2010

[Type the company name]

Mohammad Ahsan Dahar

I.D :_ 8683

Section:- C

[CONSUMER FINANCING]
Contents
INTRODUCTION ....................................................................................................................................... 4
CONSUMER FINANCING .......................................................................................................................... 4
What is Consumer Financing? .............................................................................................................. 4
Growth of Consumer Financing in Pakistan .......................................................................................... 5
Types of Consumer Financing .............................................................................................................. 6
(a) Personal Loans:........................................................................................................................... 6
(a.1) personal loan what banks hide from you:................................................................................. 6
(b) Auto Loans ................................................................................................................................. 7
(c) House Financing:......................................................................................................................... 7
(d) Credit Cards: ............................................................................................................................... 8
Need of I.T in Consumer Financing ........................................................................................................ 10
Fast application processing: ........................................................................................................... 10
Better Services to customers: In..................................................................................................... 10
Mass consumer client record handling: .......................................................................................... 10
Reduce calculation errors: ............................................................................................................. 10
Efficient loan recovery ................................................................................................................... 10
Auditing and fraud detection: ........................................................................................................ 11
Reviewing Consumer Financing through Articles :-............................................................................. 11
(1) 'High interest rate hampers consumer financing growth' .................................................... 11
(2)Consumer financing losing luster:- ............................................................................................. 13
Prudential Regulations .......................................................................................................................... 14
Pre-operation Requirements ............................................................................................................. 14
Minimum Standards for Consumer Financing Activities .............................................................. 14
Information Disclosure ...................................................................................................................... 15
Exposure Limits ................................................................................................................................. 15
Risk Mitigation Ability ........................................................................................................................ 15
Margin Requirements ........................................................................................................................ 16
Borrower’s Eligibility .......................................................................................................................... 16
Insurance Premium ........................................................................................................................... 16
Auto Loans ........................................................................................................................................ 17
House Financing ................................................................................................................................ 17
 Personal Loans .................................................................................................................................. 17
CONSUMER FINANCING IN PAKISTAN: .......................................................................................................... 18
BANK ALFALAH LIMITED ............................................................................................................................ 18
Bank Alfalah Credit Card ................................................................................................................ 18
Schedule of Charges .......................................................................................................................... 21
UNITED BANK LIMITED ............................................................................................................................. 25
UBL CREDIT CARD … MAZAY MEIN RAHO! ...................................................................................... 25
MUSLIM COMMERCIAL BANK LIMITED (MCB)............................................................................................. 27
Conclusion............................................................................................................................................. 30
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

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

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.

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.
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.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

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
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
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
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
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
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.

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
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.

Reviewing Consumer Financing through Articles :-

(1) 'High interest rate hampers consumer financing growth'

KARACHI (October 05, 2010) : Slow economic activity and high interest rate have hampered
the growth of consumer financing and posted rise in non-performing loans (NPLs) as overall
banking sector NPLs under consumer financing have reached 13 percent.

This was stated by Muhammad Raza, head of consumer banking in Meezan Bank while talking
exclusively to Business Recorder. He said that Meezan Bank has adopted a very cautious
approach in consumer financing to avoid defaults and ensure that only those people get
consumer financing who can handle its financial burden amicably.

He said that the NPLs of the entire banking system of Pakistan are on the rise mainly due to
recession, high inflation and interest rates, which have affected the repayment capacity of the
customers. He said: "Even Meezan Bank's consumer finance NPL has increased to 4 percent,
from previous 2 percent, which is still the lowest in overall banking system of the country. Even
for the Islamic banking alone the average NPL ratio is 7 to 8 percent."

He said: "Despite this, we can still claim that our ratio of non-performing loans in the consumer
business is the lowest in the market due to our highly strict due diligence and complete
compliance with our policies and procedure." He added that the key "to our success is the
quality of our credit and we never compromise on it". He appreciated State Bank of Pakistan for
launching the fraud monitoring process eg ECIB, which has largely reduced the possibilities of
bank frauds, thus providing a feasible working environment to financial institutions.

Taking about the high financing rate he said that the major challenge that all conventional and
Islamic banks are facing right now is the high interest rates due to which the cost of consumer
financing has gone out of common people's range.

He said that high interest rate has hampered the growth of consumer financing and growth rate
is much less than previous years. High interest rate is also a reason of rising non-performing
loans of banking sector. "The SBP should focus on the growth of economic activity by
decreasing the interest rate, instead of increasing interest percentage upon government
borrowing and inflation," Raza suggested.
Meezan bank does not have any recent plans to introduce credit card as Shariah supervisory
board has not given approval. "Nevertheless, we are planning to add more features to our
existing Visa debit card to facilitate our consumers," he said.

