Important segment of banks
INTRODUCTION
Consumer finance is a recognized financial invention across the world, mainly in established
economies, where it constitutes important segment of banks lending range/portfolio. In the
Pakistani banking segment, though, the progress of the consumer financing range is a latest
experience, as banks have habitually paying attention on lending to the corporate segment and
public sector entities.
In the previous 5 to 6 years, consumer banking had an extraordinary expansion in Pakistan. This
extraordinary expansion has followed privatization of state-owned banks, banking reforms
brought regarding via the SBP and progressively more market oriented approach principally
meant by banks at a huge urban consumer base. Whether large banks or small, international or
national, all of them is geared towards creation of its spot in an already cutthroat setting which
is the effect of consumer banking, international banks such as standard chartered, Citibank and
ABN AMRO have the hold up of the information base and finances of their overseas principals
which is made them first to bring in consumer products in Pakistan.
UBL, HBL and MCB were the recently privatized banks which have engaged in consumer
financing actions not only in big cities but also smaller ones too. Due to their massive branch
set-up they generated high volumes of dealing but also at the identical time reducing the prices
of their products and services they offer. In year 2002, HBL's consumer banking range was value
less than a billion rupees but at the end of year 2004, it is value 17 billion.
A set of factors is accountable for the extensive attractiveness of consumer finance in recent
years: the financial liberalization progression over the previous decade or so, has led to the
formation of a banking system which is mostly owned and operated by the private segment.
Secondly, the invasion of liquidity in the banking segment from fiscal year 2002, forced banks to
diversify and enlarge their income base by venturing into formerly untouched areas and third,
the easy monetary procedure attitude of the SBP from 2002 to 2005 provided appropriate
customers with financing options at little rate to meet up their consumption demand.
Under the supervision of the State Bank of Pakistan, all banks and DFI's work. State bank of
Pakistan divided the operations of the banks into four main segments which is Corporate,
agriculture, SME and consumer. All those banks which operate in Pakistan should follow the
regulation made by the state bank of Pakistan.
Problem definition:
In a very little time span of consumer banking in Pakistan, it has made an outstanding progress
and performed a very positive role in boosting our economy and also in meeting the needs and
necessities of the customers. Whether large banks or small, international or national, all of
them is geared towards creation of its spot in an already cutthroat setting which is the effect of
consumer banking. Due to growing economy of the country and betterment in the level of
household income in Pakistan have formed many more opportunities for consumer banking.
But at the same time it has also some drawbacks in their regulation and also difficulties for
borrowers and lenders in the current system. In this research statement the present, past and
future of the consumer banking industry will be analyzed.
Problem Statement
The problem statement of my research is,
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"Need and Scope of Consumer Banking in Peshawar"
I will only focus on this very factor and its effect on the lenders, borrowers and economic
growth.
Objectives of the study
In this study, it will try to take out the problems in the present structure of consumer banking
from both borrowers and lenders point of observation and also will try to find out the
opportunities in consumer banking in the coming future.
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Hurdles/problems faced in the existing system of consumer banking.
Consumer banking function in country economic growth.
Exploring opportunities in the field of consumer banking in future.
Local and foreign banks assessment/comparison by their services.
Scope of work
The region under attention is needs and scope of consumer banking especially in the area of
Peshawar. As consumer banking segment is a fast growing sector of both local and
internationals banks in Pakistan but facing issues like, problems in consumer banking system.
For that reason some of the banks for the time being stop consumer financing. Beside this some
other banks have not yet provided full consumer banking.
What are the opportunities in consumer banking and its result on economic growth of the
country will be analyzed. But due to the time restraint and lack of experience with research
study their many be some area remain uncovered.
Assumptions
For this research, I am taking some assumptions.
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In consumer banking industry, equally borrowers and lenders are confronting problems.
Huge interest, incorrect policies, lack of learning, etc are the factors for the turn down of
industry.
Consumer banking has a bundle of potential to rise in Pakistan.
Research Methodology
The population for my research consists of both genders of diverse ages who are working in
banks and also from the customers 0f the bank that has an account in any of the bank of
Peshawar region. In total sixty-five samples, researcher will be taking from customers out of
hundred forms and thirty-five from the banks employees.
There will be different survey forms for both bank employees and customers through whom
researcher can be able to identify troubles for both lenders and borrowers and their solutions
in the area of consumer banking. In this research the researcher will target both local and
foreign banks working in Peshawar. Along with survey forms researcher will also take interviews
from managers of different banks.
All these survey forms and interviews will be from the employees working in banks and
customers of the banks in Peshawar region because in this research the researcher targeted
only the Peshawar region.
Sources of Data
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Secondary source: - Most of the secondary data is collected from different published
papers and from different websites on which relevant data is available. As on this area
we don't have sufficient data available specifically for Peshawar, so I could only
estimate/assume it from the whole Pakistan.
Primary source:-primary data will be collected through survey forms from both
customers and employees of the banks as well as researcher will take interviews from
managers of the banks.
