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Consumer Financing in


M.Sh eh ar yar Ka ne ez
Um br ee n
Baig Fa ti ma
Ak ht er
MIF-17 MIF-2 1
Scope of Presentation
 Consumer Financing: Overview
 Growth of Consumer Financing in
 Categories
 Some Charts
 Regulatory Framework for Consumer
 Shariah Compliant Models of Consumer
 Issues and Challenges from Consumer
 Social & Economic Impacts of Consumer
Kaneez Fatima
Consumer Financing: Overview

What is “Consumer Financing”?

 “Any financing allowed to individuals

for meeting their personal, family or
household needs”

(State Bank of Pakistan)

Growth of Consumer Financing in

 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 Rs.72.4 – Rs.325 Billion

2007 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

i.e. A.Cs, Computers,

other Electricity
Educational Expenses,
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
 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

This category also

includes loans for a
combination of housing
activities such as loans for
purchase of land plus
Different Options For House Financing
Credit Cards

Credit cards include any

card, which a customer can
use to borrow credit from a

Credit cards include charge

cards, debit cards, and
Balance Transfer Facility

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
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

 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
 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
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
 Customer pays periodic rental charges along
with price of the units
Housing Finance Arrangements
 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
. .

 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

. .

 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
Social & Economic Impacts of
Consumer Financing
 Increased consumption >
increased output /
Inflationary Pressure
(Demand-Pull Inflation)

 Increased dependence on
foreign loans

 Lack of infrastructure to
absorb and manage the
increased number of cars
on the road due to easy
auto financing
 Spending beyond their means behavior results in
burdening the economy and society

 Negative Saving-Investment gap as a result of

spend now, save later behavior in developing

 It’s beneficial for those who have the prerequisite

responsibility, maturity and financial literacy to
manage their finances.
Umbreen Akhter
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.

6. 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 suits
their interests best

9. 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
 Bankers must have a positive attitude towards the
 Consumer Education:
 comparative information should be made
 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