
in this aspect.
Though still small in proportion, the rising demand for mortgage finance reflects the
individual consumer’s need and financial capacity, to acquire private ownership of
housing units. Hence in promoting their consumer financing products, banks have
played their due role in promoting economic development in the country.
Despite the many positive developments associated with consumer finance, its role in
promoting consumerism in Pakistan has generated a debate, with mostly negative
connotations. The aims to explore some of these perceptions and provides
perspectives on how far removed these perceptions are from reality. It starts by
discussing stylized facts related to Financial Stability Review 2008-09.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 14
3.2 Growth of Consumer Financing in Pakistan Until the early 1990s, consumer financing was not offered by commercial banks in
Pakistan. Just Credit cards were offered to only a selected band as a convenience for
bill payments and not for financial support. In 2001, excess in liquidity of the banks
due high inflow of remittances in the 9/11 aftermath and low interest rates motivated
banks to enter into consumer financing business. Then the bank of Pakistan jump in to
consumer financing and gives finance to all people who fulfill the requirement of
banking.
3.3 Types of Consumer Financing The consumer financing have four major types
a Personal loans.
b Auto loans.
c House financing.
d Credit cards.
(a) Personal Loans: mean the loans to individuals for the payment of goods, services
and expenses and include Running Finance / Revolving Credit to individuals.
There are two kinds of personal loans, secured and unsecured. Secured loans are
backed by some form of collateral such as an automobile, a home or property. They
are usually for longer periods of time and for larger amounts than unsecured loans.
Secured loans are easier to qualify for because the lender takes on less risk with the
presence of collateral. Because of the lowered risk they generally have lower interest
rates. Secured loans are best for borrowing large amounts, people with bad or
imperfect credit history and those that want longer repayment periods.
A higher credit score will give you a lower interest rate. Obtain a copy of your credit
report from any of the major reporting agencies. Be sure you get a copy with your
FICO score. Correct any errors and make sure all your bills are current, this will save
you money. Lenders will use your FICO to determine your eligibility and your interest
rate.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 15
Unsecured loans do not require collateral; they are normally for less than secured
loans. The upper borrowing limit is usually about $25,000 with a repayment term of 5-
10 years. Some kinds of unsecured loans are cash advances, payday loans and
revolving lines of credit. Unsecured loans can be used for debt consolidation,
unexpected expenses, vacations, home repairs, student loans, wedding loans etc.
They are ideal for people who do no own a home or property or homeowner who does
not wish to pledge their home or property.
Requiring less paperwork than other loans, you can usually apply for an unsecured
loan online with as little as your credit score and history, debt information and your
earning history. One of the main benefits of an unsecured loan is flexibility; they can
be utilized for many different kinds of purchases. The money can be available to you
in as little as 24 hours.
(a.1) personal loan what banks hide from you: It is very easy getting a personal loan these
days. You can walk into a bank or a consumer finance company and get a loan in a
very short period of time. Or it can be the other way round as well. A direct sales agent
can come to you and convince you to take a personal loan.
While convincing you to take a personal loan, the bank or the direct sales agent is
likely to tell you that the rate of interest charged on these loans is in the region of 20-
25%. The logic given is something like this: Let us say an individual decides to take a
personal loan of Rs 75,000 to be repaid over a period of three years. You are told that
to repay this loan you would have to pay an amount of Rs 3,400 every month.
Hence, over a period of three years, the total amount you would have paid would work
out to Rs 122,400. Of this Rs 75,000, is the loan that you have taken. Hence, you pay
an interest of Rs 47,400 (Rs 122,400 - Rs 75,000) over a period of three years. An
interest of Rs 47,400 works out to Rs 15,800 (Rs 47,400/3) per year. An interest of Rs
15,800 in a year on a loan amount of Rs 75,000 implies an interest rate of around
21%. This figure is arrived at by dividing Rs 15,800 by Rs 75,000 and expressing this
as a percentage.
Banks and direct sales agents call this way of expressing interest is known as the flat
rate of interest. But this is not the right way to calculate interest. Banks and consumer
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 16
finance companies in their zeal to give you the loan do not tell you the truth. In order to
repay the loan, you have to pay a certain amount every month to the bank, or the
consumer finance company, you have taken the loan from. Every month.
When you make this payment a certain part of the principal amount -- i.e. the actual
loan that you had taken -- gets repaid. Given this, the interest is to be calculated on
the loan outstanding at any point in time, instead of on the principal. This is the right
way of calculating interest and is known as the reducing balance method of calculating
interest.
When this method is used to calculate interest the actual rate of interest is the
example taken above comes to 35%. Hence, the actual interest rate that you are
paying on the loan is almost 15% higher than what banks and consumer finance
companies lead you to believe. For charging such a high rate of interest, the reason
usually offered is that personal loans are unsecured, i.e. the individual taking the loan
does not need to offer them a security. And since giving out such loans is risky
business, the rate of interest is high.
The explanation is acceptable. But what is not acceptable is the fact that banks and
consumer finance companies charge a rate of interest as high as 35% on their
personal loans and tell their borrowers that the rate being charged is as low as 20%.
This clearly is a marketing ploy. It is easier to get people to borrow at lower rates than
at higher rates.
(b) Auto Loans: mean the loans to purchase the vehicle for personal use.
(c) House Financing: means loan provided to individuals for the purchase of residential
house / apartment / land. The loans availed for the purpose of making improvements
in house / apartment / land shall also fall under this category.
The Pakistani housing finance situation has much common with that of many other
emerging markets around the world. Despite a large and persistent housing deficit (6
million households), a number of factors such as low income levels, legal property
issues, and large informal economy result in scarce demand for mortgage loans.
Financial institution’s growth in mortgage lending- and the subsequent improvement in
terms and conditions which might increase further demand in turn has been hampered
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 17
by a lack of long term funding, inadequate incentives to lend to lower income
households, with most banks performing to concentrate their activity on high income
groups and the corporate sector (average loan size is Rs. 2.6 million).
The housing finance market in Pakistan at end December, 2007 amounted to Rs. 126
billion doubling its size from 2005; a massive growth of 112 % in almost three years.
This growth has most probably been favored by greater demand resulting from the
accompanying rise in GDP per capita in Pakistan over the past few years, remittance
growth and growing competition among banks have also contributed to this trend.
Ultimately, however, most of the recent expansion of mortgage lending in Pakistan
can be traced to SBP’s efforts to increase the supply of mortgage lending through
relaxing restriction on housing finance.
Despite these developments in mortgage market, growth, albeit significant, is still
small in both relative and absolute terms: mortgage lending in Pakistan barely
amounted to 1% of GDP in 2007, far from the 14 % registered in Chile, 5 % in
Colombia, 2.5 % in India and 65% in USA. Though the mortgage market is moving in
the right direction and efforts are under way to promote housing finance activities, a
large part of the population continues to be unable to obtain a mortgage loan due to
high cost of borrowing, lack of financial support from the government for low cost
housing and land titling issues.
Having successfully encouraged banks to service the middle class, the government
efforts must now focus on developing mechanism to address the needs of lower
income groups and foster further expansion of the housing finance market. The
government should also play a role in promoting mortgage lending by breaking
barriers to entry and offering well-designed incentives such as mortgage risk
insurance and creating an enabling environment for housing finance activities in
Pakistan.
(d) Credit Cards: mean cards which allow a customer to make payments on credit.
Supplementary credit cards shall be considered part of the principal borrower for the
purposes of these regulations. Corporate Cards will not fall under this category and
shall be regulated by Prudential Regulations for Corporate / Commercial Banking or
Prudential Regulations for SMEs Financing as the case may be. The regulations for
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 18
credit cards shall also be applicable on charge cards, debit cards, stored value cards
and BTF (Balance Transfer Facility).
The State Bank of Pakistan today issued comprehensive operational guidelines for
credit card business of commercial banks/DFIs, outlining code of conduct for various
aspects of credit card operations including their marketing, interest rate charges,
recovery of dues, billing processes etc.
According to the guidelines, banks/DFIs are advised to quote interest rate and service
charges on annual basis. Although, they are free to set the aforesaid rates,
banks/DFIs are required to set well-defined service level for each of the
product/service; whether charged or free. Banks/DFIs should also inform the credit
card holder on the interest rate or services charges through advertisement and/or
sending information to card holders on their addresses.
Banks/DFIs should not levy any charge that was not explicitly mentioned either in the
User Guide or Application Form or Schedule of Charges provided to the customer at
the time of selling credit card, without the prior consent of the card holder. However,
this would not be applicable to excise duty or other charges which may be levied by
the Provincial or Federal Government or any other statutory authority from time to
time.
Banks/DFIs should, however, timely update the customers on the imposition of such
levies. Banks are also advised that interest amount should be charged on net credit
i.e. after deducting the amount paid by the card holder. The outstanding amount due
to rounding off of paisa should not be considered as partial payment and interest
amount should not be charged on it.
According to the guidelines, banks/DFIs must ensure that their recovery/collection
officers should not resort to any verbal or physical harassment of the delinquent credit
card holder, their family members, referees and friends during recovery/collection
efforts. Recovery/collection officers should also not humiliate publicly or in private or
intrude the privacy of the credit card holder’s family members, referees and friends.
Telephone calls and visits to credit card holders for recovery of unpaid dues should be
restricted to a convenient time and the same may be defined in the Bank/DFIs public
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 19
policy and should be properly communicated to customers at the time of issuance of
credit card. In addition, recovery should only be made from principal card holder and
in no case supplementary card holders shall be resorted to any sort of pressure to pay
the unpaid amount.
However, supplementary card holders may be contacted only to enquire about the
whereabouts of the principal card holder. Moreover, banks/DFIs should not start
recovery process for reported disputed transactions until the investigation carried out
by card�issuing Bank/DFI/Banking Ombudsman/State Bank of Pakistan is completed.
In case of wrong/ inappropriate basis of rejection of customer claim, bank/DFI would
be liable for penalty.
With regard to marketing of credit cards, banks/DFIs should discourage aggressive
and hard selling & marketing practices during working/office hours; except with prior
appointment of the prospective customer. In case a customer is called during office
hours for seeking appointment, he/she should be first asked for the option to continue
with the call or not.
Banks/DFIs should seek prior consent of their customers/account holders for informing
them on new products and services on telephone as and when introduced. In this
regard, banks should maintain a “Don’t call list” comprising the contact details of those
customers who do not want to be contacted. The list should be accessible to all
marketing staff and they should be advised not to contact such customers /account
holders for introducing or offering new banking products.
In this connection, banks should update the database of existing customers within
three months from the date of issue of these guidelines. Banks/DFIs should follow the
Code of Conduct for marketing of credit cards which will be issued by Pakistan Banks’
Association (PBA) in consultation with SBP. Guidelines stipulate that credit card may
only be issued by the banks/DFIs, pursuant to a written application duly filled and
signed by the prospective customer. However, in order to reward and retain high end
existing customers, pre�embossed cards may be issued after a proper acceptance by
the customer, which may be in the form of any verifiable mode such as recorded
phone call. Nevertheless, these pre�embossed Credit Cards should be activated only
after receiving complete application form from high�end customers and criteria for
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 20
selecting high end customers must be defined in the bank policy. Keeping in view the
complex nature of credit cards, the banks/DFIS are advised to simplify the credit card
terms and conditions, and keep them clear and understandable both in English and
Urdu languages. In order to mitigate fraudulent use of credit cards, banks/DFIs should
have built in functionality in their systems to monitor the usage of credit card.
Additionally, it should also promptly identify unusual or out of pattern transactions. In
this connection, banks/DFIs may introduce checks or limits on certain category of
transactions, customers, merchants etc. Under the SBP guidelines banks/DFIs are
required to dispatch monthly Statement of Account to credit card holders at least 15
days before the due date.
Towards this end, banks/DFIs may offer online, email or IVR billing facility, with
appropriate security measures. If the customer lodges complaint regarding non receipt
of monthly Statement of Account, the statement should be dispatched to him/her free
of cost, within two working days from the date of complaint.
Banks/DFIs are also advised that they should have an appropriate complaint
resolution structure in place commensurate with the volume of complaints and better
service consideration. Credit card complaints resolution mechanism must be
prominently disclosed on the official website of the Bank/DFI. The Bank/DFI may also
arrange online complaint registration on their websites.
Complaint number should be provided to each complaint submitted to bank/DFI and
same should be communicated to the Credit card holder. Banks/DFIs must resolve the
disputed transactions/complaint of the credit card holder promptly and as per the
franchise rules of VISA, MasterCard, AMEX or any other international card
association, taking into account nature of the transaction, distances, time zones, etc.
However, in no case complaint resolution time should exceed 45 days from the date of
complaint for the transaction(s) under dispute originated within Pakistan.