Sample size: - My target are the customers and employees of the banks in Peshawar but its too
difficult to take interviews and fill survey forms from all of customers and bank staff, so
researcher will be taking a sample size of hundred (100) which include sixty-five (65) customers
and thirty-five (35) employees of the banks in Peshawar as well as five (5) interviews from
managers of the banks in Peshawar.
Inclusion criteria: - persons who has an account in any of the bank in Peshawar area and has
understanding of consumer banking will be included and employees who are currently on
services in banks of Peshawar.
Tools to be used: - I will be using two tools for taking information.
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Survey forms/questionnaires
Interviews
Study plan:Chapter- II of the research is based on the literature review (secondary data) and industry
overview which will give the researcher a base of the consumer banking industry in the
Pakistan, consumer banking products and services offering by the local and foreign banks and
their comparison and a short introduction of few banks.
Chapter - III of the research will be the research methodology, which consists of sample size,
population, and technique of the research and tools for data analysis.
Chapter - IV of the research is all about analysis and findings from the data which the
researcher collected from the customers and employees of the banks.
Chapter - V of the research will give recommendation and conclusion on the basis of the
research findings and analysis.
Literature review
Consumer financing has extended in Pakistan at an extraordinary speed over most recent seven
years. Banks earned record income within the generous room for credit rule provided by the
SBP. The important matter in consumer financing from national economy and individual
consumers point of view is, that Pakistan has the maximum interest pace spread in the world.
While result of Consumer Right Commission of Pakistan analysis with situation to auto loan, it
showed that the proportion of respondents whose request for car financing were discarded is
higher (24%) than the borrowers who are at present availing car financing facility (14%). Also
the report highlight the difficulty of credit card users, that 47 percent respondent complained
that without any information providing to us they renovate in the plan of charges, and 11.3
percent respondents which suffers because of hidden charges.[1]
Fast expansion in consumer banking range of the banking sector in current years has generated
an ensuing dispute. The general opinion is that consumer finance has created troubles for less
financially educated customers. In Pakistani banking sector it is new trend, while two key banks
take an initiate in introducing credit cards in banking segment in the mid of 90s but that was
just restricted to the salaried customers and businessmen. The financial liberalization
progression over the previous decade or so, has led to the formation of a banking system which
is mostly owned and operated by the private segment. Secondly, the invasion of liquidity in the
banking segment from fiscal year 2002, forced banks to diversify and enlarge their income base
by venturing into formerly untouched areas and third, the easy monetary procedure attitude of
the SBP from 2002 to 2005 provided appropriate customers with financing options at little rate
to meet up their consumption demand. Providing purchasing power to the medium class
customer has been the mainly important accomplishment of this product set. Not only people
been capable to high their standard of existing life by buying a variety of consumption goods
which were formerly treated as luxuries.[2]
Banking sector acted as a vehicle in the improvement of the economy of the Pakistan. The
development in the banking segment has not just in terms of asset expansion and profitability
but also in of diversification of products and risk profile. The banks have targeted some of the
formerly underserved segment like consumer finance which has witnessed significant growth in
the past few years. Main factors behind such a huge expansion in consumer finance might
includes little interest rates, flush of liquidity, product modernism, greater than before
competition, financial liberalization, and highly growing income level is the main cause of high
economic growth. At the same time, indefensible consumer expansion in less strong
macroeconomic environment, unsuccessful prudential and regulatory structure, not a strong
risk management system and lawful infrastructure can form systemic vulnerabilities. In 2006,
Consumer loans increased by 29 percent or increase of Rs72.4 billion and reached from 252.6
billion to Rs325 billion. Due to determined higher growth, the share of consumer finance in all
of the loans has increased to 13.5 percent in 2006 from 9.4 percent in which was in year 2004.
[3]
The increase in credit card purchases was corresponding by the expansion in credit extension to
further products such as individual loans, banks overdraft, car loans, store cards, payment of
utilities in debts, and increase in consumer credit via mortgage lending. All of these products
have its personal unique features, so that the consumer financial segment includes a blend of
credit and interest rate hazard in difficult economic and financial surroundings. Consumer
credit is huge not only in monetary expressions but also large numbers of customers involved
and also the impact on those who deprived of consumer credit. The enlargement in consumer
credit outstanding in the last 50 years is truly stunning. In the US and Canada for total trade
banking and consumer lending is huge, it cross over corporate debt by almost 50 percent with
household debt in the united states crossing $7.2 trillion in the year 2000, almost double the
value owed in 1990. Not all of this increase is because of borrowing on credit lines. Credit cards
have become more and more important as a method of wealth transmission. In the UK, 1316
million dealings by plastic cards in 1993 of which 724 million were by credit card compared with
3728 million dealings by cheque. But in year 2002 plastic card practice had overtaken cheque
practice with 4814 million dealings on plastic card of which 1687 million were by credit
cards.[4]
The present era of cutthroat competition, it becomes a requirement to success to have a huge
and successful selection of products and services through which the banks can encourage and
then triumph their customers. In consumer banking they offer such as loans, credit cards,
simple installments and many more. Not each bank could offer a credit card and not every one
of the banks could provide the services so consistently that do currently. There were few
international banks that attempted to provide anything remotely similar to consumer banking.
