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Consumer Banking in Pakistan – a trap or solution?

In 1994 , the Borld Bank decided to do a review on the potential for consumer banking in Pakistan, market dynamics within the country and its impact on the consumer population, their buying power and overall business banking options.Traditionally, the core purpose of consumer banking was coined as the provision of product and services to meet the financial needs of individual with a steady and verifiable income flow and to improve customer standards of living by granting structured credit facilities to acquire basic necessities such as residential homes for living , cash to spend and vehicle purchase and investment plans for families and their children.

The report also indicated the risks associated with extending credit to all income groups and special criteria were established to ensure that people who were earning up to a certain sum of money in local currency should be given a multiple of their incomes as spending limits as a substitute for cash. The warnings were given to governments in those days and were obviously ignored as foreign investments were and are always  looked at , as  the key growth engine of the Pakistans economic prosperity. Plus,  borrowing  was an alien concept to the local public – the perfect jackpot for foreign investors and profit machine for foreign banks and most of their profits are sent back  over seas to the shareholder as opposed to being reinvested within the country.

In a country where over 80% of the wealth is accumulated by a mere 10 % of the population , the average man out there earns less than  $2 a day – which is way below poverty line and then suddenly ,  the thought of being able to spend 10 times more than what you are earning is nothing less than the eternal dream for the average customer.

The report also highlighted the risk of a sustained compulsive dependency on credit consumption through banks and the inability of people to maintain constant payback patterns in the long term , as our economy is primarily cash based where you pay for what you buy based on your income out of your saving pools.

Clearly, we as consumers were not aware of the hidden risks of associating with aggressive lending practices by banks.  A person earning PKR 10,000 in those days now had his own spending cash limit 5 times more than his earning. A new buzzword was coined : Buy Now – Pay Later.  You  could  buy anything from a shop , get your fuel tank filled , buy clothes and shoes for your  children  , get a ticket to go anywhere .

Welcome to the Jungle – it was banking for the people by the people in Pakistan , one of the poorest countries of the world – creating a lifestyle boom within every sector and class of our social fabric . Fatal attraction – easy money – unlimited options !

Local and foreign banks started issuing credit cards with attractive features to lure cash craving customers who went ballistic spending way beyond their means buying almost everything that they could  get their hands on , without realizing that one day they have to pay back to the banks at twice the cost or face unlimited extra financial charges. Earlier banks like Citibank and ANZ Grindlays were ahead in the race and were dominating the foreign bank sector in those days, becoming pioneers in serving the newly built market segments and decided to target the salaried class segments of society within key cities of Pakistan and then further expanding into urban and rural cities.

On the flip side , the World Bank report was ignored and warning signs were kept aside and people went on with their lives . The fact remains that banks will always find ways to flood the markets and charge people higher due to the  immense risk appetite in this market for them to play with and people will always end up  utilizing those services at a higher cost to their pockets simply because it looks good, feels great and one can always pay later –a typical lifestyle move. What banks  offer is a temporary solution and take little or no responsibility of future risk for the customer, that remains hidden under the perpetual blanket of consumer financing.

The big difference in our societies versus the west was the sheer dependency on our own savings versus borrowed cash as in the west.  We were better off in those days without the burden of debt and were not in the rat race to go on spending recklessly but the whole new world of easy money and plastic cards was thrust upon our consumer  with stylish marketing campaigns and advertising – by all banks and lending institutions . 

So the journey carries on.  Over the year , people got accustomed to spending , going from one bank to another in the hope to accumulating financial wealth or so they thought it was ,  the wealth that would be everlasting.  

Pakistan has one of the largest banking spreads in this part of the world with the deposit to lending ratio being the highest touching anywhere between 10 to 12% on average and almost all the banks are aware of the impact that has on the customer . A traditional conventional mode of banking in the eighties was more focused towards tailored solutions to enhance savings and providing options for people to place their funds and earn adequate profit on their earnings and securing their future , where as banking in the post nineties era  was all about creating maximum market share and building sales momentum , generating revenue through collecting funded income ( interest income ) and non funded income (annual fees ) to create ultimate profit maximization at all costs.

If a bank is earning in millions but is giving profit at the rate of 2% a month to the depositor while lending the depositors money forward at  12 to 13% in  the market , an average spread of 10% or higher is generated making huge profits to the bank itself while the average customer hardly makes a happy profit over his savings. Ideally , the deposit rate should nullify the inflation impact and not fall below the inflation rate. Credit cards have APR -Annual percentage rate , that the bank charges the customer on an annual basis , again ; one of the highest APR s touching 35 to 40 % which is the real killer cost to the customer. There are other ways to also make money of customers through late payments charges , limit enhancement charges , card renewal and replacement fees and financial charges on revolving the balance etc.

Post 2008 , the recession hit the world of consumer banking where most banks reduced lending by shutting off consumer banking businesses across the world and shutting down their branch networks and off setting their operating and fixed costs and one of the primary reasons was the ratio of NPL s – Non performing loans , in their credit cards and personal loans business referred to as unsecured lending  ( without collateral ) as well as home financing and auto sales ( secured lending against collateral ), arising out of the sheer inability of customers to pay back what they owe and finally the issuance of Debit . A difference between a credit and a debit card is that former gives you the option to revolve your outstanding balance by paying it off at a later date in coming months with interest – something that was discouraged back then by policy makers of the world but continued as a practice in Pakistan , while the latter gives the choice of buying what you need but paying it off at the end of the month as the money is debited through your bank account every time.

The future holds challenges where there will be an absolute customer demand for higher saving rates and better services and for banks to be more lenient credit policies towards collections or recoveries of loans, ensuring central bank support to ensure customer safety and comfort . Above all , customers need to educate themselves more in order what kind of consumer banking products they really require by being able to   be well formed and above all – to live within optimal means so that they save money for their future.

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