Cont

7.
Intimida
ting
recovery

practices
:
Banks
recovery
team
reaches

the
borrower
house to
pressurizet
hem for
payment

of dues
without
any legal
authority

Weaknes
ses in
regulato
ry

framewo
rk:
The banks
formulates
their own

policies
and
procedures
whichsuits
their

interests
best

9.
Unsolicit
ed

Financin
g
Aggressive
marketing
campaigns
launched

by the
banksare
targeting
thecostum
ers and
encouragin

g them
topurchase
a loan or
credit.Sour
ce:
Consumer

financing
inPakistan:
Issues,Cha
llenges,
and way
Forward

published
by CRCP

Socia
l&
Econ

omic
Impa
cts

of Co
nsum
er

Finan
cing

Increased
consumpti
on >
increased
output /
Inflationar

y
Pressure(D
emand-Pull
Inflation)

Increased
dependenc
e on
foreign
loans

Lack of
infrastruct
ure to
absorb and
manage
the

increasedn
umber of
cars on the
road due
to

easy auto
financing

Spending
beyond
their

means
behavior
results in
burdening
theeconom

y and
society

Negative
SavingInvestmen

t gap as a
result of
spend
now,
savelater
behavior in

developing
nations

Its
beneficial
for those

who have
the
prerequisit
e
responsibili
ty,maturity

and
financial
literacy to
manage
their
finances.

Concl
usion
s

&Rec
omm

endat
ions

High
Interest
rate
spread
should be
reduced

to
increaseco
mpetition
in the
bankingsec
tor

SBP
Regulatio
ns
regarding
consumer

financing
should
beenforce
d
strictly to
decrease

the high
profit
margins of
the
banksat
the

expense of
the
depositors

Unsolicite
d
financing
should be
discourage
d to

avoidunne
cessary
private
consumpti
on at the
cost

ofconsume
r savings

SBP should
bind banks
to

explain
ALL
applicabl
e charges
onconsum
er loans

before
signing
thecontrac
ts

Consumer
Education
:

comparativ
e

informatio
n should
be made
available

Latest
copy of
terms,
conditions,
& schedule
of charges

shouldbe
provided
to
applicants
in the
language

of
theirunder
standing

Que
stion

Ans

wer
Sess

ion

Cont
d
7.

Intimida
ting
recovery
practices
:

Banks
recovery
team
reaches
the
borrower

house to
pressurizet
hem for
payment
of dues
without

any legal
authority

Weaknes
ses in
regulato

ry
framewo
rk:
The banks
formulates

their own
policies
and
procedures
whichsuits
their

interests
best

9.
Unsolicit
ed

Financin
g
Aggressive
marketing
campaigns
launched

by the
banksare
targeting
thecostum
ers and
encouragin

g them
topurchase
a loan or
credit.Sour
ce:
Consumer

financing
inPakistan:
Issues,Cha
llenges,
and way
Forward

published
by CRCP

Socia
l&
Econ

omic
Impa
cts

of Co
nsum
er

Finan
cing

Increased
consumpti
on >
increased
output /
Inflationar

y
Pressure(D
emand-Pull
Inflation)

Increased
dependenc
e on
foreign
loans

Lack of
infrastruct
ure to
absorb and
manage
the

increasedn
umber of
cars on the
road due
to

easy auto
financing

Spending
beyond
their

means
behavior
results in
burdening
theeconom

y and
society

Negative
SavingInvestmen

t gap as a
result of
spend
now,
savelater
behavior in

developing
nations

Its
beneficial
for those

who have
the
prerequisit
e
responsibili
ty,maturity

and
financial
literacy to
manage
their
finances.

Concl
usion
s

&Rec
omm

endat
ions

High
Interest
rate
spread
should be
reduced

to
increaseco
mpetition
in the
bankingsec
tor

SBP
Regulatio
ns
regarding
consumer

financing
should
beenforce
d
strictly to
decrease

the high
profit
margins of
the
banksat
the

expense of
the
depositors

Unsolicite
d
financing
should be
discourage
d to

avoidunne
cessary
private
consumpti
on at the
cost

ofconsume
r savings

SBP should
bind banks
to

explain
ALL
applicabl
e charges
onconsum
er loans

before
signing
thecontrac
ts

Consumer
Education
:

comparativ
e

informatio
n should
be made
available

Latest
copy of
terms,
conditions,
& schedule
of charges

shouldbe
provided
to
applicants
in the
language

of
theirunder
standing

Que
stion

Ans

wer
Sess

ion

Consumer banking in Pakistan

1. Consumer Behavior Program: MBA (Evening) Submitted To: Sir Abdul Qayyum
Qureshi Submitted By: Muhammad Tayyab Roll # 111405 Pak-AIMS (Institute of
Management Science Consumer Banking in Pakistan
2. 2 Consumer Banking in Pakistan (Consumer Behavior) Introduction: In Pakistan all
banks & DFIs works under the supervision of the State Bank of Pakistan, the four
major sectors in which SBP has divided banks operations are Corporate, SME,

Agriculture and Consumer. SBP provide regulations according to which all banks
should work & continuously keep a track that banks are complying through the
regulations or not. In recent years, Consumer Banking has made tremendous
progress and has played a positive role in boosting the economy and in meeting the
needs and requirements of the consumers. Whether large or small bank,
multinational or local, each one of them is geared towards making its mark in an
already competitive environment that is the outcome of consumer banking. The
growing economy and further improvements in the level of household income have
created many opportunities for consumer banking. History of Banking in Pakistan:
Banks in Pakistan also exhibiting symptoms of similar financial malaise caused by
extensive liberalization, as are their counterparts in the West? Not quite. Pakistans
experience with financial liberalization in the banking sector is vastly limited as
compared to the developed world. A brief look at the history of banking in Pakistan
reveals that the banking sector has made impressive achievements but still has a
long way to go. Humble beginnings, 1947 1970 Our financial sector evolved very
differently from banks in the developed world. For nearly a year after partition,
Pakistan had no central bank. Habib Bank established in 1941 filled this gap
initially, until the State Bank of Pakistan (SBP) was set up in 1948 under quasigovernment ownership. The role of domestic banks was particularly limited at the
time, accounting for only 25 of the total 195 bank branches in the country.
Therefore, the SBP was initially mandated to develop commercial banking channels,
and maintain monetary stability so trade and commerce could flourish in the newlycreated state. Subsequently, Habib Bank, Allied Bank and National Bank were
amongst the first to start operations with strong support from the central bank. A
legacy of public control, 1970 1980 Commercial banking grew favorably in
Pakistan until 1974. Under the nationalization policy implemented by Zulfikar Ali
Bhuttos government, thirteen banks were brought under full government control,
and consolidated into six nationalized banks. The Pakistan Banking Council was set
up to monitor nationalized banks, marginalizing the SBPs role as a regulator. These
measures were meant to improve lending to prioritized industries. However, while
directed lending was viewed favorably at the time, little can be said of the long-term
gains that have been achieved. Business as usual, 1980-1990 Over time, the
financial sector grew to serve primarily large corporate business, politicians and the
government. Board of Directors and CEOs were not independently appointed.
Lending decisions were not always commercially motivated, and many billions of
rupees were unsurprisingly funneled out of the financial system as bad loans.
Banks were essentially not in control of their destinies during this period.
3. 3 Consumer Banking in Pakistan (Consumer Behavior) Privatization, 1990 1997
By 1991, the Bank Nationalization Act was amended, and 23 banks were established
of which ten were domestically licensed. Muslim Commercial Bank was privatized
in 1991 and the majority ownership of Allied Bank was transferred to its
management by 1993. By 1997, there were still four major state-owned banks, but
they now faced competition from 21 domestic banks and 27 foreign banks. More
importantly, administered interest rates were streamlined, bank-wise credit ceilings
removed and a system of auctioning government securities was established, forcing
the government to borrow at market determined rates. Ushering in the reforms,
1997 2006 After privatization, transformational reforms were pushed through. The
central banks regulatory powers were restored via amendments to the Banking
Companies Ordinance (1962) and the State Bank of Pakistan Act (1956).
Subsequently, corporate governance, internal controls and bank supervision was

strengthened substantially. Legal impediments and delays in recovery of bad loans

were streamlined in 2001. Furthermore, the scope of prudential framework set up in
1989 was enhanced, allowing banks to venture into hitherto untapped business
segments. Lending to small and medium enterprise had previously been neglected,
whereas consumer and mortgage finance had not developed prior to reforms. The
post-reform era, 2006 present Buoyed by the spirit of liberalization, the sectors
landscape has changed significantly. By 2010, there were five public commercial
banks,25 domestic private banks, six foreign banks and four specialized banks.
There are now 9,348 bank branches spread throughout the country, catering to the
needs of some 28 million deposit account-holders. Banking in Pakistan the long
journey ahead Much still remains to be accomplished. In the absence of sustainable
economic growth, banks will remain vulnerable to business cycle fluctuations. As
recently as 2008, non-performing loans increased sharply in response to the
preceding years of easy credit and risky consumer lending practices. Moreover,
strong regulation will continue to be required so as to maintain the delicate balance
between industry concentration and competition. Presently, the top five banks
account for about 50% of the sector, measured in terms of total advances. Finally,
the benefits of financial liberalization must trickle down to the common man. Banks
are proactively exploring new business models to make this happen such as
branchless banking. But more headway needs to be made before existing
deployments such as Tameer Banks Easypaisa or UBL Omni reach a critical mass
of users. Reforms have helped banks come a long way, but unless the central bank
remains autonomous, and continues to err on the side of caution, liberalization may
quickly become a bitter pill to swallow.
4. 4 Consumer Banking in Pakistan (Consumer Behavior) Consumer Banking in
Pakistan Consumer banking which is one of the fastest growing sectors of Pakistan
Banking Industry is also now major interest point for the banks. Initially the
consumer banking sector was only focused by the foreign banks but its efficiency &
profitability attracted others to come towards this business but still the major share
of consumer banking in Pakistan is in the hands of foreign banks. In a generic sense,
institutional arrangements that provide consumers with financing support to
enhance their consumption and as a result thereof, improve their standards of living
should fall within the broad definition of consumer finance. For the past 50 years
commercial banks in Pakistan had completely ignored consumer financing as an
activity. Consumer banking is a huge industry with great profits massive potential
for improving economic conditions. But the banking sector has to care more for its
subscribers rather than solely about itself. It needs to offer itself. It needs to offer
better services at better terms and needs to inform the consumer completely and
fully about the services. According to an analysis, credit cards loans have increased
from Rs33.538 billion during first of last calendar year to Rs42.822 billion during
first half of current calendar year. Likewise, personal loans have increased from
Rs120.517 billion in H1CY06 to Rs142.373 billion in H1 CY07. Growth in auto loans
has not been less impressive. It registered an increase of approximately Rs8.0
billion from RS97.777 billion to Rs105.444 billion during the corresponding period of
growth of credit cards and personal loans. Housing loans have also registered an
increase of approximately Rs11.0 billion in H1 CY 07 from Rs43.205 billion in H1
CY06. (Sharif, 2007) Exposure per borrower Rupees in 000 2004 2005 2006 Credit
Cards 23 26 32 Auto Loans 423 430 411 Consumer Durable 37 29 22 Mortgage
Loans 1572 1982 2025 Other Personal Loans 82 89 100 (SBP, 2006) Figure 2.1