In addition, interest amount should not be charged to customer during investigation
period. Bank/DFI will recover interest amount accumulated during investigation period
only when the dispute is settled in favor of bank/DFI. If decision turns in favor of the
customer, the bank/DFI needs to refund the amount of disputed transactions, even to
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 21
those customers who had made the payment of disputed transaction and cancelled
the card after lodging complaint.
Under the guidelines, banks/DFIs are advised to develop sound risk evaluation
procedures for enlisting /registration of merchants keeping in view the franchise rules
of their respective franchiser. The enlistment/registration process may interlaid include
proper identification, verification and good credit history, clean track record in Visa’s
National Merchant Alert Service and / or Master Card’s Member Alert to Control High
Risk Merchants etc.
Banks/DFIs providing ‘acquiring services’ need to educate their merchants about the
use of Point of Sale (POS) Machine, genuineness of credit cards, signature
verification, their rights and responsibilities under the agreement. Acquirer banks/DFIs
are required to facilitate merchants by providing prompt payments and timely
maintenance/service of POS machines. Acquirer Banks/DFIs should maintain track
record of merchant’s performance and categorize them, based on risks, involvement
in frauds & disputed transactions etc. and develop a data base or negative list of
merchants involved in fraudulent activities.
The merchants involved in credit card related frauds should be delisted and their
particulars should be shared with other banks/DFIs through PBA.
3.4 Need of I.T in Consumer Financing Now a days Information Technology is no doubt plays a significant role in the
growth of other industries. Its need in consumer financing can be justified by the
following key considerations where only IT infrastructure can help to handle these
issues.
Fast application processing: By using information technology, the application processing
of the customer can be made fast. Electronic transactions take less time to process
the application than manual because all the information is available online and
relevant application processing persons just have to take the decision on the data
available online.
Better Services to customers: In this era of high competition, it is the better service
which attracts the customers toward doorstep. In consumer financing, this can be
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 22
done by solving all the hurdles that come in front of the customer to avail the product.
In this perspective, the information technology seems to be quite useful such as easy
accessibility of resources online, fast and easy availability of the product by fast
application processing described above.
Mass consumer client record handling: This problem is a big concern for CBSP. In
consumer banking, the number of clients is very high and to keep the record of all
customers manually is not only hard to maintain but also time consuming and
resource intensive. By using any good consumer banking software solves this problem
with an ease.
Reduce calculation errors: By using a good consumer banking software makes the
tiring and time taken calculations faster and error free.
Efficient loan recovery: Because the number of consumer financing clients is large and
everyone is not innocent and responsible enough to pay the repayments or dues in
time, there is always a need to recover the loan amount from defaulter. Any efficient
collection or repayment software is very useful in this context to support the collectors
as they need to trace the defaulters frequently to take appropriate action against them
for recovery.
Auditing and fraud detection: With I.T framework, banks can closely monitor accounts
for risk analysis. They are better equipped to determine patterns of fraudulent activity
and identify fraud in time to prevent it, saving their money.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 23
04. REGULTORY FRAMEWORK FOR CONSUMER FINANCING 4.1 Regulatory Framework The mechanism for redress of consumer grievances related to credit cards, ATM,
personal loans, housing finance and auto loans comprises of both administrative and
judicial institutions.
The State Bank of Pakistan (SBP) is the regulator of all scheduled banks and
Development Finance Institutions (DFIs) operating in Pakistan. The regulatory
framework for ‘consumer financing’ comprises SBP regulations, orders, policy
directives, and its institutions mandated to deal with various aspects of credit banking
(e.g. Credit Information Bureau (CIB), Banking Ombudsman, and newly created
Consumer Protection Department (CPD), etc). The regulations prescribe minimum
standards for consumer financing activities, impose exposure limits on banks, and
provide an overall direction for provision of consumer financing services while leaving
a lot of policy space to discretion of the banks. The mechanism for redress of
consumer grievances related to credit cards, ATM, personal loans, housing finance
and auto loans comprises of both administrative and judicial institutions. In the first
place, banks have put in place internal complaint redress procedures. Where the
consumers are not satisfied or are not heard by the bank, they can approach the
Banking Ombudsman. Separate banking courts have also been established for
dealing with loan recovery issues.
Salient features of the regulatory framework for consumer financing are discussed
below:
4.2 Prudential Regulations
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
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 24
encouraging self-regulation through more transparency and greater disclosure. In this
respect, disclosure requirements have been prescribed by the SBP.
Pre-operation Requirements
According to the regulations, the pre-operation requirements for undertaking
consumer financing activities include preparation of a comprehensive consumer credit
policy duly approved by the Board of Directors of the banks and DFIs, establishment
of separate risk management capacity staffed by expert and experienced personnel,
development of a specific program for every type of consumer financing activity,
development and implementation of efficient computer-based Management
Information System (MIS) capable of generating periodical reports, development of
comprehensive recovery procedures for the delinquent consumer loans, preparation of
standardized set of borrowing and recourse documents, and acquiring membership of
at least one credit information bureau.
Every bank is obligated to clearly disclose, by publishing in the form of brochures, all
important terms, conditions, fees, charges, and penalties for the ease and reference of
customers.
Minimum Standards for Consumer Financing Activities
The minimum standards to be observed while carrying out consumer financing
activities include risk management process, such as identification of repayment source
and assessment of customers’ ability to repay, record of customers’ dealings with
banks/DFIs and the latest information obtained from CIB about credit worthiness of the
customer. Besides, the PRCF require the banks to obtain written declaration from the
customer containing details of all consumer financing facilities of other banks availed
by the customer.
The objective is to help banks avoid exposure against a person having multiple
facilities from different financial institutions on the strength of sole source of
repayment. In many cases, the banks do not obtain this declaration, and process the
applications with minimum documentation with the aim of profit maximization. In
addition, the internal audit and control system, as well as, properly equipped and
managed accounting and computer systems are also requisites for processing and
management of consumer financing activities.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 25
Information Disclosure
An important condition in the regulations is with reference to disclosure and ethics.
Under the regulations, every bank is obligated to clearly disclose, by publishing in the
form of brochures, all important terms, conditions, fees, charges, and penalties for the
ease and reference of customers. This pre-requisite is an important step forward by
the SBP for protecting customer’s right to information. However, the manner in which
this information is presented by the banks is not very helpful for customers. Most
often, the banks do not disclose to the customer all applicable charges. Similarly,
technical terms and types of charges used in the statements and information
broachers are not fully explained. Access to information is a critical issue, which has
been addressed in the regulations only partially.
Exposure Limits
The regulations are frequently updated to incorporate the emerging innovative
products and risks emanating from them. They link consumer credit exposures of the
banks to their track record of Non-Performing Loans (NPLs) and equity. Exposure
limits have been set on part of both the borrowers and lenders.
According to regulations, banks are limited to a maximum consumer credit exposure
of 10 times of their equity provided that the ratio of their classified consumer loans to
total loans is below 3%. However, if it is higher, the exposure limit is accordingly
reduced. For example, for the ratio at 3-5%, the maximum limit reduces to 6 times of
the equity and for up to and above 10%, it is reduced to merely 2 times of the equity.
This linkage ensures that the total exposure to consumer credit remains within limits
and is tied further to the bank’s The SBP has restrained the banks from charging any
amount under the head of “insurance premium” unless written consent of customer is
obtained in advance.
Risk Mitigation Ability
Moreover, in addition to the required provisioning, the regulations require an additional
general reserve of 5% for unsecured and 1.5% for secured consumer loans as
additional risk premium so that additional losses incurred could easily be absorbed
without taking additional hit on capital. During 2006, the level of compliance by the
banks and DFIs was assessed and these institutions were categorized into Largely
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 26
Compliant, Partially Compliant and Non Compliant with respect to meeting these pre-
conditions. Furthermore, to ensure safety and soundness of the bank/DFI itself, the
lender is required to ascertain that the total installment of the loan being approved is
commensurate with the monthly income and repayment capacity of the borrower. The
banks have also been restricted from transferring any classified loan or facility from
one category of consumer financing to another.
Margin Requirements
A noteworthy point is that the regulations do not put any limit on the margin
requirements on consumer financing facilities provided by the banks/DFIs. They have
been given discretionary powers to decide the margin requirements after assessing
the risk profile of the borrower. However, the SBP has the authority to fix or reinstate
margin requirements on consumer financing facilities for various purposes, as and
when required. In addition, the restrictions applicable on corporate/commercial
banking have been declared applicable on consumer financing activities, which would
assist the banks to lend in a secure manner.
Borrower’s Eligibility
All the banks/DFIs are required to develop a special programme including the
objective and qualitative parameters for the eligibility of the borrower.The regulations
on credit card have limited the maximum unsecured limit to a borrower to Rs.500, 000.
This ceiling also includes the limit assigned to any supplementary credit cards. The
bank is required to provide the credit card holders a statement of account at monthly
intervals, unless there is no transaction or outstanding balance on the account since
last statement.
Insurance Premium
The SBP has restrained the banks from charging any amount under the head of
“insurance premium” unless written consent of customer is obtained in advance. This
regulation relieves the customers by guarding them against forced and undesired
insurance premium. However, the monthly statement and insurance premium
regulations are not fully honored by the banks.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 27
Banking Surveillance Department, The Banking System Review, 2006, State Bank of
Pakistan. "Banks are not allowed to finance cars older than five years. Moreover, the
banks are also required to keep the customer informed about the repayment schedule
and changes made in it from time to time."
Auto Loans
As far as auto loans are concerned, the maximum tenure of loan cannot exceed seven
years, while minimum down payment cannot fall below 10% of the value of the
vehicle. The banks/DFIs are allowed to extend loan only for the ex-factory tax paid
price fixed by the car manufacturers without adding any premium charged by the
dealers and/or investors. The regulations also provide the opportunity of repossession
of vehicle. The regulations require the bank to mention a clause of repossession in the
loan agreement and publicize the maximum amount of repossession charges in the
schedule of charges. Banks are not allowed to finance cars older than five years.
Moreover, the banks are also required to keep the customer informed about the
repayment schedule and changes made in it from time to time. House Financing
The regulations related to house financing allow the banks to determine the finance
limit, both in urban and rural areas, in accordance with their internal credit policy,
credit worthiness and loan repayment capacity of the borrowers. However, the total
monthly amortization payments of consumer loans, inclusive of housing finance, are
not allowed to exceed 50% of the net disposable income of the prospective borrower.
The maximum debt-equity ratio for housing finance has been set 85:15. The maximum
time limit for housing finance is 20 years, but the regulations do not prescribe any
minimum time limit. Like auto finance, provisions for housing finance have been set as
25%, 50% and 100% for the substandard, doubtful and loss categories, respectively.
Personal Loans
The personal loans cover all loans that individuals avail for the payment of goods,
services and expenses. It also includes running finance/ revolving credit to individuals.
The SBP has assigned a general clean limit of Rs.500,000 for all types of personal
loans. The prime customers, who have extraordinary strong repayment capacity, can
be assigned clean limit beyond Rs.500,000, but not more than Rs.2 million. The banks
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 28
are also allowed to offer the loan up to one million, but only when the loan is
appropriately secured by tangible security with appropriate margins. The time limit set
for such loans is not allowed to exceed five years except for the advances given for
educational purposes, which can be extended to seven years. In case of
running/revolving finance the banks are required to ensure that at least 15% of the
maximum utilized loan during the year is cleaned up by the borrower for a minimum
period of one week, except the banks that require their customers to repay a minimum
amount each month and where the aggregate cumulative monthly installments exceed
the 15% clean up requirements. Like other consumer financing products, provision for
personal loans have also been set as 25%, 50% and 100% for the substandard,
doubtful and loss categories, respectively.
(The guidelines necessitate Card Facilitation Centre (CFC) in every bank. Every
branch ought to report to CFC the details of claims settled, outstanding claims and
balance suspense account on daily basis, to enable quick response of queries.)
4.3 Guidelines for Standardization of ATM Operations
ATM is among the most important e-banking delivery channels in Pakistan. It is
becoming increasingly popular, as it facilitates accountholders to withdraw fast cash
anytime, inquire balance, and transfer funds throughout the year. The SBP has issued
separate guidelines for all the commercial banks and switch operators in order to
curtail any inconvenience to the users of ATM services. The guidelines require the
banks having ATMs to carry out cash balancing and reconciliation on every working
day at the time fixed by their Head Office, other than the peak hours.
According to the guidelines, a process of “automatic credit” is to be carried out on the
basis of verified individual transactions in which a customer’s account has been
debited without any cash disbursement. Moreover, the process of “automatic credit” is
to be completed within the timeframe ranging from one to seven business days,
depending on the manner of execution of transaction by a cardholder of a bank. In
order to facilitate the customers and meet the objectives of the ATM, banks are also
required to develop a detailed documented procedure for automatic credit and carry
out training of relevant staff members.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 29
The guidelines necessitate Card Facilitation Centre (CFC) in every bank. CFC is a unit
responsible for managing e-banking channels and maintaining database of cases
(resolved/unresolved) of its own customers and balance in suspense account. In this
regard, every branch ought to report to CFC the details of claims settled, outstanding
claims and balance suspense account on daily basis, to enable quick response of
queries.