International banks such as standard chartered, Citibank and ABN AMRO have the hold up of
the information base and finances of their overseas principals which are made them first to
bring in consumer products in Pakistan. UBL, HBL and MCB were the recently privatized banks
which have engaged in consumer financing actions not only in big cities but also smaller ones
too. Due to their massive branch set-up they generated high volumes of dealing but also at the
identical time reducing the prices of their products and services they offer. In year 2002, HBL's
consumer banking range was value less than a billion rupees but at the end of year 2004, it is
value 17 billion.[5]
Commercial banks had entirely ignored consumer financing as an action Form almost fifty-four
years in Pakistan, There was negligible realization of the matter that the trademark of healthy
economies is not idealistically high dependence on exports but on demand nationally, and
expansion of indigenous resource and industrial bases that favors domestic utilization. The big
desirability in extending financing services to the passive consumer sector is the vision of
earning high interest rate, because consumers are flexible targets as far as haggling over
interest rates taxable to them are concerned. Banks are belatedly trying to rectify this huge
macroeconomic structural inequality but given the remarkable pattern of economic
developments, but their efforts to promote consumer finance. While lesser interest rates have
definitely enhanced borrowers' capability to borrow and service consumer loans, the recently
created demand is approaching prices of consumer durables to out of reach.
Consumer finance is an uncertain ball game. The well-known yellow cabs system was the only
big test in consumer finance in Pakistan, which was definitely a bad experience for nearly all
banks who took part in it. Admittedly, political twists played a giant role in the breakdown of
the system but operational inadequacies of banks played a superior role in this enormous
failure. A key factor in that failure was the operational deficiencies in banks, mainly in assessing
an individual's future refund capability keep in view his or her varying circumstances.[6]
In Pakistan, consumer finance regardless of fast growth in early period of 2-3 years has moved
towards declining. It has absolutely raised a lot of questions about its further prolongation and
growth in coming years. The mainly important query is: can it work as a medium of economic
development mainly at a time when exports have revealed slow growth, state saving rate is
low, inflationary stress is determinedly there over the three years, national and international
markets and economic group of actors have become extremely aggressive and banking sector is
highly concerned to defend its capital and enhance itself with higher profits on loans than
government's concern regarding boosting economic development. Lending by credit cards,
public/individual loans, automobile loans, loans designed for durables and housing finance
comes out the main products of consumer finance. They formed domestic insist and lending
policy by the banking sector in quite delicate ways. Consumer finance has also brought social
transform through huge circular of money and easiness of income constraints for borrowing
mainly among those medium class people. That was excited to become main part of rising
economy and benefit from economic growth. The genuine beneficiaries of consumer finance
are those people/citizens who did not have capability to purchase luxurious household items in
a solo go but could pay for them due to consumer finance; the profit-making banks due to
consumer finance have been earning huge interest and high returns on their investment and
the economy that got momentum for growth.[7]
References:
1. Khalid, S. (2008, July 28). "Consumer financing expands at high rate". The News.
2. Babar, S. Z., Iqbal, J., and Afzal, R. (2007-8). "Perspectives on Consumer Finance in
Pakistan", Financial stability report, pp 87-88.
3. Malik, L.F., Rizwan, M., and Ali, A. (2006). "Consumer sector", Banking system review, pp
24-25.
4. Thomas, L.C., Oliver, R.W., and Hand, D. J. (2005). "A Survey of the Issues in Consumer
Credit Modelling Research", The journal of the operational research society, Vol. 56, No.
9, pp1006-1008.
5. Ahmad, S. I. (2005). "Consumer banking in Pakistan", Marketing association of Pakistan.
6. Shahid, A. B. (2003, March 10). "Consumer finance: what are its chances of success?"
7. Sharif, M. (2008). "Trends in consumer finance and implications for macro-economic
indicators", business and finance review.
1. Khalid, S. (2008, July 28). "Consumer financing expands at high rate". The News.
2. Babar, S. Z., Iqbal, J., and Afzal, R. (2007-8). "Perspectives on Consumer Finance in
Pakistan", Financial stability report, pp 87-88.
3. Malik, L.F., Rizwan, M., and Ali, A. (2006). "Consumer sector", Banking system review, pp
24-25.
4. Thomas, L.C., Oliver, R.W., and Hand, D. J. (2005). "A Survey of the Issues in Consumer
Credit Modelling Research", The journal of the operational research society, Vol. 56, No.
9, pp1006-1008.
5. Ahmad, S. I. (2005). "Consumer banking in Pakistan", Marketing association of Pakistan
6. Shahid, A. B. (2003, March 10). "Consumer finance: what are its chances of success?".
7. Sharif, M. (2008). "Trends in consumer finance and implications for macro-economic
indicators", business and finance review.