5. 5 Consumer Banking in Pakistan (Consumer Behavior) Consumer Financing Share

by Sector(SBP, 2006) Amount of Consumer Financing (SBP, 2006)Figure 2.2 Figure
2.3 NPL Ratio of Consumer Financing (SBP, 2006) Auto Loans In Pakistan auto loans
are purchase of brand new or used, imported or local cars for private use. Auto
financing and auto leasing both facilities are offered by most of the banks. Salaried
Persons/Self Employed Professionals / Business Persons who meet the terms and
conditions to qualify for the finance are eligible for the loan. Some banks are also
offering both variable rate & fixed rate options for auto loans. The average market
rate for auto loans is 14-16%. Home Loans The loans taken for Buying, Building or
Renovating of house/land are classified as home loans. For home loans both variable
rate & fixed rate options are also available. The maximum duration offered by banks
for home loans is generally twenty years thats why banks conveniently give loans
to permanent employees of any firm to ensure strong repayment ability. Personal
Loans
6. 6 Consumer Banking in Pakistan (Consumer Behavior) Personal Loans are
generally unsecured type of loans but in certain cases when the amount of personal
loans increases the normal limit its remaining portion must be secured. Personal
loans include loans for the purpose of education, marriage, purchase of consumer
durables, furnishing, traveling, etc. Generally the limit for personal loans is
maximum Rs.500, 000/- Credit-Debit Cards Credit Cards mean cards which allow a
customer to make payments on credit. Supplementary credit cards are considered
part of the principal credit card. Initially only foreign banks are offering credit cards
in Pakistan but now many local banks is also offering credit card facility. Credit Card
is covered by three networks VISA, Master Card & American Express. Debit cards
are issued to account holders of any bank in Pakistan almost all the banks are
offering debit card facility the amount used by the debit card holder is directly
debited from the account of the card holder. Debit cards are accepted at all ORIX
Network in Pakistan and it can also be used as ATM cards which are covered by 1Link & MNET network in Pakistan. Deposit Accounts All the commercial banks are
offering different kinds of deposit accounts these account ranges from customer to
customer to fill the need of every type of customer. Few of the accounts provide
high interest while some pay low interest & some dont pay any interest. Some
major categories of deposit accounts are; Current Accounts Saving Accounts Foreign
Currency Accounts Business Accounts Term Deposits Accounts Wealth Management
Wealth management is a new kind of service introduced in consumer banking sector
now days. It covers all aspects of securing future of banks customers it includes
insurance, tax advisory, financial consultancy, investments plans, etc. Yet wealth
management service are mainly covered by few foreign banks only this is a new
service are even banks customers dont have any idea about Wealth Management
Service. Almost all the banks are offering insurance services to some of their
customers but the concept of wealth management is not behind it. E-banking To
facilitate its customers all banks local & foreign are offering high technological ebanking services. These services let the banks customers to perform many banking
activities easily without any restriction of time & place. Some of the major e-banking
services provided by the banks are; Phone banking Internet banking Plastic Cards
Online banking
7. 7 Consumer Banking in Pakistan (Consumer Behavior) Mobile banking ATM
Pakistan Banks Association (PBA) Pakistan Banks Association (PBA) represents the
Pakistan Banking Industry. Established in 1953, its main objective is to coordinate
the efforts of the banking industry, and to share a common vision of progress and

development with its members. PBA Membership is institutionalized and is available

only to the Banks operating in Pakistan. Currently there are 44 members,
categorized into 6 groups (one of these groups is under formation). Its governing
body is an Executive Committee (EC) comprising of 14 members, represented by
the Chief Executives of the respective member institutions. PBAs Principal
Executive is the Chairman of the Executive Committee, elected periodically from
within the EC. Presently, PBA has 10 functional Sub Committees, each chaired by a
member of the Executive Committee. Remaining members of the Sub Committees
are relevant Executives of member banks. Find more about PBA and its governance
in the PBA Profile Section. Particulars of members such as their corporate and
management profiles, branch networks and financial statements are available in the
PBA Members Section. Over the years the role of PBA has broadened considerably. It
is now referred to by the State Bank of Pakistan in formulation of regulations for the
banking industry, and has been entrusted with the function of regulating and
monitoring certain services provided to the banking industry by outside service
providers. These service providers include Professional Valuers, who are
evaluators allowed to appraise the values of assets collateralized to banks, and
Security Agencies offering security services to the Banking Industry. For details visit
the PBA Panels Section. Following financial institutions are the members of Pakistan
Banks' Association. Government Owned Banks: First Women Bank Limited Khushhali
Bank Limited National Bank of Pakistan SME Bank Limited Sindh Bank Limited The
Bank of Khyber The Bank of Punjab The Punjab Provincial Cooperative Bank Limited
Zarai Taraqiati Bank Limited Privatized Banks: Allied Bank Limited Habib Bank
Limited
8. 8 Consumer Banking in Pakistan (Consumer Behavior) MCB Bank Limited United
Bank Limited Development Financial Institutions: National Investment Trust Limited
Pak Brunei Investment Company Limited PAIR Investment Company Limited
Pakistan Kuwait Investment Company (Pvt.) Limited Pak Libya Holding Company
(Pvt.) Limited Pak Oman Investment Company Limited Saudi Pak Industrial &
Agricultural Investment Company Limited Small and Medium Enterprise (PBA
subgroup under formation): The First MicroFinanceBank Limited Private Banks: Al
Baraka Bank (Pakistan) Limited Askari Bank Limited Bank Alfalah Limited Bank AL
Habib Limited BankIslami Pakistan Limited Burj Bank Limited Dubai Islamic Bank
Pakistan Limited Faysal Bank Limited Habib Metropolitan Bank Limited JS Bank
Limited KASB Bank Limited Meezan Bank Limited NIB Bank Limited Samba Bank
Limited Silkbank Limited Soneri Bank Limited Standard Chartered Bank (Pakistan)
Limited Summit Bank Limited (Formerly Arif Habib Bank Limited) Foreign Banks:
Barclays Bank PLC, Pakistan Citibank N.A., Pakistan Deutsche Bank AG, Pakistan
HSBC Bank Middle East Limited, Pakistan
9. 9 Consumer Banking in Pakistan (Consumer Behavior) HSBC Bank Oman S.A.O.G.
(Formerly Oman International Bank S.A.O.G.) Non-Member Banks & Development
Financial Institutions: APNA Micro Finance Bank Limited (Formerly Network Micro
Finance Bank Limited) Bank of Tokyo Mitsubishi UFJ Limited, Pakistan House Building
Finance Company Limited Industrial and Commercial Bank of China Limited
Industrial Development Bank Limited KASHF Microfinance Bank Limited NRSP
Microfinance Bank Limited Pak-China Investment Company Limited Pak Oman
Microfinance Bank Limited Tameer Micro Finance Bank Limited U Microfinance Bank
Limited (Formerly Rozgar Microfinance bank Limited) Waseela Microfinance Bank
Limited Contribution Consumer Banking in Economic Development In Pakistan,
consumer finance despite rapid growth during initial period of 2-3 years has started

declining. During past few years the domestic consumer finance emerged as one of
the key factors to boost economic growth despite its comparatively low share of 14
per cent in the total private sector credit compared to its share in other countries
like India and Indonesia where it stands at 24 per cent and 30 per cent respectively.
Regional and global markets and economic players have become highly competitive
and banking sector is more concerned to safeguard its capital and enrich itself with
higher returns on loans than governments concern about boosting economic
growth. Consumer Financing & Economic Growth: Lending through credit cards,
personal loans, auto loans, loans for durables and housing finance emerged main
streams of consumer finance. They shaped domestic demand and lending strategy
by the banking sector in quite subtle ways. Consumer finance has also brought
social change through higher circular of money and relaxation of income constraints
for borrowing particularly among those middle class segments that were eager to
become part of growing economy and keen to benefit from economic growth.
Without consumer finance being in the driving seat of the banking sector, a large
number of people would not have benefited.
10. 10 Consumer Banking in Pakistan (Consumer Behavior) Lending through credit
cards, personal loans, auto loans, loans for durables and housing finance emerged
main streams of consumer finance. They shaped domestic demand and lending
strategy by the banking sector in quite subtle ways. Consumer finance has also
brought social change through higher circular of money and relaxation of income
constraints for borrowing particularly among those middle class segments that were
eager to become part of growing economy and keen to benefit from economic
growth. Significance impact on Consumer: In a generic sense, institutional
arrangements that provide consumers with financing support to enhance their
consumption and, as a result thereof, improve their standards of living, should fall
within the broad definition of Consumer Finance. These could range from Credit
Cards, to finance and operating leases, to housing finance. But the semantics of
financial markets generally tend to exclude housing finance from this range treating
it as a distinct financing product essentially because of its long-term nature. For the
past fifty-four years, commercial banks in Pakistan had completely ignored
consumer financing as an activity. There was scant realization of the fact that the
hallmark of healthy economies is not unrealistically high dependence on exports but
on domestic demand, and development of indigenous resource and industrial bases
that support domestic consumption. Until the early l990s, even Credit Cards were
offered to a select band of customers who needed them not by way of financial
support but as a convenience for paying their bills while travelling abroad, realizing
little that in developed economies this mode of financing supported consumption to
sustain steady growth in domestic demand which, in turn, prompted investment and
industrialization. Even now, the sudden urge for promoting consumer finance has
less to do with accepting this reality; it was spurred largely by a depressed
investment climate in which reduced borrowing by industrial and commercial
sectors coincided with excess liquidity in banks, thanks to 9/11. Lumbered with
liquidity that is nearing unmanageable proportions, banks are now aggressively
promoting consumer financing. The big attraction in extending financing facilities to
the passive consumer segment is the prospect of earning high interest rate spreads
because consumers are soft targets as far as haggling over interest rates
chargeable to them are concerned. They are much more likely to borrow at
unrealistically high rates a convenience that is no longer available on lending to
industrial and commercial borrowers who now insist on the finest possible loan

rates. But in pricing consumer loans unrealistically high, banks would be making a
serious mistake because "they cannot charge a high enough loan rate that could
compensate for the loss arising out of an irrecoverable loan." More importantly, if
consumer finance has to pick-up as a truly helpful mechanism for spurring domestic
demand, it must be ensured that it remains within the consumers' capacity to repay
their loans on time, and they feel confident about borrowing again and again. As its
is, ordinary consumers' capacity to borrow and repay loans out of their savings has
been rendered precarious by decades long cycle of inept economic policies that
have made the poor even
11. 11 Consumer Banking in Pakistan (Consumer Behavior) poorer. Low rise in per
capita incomes (whose impact was compounded by falling purchasing power due to
rapid depreciation of the Rupee) caused savings to fall and poverty to rise. This
combination steadily depressed consumer demand even for the less expensive
consumer durables. The sustained trend of depressed demand prevented the
development of a sizeable industrial base and contraction in opportunities for
investment and employment. In the last two years, steady reductions in returns on
savings have further diminished consumers' capacity to repay bank loans. Banks
are belatedly trying to redress this enormous macroeconomic structural imbalance
but given the historic pattem of economic developments, they will be handicapped
in their efforts to promote consumer finance. Signs are that while lower interest
rates have certainly enhanced borrowers' capacity to borrow and service consumer
loans, the newly created demand is pushing prices of consumer durables to
unrealistic levels. Take, for example, automobiles. Strengthening of the Rupee and
substantially lower interest rates should have brought their prices down or at least
served to stabilize them. Neither of these expectations were met because the
sudden rise in demand created a distortion that allowed assemblers not only to
push up prices but also created a roaring black market in this sector. With banks
now offering liberal consumer finance facilities for acquiring home appliances, their
prices too are on the rise although there is substantial over-capacity in this sector.
Many observers argue that this distortion is a temporary phase, which will soon
become history as production capacities increase to fill the large supply gap. May be
so, but going by the example set by the automobile industry (in which, so far, only
one assembler has announced a "plan" to double its output) this lag may not be as
temporary as some observers make it out to be. Banks providing cheap credit to
business and industry at the expense of the savers can exercise a powerful
influence on the manufacturing sector to push the case for compensating the savers
through lower prices. Unfortunately, however, lack of social responsibility in the
corporate sector is too pervasive to bring home this realization to the market
players. Aside from the macroeconomic distortions that suppress consumer
demand, there are other delicate issues that require focused attention of
commercial banks intending to launch a major thrust in consumer finance. The first
is the lack of institutional arrangements and practices that hamper the assessment
of consumers' re-payment risk. Ideally, risk assessment of employed individuals
should not pose as much of a problem as the self-employed individuals because
employers could help in providing a basis for establishing the employees' repayment capacity. That, unfortunately, is not yet the case. Employers appear averse
to taking even the feeblest responsibility on account of their employees. Many
employers either don't certify, or certify very inadequately, the financial status of
their employees intending to avail a consumer finance facility from a bank. Unless
provisions are made in relevant labour laws, employers will not provide even this