It is mandatory for all the banks to identify at least two key personnel of CFC, who
would be responsible for responding to the queries of customers, and their contact
details are to be made available on website of the bank. Furthermore, customer must
be informed in writing about the amount credited to his/her account by the issuing
bank. Besides, the customers are not to be charged for minimum balance when their
account has been debited without cash disbursement and time for which the amount
remains payable. For providing secondary evidence to satisfy the customer against
cash claims, banks are required to install external camera in ATM cabins in a way that
PIN may not be captured.
Moreover, the guidelines obligate all banks to report details regarding the nature of
transactions (automatic credit, claims processed or outstanding balance (suspense
ATM cash), and total number and amount of actual transactions to the SBP’s Payment
Systems Department (PSD). In addition, every bank is required to develop a
numbering sequence for complaints and every complainant is to be issued a reference
number. These guidelines are applicable only on cards used on ATM machines for
local currency transactions, which are carried out in Pakistan.
(The reply to the complaints ought to be clear and indicate the reasons of the
decisions taken. The complaint unit is also required to identify complaints of recurring
nature for taking immediate corrective measures in the related area.)
4.4 Guidelines for Dealing with Customer Complaints
Keeping in view the complaints received by the SBP regarding financial losses,
damage to the businesses, and delayed response of banks, the SBP has issued
guidelines for dealing with the customer complaints. SBP observed that due to
absence of proper mechanism for resolution of public grievances, the banks are
unable to respond to the customer complaints promptly and efficiently.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 30
Therefore, these minimum guidelines require every bank and financial institution to
designate a senior officer to deal with all sorts of complaints, whether they are
received directly by the bank or referred to by other institutions including the SBP. All
banks are obligated to provide contact details of such designated officials or any
change with this reference to the SBP. According to the guidelines, the person and the
unit/section appointed for this purpose is responsible for acknowledging, addressing,
handling and investigating all the complaints in a fair and prompt manner. The reply to
the complaints ought to be clear and indicate the reasons of the decisions taken. The
complaint unit is also required to identify complaints of recurring nature for taking
immediate corrective measures in the related area. In addition, the unit has been
guided to monitor and analyze the status and data of complaints for improving the
system. Every bank or financial institution is also required by the guidelines to submit
a regular report about the complaints to the management of the bank or financial
institution for review.
What is grievance?
‘Grievance’ may be defined as a formal statement of complaint generally against an
authority, or an institution. Most often, organizations establish a body or designate an
officer who deals with complaints of the clients. Such a body plays important role for
identification, intervention and resolution of issues that have the potential of becoming
a grievance. When the circumstances do not allow prior resolution of issues and a
grievance takes place, the redress forum is responsible for initiating a grievance
redress process. The aim is to protect the citizens’ right to raise a genuine issue,
lodge a complaint for a grievance, and have the grievance redressed in a timely
manner.
The response time for the complaints has been fixed at 10 days under the guidelines.
However, an interim reply can also be sent to the complainant explaining the reasons
for delay, but the final reply is to be transmitted within 45 working days. Like other
departments of the bank, the complaints department/unit is also required to be
regularly audited by internal auditors to check the effectiveness and performance of
the unit.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 31
For raising awareness among the customers about the grievance redress procedure
and complaint unit, the banks and DFIs are required to prepare a leaflet indicating the
procedure for lodging a complaint and its resolution, and Post the same on the notice
boards at each of their branch/office and on the website. Besides, a copy of the leaflet
is to be "CIB aids financial institutions to make well informed credit decisions in timely
manners minimizing the credit risk." supplied to customer upon request. Moreover, the
bank staff is to be provided appropriate training to enhance their skills so that an
employee who is not directly involved with the complaint unit may investigate a
complaint, if required. The guidelines specify that the complaints forwarded by the
SBP would be handled by the person who is the contact person for SBP in this regard.
Whereas, the SBP would check the performance, effectiveness and function of the
complaint section and strict actions would be taken against the bank or DFI and the
concerned staff members for noncompliance with the procedures or mishandling of
complaints.
4.5 Banking Ombudsman
The Federal Government established the Banking Ombudsman in 2005. The principal
responsibility of the Ombudsman is to resolve the complaints through mediation and
provide an amicable and acceptable solution where conciliation is not possible.
Jurisdiction
The Banking Ombudsman has been entrusted with the powers and responsibilities to
entertain complaints lodged by the customer against the scheduled banks or by a
scheduled bank against another bank, and provide the basis for an amicable and
acceptable solution after giving hearings to the complainant and the concerned bank.
Moreover, Banking Ombudsman has been given authority to make recommendations,
to be communicated to the concerned bank for considering the issue, and in some
cases to pass an order against the concerned bank. To improve the service standards
and effectiveness, and remove the generalized systematic deficiencies, the Banking
Ombudsman can recommend procedural improvements. SBP can inquire the banks
involved in violation of laws and regulations on recommendation of the Ombudsman.
The authority and powers of Banking Ombudsman have been specified for private and
public sector banks. In relation to all banks, Banking Ombudsman has been given the
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 32
authority to entertain the complaints regarding bank’s failure to act in accordance with
the laws, regulations, policy directives and guidelines, which are time to time issued by
SBP and inquire the delays or fraud in relation to the payment or collection of
cheques, drafts or transfer of funds. Moreover, the Banking Ombudsman has also
been allowed to consider the complaints regarding fraudulent or unauthorized
withdrawal or debit entries in accounts, complaints from exporters or importers,
complaints related to banking services and obligations including letters of credit,
complaints from holders of foreign currency accounts, whether maintained by
residents or non-residents, complaints relating to remittances to or from abroad and
relating to payment of utility bills. A noteworthy characteristic of the Baking
Ombudsman is that it has some special powers, which do not apply to the private
banks. The responsibilities of entertaining the complaints pertaining to corruption,
negligence of duties by bank officers in dealing with customer and excessive delay in
taking decisions can be exercised only in respect of public sector banks.
"The Banking Ombudsman has no authority to consider the complaints regarding the
schedule of charges and any other policy matter of banks." In addition, Banking
Ombudsman has the authority to call for relevant information necessary for disposal of
complaints, receiving evidence on affidavit and issuing commission for examination of
witness, given that confidentiality would not be violated.
Bar on Jurisdiction
However, there are some matters, which are outside the jurisdiction of Banking
Ombudsman including the power to direct banks for giving loans and advances to a
complainant. Similarly, the Banking Ombudsman has no authority to consider the
complaints regarding the schedule of charges and any other policy matter of banks.
Likewise, the Banking Ombudsman does not accept complaints pertaining to terms
and conditions of service of the bank. Moreover, awarding the damages against banks
is not within the jurisdiction of Banking Ombudsman. However, the authority for the
compensation of loss suffered by aggrieved persons in pursuit of justice lies with him. Complaint Procedure
The complaint handling process of Banking Ombudsman is centralized at the Karachi
Secretariat. The complainant is required to file a complaint to the bank in writing
stating the intention to refer the matter to the Banking Ombudsman if matter would not
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 33
be resolved satisfactorily. The bank is required to resolve the complaint within 45
days, otherwise the complainant can file the case to Banking Ombudsman on the
complaint form duly completed, signed and attested by an Oath Commissioner,
attached to the letter of complaint. Moreover, the complainants are required to make
sure that copies of all documents and relevant correspondence with the bank are also
attached along with the form and letter of complaint.
The Banking Ombudsman entertains those complaints, which are filed by a customer
against scheduled bank or by a scheduled bank against any other bank. Further, the
Banking Ombudsman also entertains the rejected complaints, which have not been
barred by time or have not been destroyed by the bank. In this regard, the
complainant has to send all related correspondence along with the complaint form
without giving 45 days notice to the concerned bank.
When a complaint is lodged to the Banking Ombudsman, first all procedural
requirements are confirmed and both parties may be required to provide additional
information, if necessary. Informal complaints (i.e. walk in, e-mail, copies of letters or
via telephone) are resolved by providing procedural guidance to complainant. In case
of formal complaints, the banks are formally informed where necessary. Regarding
informal complaints, the law allows to entertain only those complaints, which have
been filed directly to Banking Ombudsman and made under oath.
The Banking Ombudsman may also visit the concerned bank to examine their books,
procedures and processes relating to complaints. The case is (A complainant,
dissatisfied with the decision of SBP, has been given the right to go to a court of law.
However, the Ombudsman’s decision would be final, operative and binding upon the
bank, if no appeal is filed or SBP does not uphold the appeal.) closed if found
unjustified. However, if a case is found to be genuine, then it would be resolved
through mediation. The situation where conciliation is not possible, the Banking
Ombudsman passes an order asking the bank to rectify the situation or compensate
the loss of aggrieved.
The Banking Ombudsman solves the complaint within two months. However, some
complaints may take longer to resolve if they are complex or information and copies of
documents are not provided by the complainant.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 34
Therefore, a complainant is required to make sure that the complaint form has been
filled in with clarity and copies of all the relevant documents are attached.
The Right to Appeal
The law provides the right to appeal to parties, the complainant and the bank. A
complainant, dissatisfied with the decision of Banking Ombudsman, has the right to
appeal to the Governor SBP within 30 days from the date of order of the Ombudsman.
Moreover, a complainant, dissatisfied with the decision of SBP, has also been given
the right to go to a court of law. However, the Ombudsman’s decision would be final,
operative and binding upon the bank, if no appeal is filed or SBP does not uphold the
appeal.
Several changes have been made in the Banking Companies Ordinance, 1962
through the Finance Act, 2008 empowering the Banking Ombudsman to issue
commission for the examination of witnesses. In consideration of the changes,
Banking Ombudsman does not entertain those cases, which have already been
decided or handled by the SBP. The time allowed to banks, to send the complaint to
the Banking Ombudsman if not resolved, is reduced to 45 days from three months.
Earlier, there was no time limit for disposal of an appeal filed with SBP against any
order by the Banking Ombudsman, which has now been limited to 60 days. Unless an
appeal is referred to the Governor SBP, the time limit for implementation of an order
passed by the Banking Ombudsman has been increased to 40 days and submission
of compliance report is compulsory, which was not required previously.
4.6 Banking Courts for Recovery of Loans
Under the Recovery of Finances Ordinance, 2008, the Federal Government has been
entrusted with the authority to establish banking (Taking into consideration the
Ordinance, Federal Government has established 29 banking courts throughout
Pakistan for quick recovery of bank loans from defaulters) courts, appoint judges for
each of such courts, and specify the territorial limits to exercise its jurisdiction. For
more than one banking courts in the same territorial limit, Federal Government is
required to define the territorial limit of each court to exercise its authority. Moreover,
High Court has been authorized to transfer a case from one banking court to another,
in the same or different territorial limit, for convenience of parties or witnesses. Taking
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 35
into consideration the Ordinance, Federal Government has established 29 banking
courts throughout Pakistan for quick recovery of bank loans from defaulters.
Judges of Baking Courts
The Federal Government appoints a judge of a banking court for a term of three years,
after consulting the Chief Justice of the High Court of the province in which banking
court is established. The person appointed as judge of banking court would be a
serving or retired District Judge or retired Judge of High Court. The Federal
Government also decides places for banking court to hold its sittings, salary,
allowances and terms and conditions of the judges.
Regarding technical aspects of banking transactions, assistance is provided, if
required, to the banking court by amicus curiae having degrees in Commerce and
Accountant or Economics or Business Administration, or has completed a course in
banking from the institute of bankers, with at least 10 years experience of banking at
senior management level.
Keeping in view the case, banking court decide the remuneration of the amicus curiae
and the party who would pay the remuneration. According to the Recovery of
Finances Ordinance, 2008, the removal of a judge of banking court is decided after
consultation with Chief Justice of High Court but judge of banking court, not being a
District judge, would resign in writing under his hand addressed to the Federal
Government.
Powers of Banking Courts
In accordance with Recovery of Finances Ordinance, 2008, powers of the banking
courts are the same as vested in the civil courts under Code of Civil Procedure, 1908
(Act V) and in case of criminal jurisdiction; it would exercise the powers as vested in a
court of session under the Code of Criminal Procedure, 1989 (Act V of 1989).
Moreover, banking court is obligated not to take cognizance of any punishable offence
except upon a complaint in writing made by a person authorized in this behalf by the
financial institution in respect of which the offence was committed. The matters for
which procedure has not been provided, the banking courts are required to follow the
procedure laid down in the Code of Civil Procedure, 1908 (Act V) and the Code of
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 36
Criminal Procedure, 1989 (Act V of 1989). Besides, a banking court would be deemed
the Court for purposes of the Code of Criminal Procedure, 1898 (Act V of 1898) and
its proceedings would be considered judicial proceedings within the section 193 and
228 of Pakistan Penal Code (Act XLV, 1860).
