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Reducing interest rates help spur consumer financing

Reducing interest rates help spur consumer financing

Interview with Ms. Natasha Haseeb — an analyst 

PAGE: Tell me something about yourself, please:

Natasha Haseeb: I am an anchorperson at Pakistan Television News. I have done my MPhil in Political Science from the University of Karachi and about my professional life I am conducting a business show named ‘Baat Karobar Ki’ which includes the different aspects of businesses, investments, economy, and stock market of the country, with different segments and making it interesting day-by-day because of the quality of content, participants we invite and the authenticity of news and information. About my personal life, I am very friendly by nature, talkative and jolly with friends.

My enthusiasm and strengths are my research, the way I ask questions and the angles of my analytical approach. I have conducted a lot of interviews of different people, business community individuals, industrialists, dignitaries, economists and experts from different sectors who are very competitive. About my leisure time, I enjoy spending time with my family, friends: sometimes cooking, listening to music, watching films and dramas, reading, traveling, playing games etc.

PAGE: What is your take on the evolution of the consumer financing portfolio?

Natasha Haseeb: In my opinion, consumer finance serves as a source of financial stability and uplifts economic and social status. Continuous growth in the consumer finance portfolio of the banking sector in recent years has produced a debate, mostly critical of its alleged role in inducing consumption-led growth in the economy. The general perception is that consumer finance has created problems for less financially literate customers. It is necessary to explore some of these perceptions and data and evidence in perspective which will take so much time to explain but just cut and crop the detail while taking into account the high sensitivity of these loans to increasing interest rate dynamics. Notably, the household sector in Pakistan is under-leveraged by global standards, and emergent risks are well-managed by the banking sector.

PAGE: Which factors are responsible for the widespread popularity of consumer finance in Pakistan?

Natasha Haseeb: The popularity of consumer financing in Pakistan is spreading in a way, banks providing such access that leads to purchasing power to the middle-class consumer has been the most significant achievement of this product class. It allows people to raise their living standards by enabling them to afford various consumption goods, which previously might have been out of their reach. Most importantly, it cut out the fine line of luxury creating an overall demand for goods that were treated as luxuries. Hence, this also leads the manufacturing sector to expand its capacity, achieving a scale economy and consuming its benefits. Similarly, a lot of other socio-economic development and consequences can be noted due to furthered consumer financing; certainly, banks have played their due role in promoting economic development in Pakistan.

However, there also exists the other side of the coin the path of such financing is likely to have challenges too since introducing consumer financing services might incur short and long-term impacts. From an economic perspective, there is tension lies between creditability and capability. Consumer financing always appears worthwhile to take on, however, without a sound policy and an ability to repay, it might backfire on the consumer.

PAGE: Your perspective on various categories of consumer finance?

Natasha Haseeb: Consumer financing has expanded in Pakistan at an unprecedented growth rate over the last two decades. The banks have intensively capitalized upon the demand for consumer financing and earned record profits within the generous space for credit policy provided by the State Bank of Pakistan (SBP). This space has further motivated the banks to get into unsolicited financing by aggressively marketing products even where no genuine demand exists. Despite that a regulatory framework is in place, the banks appear to have failed in terms of full compliance with SBP regulations, and in satisfying the majority of their customers against various service parameters.

At the macroeconomic level, consumer financing has significantly contributed to economic turnaround by stimulating consumption and investments. There has been a phenomenal increase in private consumption due to the easy availability of credit from banks. However, in tandem with this development, the manner in which consumer financing is being delivered has seriously jeopardized the competitiveness of the economy. A cartel-like pattern appears to have emerged in the banks, given that the interest rate spread is among the highest in the world. Moreover, consumer financing has a significant impact on inflation, which is rising sharply. In the face of the economic challenges facing Pakistan, the SBP can no longer afford to overlook the state of poor competition in the financial sector.

PAGE: Do you presume access to and growth in, consumer finance carries both social and economic significance for society?

Natasha Haseeb: The problems in interest rate spread and service delivery notwithstanding, consumers have benefited a lot from the consumer-financing sector. A large number of people have been able to meet their real needs by accessing credit from the banks. Therefore, steps need to be taken for the sustainability of this sector. This requires the banks to develop data-based lending strategies to manage the risks associated with this sector. But in these times, high-interest rate spread is damaging the competitiveness of the economy in general, and in the financial sector in particular.

Further, huge profit margins of banks at the cost of depositors‘ savings cannot be justified on any ground whatsoever. The SBP should exercise its powers to determine reasonable rates of returns for the banks as well as the depositors. As a matter of priority, interest rate spread should be reduced, at least, to the level of average spread in the South Asian region.

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