information about their employees, which they should morally feel bound to
provide. Fewer among them are prepared to confirm to the financing institution that
they have placed on their records the fact that their employee has availed a
financing facility. Fewer still are prepared to accept the responsibility of informing
the financing institution in the event the finance-availing employee leaves the
employer, or is asked by the employer to leave.
12. 12 Consumer Banking in Pakistan (Consumer Behavior) In the case of the selfemployed, the problems are complicated further because many potential
consumers do not keep credible records of the streams of earnings from their
vocations or businesses to permit financing banks a reliable assessment of their
future re-payment capacity. Many consumers don't have utility service connections
in their names. Given these handicaps, credibly verifying consumers' repayment
sources will remain a stumbling block. Unless insurance companies lend a helping
hand in this effort by providing loan re-payment guarantees to the lending banks,
the prospects of expanding the consumer finance market remain dim. Bankers will
have to rely largely on their own credit judgment, which may not always be correct.
Given Pakistani bankers' track record in lending, such a possibility will always be
there. A factor that will further complicate extending consumer finance facilities
along sound lines are the continuing inadequacies of our legal system that make it
cumbersome for borrowers to collateralise their existing unencumbered assets for
the satisfaction of the lending bankers. Another thorny issue is the re-possession of
financed assets. While re-possessing vehicles doesn't pose too serious problem, repossessing assets such as air-conditioners, refrigerators, televisions sets, and
similar other appliances from households will not be easy. It could be both painful
and embarrassing for the lending institutions. Even if these items could be repossessed, re-selling them to recover book values of outstanding consumer
liabilities holds out a challenging prospect. Resorting to shortcuts in risk assessment
may therefore lumber banks with thousands of small delinquent loans. In most
cases, it may eventually be cheaper to write them off rather than go for repossession and sale of used assets, or initiate court action to recover loans from
defaulting consumers. Consumer finance is a risky ball game. The infamous yellow
cabs scheme was the only big experiment in consumer finance, which was
undoubtedly a bad experience for most banks that took part in it. Admittedly,
political twists played a big role in the failure of the scheme but operational
inadequacies of banks played a bigger role in this monumental failure. A major
factor in that failure was the operational deficiencies in banks, particularly in
assessing an individual's future repayment capacity keeping in view his or her
changing circumstances. Foreseeing impending changes in the circumstances of
individuals is not the same as sensing the impact of changing business cycles on
major borrowers placed in various economic sectors. Little is available in terms of
authentic statistics on this huge customer category. Pakistan Integrated Household
Survey (PIHS) is a new report, and its timely release cannot be assured because it
may report changes in politically sensitive indicators. Given the absence of credible
sources and bases for assessing risk, dealing with thousands of small borrowers
makes consumer finance is a manpower intensive business. Retail banks with large
branch networks have the potential for succeeding in this business but it will require
making alterations in banks' infrastructure, and a change in the focus on
investigative effort for risk assessment. The organization must be pro-active and
sufficient in terms of manpower and Management Information Systems to ensure a
reaction speed that is commensurate with size of the customer base. In this regard

it will be crucially important to ensure that administrative resources are matched

with the size of customer base on a continuing basis. Until recently, oblivious to the
emerging possibility of creating a large consumer finance market, banks were
closing down branches and laying-off employees. Admittedly, there was a need for
pruning the banks of deadwood but voluntary retirement schemes led to separation
of many experienced hands who
13. 13 Consumer Banking in Pakistan (Consumer Behavior) could have been redeployed in consumer finance units because they knew the essentials of risk
assessment. Banks will now have to inject fresh (and inexperienced) blood in their
organizations to support their consumer finance operations. Admittedly, consumer
finance spurs consumption and demand that is necessary for the industry to expand
its productive capacity or make fuller use of its existing excess capacity, and
succeed in cuffing prices at the retail level. It also offers the prospects of increasing
employment and, possibly, fresh investment in industrial sectors, especially those
producing consumer durables. However, the key to sustaining the consumptiondemand equation without pushing inflation to unsustainable levels is the
maintenance of the critical balance between savings, investment and borrowers'
debt- servicing ability. There is considerable truth in the observation that lowering of
interest rates by Central Banks in the mid-1990s, ostensibly to spur demand and
economic activity, resulted in acquisition of excessive amounts of "easy" bank credit
by businesses and creation of over-capacity there from. Similarly, households too
acquired credit (far in excess of their capacity to save and repay) for investing
houses, consumer durables and company shares on visibly inflated prices. The
credit boom, and the demand created there from, led to meteoric rises in prices and
deluded industry into over-investing in capacity building. Eventually, unsustainable
burden of debt-servicing forced businesses to crash, and households ended up with
negative equities. Maintaining the critical balance between savings, investment and
borrowers' debt-servicing ability is possible if input prices remain stable affording
businesses to sustain their profitability, and interest rates too remain stable to
ensure that, in the medium term, debt-servicing burden remains affordable for both
consumers and manufacturers. Unless the system can ensure the maintenance of
this delicate balance, economic instability will remain a strong possibility. Countries
that tried to achieve an over-kill in spurring domestic demand sometimes
overlooked the importance of maintaining this critical balance. We too are trying to
achieve the same objective but regulators must ensure that we don't fall in that
dangerous trap. Pakistan's economy, already rendered fragile by industrial sector
loan losses, simply cannot live through another major upheaval caused by pervasive
delinquency of consumer loans. Articles # 1 Citibank has announced that it is
wrapping up its consumer banking operations in Pakistan and has entered into an
agreement with Habib Bank (HBL) to sell its credit card and consumer lending
portfolio, according to a press release. Citi Pakistan will work with HBL to ensure a
smooth handover during the transition period. The announcement was made at a
signing ceremony held in Karachi, attended by HBL and Citi Pakistan
representatives. Speaking at the occasion, HBL President and CEO Nauman Dar
said, HBL will continue to be a key developer of consumer finance products in
Pakistan. The acquisition is part of this commitment and ties in with the banks
mission of creating value for stakeholders, especially our customers.
14. 14 Consumer Banking in Pakistan (Consumer Behavior) Nadeem Lodhi, Citis
country officer in Pakistan, said, Citibank was a pioneer in growing consumer
lending products in the Pakistani market and has since contributed to strengthening

the consumer banking landscape in the country. We have had the privilege to serve
our clients, whose discerning requirements and standards were met through our
global banking platform. We look forward to working with HBL, to ensure a smooth
transition for our customers. Citi Pakistan will continue to focus on its core
business of corporate and investment banking serving our multinational, public
sector, financial institutions and top-tier local corporate client base, Lodhi added.
Article # 2 Weak economic conditions hitting retail banking hard KARACHI:
Pakistans retail banking market is undergoing difficult times due to weak economic
conditions, banks rising non-performing loans and the lack of effective foreclosure
laws; however, local financial players try to retain this market by acquiring retail or
consumer lending portfolios of the foreign banks, experts said. The deal for the
acquisition of Citibanks (Pakistan operations) consumer business portfolio with the
Habib Bank Limited depicts this trend. The deal is expected to be finalised by the
end of this fiscal year. The financial experts said the acquisition of retail lending
portfolios reflects the very real appetite for profitable, high quality consumer assets
in an environment where deposit growth is outpacing lending growth, particularly in
terms of consumer lending. Despite this appetite, however, the banking sector has
been unable to grow their consumer lending portfolios through fresh exposures to
new or existing clients. Banks participating in the retail lending market took
significant hits to their profitability during the last credit crisis and the memory of
those losses is reflected in the generally conservative underwriting policies being
followed by most banks, Naseer Hasan, head of consumer banking at Standard
Chartered Bank, said. He also said that the regulatory framework for consumer
lending, tightened during the last credit crisis, further ensures that the growth in the
consumer lending sector remains measured. The use of positive credit bureaus
during the last six to seven years has excluded several consumers from the lending
market due to their past credit history and the reluctance of banks to bet on these
consumers again, he said. The legal environment in the country in recent times has
not helped the banks in terms of collections or legal actions against defaulters, he
added. He was of the view that the lower interest rates have yet to translate into
lower customer rates for consumer lending products. The banks have yet to come
up with the cost models for their retail lending operations that would allow for lower
rates and more sustainable profitability. Big banks sell their specific segments and
the practice to divest business from one geographical area and investing in another
is very common among the American and European banks due to a number of
reasons such as weak economic conditions, new regulations and capital adequacy
ratio, another banker at a leading commercial bank, said. He said that after the
financial crisis, several western banks preferred to concentrate on their home
15. 15 Consumer Banking in Pakistan (Consumer Behavior) or similar markets.
Barclays, HSBC and RBS are in the process of shrinking the operations from different
regions such as the Middle East. Citibank is divesting its consumer banking
operations from Pakistan but it will remain operative in the investment and
corporate banking as per its global strategy, he said. There are many
geographical areas where Citibank is providing corporate and investment banking to
the big deal tickets only. This is the history of Citibank. HBL credit card segment
was weak and Citibank has good customer built. So, after the acquisition, HBL will
be in a better position to grab the credit market, Muzzammil Aslam, a senior
economist, said. To a question why Citibank decided to exit from Pakistans
consumer market, he said, in the presence of local five big banks, foreign banks
have very small opportunity to grow. In Pakistan, third-tier banks are facing

difficulties in meeting the capital adequacy requirements, therefore, these banks

are going for merger and acquisitions. In this particular transaction, there was no
level-playing field provided by the regulator to the interested parties. The MCB Bank
was keen to acquire the consumer business of the Citibank but the central bank
granted the approval to start the process of due diligence very late. Somehow, the
regulator denied new entrants to come into the process of due diligence. It could be
better if more big players were there, he added. Bank Alfalah was inclined to buy
the Citibanks consumer portfolio, however, later it withdrew from the race.

Advantages & Disadvantages of Commercial Banking for

Businesses

Commercial banking services can help your business succeed.

Running a small business is a time-consuming process. In addition to building the business

and attracting and retaining customers, there is the added stress of finances. A business
owner needs to plan to fund payroll, purchase products and pay taxes. A small business
owner may look to a bank to help with some of these issues.

Commercial Banking
Commercial banking involves a division within a bank that focuses on business accounts and
working with business owners. Some banks may refer to these services under the term
"business banking" instead of commercial banking. The bank may offer services such as
payroll processing, a way to pay your quarterly taxes, and financial planning services. The
financial planning may also include the management of retirement accounts in addition to
financial planning for the business. Many commercial banking divisions focus on lending
money to help businesses stay afloat.

Advantages
Commercial banking can help a small business by making it easier to manage day-to-day
financial tasks. An established commercial account with a bank will make it easier to borrow
money when you grow your business. Often a business is assigned a representative who
works directly with the company to find the best services and solutions for the issues the
business is facing. For example, the company may save money by outsourcing payroll
processing. Banks also offer invoicing services, with personalized invoices, and can set up
transfers to other banks which will simplify accounting procedures. Some banks offer
retirement account management for your employees as well as other employee benefits.
This can save you money, and make it easier to manage all of the services you offer

employees. Some banks allow you to make deposits online by scanning checks. Your bank
may offer you discounts on your merchant services fees. Commercial banking allows you to
set up direct deposits for your employees as well as for any invoices you need to pay to
others, which will save you time.

Disadvantages
Commercial banking or business accounts are often more expensive than traditional bank
accounts. Banks may charge fees for night deposits, for processing a certain number of
checks and for the payroll services. Depending on the size of your business, some of the
services offered may not be needed, and you may still be charged for the services even if
you're not fully using them. Different banks may offer different services and charge different
fees, and it can be difficult to compare the services. Signing up for a commercial account
before your business is ready for one will cost you and may slow the growth of the business.
If you choose the wrong bank, you may have a difficult time opening a new account and
transferring all of the services to another bank. This can cost you both time and money.