(The SBP would not comment on disputes, which have already been heard in the
court.)
Procedure of Banking Courts
The customers or financial institutions can file a complaint against any financial
institution or the customer, as the case may be, regarding violation of any financial
obligation which would be verified on oath.
All relevant documents related to grant of finance and the statement of account, which
in case of financial institution is to be certified under the Bankers Book Evidence Act,
1981 (XVII of 1981), would be used to support the complaint and sufficient number of
copies of the same documents would also be provided in the banking court. In case a
suit is instituted by the financial institution for recovery of finance, the financial
institution is required to provide the details of finance availed by the defendant from
the financial institution, amount paid by the defendant to the financial institution with
dates of payment, and amount payable by the defendant to the financial institution up
to the date of filing of a suit. When a complaint would be presented to banking court,
summon through the bailiff or process-server of the banking court would be observed
on the defendant.
In such cases the complaint would be attached therewith and in all other cases the
defendant would be entitled to obtain a copy of the complaint from the office of the
banking court without making a written application. The banking court is entitled to
ensure the publication of the summons takes place in the newspaper and a wide
circulation within its territorial limits. The order of banking court would be final and no
other court or authority would have power to revise, review or call, into question any
proceeding, judgment, decree or order of banking court, except the Banking Court, on
its own accord or on the application of any party, as the case may be, correct any
clerical or typographical mistake in any judgment, decree, sentence or order passed
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 37
by it. In this respect, the SBP would not comment on disputes which have already
been heard in the court.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 38
05. ISSUES OF CONSUMER FINANCING
5.1 An Overview
During the pre-reform period, the financial sector in Pakistan mainly accommodated
the financing needs of the government, of public enterprises and of priority sectors.
Pakistan has witnessed phenomenal growth of consumer financing products and
services over the last seven years. Most of the commercial banks are involved in
consumer lending through one or more financing modes, as it has become very
lucrative business due to high spread and variable interest rates. The increase in
consumer financing has come with many challenges facing the national economy as
well as the individual borrowers. This chapter provides an overview of the growth of
consumer financing in Pakistan, and outlines major issues and challenges associated
with it. A caveat needs to be made here. This chapter does not aim to identify trends
and issues during a particular period, and therefore, does not offer longitudinal
analysis in a time series. The following analysis is based on a review of secondary
data with focus on the years since 2001. An effort has been made to concentrate on
the latest data dealing with the last three fiscal years since 2008.
5.2 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. In
the national context, the most important issue in consumer financing from the
standpoint of national economy as well as individual consumers 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 2008. This
indicates that average deposit rates have been very low, as compared to average
lending rates. One could have expected a decrease in spread as a potential gain of
competition among the increasing number of banks in the post-2008 period. However,
little change has been observed in average spread, which points towards a cartel-like
behavior of the banking sector.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 39
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 2008, the nominal
weighted average lending rate has always been higher than inflation rate. The real
lending rates averaged between 1.98% and 9.69%, which means that the banks
earned net profits on lending in all these years. In contrast, the average deposit rate
was slightly higher than inflation rate in four years only
(1999-2008). The real deposit rates were negative in this years. It partly explains the
impact of inflation on interest rate spread. The banks keep the lending rate high
enough to ensure that the real lending rate is almost always positive.
These rights include, for example, access to accurate information, fair credit billing
and reporting, fair debt collection practices, right to financial privacy, right to complaint
filing and redress, etc. (In February 2008, the weighted average lending rate was
11.23% whereas the weighted average deposit rate was 93% resulting in high interest
rate spread to the tone of 93%.)
Source: SBP Annual Reports (Various Issues). Compiled by Muhammad Arshad Khan
and Sajawal Khan in ‘Financial Sector Restructuring in Pakistan’. PID August 2009
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. Indeed, the lending
rates have increased and deposit rates have decreased over the last few years.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 40
Chart 3: Weighted Average Lending and Deposit Rates in February 2009
Source: State Bank of Pakistan, 2009.
The weighted average rates are for outstanding loans and deposits including zero
mark up. In February 2009, the weighted average lending rate was 11.23% whereas
the weighted average deposit rate was 4.17% resulting in high interest rate spread to
the tone of 7.04%. In terms of average interest rate spread of banks in South Asia,
Pakistan has the highest spread. From 2007 to 2008, its average spread has
remained between 6.33% and 7.79%. Whereas, during the same period, it ranged
between 4.50% and 6.9% in India, 50% and 5.99% in Sri Lanka, and between 77%
and 107% in Bangladesh (Table 4).
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 41
While the spread is higher in South Asian as compared to other regions, Pakistan
stands out distinctively due to huge difference between lending rate and rate of return
on deposits. The spread in Pakistan is much higher than average rates in many
countries around the world. Chart 2 shows average interest rate spread in 13
countries, which ranges between minimum 1.71% (Japan) and maximum 4.5% (Italy).
This is evident from these statistics that average interest rate spread in Pakistan
exceeds the regional as well as international average rates.
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 by SBP. In April 2006, the present
Governor of the SBP had said that banking spread was very high in the county and
termed it an inefficiency of banks. In December 2006, she said that spreads were high
because the sector was not facing competition and it was hurting the economy.
However, she said that time was yet to come when SBP should exercise its powers.
For India, deposit and prime lending rates are the mid-points of the range where the
rates relate to five major banks. Moreover, deposit rates are for more than one year
maturity. Bangladesh, Pakistan, and Sri Lanka figures are weighted average. The
interest rate for Pakistan has been taken from Table 3 above. A case in point is the
warning issued by Competition Commission of Pakistan (CCP) to the banks in
February 2008 for fixing 4% interest rate for small accountholders of Enhanced Saving
Accounts Scheme. The News, March 6, 2008.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 42
(In terms of average interest rate spread of banks in South Asia, Pakistan has the
highest spread. From 2003 to 2005, its average spread has remained between 6.33%
and 7.79%.)
Chart 4: Nine Year Average Interest Rate Spread of 14 Countries19
(High interest rate spread indicates that competitiveness in the banking sector in
Pakistan is either absent or is very poor.) Source: SBP Annual Reports 2008
This issue is largely attributable to weak SBP regulation of interest rates despite that it
has the powers to bring down 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 reasons cannot be said true of
Pakistan because banks are earning huge profits at the cost of savings of the
depositors.
5.3 Increasing Inflationary Impact A crucial issue that links with the increasing consumer financing is the inflation rate.
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. Similarly, the demand for
road networks and fuel imports has increased due to growth in auto financing. These
developments have an overall inflation impact, which is affecting the purchasing
capacities of the poor.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 43
5.4 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. Other issues such as non-
transparent advertisements, violation of agreed terms and conditions, levy of
unjustifiable charges, and arduous complaint redress mechanism, etc. also reflect
upon the poor quality of consumer services.
The press frequently reports such complaints, which speak of the issues in quality of
banking services. For example, some banks are involved in charging late payments
penalties despite payment on time. Similarly, many credit card users complain about
service charges appearing on their credit statements, which make no sense to
anybody. The number of complaints is increasing every year. For example, in the first
eight months of the operation of Banking Ombudsman in 2005, about 40 per cent
complaints filed with the Ombudsman were related to consumer products, and among
these complaints, 30 per cent were related to credit cards alone.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 44
Annual Report of the Banking Ombudsman, 2007, Table 5: Consumer Complaints against Banks in 2008
1 Citibank 2 SME Bank Ltd. 3 Union Bank Ltd. 4 Standard Chartered Bank 5 JS Bank 6 Bank Al-falah Ltd. 7 The Punjab Provincial Co-operative
Bank
8 Zarai Taraqiati Bank Ltd. 9 Atlas Bank Ltd. 10 Askari Commercial Bank Ltd. 11 Industrial Development Bank of
Pakistan
12 Mybank 13 United Bank Ltd. 14 KASB Bank 15 National Bank of Pakistan 16 First Women Bank Ltd. 17 Faysal Bank 18 Soneri Bank 19 Habib Bank Ltd. 20 NIB Bank 21 Prime Commercial Bank 22 MCB Bank Ltd. 23 Allied Bank Ltd. 24 The Bank of Punjab 25 Bank Al-Habib Ltd. 26 Meezan Bank 27 Saudi Pak Commercial Bank 28 Habib Metropolitan Bank
Source: Annual Report of Banking Ombudsman, 2008 In 2008, Banking Ombudsman received 215 complaints out of which 18 were rejected,
71 were declined and 90 complaints were granted. There were 36 complaints related
to internal banking fraud scam, still being investigated by the Banking Ombudsman.
The complaints received at Banking Ombudsman were related to service rules,
service inefficiency, loan remission of mark-up waiver, frauds and consumer products
including ZTBL loans. However, it is observed that percentage of complaints received
regarding consumer products including ZTBL loans was 46%, much higher than other
type of complaints received.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 45
The complaints related to consumer products included credit cards, small loans Inc
ZTBL, auto loans, undertake mark up, processing delays and ATM’s complaints.
Magnitude of credit card complaints was much more than all other complaints, nearly
40% of total complaints.
Chart 5: Types of Consumer Complaints in 2008
(Indeed, the SBP and other scheduled banks have excluded consumers as a
legitimate stakeholder in formulation of, or any change in policies and procedures.)
Processing Delay Undue mark-up ATM’s
Auto Loans Small loans inc ZTBL Credit Cards
0% 5% 10% 15% 20% 25% 30% 35% 40%
Source: Annual Report of Banking Ombudsman, 2008
5.5 Unsolicited Financing Aggressive marketing campaigns launched by the banks are targeting the consumers
and repeatedly encouraging them to purchase a loan or credit card. In some cases,
the banks have gone to an extent where a consumer who has not even applied for a
loan, is informed through telephonic call that the bank has approved a loan for him.
Misleading phone calls are made to the consumers who are misled by false promises;
they succumb to attractive offers and later discover that the commitments and
assurances held at sign up stage were not being honored. The supply-driven
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 46
approach is creating artificial consumerism on one hand, and is limiting the choices for
consumers, on the other. For example, auto leasing makes a fit case of banking
sector’s dominance over customers. A car lessee, for instance, is bound to insure the
car from an insurance company of the bank’s choice.
5.6 Lack of Consumer Education The issue of consumer education is equally important. Most of the bank users do not
have enough understanding of the very basic rules and terms (Apart from reporting
requirements laid down in the SBP regulations and contracts, there is no law in
Pakistan, which entitles the consumers to access information from private banks as a
legal right.)and conditions. Another problem is that the documents prepared by banks
are usually technical and the information which may affect financial rights of the
consumers is never stated clearly and plainly in these documents. Indeed, the SBP
and other scheduled banks have excluded consumers as a legitimate stakeholder in
formulation of, or any change in policies and procedures. There is a need to focus on
public awareness about the financial rights of the citizens, and the forums available to
them for accessing justice, if these rights are violated.
5.7 Loosing Competitiveness in International Trade Banking sector has assumed greater importance due to liberalization of trade under
the General Agreement on Trade in Services (GATS). Pakistan has opened up the
financial sector and made a number of commitments under GATS without performing
any Economic Needs Test (ENT).
The impact of such decisions needs to be ascertained keeping in view the contribution
of financial services in services trade.
The imports of financial services have remained substantially higher than exports.
Estimates suggest that the imports in financial services were US$ 77 million in 2003-
04 and 2004-05, and US$133 million in 2005 06. In comparison, exports in financial
services stood at US $21 million, US$ 39 million, and US$ 70 million million during the
same years.
(Given the huge spread in interest rates, the local banks have no incentive to improve
internal efficiencies to become competitive in the international market)
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 47
The challenge for Pakistan is to increase exports in financial services in a manner that
has least impact on low income customers. Given the huge spread in interest rates,
the local banks have no incentive to improve internal efficiencies to become
competitive in the international market. Therefore, urgent steps including reduction in
spread need to be taken to create competitive financial environment in Pakistan.
5.8 Intimidating Recovery Practices Recovery of dues from borrowers is the responsibility of the ‘collection department’.
However, when a borrower does not clear all his dues, the case is transferred to the
loan recovery department. Legally, under Section 15 (sub-section 2) of the Financial
Institutions (Recovery of Finances) Ordinance, 2001, the banks are required to send
three legal notices to the borrowers for payment of dues within the specified time
periods. If the borrower fails to pay the dues even after third legal notice, only then the
bank has the authority (under sub-section 4 of section 15) to sell the property of the
mortgagor, without the intervention of any court, which was kept on mortgage as a
security for the bank.
Keeping aside the law, the banks have constituted recovery teams comprising thugs
who use strong-arm tactics to harass the borrower and make threatening calls.
