Consumer Financing in Pakistan

M.Sh eh ar yar Um br ee n Baig Ak ht er MIF-17 Ka ne ez Fa ti ma MIF-2 1

Scope of Presentation
 Consumer Financing: Overview  Growth of Consumer Financing in

Pakistan  Categories  Some Charts  Regulatory Framework for Consumer Financing  Shariah Compliant Models of Consumer Financing  Issues and Challenges from Consumer Perspective  Social & Economic Impacts of Consumer

Kaneez Fatima MIF-21

Consumer Financing: Overview
What is “Consumer Financing”?

financing allowed to individuals for meeting their personal, family or household needs” (State Bank of Pakistan)


Growth of Consumer Financing in Pakistan
Until the early 1990s, consumer financing was not offered by commercial banks  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


As a result, Banks aggressively promoted consumer financing- credit cards, auto loans, house financing and personal loans with least documentation Unprecedented growth rate over the last 7 years According to SBP:
2006 2007 Rs.72.4 – Rs.325 Billion Reached Rs.354.4 Billions

Categories of Consumer Financing
 Personal Loans  Auto Finance  Housing Finance  Credit Cards

Personal Loans
“Loans provided to individuals for the payment of goods, services and expenses” i.e. A.Cs, Computers, other Electricity Equipments, Educational Expenses, Marriage

Auto Loans

Auto loans include any loans used to purchase a vehicle for personal use. The loans borrowed to purchase vehicles for commercial or corporate use are not included in this category. It is also available for old vehicles but their age should not be more than five years

Housing Finance:
“Housing finance includes the loan, which is provided to individuals for the purpose of purchasing or improving a residential house, or apartment, or land” This category also includes loans for a combination of housing activities such as loans for purchase of land plus construction.

Different Options For House Financing

Credit Cards
Credit cards include any card, which a customer can use to borrow credit from a bank. Credit cards include charge cards, debit cards, and Balance Transfer Facility (BTF). Corporate Cards are not included in this category.

Bank Alfalah Cards
 Platinum card

 Supplemantory card

 Women card

 Student card

Banks are making abnormal profits after the emergence of consumer financing.

Umbreen Akhter MIF-23

Regulatory frame work
 In Pakistan State Bank of Pakistan is the

regulatory authority of all banks and Development Finance Institutions (DFIs)

Regulatory Framework for Consumer Financing
 SBP is the regulator of all banks and

Development Finance Institutions (DFIs)
 For redress of consumer grievances comprises of

both administrative and judicial institutions.
 Banks are obligated to clearly disclose

Regulatory Framework for Consumer Financing
 No limits are placed on the margin requirements  SBP has restrained banks from charging any

“Insurance Premiums”

 Banks are not allowed to finance older than 5

years cars and must keep the customer informed of payment schedules and any changes

Regulations For Credit Cards
 Receipt of credit cards  Statement of accounts  Unauthorized / wrong transactions  Partial payment by cardholder

 Due date for payment  Maximum card limit  Classification and provisioning

Regulations For Auto Loans
 Prohibition on financing commercial vehicles  Maximum tenure of loan  Minimum down payment  Hypothecation of vehicles

 Insurance  Repossession of vehicles  Repayment schedule  Financing the purchase of used cars

Regulations For Housing Finance

 Maximum per party limit.  Debt-equity ratio.  Maximum tenure of loan.  Mortgage.

 Evaluation of property  Monitoring of market conditions  Floating rate products  Classification and provisioning

Regulations For Personal Loans
 Per party limit  Hypothecation  Maximum tenure of loan  Running / revolving finance  Classification and provisioning

Mirza Sheharyar Baig MIF-17

Islamic Ways of Consumer Financing
 Housing Finance Arrangements  Auto Loans  Cards  Personal Loans

Housing Finance Arrangements
 Murabaha  Ijara Muntahia Bittamleek  Istisna  Diminishing Musharaka

Housing Finance Arrangements
1. Murabaha Based Housing
 Long-term House Financing  Introduced in Many Islamic Countries  Less practicable due to
  

Price can’t be changed Customer can sell the house Resemblance with interest bearing

Housing Finance Arrangements
2. Ijara Muntahia Bittamleek Based
 Portion, Renovation or Addition  Medium-term Financing, 3-7 Years  No recourse to lessee  Expensive tangible items i.e. electric

equipment, air conditioners

Housing Finance Arrangements
3. Istisna Based Housing Finance Model
 Construction of new houses on customer land  Construction or renovation of existing house  Murabaha or Patallel Istisna Basis  Risky because of no guarantee from

customer and sub-contractor

Housing Finance Arrangements
4. Diminishing Musharaka Based Financing
 Most commonly used and practical  Shirkat-ul-Milk (Joint Ownership)  Financed by agreed ratio wholly or partially by

bank  Customer pays periodic rental charges along with price of the units

Housing Finance Arrangements
Continued:  Ways of Contracts: • Renovation or Construction • Customer own land to construct house • To buy completely build house/flat (Cost of purchased is borne in agreed ratio)