Making the Choice for Your Business

As your business grows you may reach a point where you need commercial banking
services. Visit several different banks to find out which services they offer, and the fees they
charge. Look for a bank that features good customer service. Carefully examine any fees
that it charges and see if the changes will be more beneficial or detrimental to your bottom
line.

Consumer banking in Pakistan

1. 1. Consumer Behavior Program: MBA (Evening) Submitted To: Sir Abdul Qayyum Qureshi
Submitted By: Muhammad Tayyab Roll # 111405 Pak-AIMS (Institute of Management
Science Consumer Banking in Pakistan
2. 2. 2 Consumer Banking in Pakistan (Consumer Behavior) Introduction: In Pakistan all banks
& DFIs works under the supervision of the State Bank of Pakistan, the four major sectors in
which SBP has divided banks operations are Corporate, SME, Agriculture and Consumer.
SBP provide regulations according to which all banks should work & continuously keep a
track that banks are complying through the regulations or not. In recent years, Consumer
Banking has made tremendous progress and has played a positive role in boosting the
economy and in meeting the needs and requirements of the consumers. Whether large or
small bank, multinational or local, each one of them is geared towards making its mark in an
already competitive environment that is the outcome of consumer banking. The growing
economy and further improvements in the level of household income have created many
opportunities for consumer banking. History of Banking in Pakistan: Banks in Pakistan also
exhibiting symptoms of similar financial malaise caused by extensive liberalization, as are
their counterparts in the West? Not quite. Pakistans experience with financial liberalization in
the banking sector is vastly limited as compared to the developed world. A brief look at the
history of banking in Pakistan reveals that the banking sector has made impressive
achievements but still has a long way to go. Humble beginnings, 1947 1970 Our financial
sector evolved very differently from banks in the developed world. For nearly a year after

partition, Pakistan had no central bank. Habib Bank established in 1941 filled this gap
initially, until the State Bank of Pakistan (SBP) was set up in 1948 under quasi-government
ownership. The role of domestic banks was particularly limited at the time, accounting for
only 25 of the total 195 bank branches in the country. Therefore, the SBP was initially
mandated to develop commercial banking channels, and maintain monetary stability so trade
and commerce could flourish in the newly-created state. Subsequently, Habib Bank, Allied
Bank and National Bank were amongst the first to start operations with strong support from
the central bank. A legacy of public control, 1970 1980 Commercial banking grew favorably
in Pakistan until 1974. Under the nationalization policy implemented by Zulfikar Ali Bhuttos
government, thirteen banks were brought under full government control, and consolidated
into six nationalized banks. The Pakistan Banking Council was set up to monitor nationalized
banks, marginalizing the SBPs role as a regulator. These measures were meant to improve
lending to prioritized industries. However, while directed lending was viewed favorably at the
time, little can be said of the long-term gains that have been achieved. Business as usual,
1980-1990 Over time, the financial sector grew to serve primarily large corporate business,
politicians and the government. Board of Directors and CEOs were not independently
appointed. Lending decisions were not always commercially motivated, and many billions of
rupees were unsurprisingly funneled out of the financial system as bad loans. Banks
were essentially not in control of their destinies during this period.
3. 3. 3 Consumer Banking in Pakistan (Consumer Behavior) Privatization, 1990 1997 By
1991, the Bank Nationalization Act was amended, and 23 banks were established of which
ten were domestically licensed. Muslim Commercial Bank was privatized in 1991 and the
majority ownership of Allied Bank was transferred to its management by 1993. By 1997,
there were still four major state-owned banks, but they now faced competition from 21
domestic banks and 27 foreign banks. More importantly, administered interest rates were
streamlined, bank-wise credit ceilings removed and a system of auctioning government
securities was established, forcing the government to borrow at market determined rates.
Ushering in the reforms, 1997 2006 After privatization, transformational reforms were
pushed through. The central banks regulatory powers were restored via amendments to the
Banking Companies Ordinance (1962) and the State Bank of Pakistan Act (1956).
Subsequently, corporate governance, internal controls and bank supervision was
strengthened substantially. Legal impediments and delays in recovery of bad loans were
streamlined in 2001. Furthermore, the scope of prudential framework set up in 1989 was
enhanced, allowing banks to venture into hitherto untapped business segments. Lending to
small and medium enterprise had previously been neglected, whereas consumer and
mortgage finance had not developed prior to reforms. The post-reform era, 2006 present
Buoyed by the spirit of liberalization, the sectors landscape has changed significantly. By
2010, there were five public commercial banks,25 domestic private banks, six foreign banks
and four specialized banks. There are now 9,348 bank branches spread throughout the
country, catering to the needs of some 28 million deposit account-holders. Banking in
Pakistan the long journey ahead Much still remains to be accomplished. In the absence of
sustainable economic growth, banks will remain vulnerable to business cycle fluctuations. As
recently as 2008, non-performing loans increased sharply in response to the preceding years

of easy credit and risky consumer lending practices. Moreover, strong regulation will continue
to be required so as to maintain the delicate balance between industry concentration and
competition. Presently, the top five banks account for about 50% of the sector, measured in
terms of total advances. Finally, the benefits of financial liberalization must trickle down to the
common man. Banks are proactively exploring new business models to make this happen
such as branchless banking. But more headway needs to be made before existing
deployments such as Tameer Banks Easypaisa or UBL Omni reach a critical mass of
users. Reforms have helped banks come a long way, but unless the central bank remains
autonomous, and continues to err on the side of caution, liberalization may quickly become a
bitter pill to swallow.
4. 4. 4 Consumer Banking in Pakistan (Consumer Behavior) Consumer Banking in Pakistan
Consumer banking which is one of the fastest growing sectors of Pakistan Banking Industry
is also now major interest point for the banks. Initially the consumer banking sector was only
focused by the foreign banks but its efficiency & profitability attracted others to come towards
this business but still the major share of consumer banking in Pakistan is in the hands of
foreign banks. In a generic sense, institutional arrangements that provide consumers with
financing support to enhance their consumption and as a result thereof, improve their
standards of living should fall within the broad definition of consumer finance. For the past 50
years commercial banks in Pakistan had completely ignored consumer financing as an
activity. Consumer banking is a huge industry with great profits massive potential for
improving economic conditions. But the banking sector has to care more for its subscribers
rather than solely about itself. It needs to offer itself. It needs to offer better services at better
terms and needs to inform the consumer completely and fully about the services. According
to an analysis, credit cards loans have increased from Rs33.538 billion during first of last
calendar year to Rs42.822 billion during first half of current calendar year. Likewise, personal
loans have increased from Rs120.517 billion in H1CY06 to Rs142.373 billion in H1 CY07.
Growth in auto loans has not been less impressive. It registered an increase of approximately
Rs8.0 billion from RS97.777 billion to Rs105.444 billion during the corresponding period of
growth of credit cards and personal loans. Housing loans have also registered an increase of
approximately Rs11.0 billion in H1 CY 07 from Rs43.205 billion in H1 CY06. (Sharif, 2007)
Exposure per borrower Rupees in 000 2004 2005 2006 Credit Cards 23 26 32 Auto Loans
423 430 411 Consumer Durable 37 29 22 Mortgage Loans 1572 1982 2025 Other Personal
Loans 82 89 100 (SBP, 2006) Figure 2.1
5. 5. 5 Consumer Banking in Pakistan (Consumer Behavior) Consumer Financing Share by
Sector(SBP, 2006) Amount of Consumer Financing (SBP, 2006)Figure 2.2 Figure 2.3 NPL
Ratio of Consumer Financing (SBP, 2006) Auto Loans In Pakistan auto loans are purchase of
brand new or used, imported or local cars for private use. Auto financing and auto leasing
both facilities are offered by most of the banks. Salaried Persons/Self Employed
Professionals / Business Persons who meet the terms and conditions to qualify for the
finance are eligible for the loan. Some banks are also offering both variable rate & fixed rate
options for auto loans. The average market rate for auto loans is 14-16%. Home Loans The
loans taken for Buying, Building or Renovating of house/land are classified as home loans.
For home loans both variable rate & fixed rate options are also available. The maximum

duration offered by banks for home loans is generally twenty years thats why banks
conveniently give loans to permanent employees of any firm to ensure strong repayment
ability. Personal Loans
6. 6. 6 Consumer Banking in Pakistan (Consumer Behavior) Personal Loans are generally
unsecured type of loans but in certain cases when the amount of personal loans increases
the normal limit its remaining portion must be secured. Personal loans include loans for the
purpose of education, marriage, purchase of consumer durables, furnishing, traveling, etc.
Generally the limit for personal loans is maximum Rs.500, 000/- Credit-Debit Cards Credit
Cards mean cards which allow a customer to make payments on credit. Supplementary
credit cards are considered part of the principal credit card. Initially only foreign banks are
offering credit cards in Pakistan but now many local banks is also offering credit card facility.
Credit Card is covered by three networks VISA, Master Card & American Express. Debit
cards are issued to account holders of any bank in Pakistan almost all the banks are offering
debit card facility the amount used by the debit card holder is directly debited from the
account of the card holder. Debit cards are accepted at all ORIX Network in Pakistan and it
can also be used as ATM cards which are covered by 1-Link & MNET network in Pakistan.
Deposit Accounts All the commercial banks are offering different kinds of deposit accounts
these account ranges from customer to customer to fill the need of every type of customer.
Few of the accounts provide high interest while some pay low interest & some dont pay any
interest. Some major categories of deposit accounts are; Current Accounts Saving Accounts
Foreign Currency Accounts Business Accounts Term Deposits Accounts Wealth
Management Wealth management is a new kind of service introduced in consumer banking
sector now days. It covers all aspects of securing future of banks customers it includes
insurance, tax advisory, financial consultancy, investments plans, etc. Yet wealth
management service are mainly covered by few foreign banks only this is a new service are
even banks customers dont have any idea about Wealth Management Service. Almost all
the banks are offering insurance services to some of their customers but the concept of
wealth management is not behind it. E-banking To facilitate its customers all banks local &
foreign are offering high technological e-banking services. These services let the banks
customers to perform many banking activities easily without any restriction of time & place.
Some of the major e-banking services provided by the banks are; Phone banking Internet
banking Plastic Cards Online banking
7. 7. 7 Consumer Banking in Pakistan (Consumer Behavior) Mobile banking ATM Pakistan
Banks Association (PBA) Pakistan Banks Association (PBA) represents the Pakistan
Banking Industry. Established in 1953, its main objective is to coordinate the efforts of the
banking industry, and to share a common vision of progress and development with its
members. PBA Membership is institutionalized and is available only to the Banks operating
in Pakistan. Currently there are 44 members, categorized into 6 groups (one of these groups
is under formation). Its governing body is an Executive Committee (EC) comprising of 14
members, represented by the Chief Executives of the respective member institutions. PBAs
Principal Executive is the Chairman of the Executive Committee, elected periodically from
within the EC. Presently, PBA has 10 functional Sub Committees, each chaired by a member
of the Executive Committee. Remaining members of the Sub Committees are relevant