Despite the fact that bank’s recovery teams have no legal authority to visit the
borrower’s residence; sometimes, recovery teams reach the borrower’s house to
intimidate and pressurize them for payment of dues. In some instances, they illegally
coerce and misbehave the borrowers, and, in desire of earning more commission,
cross the limits by abusing, brutally beating, showing guns, locking in the house and
threatening to dreadful consequences. (that bank’s recovery teams have no legal
authority to visit the borrower’s residence; sometimes, recovery teams reach the
borrower’s .house to intimidate and pressurize them for payment of dues.)
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 48
As a matter of fact, the banks enjoy a great degree of freedom for formulating their
own policies and procedures regarding credit cards, automated services, loans,
interest rates, etc., which suit their interests best.
Second annual report (2008) of the Banking Ombudsman stated a rise in the
unrestrained action by the debt collectors; cases have also come to light where
innocent people have been accost and maltreated as well as cases where borrowers
with up-to-date payment record have been needlessly harassed. The report
mentioned that in most countries, debt collection is regulated by the law.In the US, to
prohibit certain methods of debt collection and treat borrowers fairly, the “Fair Debt
Collection Practices Act” was incorporated in the “Consumer Credit Protection Act” in
1977. According to Banking Ombudsman Report (2008), some banks in Pakistan have
developed guidelines applicable to debt collection but these are not strictly followed by
external recovery agencies engaged for the purpose. To protect consumers from
abuse by debt collectors, it was recommended that Pakistan Banks Association be
asked by SBP to draft suitable set of instruction for compliance by external debt
collection agencies
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 49
5.9 Weaknesses in Regulatory Framework The frequent violation of financial rights of the consumers is attributed, mainly, to
weaknesses in the regulatory framework governing the banking sector, and low level
of consumer education about the relevant policies and rules. The existing regulations
do not capture the full range of problems being faced by the users of consumer
financing services. For example, the regulations do not restrict the banks to levy
unjustified service charges such as high fee on depositing cash in one’s own account.
Another case in point is the Credit Worthiness Reports maintained by the Credit
Information Bureau (CIB). According to the rules, these reports are confidential
documents for the borrowers, and amount to denial of the right to one’s own personal
information. On the top of it, whatever regulations exist, they are yet to be fully
implemented. As a matter of fact, the banks enjoy a great degree of freedom for
formulating their own policies and procedures regarding credit cards, automated
services, loans, interest rates, etc., which suit their interests best. These missing links,
if not abridged adequately, would continue to harm the interest of the consumers on
one hand, and affect the potential of banks to serve as a strong base of economy in
the longer term, on the other hand. “As a matter of fact, the banks enjoy a great
degree of freedom for formulating their own policies and procedures regarding credit
cards, automated services, loans interest rates, etc., which suit their interest best.”
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 50
06. HOUSE FINANCING
6.1 Analysis of House Financing Disbursements: Although housing finance credit disbursements has witnessed slight
fluctuations in its growth rate, between March 2007 and December 2007, it has at the
same time displayed an increasing trend at a decreasing rate (Figure 1). This
decreasing trend overall in its growth rate has varied from 4.56% (lowest) to an
11.93% (highest) during the said period. The smallest growth of only 4.56% was
witnessed during the quarter September 2009 followed by a 5.14% growth.
Over the quarters, September and December 2009, an average growth rate of 4.8%
in total disbursements, was observed. Figure 1 also shows that growth in
disbursements fell sharply during the September 2007 quarter: from 11.4% growth
during September 2007 to 7.7% during December 2007, after which growth in
disbursements have displayed a ‘tapering’ trend .This decreasing trend in growth rates
can be drawn from a few significant events that affected disbursements. Firstly,
maturing loans attributed to a decelerating growth rate.
Secondly, a tighter monetary policy initiated by State Bank of Pakistan, 2008
onwards, might have contributed to the slower growth rate in mortgage financing as
the banks have been offering it on a floating basis. This is evident in figure 1 below,
where growth rates are decelerating from a 7.8% high (June 2008) to 5.14% by
December 2009. Lastly, factoring in HBFC’s policy change, whereby change involved
shifting focus towards disbursing smaller loans under Small Medium Housing Finance,
made notable contributions towards the observed growth rates.
However, in absolute terms, the total amount disbursed by financial institutions since
March 2007 has seen significant increase over time. As shown in Figure 2,
disbursement rose from Rs.60 billion in March 2007 to Rs. 126 billion by December
2009; a growth of almost 112%.This growth has been observed alongside increased
injection of remittances from abroad into the economy and a growing number of
financial institutions offering housing loans.
Most of the banks that have entered the housing finance market are now taking a
strategic long term view of housing finance in Pakistan and subsequently have
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 51
developed plans to expand their housing finance portfolios over time. This holds true
especially in the case of Private Banks that display an increasing trend in amount
disbursed for housing loans. The growth in disbursements by HBFC, foreign banks,
DFIs and public sector banks has remained relatively low. Participation, albeit
relatively low, of Islamic banks has also emerged since March 2009.
Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09
Quarter
Mar 07 Jun 07 Sep07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep09 Dec09
Quarter
Figure 1
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 52
Mar 07 Jun 07 Sep07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep09 Dec09
Figure 2
Among financial institutions, Private Banks & DFIs are characterized as capturing a
large share of 67% of the total disbursed amount, with the remaining share of 33%
attributable to HBFC (Table 1). The average loan size of banks & DFIs is of Rs. 2.6
million and that of HBFC is Rs. 92,000 (approximate figures for December 2009). This
suggests that private banks are still concentrating on high end of the market, as
endorsed by its average loan size. Table 1 also shows that within Private Banks &
DFIs, Private Banks constitute 69% share of disbursed amount.
Outstanding: As far as the outstanding amounts are concerned, it has also witnessed
increasing growth, though at a decreasing rate. As evident in figure 3, the growth rate
in the first quarter of 2007 was 14.4% which has decreased to 4.96% in the last
quarter of December, 2009. A comparison of the outstanding housing loans with the
growth rates of private sector consumer credit helps explain the decreasing growth
rate to a considerable extent; where both ‘map’ well on each other. Additionally,
maturing of loans also helps explain the decreasing rate of outstanding loans.
Perhaps the highlight of these growth trends would be the negative growth rate of
8.4% recorded during the quarter December 2008. This is best explained by HBFC’s
reporting of non-performing loans from December 2008, thus reducing the
outstanding figure from Rs.18 billion to Rs.11 billion. Prior to December 2008, HBFC
was reporting total outstanding including NPLs. The subsequent increase in growth
rate from -8.4% to 6.4% during the quarter of March 2009 is due to the rising
participation of three Islamic banks. Figure 2 shows that the total outstanding amount
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 53
has shown an upward trend and has reported a growth of 81%; from Rs. 42 billion in
March 2007 to Rs.76 billion in December 2009. Among financial Institutions,
Private Banks & DFIs have an 84% share and HBFC has 16% share in the total
amount outstanding (Table 1). Within Banks & DFIs, private banks have a 69% share,
followed by 14% share of public sector banks. Public sector banks have experienced a
slight acceleration in its outstanding since December 2008 HBFC experienced a fairly
constant level of outstanding until September 2008 after which it was followed by a
sharp decline (from Rs 20 billion to Rs. 10 billion) during the quarter December 2008.
Within the banks and DFIs, private banks are clearly seen to be taking a lead role
followed by public sector banks.
Table 1. Share of Financial Institutions
% share in total amount disbursed
% share in total amount outstanding
% share in no. of loans disbursed
% share in no. of loans outstanding
HBFC 33 16 93 79
BANK &DFIs 67 84 7 21
TOTAL 100 100 100 100
Within Bank and DFISs
Public sectors
12 14 24 27
Private
69 69 58 58
Islamic
4 5 1 2
Foreign
11 9 11 8
DFIs
4 3 6 5
Total 100 100 100 100
Growth in disbursements and outstanding loan amounts reported a growth rate of
4.6% and 4.8%, respectively for the quarter September 2009 and 5% (disbursements
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 54
and outstanding) growth during the quarter December 2009. Both also registered a
10% growth rate over the six months ending December 2009. Furthermore, public
sector banks have experienced a 95% increase in amount disbursed, during the year
end December 2009. Private Banks report an increase of 21%, foreign banks reported
a 40% increase, DFIs increased by 8.5% and HBFC increased amount disbursements
by 1.5% during the year end December 2009
Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09
Figure 3
Mar 07 Jun 07 Sep07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep09 Dec09
Figure 4
Number of Borrowers: Number of loans disbursed has seen a slight increase with an
average growth rate of less than 1%. Total outstanding no. of loans has witnessed a
fall from 152,881 to 125,490 numbers of loans; an 18% fall approximately.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 55
This fall is attributed mainly to the decreasing number of outstanding loans of HBFC,
despite an increasing trend witnessed in the case of Banks and DFIs , Table 1 above
shows that HBFC’s share in the number of loans disbursed stands at 93%, while rest
of the institutions share only 7%. Similar proportion is seen between HBFC and
Banks/DFIs in the number of loans outstanding. It can be seen that while banks and
DFIs have a smaller share in no. of loans compared to that of HBFC, they report a
greater share in the total amount disbursed (figure 4). This is consistent with
expectations as HBFC has a significant role in disbursing a greater number of small
loans contrary to Banks and DFIs.
Housing Finance: A Sector Analysis: Housing finance is currently extended under three
main broad categories. These include loaning for construction, outright purchase and
renovation. Figure 5 below shows share of housing finance for all these areas
separately since March 2007. Amounts disbursed for construction and renovation
have experienced little change over time. However, outright purchase has reported the
greatest growth from Rs. 20,000 million to over Rs.60,000 million by December 2009.
Mar 2007 Jun 2007 Sep 2007 Dec 2007 Mar 2008 Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009
Figure 5
Construction: The disbursements for construction have witnessed a growth of 4.9%
from 408,328 number of loans disbursed during March 2007 to 423,182 disbursed by
December 2009. The amount disbursed since March 2007 has increased from Rs.
34,908 million to Rs. 49,398 million. Similarly number of outstanding loans have
decreased from 130,882 (March 2007) to 91,194. The outstanding loan amount has
shown a downward trend that sets in during the quarter September 2007 but rises by
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 56
March 2007 (Figure 6). Overall while HBFC reported 0.9% growth, Banks and DFIs
disbursements for the purpose of construction grew by 14.3% over the last year.
Mar 07 Jun 07 Sep07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep09 Dec09
Figure 6
Outright Purchase: The disbursements for outright purchase have witnessed a growth of
11.6 % from 22,325 numbers of loans disbursed during March 2007 to 24,934
disbursed by December 2009. The amount disbursed since March 2007 has increased
from Rs. 2,966 million to Rs. 4,733 million. Similarly number of outstanding loans have
slightly decreased from 9,914 (March 2007) to 8,457 number of loans. The
outstanding loan amount has grown continuously as shown in figure 7. While HBFC
reported 17.8% growth, Banks and DFIs disbursements for the purpose of outright
purchase grew by 30% over the last year.
Mar 07 Jun 07 Sep07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep09 Dec09
Figure 7
Renovations: The disbursements for renovation witnessed a growth of 153 % from
5,650 numbers of loans disbursed during March 2007 to 14,329 disbursed by
December 2009. The amount disbursed since March 2007 has increased from Rs.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 57
4,477 million to Rs. 13,158 million. Similarly number of outstanding loans have
increased from 5,314 (March 2007) to 11,633 number of loans. The outstanding loan
amount has grown constantly as shown in figure 8, reaching a peak during December
2007, before coming back on the steady growth path. HBFC shows less jubilant
growth when compared to banks and DFIs. The figure also shows that this constant
growth is mainly supported by banks and DFIs.With Banks and DFIs contributing 5270
disbursed loans by December 2009, private banks dominate other banks and DFIs in
both number of loans and loan amount. While HBFC reported 48.8% growth, Banks
and DFIs disbursements for the purpose of renovation grew by 27.7% over the last
year.
Mar 07 Jun 07 Sep07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep09 Dec09
Figure 8
The Housing & Economy Nexus: Figure 9 shows the mortgage to GDP ratio in nominal
terms. The ratio has risen only slightly from 0.49% since 2005, reaching its peak at
0.98% during 2008. Despite this overall growth, the ratio still remains very low when
compared to other courtiers, e.g. 14 % in Chile, 5 % in Colombia, 2.5 % in India and
65% in USA. While the ratio shows a slight upward trend, the slowing growth rate of
disbursements and the outstanding could potentially dampen the ratio.
Moreover, interest rates on housing loans have remained constant for HBFC and
other banks only up until September 2009. Differential interest rates have been
witnessed among financial institutions, with HBFC charging an interest rate of 9% (on
average) and Banks charging around 12%. According to Figure 10, the quarter
December 2009 has seen interests rates converge to 12% for both HBFC &
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 58
Banks/DFIs. This is in line with the increasing levels of inflation that is feeding into cost
of production through increased fuel prices and there by escalating the cost of
borrowing and affecting the borrowers’ ability to pay scheduled amounts due in the
face of abrupt changes.