On liability side, Meezan Bank has grown consistently and the deposits grew at a rate of 42
percent in 2009 as compared to 9 percent growth in the banking industry. "Even this year, our
deposits have grown at 25 percent during the 9 months of the year. This clearly shows the trust
of the customers on Islamic banking and Meezan Bank," Raza said.

"I personally see huge untapped potential of consumer financing in Pakistan as there are
millions of consumers who are at a distance from banking due to various reasons," he said. He
sad that being the pioneering Islamic bank in Pakistan, Meezan Bank has to go a long way and
bring these potential consumers in its net, as consumer financing is still relatively new and its
demand would stay in Pakistan.

Talking about products he said that currently Meezan Bank offers Car Ijarah (car financing),
Easy Home (housing finance), Motorcycle Financing and Labbaik Umrah and Hajj financing
products for Pakistani consumers. He added that the Bank would soon introduce laptop and
generator financing, too.

Meezan Bank's Car Ijarah provides car financing, based on the principles of Ijarah and is free
from the element of interest. Meezan Bank' Car Ijarah is a car rental agreement, under which
the Bank purchases the car and rents it out to the customer for a period of 3 to 5 years, agreed
at the time of the contract. Upon completion of the lease period the customer has the option of
purchasing the car from the bank, he said.
'High interest rate hampers consumer financing growth'
An Islamic Ijarah is an asset-based contract, ie the lessor should have ownership of the asset
during the period of the contract. Under Islamic Shariah, all ownership-related rights and
liabilities should lie with the owner, while all usage-related rights and liabilities should lie with the
user.

Meezan Bank's 'Easy Home' works through diminishing Musharakah. The nature of the contract
is co-ownership, and not a loan, because the transaction is not based on lending and borrowing,
but on joint ownership in the house, Raza said. Creating joint ownership and then gradually
transferring it to the customer, instead of simply lending money, is the major factor that makes
'Easy Home' Shariah-compliant, he added.

Another challenge remains mass public awareness of the fact that Islamic banking provides a
comprehensive business solution to all. That could only be possible with a strategic presence of
Islamic banking branches across the country. "Currently, we have a network of 202 branches in
54 cities of the country, and Meezan Bank has received an outstanding response from the
public. We plan to close the year at 222 branches," he said.
 (2)Consumer financing losing luster:-

KARACHI: Every segment of consumer financing from credit card to car

purchasing witnessed a sharp contraction during the last fiscal year 2009-
10 that ended June 30, the State Bank of Pakistan reported on Monday.

The overall consumer financing plunged by Rs50 billion, or 17 per cent, during the year
under review over the previous fiscal year. The outstanding stock of consumer loans fell
to Rs244 billion in 2009-10 against the Rs294 billion in 2008-09.

The data showed that well-advertised credit card business also shrank significantly. The
loans under the credit card had fallen to Rs28 billion from Rs35 billion the previous year.

The lucrative credit card business, which has a great influence in developed and
developing economies, failed to get significant space in the domestic market.

Most of large domestic banks and foreign banks had been involved in this business,
however, a report recently issued by Banking Ombudsman showed that the highest
number of complaints were against the credit card business.

Analysts believe that low quality performance of banks in case of credit card is the real
hurdle in promotion of plastic money business.

The car purchasing was the second highest attraction for the consumers but the
outstanding loans in this particular sector showed steep fall during the last couple of
years.

The outstanding loans for car purchasing fell to Rs64 billion till June 30, 2010. The same
was Rs78 billion in 2009 and Rs105 billion in 2008.

Despite fall in the loans for car purchasing, the prices of cars went up due to high
demand and short supply, a policy adopted by the local car producers due to their
monopolistic domination in the market.

Some reports also indicate that purchasing of cars on cash has increased mainly due to
higher liquidity in agriculture sector as growers got much higher prices for their cash
crops like sugarcane, wheat and rice during last couple of years.

Higher volume of loans given under the consumer financing was of personal loans which
also witnessed sharp decline. The stock of personal loans reduced to Rs94 billion in
2009-10 from Rs115 billion in 2008-09. In 2007-08 it was Rs140 billion.

Loans for house building under the consumer financing dropped to Rs54.5 billion from
Rs61 billion the previous year. In FY2008, it was Rs66 billion.
 Consumer durables were the poorest among the different segments of consumer
financing as the outstanding loans were just Rs211 million in 2009-10 as against Rs420
million in 2008-09 and Rs499 million in 2007-08.