Executives of member banks. Find more about PBA and its governance in the PBA Profile
Section. Particulars of members such as their corporate and management profiles, branch
networks and financial statements are available in the PBA Members Section. Over the years
the role of PBA has broadened considerably. It is now referred to by the State Bank of
Pakistan in formulation of regulations for the banking industry, and has been entrusted with
the function of regulating and monitoring certain services provided to the banking industry by
outside service providers. These service providers include Professional Valuers, who are
evaluators allowed to appraise the values of assets collateralized to banks, and Security
Agencies offering security services to the Banking Industry. For details visit the PBA Panels
Section. Following financial institutions are the members of Pakistan Banks' Association.
Government Owned Banks: First Women Bank Limited Khushhali Bank Limited National
Bank of Pakistan SME Bank Limited Sindh Bank Limited The Bank of Khyber The Bank of
Punjab The Punjab Provincial Cooperative Bank Limited Zarai Taraqiati Bank Limited
Privatized Banks: Allied Bank Limited Habib Bank Limited
8. 8. 8 Consumer Banking in Pakistan (Consumer Behavior) MCB Bank Limited United Bank
Limited Development Financial Institutions: National Investment Trust Limited Pak Brunei
Investment Company Limited PAIR Investment Company Limited Pakistan Kuwait Investment
Company (Pvt.) Limited Pak Libya Holding Company (Pvt.) Limited Pak Oman Investment
Company Limited Saudi Pak Industrial & Agricultural Investment Company Limited Small and
Medium Enterprise (PBA subgroup under formation): The First MicroFinanceBank Limited
Private Banks: Al Baraka Bank (Pakistan) Limited Askari Bank Limited Bank Alfalah Limited
Bank AL Habib Limited BankIslami Pakistan Limited Burj Bank Limited Dubai Islamic Bank
Pakistan Limited Faysal Bank Limited Habib Metropolitan Bank Limited JS Bank Limited
KASB Bank Limited Meezan Bank Limited NIB Bank Limited Samba Bank Limited Silkbank
Limited Soneri Bank Limited Standard Chartered Bank (Pakistan) Limited Summit Bank
Limited (Formerly Arif Habib Bank Limited) Foreign Banks: Barclays Bank PLC, Pakistan
Citibank N.A., Pakistan Deutsche Bank AG, Pakistan HSBC Bank Middle East Limited,
Pakistan
9. 9. 9 Consumer Banking in Pakistan (Consumer Behavior) HSBC Bank Oman S.A.O.G.
(Formerly Oman International Bank S.A.O.G.) Non-Member Banks & Development Financial
Institutions: APNA Micro Finance Bank Limited (Formerly Network Micro Finance Bank
Limited) Bank of Tokyo Mitsubishi UFJ Limited, Pakistan House Building Finance Company
Limited Industrial and Commercial Bank of China Limited Industrial Development Bank
Limited KASHF Microfinance Bank Limited NRSP Microfinance Bank Limited Pak-China
Investment Company Limited Pak Oman Microfinance Bank Limited Tameer Micro Finance
Bank Limited U Microfinance Bank Limited (Formerly Rozgar Microfinance bank Limited)
Waseela Microfinance Bank Limited Contribution Consumer Banking in Economic
Development In Pakistan, consumer finance despite rapid growth during initial period of 2-3
years has started declining. During past few years the domestic consumer finance emerged
as one of the key factors to boost economic growth despite its comparatively low share of 14
per cent in the total private sector credit compared to its share in other countries like India
and Indonesia where it stands at 24 per cent and 30 per cent respectively. Regional and
global markets and economic players have become highly competitive and banking sector is

more concerned to safeguard its capital and enrich itself with higher returns on loans than
governments concern about boosting economic growth. Consumer Financing & Economic
Growth: Lending through credit cards, personal loans, auto loans, loans for durables and
housing finance emerged main streams of consumer finance. They shaped domestic
demand and lending strategy by the banking sector in quite subtle ways. Consumer finance
has also brought social change through higher circular of money and relaxation of income
constraints for borrowing particularly among those middle class segments that were eager to
become part of growing economy and keen to benefit from economic growth. Without
consumer finance being in the driving seat of the banking sector, a large number of people
would not have benefited.
10. 10. 10 Consumer Banking in Pakistan (Consumer Behavior) Lending through credit cards,
personal loans, auto loans, loans for durables and housing finance emerged main streams of
consumer finance. They shaped domestic demand and lending strategy by the banking
sector in quite subtle ways. Consumer finance has also brought social change through higher
circular of money and relaxation of income constraints for borrowing particularly among those
middle class segments that were eager to become part of growing economy and keen to
benefit from economic growth. Significance impact on Consumer: In a generic sense,
institutional arrangements that provide consumers with financing support to enhance their
consumption and, as a result thereof, improve their standards of living, should fall within the
broad definition of Consumer Finance. These could range from Credit Cards, to finance and
operating leases, to housing finance. But the semantics of financial markets generally tend to
exclude housing finance from this range treating it as a distinct financing product essentially
because of its long-term nature. For the past fifty-four years, commercial banks in Pakistan
had completely ignored consumer financing as an activity. There was scant realization of the
fact that the hallmark of healthy economies is not unrealistically high dependence on exports
but on domestic demand, and development of indigenous resource and industrial bases that
support domestic consumption. Until the early l990s, even Credit Cards were offered to a
select band of customers who needed them not by way of financial support but as a
convenience for paying their bills while travelling abroad, realizing little that in developed
economies this mode of financing supported consumption to sustain steady growth in
domestic demand which, in turn, prompted investment and industrialization. Even now, the
sudden urge for promoting consumer finance has less to do with accepting this reality; it was
spurred largely by a depressed investment climate in which reduced borrowing by industrial
and commercial sectors coincided with excess liquidity in banks, thanks to 9/11. Lumbered
with liquidity that is nearing unmanageable proportions, banks are now aggressively
promoting consumer financing. The big attraction in extending financing facilities to the
passive consumer segment is the prospect of earning high interest rate spreads because
consumers are soft targets as far as haggling over interest rates chargeable to them are
concerned. They are much more likely to borrow at unrealistically high rates a
convenience that is no longer available on lending to industrial and commercial borrowers
who now insist on the finest possible loan rates. But in pricing consumer loans unrealistically
high, banks would be making a serious mistake because "they cannot charge a high enough
loan rate that could compensate for the loss arising out of an irrecoverable loan." More

importantly, if consumer finance has to pick-up as a truly helpful mechanism for spurring
domestic demand, it must be ensured that it remains within the consumers' capacity to repay
their loans on time, and they feel confident about borrowing again and again. As its is,
ordinary consumers' capacity to borrow and repay loans out of their savings has been
rendered precarious by decades long cycle of inept economic policies that have made the
poor even
11. 11. 11 Consumer Banking in Pakistan (Consumer Behavior) poorer. Low rise in per capita
incomes (whose impact was compounded by falling purchasing power due to rapid
depreciation of the Rupee) caused savings to fall and poverty to rise. This combination
steadily depressed consumer demand even for the less expensive consumer durables. The
sustained trend of depressed demand prevented the development of a sizeable industrial
base and contraction in opportunities for investment and employment. In the last two years,
steady reductions in returns on savings have further diminished consumers' capacity to repay
bank loans. Banks are belatedly trying to redress this enormous macroeconomic structural
imbalance but given the historic pattem of economic developments, they will be handicapped
in their efforts to promote consumer finance. Signs are that while lower interest rates have
certainly enhanced borrowers' capacity to borrow and service consumer loans, the newly
created demand is pushing prices of consumer durables to unrealistic levels. Take, for
example, automobiles. Strengthening of the Rupee and substantially lower interest rates
should have brought their prices down or at least served to stabilize them. Neither of these
expectations were met because the sudden rise in demand created a distortion that allowed
assemblers not only to push up prices but also created a roaring black market in this sector.
With banks now offering liberal consumer finance facilities for acquiring home appliances,
their prices too are on the rise although there is substantial over-capacity in this sector. Many
observers argue that this distortion is a temporary phase, which will soon become history as
production capacities increase to fill the large supply gap. May be so, but going by the
example set by the automobile industry (in which, so far, only one assembler has announced
a "plan" to double its output) this lag may not be as temporary as some observers make it out
to be. Banks providing cheap credit to business and industry at the expense of the savers
can exercise a powerful influence on the manufacturing sector to push the case for
compensating the savers through lower prices. Unfortunately, however, lack of social
responsibility in the corporate sector is too pervasive to bring home this realization to the
market players. Aside from the macroeconomic distortions that suppress consumer demand,
there are other delicate issues that require focused attention of commercial banks intending
to launch a major thrust in consumer finance. The first is the lack of institutional
arrangements and practices that hamper the assessment of consumers' re-payment risk.
Ideally, risk assessment of employed individuals should not pose as much of a problem as
the self-employed individuals because employers could help in providing a basis for
establishing the employees' re-payment capacity. That, unfortunately, is not yet the case.
Employers appear averse to taking even the feeblest responsibility on account of their
employees. Many employers either don't certify, or certify very inadequately, the financial
status of their employees intending to avail a consumer finance facility from a bank. Unless
provisions are made in relevant labour laws, employers will not provide even this information

about their employees, which they should morally feel bound to provide. Fewer among them
are prepared to confirm to the financing institution that they have placed on their records the
fact that their employee has availed a financing facility. Fewer still are prepared to accept the
responsibility of informing the financing institution in the event the finance-availing employee
leaves the employer, or is asked by the employer to leave.
12. 12. 12 Consumer Banking in Pakistan (Consumer Behavior) In the case of the self-employed,
the problems are complicated further because many potential consumers do not keep
credible records of the streams of earnings from their vocations or businesses to permit
financing banks a reliable assessment of their future re-payment capacity. Many consumers
don't have utility service connections in their names. Given these handicaps, credibly
verifying consumers' repayment sources will remain a stumbling block. Unless insurance
companies lend a helping hand in this effort by providing loan re-payment guarantees to the
lending banks, the prospects of expanding the consumer finance market remain dim.
Bankers will have to rely largely on their own credit judgment, which may not always be
correct. Given Pakistani bankers' track record in lending, such a possibility will always be
there. A factor that will further complicate extending consumer finance facilities along sound
lines are the continuing inadequacies of our legal system that make it cumbersome for
borrowers to collateralise their existing unencumbered assets for the satisfaction of the
lending bankers. Another thorny issue is the re-possession of financed assets. While repossessing vehicles doesn't pose too serious problem, re-possessing assets such as airconditioners, refrigerators, televisions sets, and similar other appliances from households will
not be easy. It could be both painful and embarrassing for the lending institutions. Even if
these items could be re-possessed, re-selling them to recover book values of outstanding
consumer liabilities holds out a challenging prospect. Resorting to shortcuts in risk
assessment may therefore lumber banks with thousands of small delinquent loans. In most
cases, it may eventually be cheaper to write them off rather than go for re-possession and
sale of used assets, or initiate court action to recover loans from defaulting consumers.
Consumer finance is a risky ball game. The infamous yellow cabs scheme was the only big
experiment in consumer finance, which was undoubtedly a bad experience for most banks
that took part in it. Admittedly, political twists played a big role in the failure of the scheme but
operational inadequacies of banks played a bigger role in this monumental failure. A major
factor in that failure was the operational deficiencies in banks, particularly in assessing an
individual's future repayment capacity keeping in view his or her changing circumstances.
Foreseeing impending changes in the circumstances of individuals is not the same as
sensing the impact of changing business cycles on major borrowers placed in various
economic sectors. Little is available in terms of authentic statistics on this huge customer
category. Pakistan Integrated Household Survey (PIHS) is a new report, and its timely
release cannot be assured because it may report changes in politically sensitive indicators.
Given the absence of credible sources and bases for assessing risk, dealing with thousands
of small borrowers makes consumer finance is a manpower intensive business. Retail banks
with large branch networks have the potential for succeeding in this business but it will
require making alterations in banks' infrastructure, and a change in the focus on investigative
effort for risk assessment. The organization must be pro-active and sufficient in terms of