Figure 11 shows that tenure on an average has remained around 13 years with Banks
showing a downward trend in their tenure offerings where as HBFC is seen to be
lending for 14 years, on an average. This might contribute in increasing the monthly
mortgage repayment, borne by the borrower. Against the backdrop of government
initiatives to respond to increasing demand for housing in Pakistan, the increased
involvement of Private Banks and DFIs in lending for construction, outright purchases
and renovation, is promising.
Although the existing mortgage market in Pakistan is at a very nascent stage, and
considerably inclined towards the high end of the market (high income groups),
decelerating levels of disbursements, increasing interest rates, shortening tenure on
housing loans and information asymmetries between borrowers and lenders, and
regulation could potentially hurt the development of a well-structured mortgage
market, affecting negatively its ability to go forward in the next stage of development in
a competitive environment.
2005 2006 2007 2008 2009
Figure 9
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 59
Dec2009 Sep2009 Jun2009 Mar2009 Dec2008 Sep2008 Jun 2008
Figure 10:
6.2 Maximum per Party Limit According to central bank regulation R-15, Banks / DFIs shall determine the housing
finance limit, both in urban and rural areas, in accordance with their internal credit
policy, credit worthiness and loan repayment capacity of the borrowers. At the same
time, while determining the credit worthiness and repayment capacity of the
prospective borrower, banks / DFIs shall ensure that the total monthly amortization
payments of consumer loans, inclusive of housing loan, should not exceed 50% of the
net disposable income of the prospective borrower.
Banks / DFIs will not allow housing finance purely for the purchase of land / plots;
rather, such financing would be extended for the purchase of land / plot and
construction on it. Accordingly, the sanctioned loan limit, assessed on the basis of
repayment capacity of the borrower, value of land / plot and cost of construction on it
etc., should be disbursed in trenches, i.e. up to a maximum of 50% of the loan limit
can be disbursed for the purchase of land/ plot, and the remaining amount be
disbursed for construction there-upon. Further, the lending bank / DFI will take a
realistic construction schedule from the borrower before allowing disbursement of the
initial loan limit for the purchase of land / plot. Banks / DFIs may allow housing finance
facility for construction of houses against the security of land / plot already owned by
their customers. However, the lending bank / DFI will ensure that the loan amount is
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 60
utilized strictly for the construction purpose and loan is disbursed in trenches as per
construction schedule.
Loans against the security of existing land / plot, or for the purchase of new piece of
land / plot, for commercial and industrial purposes may be allowed. But such loans will
be treated as Commercial Loans, which will be covered either under Prudential
Regulations for Corporate / Commercial Banking or Prudential Regulations for SMEs
Financing. Banks / DFIs may allow Housing Loans in the rural areas provided all
relevant guidelines/regulations on the subject are complied with by them.
6.3 Debt-Equity Ratio According to regulation R-16, CBSP also see the customer debt to equity ratio. The
housing finance facility shall be provided at a maximum debt-equity ratio of 85:15. if
your debt to equity ratio is exceed from that ratio, the financial institute can not
provide you that facility.
6.4 Maximum Tenure of Loan
According to central bank regulation R-17, all bank to give the total exposure for every
party. They can not give there clients to over that limit. Banks / DFIs are free to extend
mortgage loans for housing, for a period not exceeding twenty years. Banks / DFIs
should be mindful of adequate asset liability matching. They are all buoyed to obey the
central bank regulations. 6.5 Mortgages Debt instrument giving conditional ownership of an asset, secured by the asset being
financed. The borrower gives the lender a mortgage in exchange for the right to use
the property while the mortgage is in effect, and agrees to make regular payments of
principal and interest. The mortgage lien is the lender's security interest and is
recorded in title documents in public land records. The lien is removed when the debt
is paid in full. A mortgage normally involves real estate and is a long-term debt,
normally 25 to 30 years, but can be written for much shorter periods.
Originally written exclusively as fixed-rate fully amortizing loans, mortgages have
evolved into more flexible contracts. Since the mid-1970s, the financial industry's
funding sources have become more volatile and market sensitive, and legislation and
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 61
regulation have relaxed the prohibitions on alternative types of mortgage financing,
such as variable rate and adjustable rate mortgages.
Recent innovations in packaging of mortgage loans for resale in the Secondary
Mortgage Market to investors have helped to create a national market for mortgage
lending and a wide variety of synthetic financial instruments, such as the Collateralized
Mortgage Obligation a multicasts security consisting of several different mortgage
backed bonds that have payment characteristics quite different from the mortgages
securing the bonds. The central bank also made a regulation for mortgage. According
the regulation R-18, the house financed by the bank / DFI shall be mortgaged in banks
/ DFI’s favor by way of equitable or registered mortgage.
6.6 Evaluation of Property For financing a house, it is must first you are evaluating the property. For this purpose
you are hiring the some expertise in you company. And get also help to some external
skillful Persons. The central bank made a regulation for evaluation of properties. According to R- 19. Banks / DFIs shall either engage professional expertise or arrange sufficient training
for their concerned officials to evaluate the property, assess the genuineness and
integrity of the title documents, etc.It may, however, be noted that the requirement of
full-scope and desk-top evaluation, as required under R-8 and R-11 of Prudential
Regulations for Corporate / Commercial Banking and SMEs Financing respectively,
will not be applicable on housing finance.It is must all banks to follow the instruction of
the central bank.
6.7 Monitoring of Market Conditions According to central bank regulation – 20
The bank’s / DFI’s management should put in place a mechanism to monitor
conditions in the real estate market (or other product market) at least on quarterly
basis to ensure that its policies are aligned to current market conditions.
6.8 Floating Rate Products
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 62
The central bank also sees that with the time past the value of the house be changed.
That is why they called it floating rate product. For this purpose they create a
regulation. According to R-21 Banks / DFIs are encouraged to develop floating rate products for extending housing
finance, thereby managing interest rate risk to avoid its adverse effects. Banks / DFIs
are also encouraged to develop in-house system to stress test their housing portfolio
against adverse movements in interest rates as also maturity mismatches.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 63
6.9 Classification and Provisioning: According to central regulation 22
The mortgage loans shall be classified and provided for in the following manner:
CLASSIFICATION
DETERMINANT
TREATMENT OF INCOME
PROVISIONS TO BE MADE*
(1) (2) (3) (4) 1.Substandard.
Where mark-up/ interest or principal is overdue by 90 days or more from the due date.
Unrealized mark-up/interest to be kept in Memorandum Account and not to be credited to Income Account except when realized in cash. Unrealized mark up/interest already taken to income account to be reversed and kept in Memorandum Account.
Provision of 10% (25% from 31st December 2006) of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and adjusted forced sale value of mortgaged/ pledged assets (subject to Note 1 below) as valued by valuers on the approved panel of PBA.
2. Doubtful.
Where mark-up/ interest or principal is overdue by 180 days or more from the due date.
As above. Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and adjusted forced sale value of mortgaged/ pledged assets (subject to Note 1 below) as valued by valuers on the approved panel of PBA.
3. Loss.
Where mark-up/ interest or principal is overdue by one year or more from the due date
As above. Provision of 100% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and adjusted forced sale value of mortgaged/ pledged asset subject to Note 1 below) as valued by values on the approved panel of PBA.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 64
07. PERSONAL LOANS
7.1 Per party Limit According R-23, by state bank of Pakistan
The clean limit per person for personal loans will generally not exceed Rs 500,000/-.
Banks / DFIs may assign a clean limit beyond Rs 500,000 but not in excess of Rs 2
million to their prime customers who have extraordinary strong repayment capacity,
moderate debt burden and a clean track record. But aggregate outstanding in this
respect should not exceed 10% of the total outstanding personal loans at any point in
time. However, while availing benefit of this provision, banks / DFIs would place on
record well defined criteria for terms "Prime Customers" and "Moderate Debt Burden"
approved by their Board of Directors / Chief Executive. Banks / DFIs may also allow
financing under Personal Loans in excess of Rs 500,000 (up to Rs 1,000,000) to other
customers as well, provided the loan is appropriately secured according to the
definition given in Part A of these regulations.
The loan secured against liquid securities shall, however, be exempted from this limit.
The loans against the securities issued by Central Directorate of National Savings
(CDNS) shall be subject to such limits as are prescribed by CDNS / Federal
Government / State Bank of Pakistan from time to time.
7.2 Hypothecation According to state bank of Pakistan R-24
In cases, where the loan has been extended to purchase some durable goods / items,
including personal computers and accessories thereof, the same will be hypothecated
with the bank / DFI besides other securities, which the bank / DFI may require on its
own.
7.3 Maximum Tenure of Loan According to central bank of Pakistan R-25
The maximum tenure of the loan shall not exceed 5 years. However, this period may
be extended to 7 years for loans / advances given for educational purposes, provided
that disbursement of such loans shall directly be made by the bank / DFI to the
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 65
educational institution and the borrower shall not be allowed to utilize / withdraw cash
directly from the bank / DFI under this head for any other purpose.
7.4 Running / Revolving Finance According R-26,
In case of Running Finance / Revolving Finance, it shall be ensured that at least 15%
of the maximum utilization of the loan during the year is cleaned up by the borrower
for a minimum period of one week. In case the clean up is not made by the borrower,
the loan will be appropriately classified. However, banks / DFIs who require their
customers to repay a minimum amount each month, will be considered compliant with
this regulation subject to the condition that the aggregate cumulative monthly
installments exceed the 15% clean up requirement and accordingly the loans where
the specified minimum repayments are being made by the borrowers regularly, will not
require classification under this regulation.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 66
7.5 Classification and Provisioning
The personal loans shall be classified and provided for in the following manner:
CLASSIFICATION DETERMINANT TREATMENT OF INCOME
PROVISIONS TO BE MADE*
(1) (2) (3) (4) 1. Substandard.
Where mark-up/ interest or principal is overdue by 90 days or more from the due date.
Unrealized mark-up/interest to be kept in Memorandum Account and not to be credited to Income Account except when realized in cash. Unrealized mark up/interest already taken to income account to be reversed and kept in Memorandum Account.
Provision of 10% (25% from 31st December 2006) of the difference resulting from the outstanding balance of principal less the amount of liquid assets.
2. Doubtful.
Where mark-up/ interest or principal is overdue by 180 days or more from the due date.
As above. Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets.
3. Loss.
Where mark-up/ interest or Principal is overdue by one year or more from the due date.
As above. Provision of 100% of the the personal loans shall be classified and provided for in the following manner:
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 67
08. AUTO LOANS
8.1 Financing of Cars Vehicles According R-9
The vehicles to be utilized for commercial purposes shall not be covered under the
Prudential Regulations for Consumer Financing. Any such financing shall ensure
compliance with Prudential Regulations for Corporate / Commercial Banking or
Prudential Regulations for SMEs Financing. These regulations shall only apply for
financing vehicles for personal use including light commercial vehicles also used for
personal purposes.
8.2 Maximum Tenure of Loan According SBP R-10,
The maximum tenure of the auto loan finance shall not exceed seven years. Choosing
right home loan tenure is as important an option as choosing an interest rate for the
loan or focus on repayment and prepayment options. In recent times, as the rate of
inflation has touched double-digit figure choosing the right home loan tenure becomes
even more important as interest rates show signs of going up further. There are
several factors to be considered when one decides to take a home loan for a specific
period.
8.3 Minimum Down Payment According to SBP R-11,
While allowing auto loans, the banks / DFIs shall ensure that the minimum down
payment does not fall below 10% of the value of vehicle. Further, banks / DFIs shall
extend auto loans only for the ex-factory tax paid price fixed by the car manufacturers.
In other words, banks / DFIs cannot finance the premium charged by the dealers and /
or investors over and above the ex-factory tax paid price of cars, fixed by the
manufacturers.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 68
8.4 Hypothecation of Vehicles According to SBP R-12,
In addition to any other security arrangement on the discretion of the banks/ DFIs, the
vehicles financed by the banks / DFIs shall be properly secured by way of
hypothecation. Payments against the sale orders issued by the manufacturers are
allowed till the time of delivery of the vehicle subject to the condition that payment will
directly be made to the manufacturer / authorized dealer by the bank/ DFI and upon
delivery, the vehicle will immediately be hypothecated to the bank/ DFI.
8.5 Insurance According to SBP R-13,
The banks / DFIs shall ensure that the vehicle remains properly insured at all times
during the tenure of the loan. Vehicle insurance (also known as auto insurance, car
insurance, or motor insurance) is insurance purchased for cars, trucks, and other road
vehicles. Its primary use is to provide protection against physical damage resulting
from traffic collisions and against liability that could also arise therefrom.