The private sector performed much below the expectation in the last fiscal year while the
overall economy remained under pressure owing to rising inflation, higher cost of
production and unpopular agreement with the IMF.

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
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.

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
Compliant, Partially Compliant and Non Compliant with respect to meeting these
preconditions.
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.
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
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.
CONSUMER FINANCING IN PAKISTAN:

In Pakistan, more or less all the major banks are providing consumer financing. The industry is highly
competitive, fairly efficient and has a high potential of future development. Generally banks provide the
same kind of options in terms of consumer financing. In this report, Credit cards of the following 3
banks has been explained.

Bank Alfalah Limited

Muslim Commercial Bank Limited (MCB)

United Bank Limited

BANK ALFALAH LIMITED

Bank Alfalah Credit Card

Your Bank
Alfalah Credit Card is your partner everywhere and is globally accepted and welcomed at locations
displaying the VISA logo. It is accepted at nearly 27 million locations in more than 150 countries
around the globe and over 22,000 Bank Alfalah’s establishments in Pakistan.

Alfalah VISA lets you pay for shopping, travel, entertainment, meals and much more. Card members are
facilitated through a number of promotions from time to time. In addition, there are a number of
strategic business partnerships with leading local and international brands for purchase of home
appliances at exciting Step-BY-Step (SBS) monthly installment plan with free home delivery at lowest
interest rates. Salient features are:

• No Joining / Annual / Renewal fee

• Electricity, Sui Gas, PTCL and Warid bills payment through 24 hour Call Center and Auto Debit
instructions
• SMS for card usage, mini statement, payment receipt confirmation, etc.
• Cash withdrawal at all 1LINK ATMs
• Special offer on Warid post paid connections

Rush now to avail matchless features offered by Alfalah VISA.

Platinum Card

It is accepted at nearly 27 million locations in more than 150 countries around the globe and at over 22,000
establishments in Pakistan.

Titanium

Titanium MasterCard is your partner everywhere and is globally accepted and welcomed at locations
displaying the MasterCard logo.

Gold & Silver

A perfect card combination for all segments of salaried & professional individuals.

Young Professional
This Card is for you, if you are:
• a Graduate...
• has just started your Career.

As a Classic Blue Cardholder you have a privilege of having access to all features of Alfalah VISA Credit
Cards including two free supplementary cards.

Women Exclusive

Now for the first time in Pakistan, Bank Alfalah has introduced a credit card exclusively for
women. This card has its unique features which have been tailor made for women in Pakistan.

Student Card

For the first time in Pakistan, Bank Alfalah introduces a credit card for Students. This card is for you if you
are enrolled in a professional university (as per Bank Alfalah’s approved list) with 15 years of schooling
experience.

Now you can pay your fee, buy books or just with Alfalah VISA... :-) Not only this but you will
also earn reward points and can redeem them for a TV, Mobile Phone, CD player & DVDs etc.

Supplementary Card

Now you can give Free Supplementary Cards to anyone you care for.

All Bank Alfalah Basic Card members can apply for supplementary cards in separate categories including
Son’s Card, Daughter’s card (children who are above 13 years of age) and House Staff’s card. This feature has
been introduced for the first time in Pakistan, yet another beginning made by Bank Alfalah Credit Cards. In
addition, supplementary cards can be issued to anyone you like thus giving you complete freedom of choice
(Only 1 supplementary card will be issued to Awami Card holder).
Visa Mini

Visa Mini is a practical and convenient part of your everyday life - whether you go for shopping,
dine out, buy grocery, want to go for holidays or feel like buying something of interest while you are
out just for a jog!
You can take it with you anywhere you like with no hassle as it has a perforated hole in the bottom
left corner making it attachable to your key chain, mobile phone or other day-to-day carry along
device.

• 43% smaller than the regular sized credit card with the same features and benefits.
• Accepted at over 27 million merchants worldwide and around 22,000 establishments in Pakistan
(used on electronic POS terminals only).
• Has the same security features as the regular sized Alfalah VISA credit card.

Schedule of Charges

The following Schedule of Charges is associated with your Alfalah VISA Platinum Card &
Titanium MasterCard.