manpower and Management Information Systems to ensure a reaction speed that is

commensurate with size of the customer base. In this regard it will be crucially important to
ensure that administrative resources are matched with the size of customer base on a
continuing basis. Until recently, oblivious to the emerging possibility of creating a large
consumer finance market, banks were closing down branches and laying-off employees.
Admittedly, there was a need for pruning the banks of deadwood but voluntary retirement
schemes led to separation of many experienced hands who
13. 13. 13 Consumer Banking in Pakistan (Consumer Behavior) could have been re-deployed in
consumer finance units because they knew the essentials of risk assessment. Banks will now
have to inject fresh (and inexperienced) blood in their organizations to support their
consumer finance operations. Admittedly, consumer finance spurs consumption and demand
that is necessary for the industry to expand its productive capacity or make fuller use of its
existing excess capacity, and succeed in cuffing prices at the retail level. It also offers the
prospects of increasing employment and, possibly, fresh investment in industrial sectors,
especially those producing consumer durables. However, the key to sustaining the
consumption-demand equation without pushing inflation to unsustainable levels is the
maintenance of the critical balance between savings, investment and borrowers' debtservicing ability. There is considerable truth in the observation that lowering of interest rates
by Central Banks in the mid-1990s, ostensibly to spur demand and economic activity,
resulted in acquisition of excessive amounts of "easy" bank credit by businesses and
creation of over-capacity there from. Similarly, households too acquired credit (far in excess
of their capacity to save and repay) for investing houses, consumer durables and company
shares on visibly inflated prices. The credit boom, and the demand created there from, led to
meteoric rises in prices and deluded industry into over-investing in capacity building.
Eventually, unsustainable burden of debt-servicing forced businesses to crash, and
households ended up with negative equities. Maintaining the critical balance between
savings, investment and borrowers' debt-servicing ability is possible if input prices remain
stable affording businesses to sustain their profitability, and interest rates too remain stable to
ensure that, in the medium term, debt-servicing burden remains affordable for both
consumers and manufacturers. Unless the system can ensure the maintenance of this
delicate balance, economic instability will remain a strong possibility. Countries that tried to
achieve an over-kill in spurring domestic demand sometimes overlooked the importance of
maintaining this critical balance. We too are trying to achieve the same objective but
regulators must ensure that we don't fall in that dangerous trap. Pakistan's economy, already
rendered fragile by industrial sector loan losses, simply cannot live through another major
upheaval caused by pervasive delinquency of consumer loans. Articles # 1 Citibank has
announced that it is wrapping up its consumer banking operations in Pakistan and has
entered into an agreement with Habib Bank (HBL) to sell its credit card and consumer
lending portfolio, according to a press release. Citi Pakistan will work with HBL to ensure a
smooth handover during the transition period. The announcement was made at a signing
ceremony held in Karachi, attended by HBL and Citi Pakistan representatives. Speaking at
the occasion, HBL President and CEO Nauman Dar said, HBL will continue to be a key
developer of consumer finance products in Pakistan. The acquisition is part of this

commitment and ties in with the banks mission of creating value for stakeholders, especially
our customers.

14. 14 Consumer Banking in

Pakistan (Consumer Behavior)
Nadeem Lodhi, Citis country
officer in Pakistan, said, Citibank
was a pioneer in growing
consumer lending products in the
Pakistani market and has since
contributed to strengthening the
consumer banking landscape in
the country. We have had the
privilege to serve our clients,
whose discerning requirements
and standards were met through
our global banking platform. We
look forward to working with HBL,
to ensure a smooth transition for
our customers. Citi Pakistan will
continue to focus on its core
business of corporate and
investment banking serving our

multinational, public sector,

financial institutions and top-tier
local corporate client base, Lodhi
added. Article # 2 Weak economic
conditions hitting retail banking
hard KARACHI: Pakistans retail
banking market is undergoing
difficult times due to weak
economic conditions, banks rising
non-performing loans and the lack
of effective foreclosure laws;
however, local financial players try
to retain this market by acquiring
retail or consumer lending
portfolios of the foreign banks,
experts said. The deal for the
acquisition of Citibanks (Pakistan
operations) consumer business
portfolio with the Habib Bank
Limited depicts this trend. The
deal is expected to be finalised by

the end of this fiscal year. The

financial experts said the
acquisition of retail lending
portfolios reflects the very real
appetite for profitable, high quality
consumer assets in an
environment where deposit growth
is outpacing lending growth,
particularly in terms of consumer
lending. Despite this appetite,
however, the banking sector has
been unable to grow their
consumer lending portfolios
through fresh exposures to new or
existing clients. Banks
participating in the retail lending
market took significant hits to
their profitability during the last
credit crisis and the memory of
those losses is reflected in the
generally conservative

underwriting policies being

followed by most banks, Naseer
Hasan, head of consumer banking
at Standard Chartered Bank, said.
He also said that the regulatory
framework for consumer lending,
tightened during the last credit
crisis, further ensures that the
growth in the consumer lending
sector remains measured. The
use of positive credit bureaus
during the last six to seven years
has excluded several consumers
from the lending market due to
their past credit history and the
reluctance of banks to bet on
these consumers again, he said.
The legal environment in the
country in recent times has not
helped the banks in terms of
collections or legal actions against

defaulters, he added. He was of

the view that the lower interest
rates have yet to translate into
lower customer rates for consumer
lending products. The banks have
yet to come up with the cost
models for their retail lending
operations that would allow for
lower rates and more sustainable
profitability. Big banks sell their
specific segments and the practice
to divest business from one
geographical area and investing in
another is very common among
the American and European banks
due to a number of reasons such
as weak economic conditions, new
regulations and capital adequacy
ratio, another banker at a leading
commercial bank, said. He said
that after the financial crisis,

several western banks preferred to

concentrate on their home
15. 15 Consumer Banking in Pakistan (Consumer Behavior) or similar markets. Barclays,
HSBC and RBS are in the process of shrinking the operations from different regions such as
the Middle East. Citibank is divesting its consumer banking operations from Pakistan but it
will remain operative in the investment and corporate banking as per its global strategy, he
said. There are many geographical areas where Citibank is providing corporate and
investment banking to the big deal tickets only. This is the history of Citibank. HBL credit
card segment was weak and Citibank has good customer built. So, after the acquisition, HBL
will be in a better position to grab the credit market, Muzzammil Aslam, a senior economist,
said. To a question why Citibank decided to exit from Pakistans consumer market, he said, in
the presence of local five big banks, foreign banks have very small opportunity to grow. In
Pakistan, third-tier banks are facing difficulties in meeting the capital adequacy requirements,
therefore, these banks areConsumer

banking in Pakistan

1. 1. Consumer Behavior Program: MBA (Evening) Submitted To: Sir Abdul Qayyum Qureshi
Submitted By: Muhammad Tayyab Roll # 111405 Pak-AIMS (Institute of Management
Science Consumer Banking in Pakistan
2. 2. 2 Consumer Banking in Pakistan (Consumer Behavior) Introduction: In Pakistan all banks
& DFIs works under the supervision of the State Bank of Pakistan, the four major sectors in
which SBP has divided banks operations are Corporate, SME, Agriculture and Consumer.
SBP provide regulations according to which all banks should work & continuously keep a
track that banks are complying through the regulations or not. In recent years, Consumer
Banking has made tremendous progress and has played a positive role in boosting the
economy and in meeting the needs and requirements of the consumers. Whether large or
small bank, multinational or local, each one of them is geared towards making its mark in an
already competitive environment that is the outcome of consumer banking. The growing
economy and further improvements in the level of household income have created many
opportunities for consumer banking. History of Banking in Pakistan: Banks in Pakistan also
exhibiting symptoms of similar financial malaise caused by extensive liberalization, as are
their counterparts in the West? Not quite. Pakistans experience with financial liberalization in
the banking sector is vastly limited as compared to the developed world. A brief look at the
history of banking in Pakistan reveals that the banking sector has made impressive
achievements but still has a long way to go. Humble beginnings, 1947 1970 Our financial
sector evolved very differently from banks in the developed world. For nearly a year after
partition, Pakistan had no central bank. Habib Bank established in 1941 filled this gap
initially, until the State Bank of Pakistan (SBP) was set up in 1948 under quasi-government
ownership. The role of domestic banks was particularly limited at the time, accounting for

only 25 of the total 195 bank branches in the country. Therefore, the SBP was initially
mandated to develop commercial banking channels, and maintain monetary stability so trade
and commerce could flourish in the newly-created state. Subsequently, Habib Bank, Allied
Bank and National Bank were amongst the first to start operations with strong support from
the central bank. A legacy of public control, 1970 1980 Commercial banking grew favorably
in Pakistan until 1974. Under the nationalization policy implemented by Zulfikar Ali Bhuttos
government, thirteen banks were brought under full government control, and consolidated
into six nationalized banks. The Pakistan Banking Council was set up to monitor nationalized
banks, marginalizing the SBPs role as a regulator. These measures were meant to improve
lending to prioritized industries. However, while directed lending was viewed favorably at the
time, little can be said of the long-term gains that have been achieved. Business as usual,
1980-1990 Over time, the financial sector grew to serve primarily large corporate business,
politicians and the government. Board of Directors and CEOs were not independently
appointed. Lending decisions were not always commercially motivated, and many billions of
rupees were unsurprisingly funneled out of the financial system as bad loans. Banks
were essentially not in control of their destinies during this period.
3. 3. 3 Consumer Banking in Pakistan (Consumer Behavior) Privatization, 1990 1997 By
1991, the Bank Nationalization Act was amended, and 23 banks were established of which
ten were domestically licensed. Muslim Commercial Bank was privatized in 1991 and the
majority ownership of Allied Bank was transferred to its management by 1993. By 1997,
there were still four major state-owned banks, but they now faced competition from 21
domestic banks and 27 foreign banks. More importantly, administered interest rates were
streamlined, bank-wise credit ceilings removed and a system of auctioning government
securities was established, forcing the government to borrow at market determined rates.
Ushering in the reforms, 1997 2006 After privatization, transformational reforms were
pushed through. The central banks regulatory powers were restored via amendments to the
Banking Companies Ordinance (1962) and the State Bank of Pakistan Act (1956).
Subsequently, corporate governance, internal controls and bank supervision was
strengthened substantially. Legal impediments and delays in recovery of bad loans were
streamlined in 2001. Furthermore, the scope of prudential framework set up in 1989 was
enhanced, allowing banks to venture into hitherto untapped business segments. Lending to
small and medium enterprise had previously been neglected, whereas consumer and
mortgage finance had not developed prior to reforms. The post-reform era, 2006 present
Buoyed by the spirit of liberalization, the sectors landscape has changed significantly. By
2010, there were five public commercial banks,25 domestic private banks, six foreign banks
and four specialized banks. There are now 9,348 bank branches spread throughout the
country, catering to the needs of some 28 million deposit account-holders. Banking in
Pakistan the long journey ahead Much still remains to be accomplished. In the absence of
sustainable economic growth, banks will remain vulnerable to business cycle fluctuations. As
recently as 2008, non-performing loans increased sharply in response to the preceding years
of easy credit and risky consumer lending practices. Moreover, strong regulation will continue
to be required so as to maintain the delicate balance between industry concentration and
competition. Presently, the top five banks account for about 50% of the sector, measured in

terms of total advances. Finally, the benefits of financial liberalization must trickle down to the
common man. Banks are proactively exploring new business models to make this happen
such as branchless banking. But more headway needs to be made before existing
deployments such as Tameer Banks Easypaisa or UBL Omni reach a critical mass of
users. Reforms have helped banks come a long way, but unless the central bank remains
autonomous, and continues to err on the side of caution, liberalization may quickly become a
bitter pill to swallow.
4. 4. 4 Consumer Banking in Pakistan (Consumer Behavior) Consumer Banking in Pakistan
Consumer banking which is one of the fastest growing sectors of Pakistan Banking Industry
is also now major interest point for the banks. Initially the consumer banking sector was only
focused by the foreign banks but its efficiency & profitability attracted others to come towards
this business but still the major share of consumer banking in Pakistan is in the hands of
foreign banks. In a generic sense, institutional arrangements that provide consumers with
financing support to enhance their consumption and as a result thereof, improve their
standards of living should fall within the broad definition of consumer finance. For the past 50
years commercial banks in Pakistan had completely ignored consumer financing as an
activity. Consumer banking is a huge industry with great profits massive potential for
improving economic conditions. But the banking sector has to care more for its subscribers
rather than solely about itself. It needs to offer itself. It needs to offer better services at better
terms and needs to inform the consumer completely and fully about the services. According
to an analysis, credit cards loans have increased from Rs33.538 billion during first of last
calendar year to Rs42.822 billion during first half of current calendar year. Likewise, personal
loans have increased from Rs120.517 billion in H1CY06 to Rs142.373 billion in H1 CY07.
Growth in auto loans has not been less impressive. It registered an increase of approximately
Rs8.0 billion from RS97.777 billion to Rs105.444 billion during the corresponding period of
growth of credit cards and personal loans. Housing loans have also registered an increase of
approximately Rs11.0 billion in H1 CY 07 from Rs43.205 billion in H1 CY06. (Sharif, 2007)
Exposure per borrower Rupees in 000 2004 2005 2006 Credit Cards 23 26 32 Auto Loans
423 430 411 Consumer Durable 37 29 22 Mortgage Loans 1572 1982 2025 Other Personal
Loans 82 89 100 (SBP, 2006) Figure 2.1
5. 5. 5 Consumer Banking in Pakistan (Consumer Behavior) Consumer Financing Share by
Sector(SBP, 2006) Amount of Consumer Financing (SBP, 2006)Figure 2.2 Figure 2.3 NPL
Ratio of Consumer Financing (SBP, 2006) Auto Loans In Pakistan auto loans are purchase of
brand new or used, imported or local cars for private use. Auto financing and auto leasing
both facilities are offered by most of the banks. Salaried Persons/Self Employed
Professionals / Business Persons who meet the terms and conditions to qualify for the
finance are eligible for the loan. Some banks are also offering both variable rate & fixed rate
options for auto loans. The average market rate for auto loans is 14-16%. Home Loans The
loans taken for Buying, Building or Renovating of house/land are classified as home loans.
For home loans both variable rate & fixed rate options are also available. The maximum
duration offered by banks for home loans is generally twenty years thats why banks
conveniently give loans to permanent employees of any firm to ensure strong repayment
ability. Personal Loans