8.6 Repossession of Vehicles According to SBP R-6,
The clause of repossession in case of default should be clearly stated in the loan
agreement mentioning specific default period after which the repossession can be
initiated. The repossession expenses charged to the borrower shall not be more than
actual incurred by the bank / DFI. However, the maximum amount of repossession
charges shall be listed in the schedule of charges provided to customers. The banks /
DFIs shall develop an appropriate procedure for repossession of the vehicles and
shall ensure that the procedure is strictly in accordance with law.
8.7 Repayment Schedule According to SBP R-7,
A detailed repayment schedule should be provided to the borrower at the outset.
Where alterations become imminent because of late payments or prepayments and
the installment amount or period changes significantly, the revised schedule should be
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 69
provided to the borrower at the earliest convenience of the bank / DFI but not later
than 15 days of the change. Further, even in case of insignificant changes, upon the
request of the customer, the bank / DFI shall provide him revised repayment schedule
free of cost.
8.8 Financing the Purchase of Used Cars According to SBP R-8,
The banks / DFIs desirous of financing the purchase of used cars shall prepare
uniform guidelines for determining the value of the used vehicles. However, in no case
the bank / DFI shall finance the cars older than five years.
8.9 Authorized Auto Dealers According to SBP R-9,
The banks / DFIs should ensure that a good number of authorized auto dealers are
placed at their panel to eliminate the chances of collusion or other unethical practices.
8.10 Classification and Provisioning The auto loans shall be classified and provided for in the following manner:
CLASSIFICATION DETERMINANT TREATMENT OF INCOME
PROVISIONS TO BE MADE*
(1) (2) (3) (4)
1. Substandard.
Where mark-up/ interest or principal is overdue by 90 days or more from the due date.
Unrealized mark-up/interest to be kept in Memorandum Account and not to be credited to Income Account except when realized in cash. Unrealized mark up/interest already taken to income account to be reversed and kept in
Provision of 10% (25% from 31st December 2006) of the difference resulting from the outstanding balance of principal less the amount of liquid assets.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 70
Memorandum Account.
2. Doubtful.
Where mark-up/ interest or principal is Overdue by 180 days or more from the due date.
As above. Provision of 50% of the difference resulting from the outstanding Balance of principal less the amount of liquid assets.
. 3. Loss.
Where mark-up/ interest or principal is overdue by one year or more from the due date
As above. Provision of 100% of the difference resulting from the outstanding balance of principal less the amount of liquid assets.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 71
09. CREDIT CARDS
9.1 Receipt of Credit Cards According to SBP R-01,
The banks / DFIs should take reasonable steps to satisfy themselves that cardholders
have received the cards, whether personally or by mail. The banks / DFIs should
advise the card holders of the need to take reasonable steps to keep the card safe
and the PIN secret so that frauds are avoided.
9.2 Statement of Accounts According to SBP R-02,
Banks / DFIs shall provide to the credit card holders, the statement of account at
monthly intervals, unless there has been no transaction or no outstanding balance on
the account since last statement. The County Council's annual Statement of Accounts
reports the financial position of the authority at the end of the year and transactions
during the year.
The Statement of Accounts is audited by the County Council's external auditor and
includes a foreword by the Director of Finance & Information Technology revenue
account, balance sheet, pension fund accounts and supporting notes.
9.3 Unauthorized / Wrong transactions According to SBP R-03, Banks / DFIs shall be liable for all transactions not authorized by the credit card
holders after they have been properly served with a notice that the card has been lost
/ stolen. However, the bank’s / DFI’s liability shall be limited to those amounts wrongly
charged to the credit card holder’s account. In order to mitigate the risks in this
respect, the banks / DFIs are encouraged to take insurance cover against wrongly
charged amounts, frauds, etc.
The bank/DFI shall, however, not charge the borrowers’ account with any amount
under the head of “insurance premium” (by what so ever name called) without
obtaining consent of each existing & prospective customer in writing. In addition to
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 72
obtaining consent in writing, the banks/DFIs may also use the following modes for
obtaining prior consent of their customers provided proper record is maintained by
banks/DFIs:-
i) Customer’s consent on recorded lines via out bound/in bound call center (after due verification)
ii) ATM screens – screen pop up before conducting transaction and after inputting pin code
iii) Signed consent acquired with credit card application or as separate form iv) IVR (Integrated Voice Recording)
9.4 Partial Payment by Cardholder
According regulation R-04 by State bank of Pakistan.
In case the cardholders make partial payment, the banks / DFIs should take into
account the partial payment before charging service fee / mark-up amount on the
outstanding / billed amount so that the possibility of charging excess amount of mark-
up could be avoided.
9.5 Due Date for Payment According to central bank regulation R – 04, Due date for payment must be specifically mentioned on the accounts statement. If
fine / penalty is agreed to be charged in case the payment is not made by the due
date, it should be clearly mentioned in the agreement.
9.6 Maximum Card Limit State bank of Pakistan issue regulation no. R- 07, Maximum unsecured limit under credit card to a borrower (supplementary cards shall
be considered part of the principal borrower) shall generally not exceed Rs 500,000/.
Banks / DFIs may, however, assign a clean limit beyond Rs 500,000 but not in excess
of Rs 2 million to their prime customers who have extraordinary strong repayment
capacity, moderate debt burden and a clean track record. But the aggregate
outstanding in this respect should not exceed 10% of the total outstanding credit card
portfolio at any point in time. However, while availing benefit of this provision, banks /
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 73
DFIs would place on record well defined criteria for terms "Prime Customers" and
"Moderate Debt Burden" approved by their Board of Directors / Chief Executive.
Banks / DFIs may also allow financing under the credit card scheme in excess of Rs
500,000/- (up to Rs 2 million) to other customers as well, provided the excess amount
is appropriately secured according to the definition given in Part A of these
regulations. The loan secured against liquid securities shall, however, be exempted
from the above limit. The loans against the securities issued by Central Directorate of
National Savings (CDNS) shall be subject to such limits as are prescribed by CDNS /
Federal Government / State Bank of Pakistan from time to time. For Charge Cards,
pre-set spending limits generated by the standardized systems, as is the global
practice, shall be allowed.
9.7 Classifications and Provisioning According to central bank of Pakistan regulation R- 08, The credit card advances shall be classified and provided for in the following manner:
CLASSIFICAT
ION DETERMINAN
T TREATMENT OF INCOME
PROVISION TO BE MADE*
(1) (2) (3) (4) Loss. Where mark-
up / interest or Principal is overdue by 180 days or more from the due date.
Unrealized mark-up / interest to be Put in Suspense Account and not to be credited to Income Account except when realized in cash.
Provision of 100% of the difference Resulting from the outstanding balance of principal less the amount of liquid securities with the bank / DFI.
It is clarified that the lenders are allowed to follow more conservative policies. Further,
provisioning may be created and maintained by the bank / DFI on a portfolio basis
provided that the provision maintained by the bank / DFI shall not be less than the
level required under this Regulation.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 74
10. CONCLUSION AND RECOMMENDATIONS
10.1 Conclusion 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 for 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.
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. 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.
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.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 75
The consumer banking industry has many opportunities to grow, customer wants
convenience mode of banking for which new products & services should be introduced
on the other hand it is giving huge profits to bank while the level to risk is less in
consumer financing as compare to others. Wealth Management Service which is a
new service in Pakistan Consumer Banking industry its awareness should be
increased as in our survey it reveals that most of the respondent even don’t have any
idea of consumer financing. Bank’s customers want new services to be introduced in
which Interbank Transfer Facility & Money at door step the most are demanding
services.
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.
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. Incase of credit
cards the respondents in our survey marked High Markup Rate as the major problem
they are facing in 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.
Although CIB provide complete and accurate information about the bank’s customer
Credit records but still loans default occurs in consumer financing the problem is not
with only due 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 in the middle class because they have the strong
ability to pay off their loans, banks should make adequate polices to provide loans to
lower class on easy terms and low markup rate. Upper class is generally not focused
for consumer financing because they have enough resources & purchasing power to
buy any asset.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 76
Due to high markup personal loans and credit cards are among 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.
According to bank’s staff the major reason for defaults on consumer loans is improper
assessment and consumer willingness to pay the loan. 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. 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.
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 are the introducer of CB in Pakistan still retains 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 NPL with low recovery rate. Maintaining the critical
balance between savings, investment and borrowers debt-servicing ability is possible
if input prices remain stable affording business to sustain their profitability and interest
rate should remain 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 perform for improvement of
his well beings and ultimately his living standard in the society. It is financing facilities
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 77
that generally and wholesomely support consumption and as a result improves the
overall living standards of house holds.
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 o 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 NPL of commercial banks in Pakistan have touched level of Rs.154 Billion which
is covered by 66% provisions in 2008.
The local private banks have loan loss coverage of 63% as on June 30, 2008. And for
public banks and foreign banks this 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 NPL. (Sharif, 2008) Besides average borrowing of an
individual is small but a lot of time and effort have to be spent on documentation, etc.
Therefore there is valid reason for charging high interest rates from individuals
borrowers.
Based on the analysis, the study makes the following recommendations:
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 78
10.2 Recommendations Interest Rates and Competition in Banking Sector
i. High interest rate spread is damaging the competitiveness in economy in general, and
in the financial sector in particular. Further, huge profit margins of banks at the cost of
depositors’ savings cannot be justified on any ground whatsoever. 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. The average spread in India,
ii. Presently, almost all consumer loans are on the basis of variable mark up. It should be
mandatory for all banks to offer both fixed as well as variable mark up on consumer
loans. If a borrower chooses fixed mark up, it should not exceed the market rate
current at the time of the signing of agreement.
iii. The banks should introduce discounted variable rates for fixed periods. The small
borrowers should be provided opportunities to pay interest on loan at a lower level
than the standard variable rate.
Compliance with SBP Regulations
i. The rising volume of public complaints indicates that banks are not fully complying
with existing SBP regulations. The mechanism for enforcement of regulations needs to
be strengthened. The compliance assessments conducted by SBP should be
publicized, and a ranking of banks according to the degree of compliance be
publicized through print and electronic media to deter the banks from non-compliance.
Also, the banks should be penalized for non-compliance with mandatory requirements.
ii. The SBP should develop and enforce minimum customer service standards
modeled on the Citizen’s Charter to be observed by every bank. Some illustrative
examples of the standards are: maximum waiting time for customers, minimum
information to be proactively disclosed by the banks, minimum instructions to be
displayed inside ATM cabins, reduction in time for resolution of 80% registered
complaints, etc. This initiative should be undertaken in collaboration with consumer
protection groups and other civil society organizations.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 79
iii. Aggressive marketing and unsolicited financing is promoting unnecessary private
consumptions at the cost of consumer savings. The SBP regulations should
discourage this approach. The unsolicited financing through personal loans, auto
loans, credit cards, etc. should be forbidden. Nevertheless, the banks should have the
right to offer products through transparent advertising.
Transparency and Access to Information related to Consumer Financing Product and Services
i. The available data about consumer financing is collected and analyzed mainly from
the viewpoint of monetary policy and macroeconomic indicators. The issues, which
affect the borrowers at individual level, are not fully captured in research. Standalone
stories appear in the media, which are not sufficient to articulate the real issues in a
broader context. Therefore, the SBP should conduct national Survey of Consumer
Financing (SCF) at least every two years. The findings of this survey should be used
to adjust and modify the regulations, and introduce reforms in the banking sector to
address the grievances of consumers.
ii. Presently, individual borrowers do not have the right to access their own Credit
Worthiness Report (CWR) maintained by Credit Information Bureau (CIB). The SBP
should amend the rules to allow the borrowers to access their CWR.
iii. Although Prudential Regulations for Consumer Financing prescribe disclosure
requirements for the banks, the data indicate that the present disclosure practices are
not adequate from the perspective of consumer and researchers. Therefore, the need
of the hour is to enact legislation for transparency in lending for protection of
consumer rights. Lesson should be learnt from the USA’s Truth in Lending Act that
protects consumers in credit transactions by requiring the banks to make adequate
disclosures. As an additional step, the SBP should direct every bank to formulate and
implement Freedom of Information (FOI) Policy. The policies should provide for overall
presumption in favor of disclosure while allowing for adequate protection of personal
information.
iv. It should be mandatory for all banks to make available Consumer Credit Policy and
updated Schedule of Charges on the website. Copies of the Policy and Schedule
should be made available to any citizen on demand.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 80
v. The existing FOI laws do not extend to the private sector. No person can access
information from a private bank under any law, except as provided in the SBP
regulations or bank’s own terms and conditions. The SBP regulations do not entitle a
citizen to access information from a bank as a legal right other than personal
information (although restrictions apply even on personal data). The Government of
Pakistan should amend the FOI laws and extend them to the private sector including
the private banks.
Consumer Education
i. Comparative information is not available to the consumers to make informed choices.
