- Pakistan is likely to make significant progress in the coming years
The concept of consumer finance dates back thousands of years, to the earliest civilizations in Mesopotamia and Egypt. In these societies, merchants and moneylenders would provide credit to customers who needed to purchase goods or services but did not have the immediate funds to do so. Over time, this system evolved and spread throughout the world, becoming a key feature of many different economic systems.
In the middle ages, consumer finance was largely controlled by the Catholic Church, which forbade the charging of interest on loans. This meant that many moneylenders and merchants had to find other ways to make money, such as charging fees or taking a share of the profits from a business. However, by the 16th century, the Protestant Reformation had led to a relaxation of these restrictions, and interest-bearing loans became more common. The Industrial Revolution brought significant changes to the world of consumer finance. New technologies and production methods made it easier and cheaper to produce goods, which in turn led to increased demand for credit. Banks and other financial institutions began to emerge, offering a range of services such as loans, savings accounts, and insurance policies.
In the late 19th century, consumer finance truly began to take shape. The introduction of department stores and mail-order catalogs gave rise to installment credit, which allowed consumers to pay for goods over an extended period of time, rather than all at once. As the 20th century dawned, consumer finance became even more prevalent. The automobile industry, in particular, played a significant role in the development of consumer finance. Auto manufacturers offered financing to buyers, and banks soon followed suit, offering auto loans as well as personal loans.
In the United States, consumer finance began to take shape in the late 19th century when the first consumer credit bureau, the Retail Credit Company (now known as Equifax), was established in 1899. This company collected information about individuals’ credit histories and sold it to merchants and lenders. The credit bureau’s system enabled lenders to assess the creditworthiness of their borrowers and determine their likelihood of defaulting on loans. The early 20th century saw the establishment of a number of financial institutions specializing in consumer finance. In 1911, the first installment loan company, Household Finance Corporation, was established. This company provided loans to individuals to purchase household items like furniture and appliances. In 1934, the Federal Housing Administration (FHA) was established to provide mortgage insurance to lenders, thereby enabling them to offer low-interest mortgage loans to individuals.
In the post-World War II era, consumer finance grew rapidly, driven by economic growth and rising consumer demand. The introduction of credit cards in the 1950s revolutionized consumer finance by making it easier for individuals to borrow money. The use of credit cards grew rapidly, and by the 1970s, they had become a major form of consumer credit. In the 1950s, the credit card was invented, which revolutionized consumer finance. With credit cards, consumers could make purchases without needing to have cash on hand. Credit cards allowed for the rise of a new type of credit, revolving credit, where consumers could carry a balance and make payments over time. In the latter part of the 20th century, the growth of the financial sector led to the development of new types of consumer credit, such as payday loans, title loans, and peer-to-peer lending. These types of credit have been controversial, with some arguing that they prey on vulnerable consumers. In the late 20th and early 21st centuries, technology and data analytics transformed consumer finance. The introduction of the internet enabled financial institutions to offer online banking services and make loan applications and approvals more efficient. The use of data analytics enabled lenders to assess the creditworthiness of borrowers more accurately and offer personalized loan terms.
Global Industry
Today, consumer finance is a global industry, with a wide range of products and services available to consumers. The advent of the internet and mobile technology has made it easier than ever for consumers to access credit and manage their finances. Credit cards remain a popular form of consumer credit, with many people carrying multiple cards. Banks and other financial institutions also offer personal loans, auto loans, and mortgages. In recent years, new types of consumer finance have emerged, such as buy now, pay later services and digital wallets. Buy now, pay later services allow consumers to make purchases and pay for them over time, without incurring interest charges.
Digital wallets allow consumers to store their payment information and make purchases online or in-store without needing to carry a physical credit card. Consumer finance has also become more inclusive in recent years, with financial institutions and fintech companies offering services to under-banked and underserved populations. For example, microfinance institutions provide small loans to entrepreneurs in developing countries, while mobile banking services allow people without access to traditional banking services to manage their finances through their mobile phones.
In many countries, it accounts for a significant portion of gross domestic product (GDP), and millions of people rely on it to manage their daily finances. Some of the key products and services in modern-day consumer finance include:
- Credit cards: Credit cards allow consumers to make purchases and borrow money on a revolving line of credit. These cards often come with rewards programs and other perks, but they can also carry high-interest rates and fees.
- Personal loans: Personal loans are unsecured loans that can be used for a variety of purposes, such as consolidating debt or financing a major purchase. These loans typically have fixed interest rates and repayment terms.
- Mortgages: Mortgages are loans that are used to purchase a home or other real estate. These loans often have long repayment terms and can come with variable or fixed interest rates.
- Insurance: Insurance policies provide protection against financial losses due to accidents, illness, or other events. There are many different types of insurance, including health insurance, car insurance, and life insurance.