6. 6. 6 Consumer Banking in Pakistan (Consumer Behavior) Personal Loans are generally

unsecured type of loans but in certain cases when the amount of personal loans increases
the normal limit its remaining portion must be secured. Personal loans include loans for the
purpose of education, marriage, purchase of consumer durables, furnishing, traveling, etc.
Generally the limit for personal loans is maximum Rs.500, 000/- Credit-Debit Cards Credit
Cards mean cards which allow a customer to make payments on credit. Supplementary
credit cards are considered part of the principal credit card. Initially only foreign banks are
offering credit cards in Pakistan but now many local banks is also offering credit card facility.
Credit Card is covered by three networks VISA, Master Card & American Express. Debit
cards are issued to account holders of any bank in Pakistan almost all the banks are offering
debit card facility the amount used by the debit card holder is directly debited from the
account of the card holder. Debit cards are accepted at all ORIX Network in Pakistan and it
can also be used as ATM cards which are covered by 1-Link & MNET network in Pakistan.
Deposit Accounts All the commercial banks are offering different kinds of deposit accounts
these account ranges from customer to customer to fill the need of every type of customer.
Few of the accounts provide high interest while some pay low interest & some dont pay any
interest. Some major categories of deposit accounts are; Current Accounts Saving Accounts
Foreign Currency Accounts Business Accounts Term Deposits Accounts Wealth
Management Wealth management is a new kind of service introduced in consumer banking
sector now days. It covers all aspects of securing future of banks customers it includes
insurance, tax advisory, financial consultancy, investments plans, etc. Yet wealth
management service are mainly covered by few foreign banks only this is a new service are
even banks customers dont have any idea about Wealth Management Service. Almost all
the banks are offering insurance services to some of their customers but the concept of
wealth management is not behind it. E-banking To facilitate its customers all banks local &
foreign are offering high technological e-banking services. These services let the banks
customers to perform many banking activities easily without any restriction of time & place.
Some of the major e-banking services provided by the banks are; Phone banking Internet
banking Plastic Cards Online banking
7. 7. 7 Consumer Banking in Pakistan (Consumer Behavior) Mobile banking ATM Pakistan
Banks Association (PBA) Pakistan Banks Association (PBA) represents the Pakistan
Banking Industry. Established in 1953, its main objective is to coordinate the efforts of the
banking industry, and to share a common vision of progress and development with its
members. PBA Membership is institutionalized and is available only to the Banks operating
in Pakistan. Currently there are 44 members, categorized into 6 groups (one of these groups
is under formation). Its governing body is an Executive Committee (EC) comprising of 14
members, represented by the Chief Executives of the respective member institutions. PBAs
Principal Executive is the Chairman of the Executive Committee, elected periodically from
within the EC. Presently, PBA has 10 functional Sub Committees, each chaired by a member
of the Executive Committee. Remaining members of the Sub Committees are relevant
Executives of member banks. Find more about PBA and its governance in the PBA Profile
Section. Particulars of members such as their corporate and management profiles, branch
networks and financial statements are available in the PBA Members Section. Over the years

the role of PBA has broadened considerably. It is now referred to by the State Bank of
Pakistan in formulation of regulations for the banking industry, and has been entrusted with
the function of regulating and monitoring certain services provided to the banking industry by
outside service providers. These service providers include Professional Valuers, who are
evaluators allowed to appraise the values of assets collateralized to banks, and Security
Agencies offering security services to the Banking Industry. For details visit the PBA Panels
Section. Following financial institutions are the members of Pakistan Banks' Association.
Government Owned Banks: First Women Bank Limited Khushhali Bank Limited National
Bank of Pakistan SME Bank Limited Sindh Bank Limited The Bank of Khyber The Bank of
Punjab The Punjab Provincial Cooperative Bank Limited Zarai Taraqiati Bank Limited
Privatized Banks: Allied Bank Limited Habib Bank Limited
8. 8. 8 Consumer Banking in Pakistan (Consumer Behavior) MCB Bank Limited United Bank
Limited Development Financial Institutions: National Investment Trust Limited Pak Brunei
Investment Company Limited PAIR Investment Company Limited Pakistan Kuwait Investment
Company (Pvt.) Limited Pak Libya Holding Company (Pvt.) Limited Pak Oman Investment
Company Limited Saudi Pak Industrial & Agricultural Investment Company Limited Small and
Medium Enterprise (PBA subgroup under formation): The First MicroFinanceBank Limited
Private Banks: Al Baraka Bank (Pakistan) Limited Askari Bank Limited Bank Alfalah Limited
Bank AL Habib Limited BankIslami Pakistan Limited Burj Bank Limited Dubai Islamic Bank
Pakistan Limited Faysal Bank Limited Habib Metropolitan Bank Limited JS Bank Limited
KASB Bank Limited Meezan Bank Limited NIB Bank Limited Samba Bank Limited Silkbank
Limited Soneri Bank Limited Standard Chartered Bank (Pakistan) Limited Summit Bank
Limited (Formerly Arif Habib Bank Limited) Foreign Banks: Barclays Bank PLC, Pakistan
Citibank N.A., Pakistan Deutsche Bank AG, Pakistan HSBC Bank Middle East Limited,
Pakistan
9. 9. 9 Consumer Banking in Pakistan (Consumer Behavior) HSBC Bank Oman S.A.O.G.
(Formerly Oman International Bank S.A.O.G.) Non-Member Banks & Development Financial
Institutions: APNA Micro Finance Bank Limited (Formerly Network Micro Finance Bank
Limited) Bank of Tokyo Mitsubishi UFJ Limited, Pakistan House Building Finance Company
Limited Industrial and Commercial Bank of China Limited Industrial Development Bank
Limited KASHF Microfinance Bank Limited NRSP Microfinance Bank Limited Pak-China
Investment Company Limited Pak Oman Microfinance Bank Limited Tameer Micro Finance
Bank Limited U Microfinance Bank Limited (Formerly Rozgar Microfinance bank Limited)
Waseela Microfinance Bank Limited Contribution Consumer Banking in Economic
Development In Pakistan, consumer finance despite rapid growth during initial period of 2-3
years has started declining. During past few years the domestic consumer finance emerged
as one of the key factors to boost economic growth despite its comparatively low share of 14
per cent in the total private sector credit compared to its share in other countries like India
and Indonesia where it stands at 24 per cent and 30 per cent respectively. Regional and
global markets and economic players have become highly competitive and banking sector is
more concerned to safeguard its capital and enrich itself with higher returns on loans than
governments concern about boosting economic growth. Consumer Financing & Economic
Growth: Lending through credit cards, personal loans, auto loans, loans for durables and

housing finance emerged main streams of consumer finance. They shaped domestic
demand and lending strategy by the banking sector in quite subtle ways. Consumer finance
has also brought social change through higher circular of money and relaxation of income
constraints for borrowing particularly among those middle class segments that were eager to
become part of growing economy and keen to benefit from economic growth. Without
consumer finance being in the driving seat of the banking sector, a large number of people
would not have benefited.
10. 10. 10 Consumer Banking in Pakistan (Consumer Behavior) Lending through credit cards,
personal loans, auto loans, loans for durables and housing finance emerged main streams of
consumer finance. They shaped domestic demand and lending strategy by the banking
sector in quite subtle ways. Consumer finance has also brought social change through higher
circular of money and relaxation of income constraints for borrowing particularly among those
middle class segments that were eager to become part of growing economy and keen to
benefit from economic growth. Significance impact on Consumer: In a generic sense,
institutional arrangements that provide consumers with financing support to enhance their
consumption and, as a result thereof, improve their standards of living, should fall within the
broad definition of Consumer Finance. These could range from Credit Cards, to finance and
operating leases, to housing finance. But the semantics of financial markets generally tend to
exclude housing finance from this range treating it as a distinct financing product essentially
because of its long-term nature. For the past fifty-four years, commercial banks in Pakistan
had completely ignored consumer financing as an activity. There was scant realization of the
fact that the hallmark of healthy economies is not unrealistically high dependence on exports
but on domestic demand, and development of indigenous resource and industrial bases that
support domestic consumption. Until the early l990s, even Credit Cards were offered to a
select band of customers who needed them not by way of financial support but as a
convenience for paying their bills while travelling abroad, realizing little that in developed
economies this mode of financing supported consumption to sustain steady growth in
domestic demand which, in turn, prompted investment and industrialization. Even now, the
sudden urge for promoting consumer finance has less to do with accepting this reality; it was
spurred largely by a depressed investment climate in which reduced borrowing by industrial
and commercial sectors coincided with excess liquidity in banks, thanks to 9/11. Lumbered
with liquidity that is nearing unmanageable proportions, banks are now aggressively
promoting consumer financing. The big attraction in extending financing facilities to the
passive consumer segment is the prospect of earning high interest rate spreads because
consumers are soft targets as far as haggling over interest rates chargeable to them are
concerned. They are much more likely to borrow at unrealistically high rates a
convenience that is no longer available on lending to industrial and commercial borrowers
who now insist on the finest possible loan rates. But in pricing consumer loans unrealistically
high, banks would be making a serious mistake because "they cannot charge a high enough
loan rate that could compensate for the loss arising out of an irrecoverable loan." More
importantly, if consumer finance has to pick-up as a truly helpful mechanism for spurring
domestic demand, it must be ensured that it remains within the consumers' capacity to repay
their loans on time, and they feel confident about borrowing again and again. As its is,