If a consumer is interested to find out the bank with lowest mark up on the personal
loan for instance, consolidated bank-wise data is not available in Pakistan. As a result,
the consumer has to rely on misleading advertisements and false promises of banks.
The SBP should prepare and advertise bank-wise consolidated data in form of charts
and tables for the public in Urdu and local languages so that they are able to choose a
bank on the basis of reliable information. This practice would help promote
competition among the banks, and create an incentive for improving efficiency and the
quality of services.
ii. All banks should be directed to provide latest copy of Terms of Conditions and
Schedule of Charges to all applicants for consumer loans and credit cards well before
signing the application form. The applicants should be encouraged to read and
understand these documents before they enter into the agreement.
iii. There is a need to establish independent consumer credit counseling centres such as
those established in the USA. These centres should develop and implement programs
for consumer education on one hand, and provide advice to the consumers to choose
the right kind of products.
Complaint Redress Mechanism
i. The complaint procedure is lengthy. The normal time allowed to banks, the Banking
Ombudsman and in case of appeal, to the SBP for redress of a consumer complaint
aggregates to about 4 months. If a consumer has to go the judicial process against the
SBP’s decision, then it might take even longer. The number of days for redress of
complaints should be reduced.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 81
ii. Generally, bank officials are reluctant to provide Complaint Form to the aggrieved
customer. The banks should be required to place the Complaint Forms at a prominent
place within the bank’s premises.
iii. The procedure of complaint registration with Banking Ombudsman is cumbersome
and tends to discourage the customers to lodge a complaint. The Ombudsman should
have the powers to accept application on plain paper without the requirement of
attestation by Oath Commissioner.
iv. The powers of Banking Ombudsman are restricted in scope. The Ombudsman should
have the authority to take cognizance of maladministration and violation of SBP rules
based on information collected from any source. The responsibilities of entertaining
the complaints pertaining to corruption, negligence of duties by bank officers in dealing
with customer and excessive delay in taking decisions can be exercised only in
respect of public sector banks.
Bank Charges
i. The SBP regulations should bind the banks to explain ALL applicable charges on
consumer loans before signing the contract.
ii. Banks fix different types of charges on credit cards and loans as a percentage as well
as a minimum amount, and charge to the customer whichever is higher. For instance,
some banks charge Rs.500 or 3% of cash advance amount on credit cards, whichever
is higher. If the cash advance amount to be paid by the customer at the rate of 3% is
less, then the bank would charge Rs.500, instead of 3%. This practice is unfair and
should be abolished immediately. The bank should either charge fee or only
percentage.
ATM
i. ATM users face a lot of inconvenience due to out-of-order or out-of-cash ATM
machines because there is nothing compelling the banks to keep their machines in
good order. If ATM machine returns the card due to any technical error or
unavailability of cash, it amounts to bank default from a consumer perspective. It is
just like a customer who visits a bank to debit certain amount from his account, but the
cashier says the bank has run out of money. If the ATM machines fail to service the
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 82
customer, the respective bank must be penalized and the customer be compensated.
If the banks have the right to charge handsome fee to credit borrowers if the cheque is
dishonoured, should not the customers have the right to be compensated when the
ATM machine does not work. The consumer must be compensated for this
inconvenience. ii. Some banks de-link their ATM machines from 1Link at their discretion. This practice
not only causes inconvenience to the ATM users of other banks, but also amounts to
cheating the customer. When the ATM machine is de-linked, it accepts ATM cards of
that bank only, which owns the machine. Whereas, customers with ATM cards of other
banks are shown some technical error on the screen. The SBP should take notice of
this practice, and centralize the linking of ATM machines so that no bank could de-link
from the network to cause inconvenience.
Sustainability of Consumer Financing Sector
i. The problems in interest rate spread and service delivery notwithstanding, consumers
have benefited a lot from the consumer financing sector. A large number of people
have been able to meet their real needs by accessing credit from the banks.
Therefore, steps need to be taken for sustainability of this sector. This requires the
banks to develop data-based lending strategies to manage the risks associated with
this sector.
ii. The protection of this sector, however, should be based on a cautious approach.
Pakistan needs to learn from the South East Asian financial crisis, which jolted the
leading economies in the region as a result of high private sector borrowing. Banks
that are aggressively involved in consumer lending need to learn lessons from the
crisis that forced Thailand to fix a universal cap of 18% as being chargeable on credit
cards, besides raising the minimum monthly income criterion for issuance of cards.
a. As the number of complaints of misuse cards increased PIN-based credit cards should
be issued that would provided additional security.
b. Financing to negative area residents should be made available and term & policies
should be designed accordingly to reduce the chances of defaults.
c. Markup charged on consumer financing should be reduced to a substantial level so
the spread between bank loans and deposit could be reduced and customer could
easily pay off the loans.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 83
d. Better returns should be provided on deposit accounts.
e. To facilitate the customer’s new products and services should be introduced
continuously.
f. SBP should continuously update its regulations according to need of people and
economic situations of the country.
g. Increase consumer awareness, give clear instructions and guidance.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 84
BIBLIOGRAPHY ARTICALS A.B. Shahid, Consumer Finance: What are its Chances of Success?,
Pakistan Economist.
Abid A. Burki and Shabbir Ahmed, ‘Corporate Governance Changes in Pakistan’s
Banking Sector: Is there is a Performance Effect’. CMER Working Paper No. 07-059,
LUMS, 2007
Abid A. Burki and S.M. Turab Hussain, Opportunities and Risks for Liberalizing Trade
in Pakistan. LUMS and ICTSD, 2007
Banking Surveillance Department (BSD), The Banking System Review, 2006, State
Bank of Pakistan.
A.B. Shahid, Consumer Finance: What are its Chances of Success?, Pakistan
Economist.
Abid A. Burki and Shabbir Ahmed, ‘Corporate Governance Changes in Pakistan’s
Banking Sector: Is there is a Performance Effect’. CMER Working Paper No. 08-059,
LUMS, 2008
Abid A. Burki and S.M. Turab Hussain, Opportunities and Risks for Liberalizing Trade
in Pakistan. LUMS and ICTSD, 2008
Banking Surveillance Department (BSD), The Banking System Review, 2006, State
Bank of Pakistan.
Barton, Dominic, Roberto Newell and Gregory Wilson, Dangerous Markets: Managing
in Financial Crises
Consumer Voice: A Magazine of Consumer Awareness, Volume 7, Issue 1 and 3.
Cunningham, G. Cotter, Your Financial Action Plan.
Economic Survey of Pakistan 2007-2009
Emmons, William R., Consumer financing Myths and other Obstacles to Financial
Literacy.
Ishrat Hussain. Governor of the State Bank of Pakistan. ‘Banking Sector Reforms in
Pakistan’. The Business People’s Magazine. January 2008.
Muhammad Arshad Khan, and Sajawal Khan, ‘Financial Sector Restructuring in
Pakistan’. Institute of Development Economics Islamabad (PIDE), August 2008,
MPRA Paper No.4141.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 85
Pakistan and Gulf Economist (Different articles in the issues of 2005 TO 2008)
Policy Paper MCB Limited, Complaint Resolution Program, 2008 (prepared by Internal
Audit and RAR Group)
Shamshad Akhtar, Dr. Governor of the State Bank of Pakistan. ‘Pakistan’s banking
sector–the need for second tier of reforms’. Address at the Pakistan Banking
Association, London, 12 November 2008.
State Bank of Pakistan, Pakistan: Financial Sector Assessment 1990 -2008 Research
Development Department SBP
Tariq Ahmed Saeedi, ‘Consumer Financing: Fine Line Drawn between Haves and
Have Not’. Economist. January 28February 3, 2008
The Banking Mohtasib of Pakistan: Annual Report 2009
The Wafaqi Mohtasib of Pakistan: Annual Report 2007
The World Economy, Volume 19 Issue 3 Page 307-332, May 1996
Trends and Issues Facing the Consumer financing Industry, Volume 9, Issue 1, Spring
2008, The PricewaterhouseCoopers
Laws, Regulations and Guidelines
The Competition Ordinance, 2008 Prudential Regulations for Consumer Financing
Guidelines in Dealing with Customer Complaints Guidelines for Standardization of
ATM Operations The Financial Institutions (Recovery of Finances) Ordinance, 2005
The Payment Systems and Electronic Fund Transfers Act, 2008
BOOKS
Barton, Dominic, Roberto Newell and Gregory Wilson, Dangerous Markets: Managing
in Financial Crises
Consumer Voice: A Magazine of Consumer Awareness, Volume 7, Issue 1 and 3.
Cunningham, G. Cotter, Your Financial Action Plan.
Economic Survey of Pakistan 2006-2007
Emmons, William R., Consumer financing Myths and other Obstacles to Financial
Literacy.
Ishrat Hussain. Governor of the State Bank of Pakistan. ‘Banking Sector Reforms in
Pakistan’. The Business People’s Magazine. January 2005.
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 86
Muhammad Arshad Khan, and Sajawal Khan, ‘Financial Sector Restructuring in
Pakistan’. Institute of Development Economics Islamabad (PIDE), August 2009,
MPRA Paper No.4141.
Pakistan and Gulf Economist (Different articles in the issues of 2007 2009)
Policy Paper MCB Limited, Complaint Resolution Program, 2009 (prepared by Internal
Audit and RAR Group)
Shamshad Akhtar, Dr. Governor of the State Bank of Pakistan. ‘Pakistan’s banking
sector–the need for second tier of reforms’. Address at the Pakistan Banking
Association, London, 12 November 2008.
State Bank of Pakistan, Pakistan: Financial Sector Assessment 1990 -2000 Research
Development Department SBP
Tariq Ahmed Saeedi, ‘Consumer Financing: Fine Line Drawn between Haves and
Have Not’. Economist. January 28February 3, 2008
The Banking Mohtasib of Pakistan: Annual Report 2008
The Wafaqi Mohtasib of Pakistan: Annual Report 2009
The World Economy, Volume 19 Issue 3 Page 307-332, May 2008
Trends and Issues Facing the Consumer financing Industry, Volume 9, Issue 1, Spring
2008, The PricewaterhouseCoopers
Laws, Regulations and Guidelines
The Competition Ordinance, 2008 Prudential Regulations for Consumer Financing
Guidelines in Dealing with Customer Complaints Guidelines for Standardization of
ATM Operations The Financial Institutions (Recovery of Finances) Ordinance, 2008
The Payment Systems and Electronic Fund Transfers Act, 2008
Pakistan & Gulf Economist, XXVI (44) WEBSITES www.dawn.com
http://netxpress.com.pk/2008/03/08/consumer-banking
http://www.pakistaneconomist.com/database2/cover/c2008-14.asp
http://www.jang.com.pk/thenews/dec2008-weekly/busrev
Consumer Banking in Pakistan, National Bank of Pakistan Economic Bulletin
Hudgins, P. S. (2008), Bank Management & Financial Services, Seventh Edition, pp.
521-642, McGraw Hill International Edition
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 87
Siddiqui, D. A. (2008), Practice & Law of Banking in Pakistan, Sixth Edition, Royal
Book Company
www. Google .com
www. Answers.com
http://www.sbp.org.pk/publications/prudential/index.htm
http://www.kpmg.com.pk/industries/ind_bankingsurvery.htm
www . sbp .org.pk/publications/q_ reviews /q_ review july_08
http://www.pakistaneconomist.com/database2/cover/c2008-14.asp
http://www.thenews.com.pk/daily_detail.asp?id=4463500
http://www.pakistaneconomist.com/database2/cover/c2008-14.asp
Consumer Financing in Pakistan: Issues and Challenges
___________________________________________________ Institute of Business and Technology 88
ANNEX
Annex II List of Interviews Dr. Pervaiz Tahir, Mahboob-ul-Haq Professor of Economics, Government College
University, Lahore
Dr. Aliya H. Khan, Chairperson, Department of Economics, Quaid-e-Azam University,
Islamabad
Mr. Azhar Hameed, Banking Ombudsman, Karachi
Mr. Masood Yasin, Manager, National Bank of Pakistan, Islamabad
Ms. Amber Rathor, Manager, Allied Bank Ltd., Islamabad
Malik Noor Khan, Manager, Askari Commercial Bank Ltd., Islamabad
Mr. Gul Muhammad Khan, Manager, Muslim Commercial Bank Ltd., Islamabad
Mr. Ehtesham, Senior Reporter, Daily Dawn, Islamabad
Mr. Asif Ali, Joint Director, State Bank of Pakistan, Islamabad
Annex II List of Tables Key Issues in Consumer Financing: An Overview Tables Consumer Financing Portfolio of Banks (December 2008 and June 2007) Growth in Consumer Financing (July-January 2008 and 2009) Interest Rate Behaviour in Pakistan Average Interest Rate Spread in South Asia (2005-08) Consumer Complaints against Banks in 2008