consumer financing in pakistan
TRANSCRIPT
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Consumer Financing in Pakistan
M.Sheharyar Kaneez Umbreen Baig Fatima Akhter MIF-17 MIF-21 MIF-23
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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
Financing Conclusions & Recommendations
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Kaneez Fatima MIF-21
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Consumer Financing: Overview
What is “Consumer Financing”?
“Any financing allowed to individuals for meeting their personal, family or household needs”
(State Bank of Pakistan)
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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
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Continued
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
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Categories of Consumer Financing
Personal Loans Auto Finance Housing Finance Credit Cards
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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
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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
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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.
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Different Options For House Financing
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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.
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Bank Alfalah Cards
Platinum card
Supplemantory card
Women card
Student card
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Banks are making abnormal profits after the emergence of consumer financing.
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Umbreen AkhterMIF-23
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Regulatory frame work
In Pakistan State Bank of Pakistan is the regulatory authority of all banks and Development Finance Institutions (DFIs)
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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
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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
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Regulations For Credit Cards
Receipt of credit cards
Statement of accounts
Unauthorized / wrong transactions
Partial payment by cardholder
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Contd….
Due date for payment
Maximum card limit
Classification and provisioning
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Regulations For Auto Loans
Prohibition on financing commercial vehicles
Maximum tenure of loan
Minimum down payment
Hypothecation of vehicles
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Contd….
Insurance
Repossession of vehicles
Repayment schedule
Financing the purchase of used cars
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Regulations For Housing Finance
Maximum per party limit.
Debt-equity ratio.
Maximum tenure of loan.
Mortgage.
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Contd….
Evaluation of property
Monitoring of market conditions
Floating rate products
Classification and provisioning
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Regulations For Personal Loans
Per party limit Hypothecation Maximum tenure of loan Running / revolving finance Classification and provisioning
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Mirza Sheharyar BaigMIF-17
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Islamic Ways of Consumer Financing
Housing Finance Arrangements Auto Loans Cards Personal Loans
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Housing Finance Arrangements
Murabaha Ijara Muntahia Bittamleek Istisna Diminishing Musharaka
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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
transactions
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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
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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
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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
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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)
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Auto Loans
Car Financing Car Leasing
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Auto Loans
Car Financing
“Providing loan to the customer for purchase of a car”
It is done through Car Murabaha
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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
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CUSTOMERISLAMIC BANK
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
VENDOR. .
Agreement-1
Process of Ijarah
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CUSTOMERISLAMIC BANK
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.
VENDOR. .
Agreement-2
Process of Ijarah
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Cards
Credit Cards Debit Cards ATM Cards Charge Cards
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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)
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Cards
Debit Cards ATM Cards Charge Cards
“All are allowed and bank can charge a periodic reasonable service charges”
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Personal Loans
Motives of Personal Loans
Purchase of Assets Payment of Expenditures
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Personal Loans
Purchase of Assets
“Loan is offered under the principles of Murabaha and Ijara Muntahia Bittamleek by Islamic Financial Institutions”
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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
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Kaneez Fatima MIF-21
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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
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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.
Contd…
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Umbreen AkhterMIF-23
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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 RateAccording 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 impactAcquisition of easy bank credit by the household
consumers has spurred the demand for many essential and luxury items.
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Contd…
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.
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Contd…
6. Lack of consumer education
The technical documents prepared by the banks affects the financial rights of uneducated customers.
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Contd…
7. Intimidating recovery practices:
Banks recovery team reaches the borrower house to pressurize them for payment of dues without any legal authority
8. 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
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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
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Contd….
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
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Contd….
There should be a unified principles of Islamic Finance.
Islam has very flexible finance principles
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Question Answer Session
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