Auto Loans
 Car Financing  Car Leasing

Auto Loans
 Car Financing

“Providing loan to the customer for purchase of a car”
 It is done through Car Murabaha

Auto Loans
 Car Leasing

“Car remains in the ownership of financier and customer pays the rental charges to financier till the end of the term”
 It is done through Car Ijara Scheme

Process of Ijarah

Agreeme nt-1



 The customer approaches the Bank with the request for Ijarah financing and enters into a promise to lease agreement.  The Bank purchases the item required for leasing and receives title of ownership from the vendor  The Bank makes payment to the vendor

Process of Ijarah
Agreeme nt-2



 The Bank leases the asset to the customer after execution of lease agreement.  The customer makes periodic payments as per the contract.  At the end of the tenure customer can purchase the asset from the bank with the help of separate Sale agreement.

 Credit Cards  Debit Cards  ATM Cards  Charge Cards

 Credit Card  Allowed in following situations
• • • • •

Traveling abroad or out of city where cash may not be carried Payment on internet Purchasing valuables Extreme emergency Iztirar (Compulsion)

 Debit Cards  ATM Cards  Charge Cards

“All are allowed and bank can charge a periodic reasonable service charges”

Personal Loans
Motives of Personal Loans
 Purchase of Assets  Payment of Expenditures

Personal Loans
 Purchase of Assets

“Loan is offered under the principles of Murabaha and Ijara Muntahia Bittamleek by Islamic Financial Institutions”

Personal Loans
Payment of Expenditure
 Interest-free loan or Qard-e-Hasana  Sale and Lease back under Ijara

Not consumable items  Buy back of Assets (Iztirar) Any type of items  Tawarruq (Iztirar) Blue-chip security

Kaneez Fatima MIF-21

Social & Economic Impacts of Consumer Financing
 Increased consumption >

increased output / Inflationary Pressure (Demand-Pull Inflation) foreign loans

 Increased dependence on

 Lack of infrastructure to

absorb and manage the increased number of cars on the road due to easy auto financing

 Spending beyond their means behavior results in

burdening the economy and society

 Negative Saving-Investment gap as a result of

spend now, save later behavior in developing nations

 It’s beneficial for those who have the prerequisite

responsibility, maturity and financial literacy to manage their finances.

Umbreen Akhter MIF-23

Issues And Challenges From Consumer Perspective
1. High Interest Rate: In Pakistan the spread has vacillated between 5.95% and 9.58% during the period from 1990 to 2005. 2. Variable Interest Rate According to the annual report of the banking ombudsman, in Pakistan almost all consumer loan are on the basis of variable mark up rates. 3. Increasing Inflationary impact Acquisition of easy bank credit by the household consumers has spurred the demand for many essential and luxury items.

4. Deteriorating quality of service
As the consumer financing portfolio is increasing quality of related bank services is becoming a serious issue.

5. Poor information disclosure practice
There is no law in Pakistan, which entitles the consumers to access information from the private banks as a legal right.


Lack of consumer education
The technical documents prepared by the banks affects the financial rights of uneducated customers.

7. Intimidating recovery practices:
Banks recovery team reaches the borrower house to pressurize them for payment of dues without any legal authority 

Weaknesses in regulatory framework:
The banks formulates their own policies and procedures which their interests best suits


Unsolicited Financing
Aggressive marketing campaigns launched by the banks are targeting the costumers and encouraging them to purchase a loan or credit. Source: Consumer financing in Pakistan: Issues, Challenges, and way Forward published by CRCP

Conclusions & Recommendations
 High Interest rate spread should be reduced to

increase competition in the banking sector

 SBP Regulations regarding consumer financing

should be enforced strictly to decrease the high profit margins of the banks at the expense of the depositors i.e. Compounding is not allowed by SBP

 Unsolicited financing should be discouraged to avoid

unnecessary private consumption at the cost of consumer savings

 SBP should bind banks to explain ALL applicable

charges on consumer loans before signing the contracts  Bankers must have a positive attitude towards the customer  Consumer Education:

comparative information should be made available  Latest copy of terms, conditions, & schedule of charges should be provided to applicants in the language of their understanding

 There should be a unified principles of

Islamic Finance.  Islam has very flexible finance principles

Question Answer Session

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