Prevalence of uncertainty in consumer finance

Consumer finance is in inverse proportion to discount rate. There is no denying that low discount rate all over the globe is an indication of spike in consumer finance. Low discount rate undoubtedly underpins the consumer financing opportunities substantially both in developed as well as developing and even in the rickety economies. Decisions are taken by the central banks in liaison with the finance ministry all over the world to decelerate discount rates to substantiate economic growth during trying times which holds true in particular during the preceding two years of the pandemic.

The policy interest rate in Pakistan was 13.25% in November 2019 prior to the outbreak of coronavirus. However with the emergence of Covid-19, there was a drastic curtailment from 13.25% to 7%in a short span of time from March 2020 to June 2020 in order to deepen the momentum of economic growth. The central bank did not hike the discount rate for quite some time i.e. 15 months until recently with the trivial increase of 25 basis points effective from October 1, 2021. Even with this increase the discount rate at 7.25% is rather low to underpin consumer finance business.

Ideally consumer finance should witness an unprecedented growth in the given situation when the policy interest rate is 7.25% however taking stock of the inflationary pressures in the wake of exorbitant food prices and the unemployment woes with 16% uneducated and 24% graduates suffering from unemployment, one could gauge that consumer finance would be abysmal during the current fiscal year in Pakistan.

Auto financing being the largest component of consumer finance may witness a steep decline in the wake of spike in prices and also owing to certain government decisions to discourage less consumption of the imported fuel which in essence is wreaking havoc on the current account of the economy. It is staggering to know the sheer volume of housing and construction finance which has taken precedence by virtue of the government policies. Banks have almost met their target of disbursement so far and it is expected that there might be robust growth in this type of consumer finance during the current fiscal. Users of the credit card seem to be shying away vis-à-vis the preceding years. The distinct decline in the use of credit card may be attributed to the pandemic woes and also to religious factor, to some extent.

There are plenty of opportunities to the consumers to avail financing facilities for home appliance and other consumer goods. They are not confined to the financial institutions only. However, there is every reason to assume that downside of inflation coupled with uncertain economic condition of the country might impel consumers to exercise caution in terms of their spending patterns. The good news for the consumer finance business is the setup of a TV plant by the South Korean technology giant, Samsung Electronics, in collaboration with a Pakistani partner which is going to be functional by the end of this year with the production capacity of 50,000 units per annum. This might underpin the consumer finance in the wake of relative lower prices. Moreover, the fabrication of Samsung’s mobile devices in Pakistan is another upside for the consumer finance down the line.

The Asian Development Bank’s anticipation of Pakistan’s economic growth rate at 4% vis-à-vis 4.2% growth forecast by Fitch Solutions against Pakistan government’s FY22 budget target of 4.8% does not seem to have a positive impact on the consumer finance business in Pakistan during the current fiscal year since other factors might stave off the expected growth.

Since the lockdown restriction are diminishing in North America and Europe which are export destinations for Pakistani textile goods, this might generate employment opportunities which eventually would enhance the purchasing power bolstering consumer finance business down the road. Certain critics fulminate against consumer finance business assuming that this is detrimental to the private-sector lending. Their rationale is that consumer finance takes the share of private lending hurting the industrial growth. It is essential to maintain tradeoff so that all sectors of the economy have their due share in the prosperity of our beloved homeland.

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