Schedule of Charges

Service Fee 3.00% per month (36% APR) on cash advance

3.00% per month (36% APR) on retail transactions
1.50% per month (18% APR) on BTF transactions

1.75% per month (21% P.A. flat rate) on SBS transactions (APR 31.23% to 36.74%)
Step-By-Step (SBS) - Factors & APR details:
Installment Plan Factor APR

3 months 0.350833 31.23%

6 months 0.184167 35.15%

9 months 0.128611 36.36%

12 months 0.100833 36.74%

18 months 0.073056 36.68%

24 months 0.059167 36.22%

30 months 0.050833 35.66%

 36 months 0.045278 35.07%

0.99% per month (11.88% P.A. flat rate) on BTF to SBS transactions (APR 17.73% to
21.44%)
BTF to SBS - Factors & APR details:
Installment Plan Factor APR

3 months 0.343233 17.73%

6 months 0.176567 20.09%

9 months 0.121011 20.90%

12 months 0.093233 21.25%

18 months 0.065456 21.44%

24 months 0.051567 21.37%

30 months 0.043233 21.21%

36 months 0.037678 21.01%

24% APR on Credit on Phone to SBS Transactions

Credit on Phone to SBS - Factors & APR details:

Installment Plan Factor APR

3 months 0.34675 24.00%

6 months 0.17853 24.00%

9 months 0.12252 24.00%

12 months 0.09456 24.00%

18 months 0.0667 24.00%

24 months 0.05287 24.00%

30 months 0.04465 24.00%

36 months 0.03923 24.00%

Late Fee Rs. 600/- or 10% of minimum amount, whichever is higher.

Cash Payment Processing Rs. 100/- per transaction.

fee

Merchant Discount Upto 5% of transaction amount.

Charges
VISA Mini Card Rs. 500/-
Supplementary Fee

Cash Withdrawal Fee:

- Cash Advance Fee/Call Rs. 500/- or 3% of cash advance amount, whichever is higher
& Pay Fee
1% of cash advance amount
- Acquiring Bank Charges
1% of transaction amount or Rs. 300/-,
- Acquirer Cash Counter whichever is higher
Fee
(off us cards)
Cheque / Cash Pickup Fee Rs. 200/- (available in cities having Bank Alfalah
branches)

Over Limit Fee Rs. 600/- or 2% of Over Limit amount,

whichever is higher

Voucher Retrieval Fee Local: Rs. 350/- and International: Rs. 800/-

Card Rs. 500/-

Replacement/Upgrade Fee

Cheque Return Charges/ Rs. 800/-

Rejected Auto Pay Service
Fee

Duplicate Statement Rs. 200/- (whenever 1 month old)

Charges

Step-By-Step (SBS) / 2% of transaction amount

Credit on Phone
to SBS Processing Charges

Step-By-Step (SBS) / 5% on balance amount or

Credit on Phone Rs. 1,000/-, whichever is higher
to SBS Premature
Settlement Charges

Credit Cover Premium 0.50% of outstanding amount

Utility Bill Payment Rs. 25/- per utility bill

Charges

Platinum / Titanium Upto US $4.71 per annum

Priority - Annual Fee

Platinum / Titanium Upto US $28.25 per visit

Priority - Airport
Lounge Visit Fee

SMS Alert Fee Rs. 25/- per month

Mobile Banking Fee Rs. 5/- per transaction

Mobile PIN Issuance Rs. 10/- per PIN

Foreign Transactions Upto 5% over prevailing market rate or as per SBP directive. Third currency
transactions will be first converted into US Dollars as per rate quoted under
arrangement with VISA and MasterCard. Cross border transaction fee will also be
charged as per VISA / MasterCard rules.

Arbitration Charges US$ 500/-

Insurance Plans Rs. 100/-

Cancellation Charge
(Life & Education
Insurance Plan)

Chip Maintenance Fee Rs. 300/- for Principal Card member

Rs. 300/- for Supplementary Card member
 UNITED BANK LIMITED

Welcome to the world of UBL Credit Card, the most exciting and vibrant credit card brand in Pakistan.
We offer you a range of innovative and exciting cards that is not only powered by the security of chip
but also enable you to personalize it any way you want. In order to get more information on our credit
cards range.

UBL CREDIT CARD … MAZAY MEIN RAHO!

Welcome to the world of UBL Credit Card. Pakistan’s 1st Chip Credit Card that guarantees you both
enjoyment and high value. It assures you global acceptability in more than 22 million establishments
worldwide in 130 countries and in more than 12, 000 outlets within Pakistan.

CHIP based credit cards have globally proven to be the most secure way of conducting credit card
transactions. This unique high tech CHIP guarantees your financial security while conducting
transactions on credit cards, both within Pakistan and around the world.

FEATURES & BENEFITS

Your UBL Credit Card’s exciting and value added features will change your life in a manner which will

ensure that you constantly enjoy living it.

