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FINANCING IN
PAKISTAN
Term Report
Aamir Basrai
8265
What is Consumer Financing?...........................3
Credit History....................................................4
OF Mortgages Calculator........................................5
Summary........................................................16
A loan gives you the money you need to pay for something big like a house, a
car, college tuition, or major home repairs when you don't have the cash to
cover the purchase. While small purchases can be paid for in advance with a
credit card. Most people could not afford to do these things without finance.
Home loans
Student loans
Car loans
Personal Loans
Credit Card
Debt Consolidation
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Consumer Financing in Pakistan Financial Institutions
A credit card is a plastic bank card with a magnified strip. Like all bankcards it
enables consumers to make purchases and withdraw money up to a limit set
by the providing financial institution. Unlike debit bankcards this provides the
convenience for the consumer to purchase products immediately and pay for
the cost of the goods later.
Most credit cards can involve no initial interest, but the full price of the
purchase or withdrawal must be paid for within the specified period which
could be from 30 to 90 days depending on your institution. If it is not paid by
the specified date, it may require interest payments. In conjunction with this
purchase repayments there is usually an annual fee charged on most credit
card accounts for their convenience.
CREDIT HISTORY
This area provides information about a consumer's credit history, why it is
important and the issues faced if you have had a bad one.
All applicable financial institutions that by law are allowed to lend such as
banks use a persons credit history (which is a score compiled on a persons
previous credit) in the process for approving there loans. These financial
institutions evaluate the potential risk by providing the recipient a loan and
the probability that the they would be pay it back including mitigating the
potential loss due to the inability of loan recipients to pay back the loan.
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Consumer Financing in Pakistan Financial Institutions
A bad credit history can pose problems when trying to attain financing from
institutions that have strict credit history requirements. With a bad history
you may still be able to attain financing but at a higher interest rate which
many institutions may offer to offset the potential risk of the bad history.
MORTGAGES CALCULATOR
Provides information about Mortgages Financing including renting vs. buying,
variable vs. fixed and home loan benefits.
As you pay off the loan initially a large portion of your loan repayment will go
towards the interest. However as the borrower pays off the loan, more of the
each monthly payment goes to the principal and less towards the interest
eventually paying off the loan.
Variable rate depends on the official interest rate set by the central bank of
each country. This rate in conjunction with the banks spread forms the
interest rate. This variable rate can fluctuate depending on central bank
strategy, by cutting interest rates, there will be a reduction in repayments
and increasing interest rates means an increase in repayments to your
lender.
Fixed rate is a fixed interest rate set by the agreement with your financial
institution; this rate is set for the life of the loan period agreed upon with your
institution. This means you will have a set repayment to pay consistently
through the life of your loan.
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Consumer Financing in Pakistan Financial Institutions
Buying a house has its positive and negative aspects and so before deciding
whether to go ahead and purchase that home, look at the pros and cons in
conjunction with your situation and decision will be appropriate for you.
ADVANTAGES OF BUYING
Build Equity. As you are making your mortgage payment, you're building
equity. Equity is the portion of the property that you actually own through
your payments, versus the portion that you still owe the mortgage lender.
The longer you stay in your home and the more mortgage payment you
make, the more equity you'll have. This may assist you in using your equity in
purchasing another property or another useful investment.
Stability and Freedom. By owning your own home you can decorate and
renovate your home whichever way you like. Also staying in a common
location for a number of years will provide a stable environment for children
growing up.
Financial Credibility. Owning your own home helps you establish financial
credibility with banking institutions which can help if you intend to finance in
the future.
Pride. A house is only a building while a home is when people living within
its walls. Owning your own home provides owners with the sense of pride and
satisfaction knowing that they created, renovated and enjoyed times within
their home.
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Consumer Financing in Pakistan Financial Institutions
Buying a house has its positive and negative aspects and it is not for everyone. Depending on your
life style and stage in your life it may or may not be the right time to buy a home.
DISADVANTAGES IN BUYING
Larger costs then renting. Not only now will you be paying a monthly
mortgage but include the added costs of maintenance and repairs.
Bad Area. Depending on the area you moved to could have implications on
your long term ambitions; this can require living through a period with bad
neighbors, unhelpful council and many other problems that can plague an
area. After you've bought a home, you may not have as much flexibility in
choosing a new location or job.
Inflexible to job opportunities. After you have bought your own home there
will not be as much flexibility in choosing a new job in another location.