ordinary consumers' capacity to borrow and repay loans out of their savings has been
rendered precarious by decades long cycle of inept economic policies that have made the
poor even
11. 11. 11 Consumer Banking in Pakistan (Consumer Behavior) poorer. Low rise in per capita
incomes (whose impact was compounded by falling purchasing power due to rapid
depreciation of the Rupee) caused savings to fall and poverty to rise. This combination
steadily depressed consumer demand even for the less expensive consumer durables. The
sustained trend of depressed demand prevented the development of a sizeable industrial
base and contraction in opportunities for investment and employment. In the last two years,
steady reductions in returns on savings have further diminished consumers' capacity to repay
bank loans. Banks are belatedly trying to redress this enormous macroeconomic structural
imbalance but given the historic pattem of economic developments, they will be handicapped
in their efforts to promote consumer finance. Signs are that while lower interest rates have
certainly enhanced borrowers' capacity to borrow and service consumer loans, the newly
created demand is pushing prices of consumer durables to unrealistic levels. Take, for
example, automobiles. Strengthening of the Rupee and substantially lower interest rates
should have brought their prices down or at least served to stabilize them. Neither of these
expectations were met because the sudden rise in demand created a distortion that allowed
assemblers not only to push up prices but also created a roaring black market in this sector.
With banks now offering liberal consumer finance facilities for acquiring home appliances,
their prices too are on the rise although there is substantial over-capacity in this sector. Many
observers argue that this distortion is a temporary phase, which will soon become history as
production capacities increase to fill the large supply gap. May be so, but going by the
example set by the automobile industry (in which, so far, only one assembler has announced
a "plan" to double its output) this lag may not be as temporary as some observers make it out
to be. Banks providing cheap credit to business and industry at the expense of the savers
can exercise a powerful influence on the manufacturing sector to push the case for
compensating the savers through lower prices. Unfortunately, however, lack of social
responsibility in the corporate sector is too pervasive to bring home this realization to the
market players. Aside from the macroeconomic distortions that suppress consumer demand,
there are other delicate issues that require focused attention of commercial banks intending
to launch a major thrust in consumer finance. The first is the lack of institutional
arrangements and practices that hamper the assessment of consumers' re-payment risk.
Ideally, risk assessment of employed individuals should not pose as much of a problem as
the self-employed individuals because employers could help in providing a basis for
establishing the employees' re-payment capacity. That, unfortunately, is not yet the case.
Employers appear averse to taking even the feeblest responsibility on account of their
employees. Many employers either don't certify, or certify very inadequately, the financial
status of their employees intending to avail a consumer finance facility from a bank. Unless
provisions are made in relevant labour laws, employers will not provide even this information
about their employees, which they should morally feel bound to provide. Fewer among them
are prepared to confirm to the financing institution that they have placed on their records the
fact that their employee has availed a financing facility. Fewer still are prepared to accept the

responsibility of informing the financing institution in the event the finance-availing employee
leaves the employer, or is asked by the employer to leave.
12. 12. 12 Consumer Banking in Pakistan (Consumer Behavior) In the case of the self-employed,
the problems are complicated further because many potential consumers do not keep
credible records of the streams of earnings from their vocations or businesses to permit
financing banks a reliable assessment of their future re-payment capacity. Many consumers
don't have utility service connections in their names. Given these handicaps, credibly
verifying consumers' repayment sources will remain a stumbling block. Unless insurance
companies lend a helping hand in this effort by providing loan re-payment guarantees to the
lending banks, the prospects of expanding the consumer finance market remain dim.
Bankers will have to rely largely on their own credit judgment, which may not always be
correct. Given Pakistani bankers' track record in lending, such a possibility will always be
there. A factor that will further complicate extending consumer finance facilities along sound
lines are the continuing inadequacies of our legal system that make it cumbersome for
borrowers to collateralise their existing unencumbered assets for the satisfaction of the
lending bankers. Another thorny issue is the re-possession of financed assets. While repossessing vehicles doesn't pose too serious problem, re-possessing assets such as airconditioners, refrigerators, televisions sets, and similar other appliances from households will
not be easy. It could be both painful and embarrassing for the lending institutions. Even if
these items could be re-possessed, re-selling them to recover book values of outstanding
consumer liabilities holds out a challenging prospect. Resorting to shortcuts in risk
assessment may therefore lumber banks with thousands of small delinquent loans. In most
cases, it may eventually be cheaper to write them off rather than go for re-possession and
sale of used assets, or initiate court action to recover loans from defaulting consumers.
Consumer finance is a risky ball game. The infamous yellow cabs scheme was the only big
experiment in consumer finance, which was undoubtedly a bad experience for most banks
that took part in it. Admittedly, political twists played a big role in the failure of the scheme but
operational inadequacies of banks played a bigger role in this monumental failure. A major
factor in that failure was the operational deficiencies in banks, particularly in assessing an
individual's future repayment capacity keeping in view his or her changing circumstances.
Foreseeing impending changes in the circumstances of individuals is not the same as
sensing the impact of changing business cycles on major borrowers placed in various
economic sectors. Little is available in terms of authentic statistics on this huge customer
category. Pakistan Integrated Household Survey (PIHS) is a new report, and its timely
release cannot be assured because it may report changes in politically sensitive indicators.
Given the absence of credible sources and bases for assessing risk, dealing with thousands
of small borrowers makes consumer finance is a manpower intensive business. Retail banks
with large branch networks have the potential for succeeding in this business but it will
require making alterations in banks' infrastructure, and a change in the focus on investigative
effort for risk assessment. The organization must be pro-active and sufficient in terms of
manpower and Management Information Systems to ensure a reaction speed that is
commensurate with size of the customer base. In this regard it will be crucially important to
ensure that administrative resources are matched with the size of customer base on a

continuing basis. Until recently, oblivious to the emerging possibility of creating a large
consumer finance market, banks were closing down branches and laying-off employees.
Admittedly, there was a need for pruning the banks of deadwood but voluntary retirement
schemes led to separation of many experienced hands who
13. 13. 13 Consumer Banking in Pakistan (Consumer Behavior) could have been re-deployed in
consumer finance units because they knew the essentials of risk assessment. Banks will now
have to inject fresh (and inexperienced) blood in their organizations to support their
consumer finance operations. Admittedly, consumer finance spurs consumption and demand
that is necessary for the industry to expand its productive capacity or make fuller use of its
existing excess capacity, and succeed in cuffing prices at the retail level. It also offers the
prospects of increasing employment and, possibly, fresh investment in industrial sectors,
especially those producing consumer durables. However, the key to sustaining the
consumption-demand equation without pushing inflation to unsustainable levels is the
maintenance of the critical balance between savings, investment and borrowers' debtservicing ability. There is considerable truth in the observation that lowering of interest rates
by Central Banks in the mid-1990s, ostensibly to spur demand and economic activity,
resulted in acquisition of excessive amounts of "easy" bank credit by businesses and
creation of over-capacity there from. Similarly, households too acquired credit (far in excess
of their capacity to save and repay) for investing houses, consumer durables and company
shares on visibly inflated prices. The credit boom, and the demand created there from, led to
meteoric rises in prices and deluded industry into over-investing in capacity building.
Eventually, unsustainable burden of debt-servicing forced businesses to crash, and
households ended up with negative equities. Maintaining the critical balance between
savings, investment and borrowers' debt-servicing ability is possible if input prices remain
stable affording businesses to sustain their profitability, and interest rates too remain stable to
ensure that, in the medium term, debt-servicing burden remains affordable for both
consumers and manufacturers. Unless the system can ensure the maintenance of this
delicate balance, economic instability will remain a strong possibility. Countries that tried to
achieve an over-kill in spurring domestic demand sometimes overlooked the importance of
maintaining this critical balance. We too are trying to achieve the same objective but
regulators must ensure that we don't fall in that dangerous trap. Pakistan's economy, already
rendered fragile by industrial sector loan losses, simply cannot live through another major
upheaval caused by pervasive delinquency of consumer loans. Articles # 1 Citibank has
announced that it is wrapping up its consumer banking operations in Pakistan and has
entered into an agreement with Habib Bank (HBL) to sell its credit card and consumer
lending portfolio, according to a press release. Citi Pakistan will work with HBL to ensure a
smooth handover during the transition period. The announcement was made at a signing
ceremony held in Karachi, attended by HBL and Citi Pakistan representatives. Speaking at
the occasion, HBL President and CEO Nauman Dar said, HBL will continue to be a key
developer of consumer finance products in Pakistan. The acquisition is part of this
commitment and ties in with the banks mission of creating value for stakeholders, especially
our customers.

14. 14. 14 Consumer Banking in Pakistan (Consumer Behavior) Nadeem Lodhi, Citis country
officer in Pakistan, said, Citibank was a pioneer in growing consumer lending products in
the Pakistani market and has since contributed to strengthening the consumer banking
landscape in the country. We have had the privilege to serve our clients, whose discerning
requirements and standards were met through our global banking platform. We look forward
to working with HBL, to ensure a smooth transition for our customers. Citi Pakistan will
continue to focus on its core business of corporate and investment banking serving our
multinational, public sector, financial institutions and top-tier local corporate client base,
Lodhi added. Article # 2 Weak economic conditions hitting retail banking hard KARACHI:
Pakistans retail banking market is undergoing difficult times due to weak economic
conditions, banks rising non-performing loans and the lack of effective foreclosure laws;
however, local financial players try to retain this market by acquiring retail or consumer
lending portfolios of the foreign banks, experts said. The deal for the acquisition of Citibanks
(Pakistan operations) consumer business portfolio with the Habib Bank Limited depicts this
trend. The deal is expected to be finalised by the end of this fiscal year. The financial experts
said the acquisition of retail lending portfolios reflects the very real appetite for profitable,
high quality consumer assets in an environment where deposit growth is outpacing lending
growth, particularly in terms of consumer lending. Despite this appetite, however, the banking
sector has been unable to grow their consumer lending portfolios through fresh exposures to
new or existing clients. Banks participating in the retail lending market took significant hits
to their profitability during the last credit crisis and the memory of those losses is reflected in
the generally conservative underwriting policies being followed by most banks, Naseer
Hasan, head of consumer banking at Standard Chartered Bank, said. He also said that the
regulatory framework for consumer lending, tightened during the last credit crisis, further
ensures that the growth in the consumer lending sector remains measured. The use of
positive credit bureaus during the last six to seven years has excluded several consumers
from the lending market due to their past credit history and the reluctance of banks to bet on
these consumers again, he said. The legal environment in the country in recent times has
not helped the banks in terms of collections or legal actions against defaulters, he added. He
was of the view that the lower interest rates have yet to translate into lower customer rates for
consumer lending products. The banks have yet to come up with the cost models for their
retail lending operations that would allow for lower rates and more sustainable profitability.
Big banks sell their specific segments and the practice to divest business from one
geographical area and investing in another is very common among the American and
European banks due to a number of reasons such as weak economic conditions, new
regulations and capital adequacy ratio, another banker at a leading commercial bank, said.
He said that after the financial crisis, several western banks preferred to concentrate on their
home
15. 15 Consumer Banking in Pakistan (Consumer Behavior) or similar markets.
Barclays, HSBC and RBS are in the process of shrinking the operations from different
regions such as the Middle East. Citibank is divesting its consumer banking
operations from Pakistan but it will remain operative in the investment and
corporate banking as per its global strategy, he said. There are many

geographical areas where Citibank is providing corporate and investment banking to

the big deal tickets only. This is the history of Citibank. HBL credit card segment
was weak and Citibank has good customer built. So, after the acquisition, HBL will
be in a better position to grab the credit market, Muzzammil Aslam, a senior
economist, said. To a question why Citibank decided to exit from Pakistans
consumer market, he said, in the presence of local five big banks, foreign banks
have very small opportunity to grow. In Pakistan, third-tier banks are facing
difficulties in meeting the capital adequacy requirements, therefore, these banks
are going for merger and acquisitions. In this particular transaction, there was no
level-playing field provided by the regulator to the interested parties. The MCB Bank
was keen to acquire the consumer business of the Citibank but the central bank
granted the approval to start the process of due diligence very late. Somehow, the
regulator denied new entrants to come into the process of due diligence. It could be
better if more big players were there, he added. Bank Alfalah was inclined to buy
the Citibanks consumer portfolio, however, later it withdrew from the race.
REFERENCES: History :
14. going for merger and acquisitions. In this particular transaction, there was no level-playing
field provided by the regulator to the interested parties. The MCB Bank was keen to acquire
the consumer business of the Citibank but the central bank granted the approval to start the
process of due diligence very late. Somehow, the regulator denied new entrants to come into
the process of due diligence. It could be better if more big players were there, he added.
Bank Alfalah was inclined to buy the Citibanks consumer portfolio, however, later it withdrew
from the race. REFERENCES: History :