Cash Advance
You can now withdraw cash through your UBL Credit Card’s instant cash advance facility from any
designated UBL Card Payment Branches nationwide and more than 780,000 ATMs and financial
institutions worldwide displaying VISA/PLUS logo.

The service charges for cash advance will be applied from the day of the transaction. A cash advance
fee will also apply for each cash withdrawal.

Buy Today, Pay Later

Your UBL Credit Card gives you the financial flexibility to buy today and pay after a month at no extra
charge. You have the option of paying a minimum 5% of the outstanding balance or any other amount
of your choice up to your total account balance.
A service charge of only 3% per month will apply to whatever remaining unpaid balance that is carried
forward.

Credit Guardian
UBL takes care of its Credit Card members payments in time when they cannot. Our Card members can
now get total peace of mind and insure themselves against unforeseen emergencies. In the event of any
temporary disability where UBL Card member is unable to pay his/her monthly dues, Credit Guardian
will allow payment of the outstanding monthly amount. Moreover, in the unfortunate event of
permanent disability or death, the entire outstanding amount will be waived off. Credit Guardian
Facility is available for a minimal fee, charged automatically on the card balance every month.

Free Travel Accident Insurance

Each time our Card members use their UBL Credit Card to purchase airline, train or bus
tickets, they are automatically covered against any sort of accident that might befall them
while traveling:

The coverage amounts are:

Classic Card: Up to Rs. 3.5 Million

Gold Card: Up to Rs. 7 Million.
 MUSLIM COMMERCIAL BANK LIMITED (MCB)

Smart cards / Debit CARDS

MCB now brings you MCB Smartcard -aa secure and convenient instrument of payment with
unmatched functionalities. It provides 24-hour
24 hour direct access to your bank account.

The convenience and flexibility of MCB Smartcard will help you live a smarter life. It not only
helps you manage your expenses,
penses, but also eliminates undue interest on your day to day credit
card transactions. Your balance is always within your reach and you spend accordingly.

MCB is the only bank to introduce a debit card that gives the option to choose from domestic
and international
ernational cards for local and global usage respectively. You can avail the following
functionalities on your MCB Smartcard

Smart Features.

SmartCard is your debit card for cash free convenience. Use it for your shopping and
purchases at a rapidly growing nationwide network of merchant locations including petrol
pumps, stores, bakeries, departmental stores, jewelers, travel agents, restaurants, chemists,
hospitals etc.

It’s simple, safe and convenient to use:

Shop at locations displaying the Cash Free sign and the MCB Cards logo.

For payment, no need to pay cash. Simply present your card.

Merchant will swipe your card for the amount of the transaction.

You simply authorize your transaction by entering yo

your
ur PIN (Personal Identification
Number) yourself. The PIN is for extra security.

The purchase amount is debited from your account

To make your transaction safe and secure, MCB has installed State of the art smart terminals
at your merchant locations, toto ensure your personal convenience. At restaurants & fuel
Stations your merchant will bring portable terminals to you for your PIN entry.
Smart Support

Whether you are traveling for business, vacation, or performing Haj or Umrah, SmartCard
gives you access to your bank account in Pakistan. Your International SmartCard with Maestro
and Cirrus logos is welcome at over 5 million merchant establishments displaying the Maestro
signs at their outlets. In addition, your card is accepted at 634,000 ATMs with Cirrus logo.

Your international SmartCard gives you round-the-clock convenience and helps avoid
unfavorable exchange rates of money changers as well as time wasted in providing
documentation while converting traveler cheques.

MCB VISA
MCB Visa is not just another card in your wallet. It not only provides the conventional credit card
services in a manner that is superior in comparison, but goes an extra mile.

Makes MCB Visa the most affordable credit card in your wallet.

MCB VISA offers you a wide range of products that will cater to your diversified
taste perfectly.

Intelligent Reward Monitoring and Redemption System.

Buy now and pay off latter in easy and affordable monthly installments!
 Saving you from the hassle of making multiple payments on your various credit
cards.

You need cash and want to pay back in installments. Just Dial for it!

Life is too precious to be spoilt by unforeseen events and mishaps.

How About a credit card that acts like hard cash.

Now Experience peace of mind of having a credit card free from fraud or
misuse!

SCHEDULE OF CHARGES
Gold Classic

Joining Fee FREE FREE

Annual Fee FREE FREE

Chip Maintenance Fee upto PKR. 500 p.a upto PKR. 350 p.a

Supplementary Annual Fee FREE FREE

Supplementary Chip Maintenance Fee PKR. 300 p.a PKR. 300 p.a
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.
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.
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
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.