- Investment products: Investment products allow consumers to invest their money in various assets, such as stocks, bonds, and mutual funds. These products can offer the potential for high returns, but they also carry risks.
Consumer finance has become increasingly complex and sophisticated over the years, with new products and services constantly being developed to meet the needs of consumers. However, this complexity can also make it difficult for people to navigate the world of consumer finance and make informed decisions about their finances. As such, it is important for consumers to educate themselves about the various options available to them and to seek out trusted advisors who can help them make the best decisions for their financial situation.
Pakistan scenario
Consumer finance has played a significant role in the economic development of the country over the years. The concept of consumer finance first emerged in the country during the early 1960s, when the Government of Pakistan introduced a housing finance scheme to encourage people to invest in property. This scheme provided individuals with access to credit to purchase or build homes, thereby increasing the availability of housing in the country.
In the 1970s, the government of Pakistan launched a series of initiatives to promote consumer finance, including the establishment of specialized financial institutions such as the House Building Finance Corporation (HBFC) and the National Investment Trust (NIT). The HBFC provided long-term loans to individuals for the purchase or construction of homes, while the NIT offered investment schemes to encourage individuals to save and invest their money.
During the 1980s, the Government of Pakistan further expanded the scope of consumer finance by allowing commercial banks to offer consumer credit facilities. This move led to the emergence of a range of consumer finance products, including personal loans, auto loans, and credit cards.
The 1990s saw a significant expansion of the consumer finance industry in Pakistan, driven by economic growth and rising consumer demand. Commercial banks introduced a range of new products, including home improvement loans, education loans, and SME finance. This period also saw the emergence of Islamic banking, with the establishment of the first Islamic bank, Meezan Bank, in 1997. Islamic banking offered Shariah-compliant financial products and services to consumers, including home financing and car financing. In the early 2000s, the consumer finance industry in Pakistan experienced a period of consolidation, with a number of mergers and acquisitions taking place.
The industry also witnessed the introduction of new financial products and services, including online banking and mobile banking. The State Bank of Pakistan (SBP) played a significant role in regulating the industry, introducing guidelines and regulations to protect consumers and ensure the soundness of financial institutions.
In recent years, the consumer finance industry in Pakistan has continued to grow, with the introduction of new products and services, including microfinance and digital lending. The government of Pakistan has also launched several initiatives to promote financial inclusion, including the National Financial Inclusion Strategy and the Prime Minister’s Kamyab Jawan Program, which aims to provide youth
Key players in the market
The consumer finance market in Pakistan is dominated by banks, which account for more than 90% of all loans issued. The largest players in the market include Habib Bank Limited, MCB Bank Limited, National Bank of Pakistan, and United Bank Limited. Non-banking financial institutions (NBFI) such as leasing companies and microfinance banks also offer consumer finance, but they account for a much smaller portion of the market.
Types of loans available
The most common types of consumer finance in Pakistan include personal loans, credit cards, and auto loans. Personal loans are the most popular, accounting for more than 50% of all consumer finance loans. These loans are typically unsecured and can be used for a variety of purposes, such as home renovations, weddings, or medical expenses.
Credit cards are also popular in Pakistan, with more than 8 million credit cards currently in circulation. The number of credit card users has grown rapidly in recent years, driven by the convenience and flexibility of credit card usage. Auto loans are also popular, particularly as the number of cars on the roads in Pakistan continues to increase.
Growth potential
The consumer finance market in Pakistan has significant growth potential, driven by a growing middle class and an increasing focus on financial inclusion by the government and financial institutions. According to the World Bank, only 21% of adults in Pakistan have a formal bank account, leaving a large portion of the population without access to credit and other financial services.
To address this gap, the government has launched several initiatives to promote financial inclusion, such as the National Financial Inclusion Strategy (NFIS) and the Pakistan Remittance Initiative (PRI). These initiatives aim to increase access to financial services, including consumer finance, for low-income households and rural communities. In addition, the market is expected to benefit from the growing popularity of digital banking and online lending platforms. Many financial institutions in Pakistan are investing in digital platforms to streamline the loan application process and provide faster, more convenient access to credit.
Last word
The consumer finance market in Pakistan is a rapidly growing industry, driven by increasing demand for loans and credit facilities. Banks dominate the market, but non-banking financial institutions are also playing a growing role. Personal loans, credit cards, and auto loans are the most popular types of consumer finance, and the market is expected to benefit from the growing popularity of digital banking and online lending platforms. With the government and financial institutions focused on promoting financial inclusion, the consumer finance market in Pakistan has significant growth potential in the coming years.
The author, Mr. Nazir Ahmed Shaikh is freelance writer, columnist, blogger and motivational speaker. He write articles on diversified topics. Mr. Shaikh could be contacted at nazir_shaikh86@hotmail.com.