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Consumer Financing in Pakistan Financial Institutions
A personal loan is a loan to an individual that can be used for almost any
purchase, including purchasing cars, schoolbooks, and holidays or paying off
existing debts. The lending criteria can be structured to meet different
individual’s requirements:
Usually the key aspects in guiding the lending institution of the amount to
borrow can include:
How much income do you earn per year – Providing pay slips
How long you have been at this employment
Good credit rating
Personal loans are considered more risky than other types of loans. Borrowing
to purchase a home is considered a good business decision as well as
borrowing to invest in a newfound business. These types of borrowing tend to
convince lenders that they are of lesser risk. However personal loans can be
used for virtually any purpose and this lack of certainty in investment
decision provides lenders with higher risk of default.
A financial institution may provide a secured personal loan with the offer
lower interest rates if security is used against your house or some other
security. In case of default the lender is able to seize/claim the security.
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Consumer Financing in Pakistan Financial Institutions
The length of the loan affects how much interest is actually paid. The longer
the period of the loan, the more interest you would have to pay.
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.
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Consumer Financing in Pakistan Financial Institutions
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.
For the past 55 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 1990s, 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 traveling 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.
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Consumer Financing in Pakistan Financial Institutions
consumers' capacity to repay their loans on time, and they feel confident
about borrowing again and again.
Low rise in per capita incomes (whose impact was compounded by falling
their purchasing power due to rapid depreciation of the Rupee) caused
savings to fall and poverty to rise. This combination steadily depressed
demand even for the less expensive consumer durables.
It would therefore be unwise to assume that ordinary consumers will have the
capacity to re-pay loans out of their savings. Even in good times, ordinary
Pakistanis were unable to save more than 14 per cent of their disposable
incomes. In the current scenario, capacity of the lower middle class - current
target of the banks - to save has only worsened.
With banks now offering liberal consumer finance facilities for acquiring home
appliances, their prices too are on the rise although excess manufacturing
capacity in this sector may encourage the less greedy manufacturers to
concentrate more on stretching demand by refraining from pushing up prices.
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 optimistic observers make it out
to be.
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Consumer Financing in Pakistan Financial Institutions
Banks providing cheap credit to business and industry at the expense of their
depositors can exercise a powerful influence on the manufacturing sector to
push the case for compensating 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.
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 labor 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.
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Consumer Financing in Pakistan Financial Institutions
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.
Given the absence of credible sources and bases for assessing risk, dealing
with thousands of small borrowers makes consumer finance 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 bank’s infrastructure and a change in the focus on investigative effort for
risk assessment.
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Consumer Financing in Pakistan Financial Institutions
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SUMMARY
However, the report said, the manner in which consumer financing was being
delivered had seriously jeopardized the competitiveness in economy.
The most important issue is that Pakistan has one of the highest interest rate
spreads in the world, Hamid Siraj of the CRCP said while explaining details of
the report.
He said that an analysis of the interest rate behavior in Pakistan showed that
the spread had vacillated between 5.95 and 9.58 per cent during the period
from 1990 to 2005. In recent years, the spread has exceeded seven per cent
on an average.
The report says the high interest rate spread indicates that competitiveness
in the banking sector in Pakistan is either absent or very poor. This issue is
largely attributed to weak regulation of interest rates despite the fact that the
SBP has powers to control the spread through monetary policy. While non-
operating loans and high administrative costs could be considered as major
reasons in countries where the spread is high, these cannot be said to be true
of Pakistan because banks are earning huge profits at the cost of savings of
depositors. High interest rate spread is damaging the competitiveness in the
economy in general and in the financial sector in particular.
The report says the State Bank should exercise its powers to determine a
reasonable rate of returns for banks as well as depositors. As a matter of
priority, the interest rate spread should be reduced, at least, to the level of
average spread in the South Asian region.
The report says that another critical issue is that almost all consumer loans
are on the basis of variable mark-up, which has reduced the loan-servicing
capacity of borrowers due to progressive increase in the rates. In addition,
the growth in consumer financing has put great inflationary pressure on
economy.
Drawing on secondary data sources and user surveys, the study covers all
main consumer financing products, including credit cards, car financing and
leasing, personal loans and house financing. It provides evidence-based
proposals for designing and implementing strategic and practical
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Consumer Financing in Pakistan Financial Institutions
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