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  • Understanding the economic forces and policy decisions shaping consumer lending and private sector borrowing

Consumer credit in Pakistan decreased to Rs1,119,839 million in January from Rs1,120,491 million in December of 2023. Consumer credit in Pakistan averaged Rs535,413.34 million from 2006 until 2024, reaching an all-time high of Rs1,142,683.00 million in December of 2022 and a record low of Rs282,406.00 million in April of 2012. Total revenue is expected to show an annual growth rate (CAGR 2022-2027) of 9.97%, resulting in a projected market volume of $929.50k by 2027. The average revenue per download currently is expected to amount to $0.07. The total transaction value in the market place lending (consumer) market in Pakistan is forecasted to reach $8.5 million in 2024. When compared globally, the United States leads with a transaction value of $26,720 million in 2024. Pakistan domestic credit reached $150.7 billion in February 2024, compared with a reported figure of $147.5 billion in the previous month.

Amidst the flourishing profits of commercial banks, driven by rising interest rates, a narrative of stark inequality emerges, leaving private businesses and individuals struggling with the tightening grip of limited borrowing opportunities. Interest rates in Pakistan soared to an all-high level of 22% on June 27, 2023, as the government scrambled to make last-minute changes to secure a deal with the International Monetary Fund (IMF). Since then, the policy rate has remained at an elevated level.

Private-sector borrowing costs have gone up due to high interest rates. Financing availability from banks has been reduced because banks are less willing to lend to the private sector and prefer lending to the government. Demand and supply for financing have gone down, squeezing private-sector credit. This also means that Greenfield projects and new investments have decreased while working capital requirements have increased. While analysts anticipate rate cuts in the coming monetary policy meetings, an elevated inflation rate remains a challenge. The country has been fighting a losing battle with inflation, leading to the State Bank of Pakistan (SBP) maintaining interest rates at unsustainable levels. One of the conditions set by the IMF is to maintain a tight monetary policy to bring down inflation which means that a rate cut will only be possible if the inflation rate falls below the prevailing interest rate.

Given the persistently high interest rates with no sign of reprieve, commercial banks continue prioritising investment in secure government securities, over riskier private sector. At the end of December 2023, investment to deposit ratio stood at 91%. This means that the majority of the deposits with the banking sector are being lent to the government, resulting in crowding out of the private sector. It is to be noted that banks have become more cautious in lending to the private sector to avoid asset quality deterioration and have instead channeled available liquidity to government securities. Investment in government securities increased by 42% during 2023 to Rs24.5 trillion. It is assumed that the squeezing out of private sector financing to a high policy rate. In almost over a decade, we have first time witnessed a decline in advances to the private sector which fell by 0.4% year-on-year in 2023. Historically, there has usually been a double-digit growth in advances to the private sector.

Within private sector lending, the manufacturing sector accounts for around 65-66% of total loans. Lending to the manufacturing sector declined by Rs106 billion from Rs4,955 billion in December 2022 to Rs4,848 billion in December 2023. As the following chart shows, lending to the manufacturing sector declined for much of 2023, only picking up pace in the last quarter of 2023.

Much like private sector businesses, borrowing by individuals has also plummeted. Personal borrowing declined by Rs22 billion in 2023 from Rs1,143 billion in December 2022 to Rs1,120 in December 2023. However, lending to bank employees has risen by around Rs60 billion. On the other hand, consumer financing decreased by 9% year-on-year from Rs900 billion in December 2022 to Rs818 billion in December 2023. In January 2024, consumer financing declined by another Rs4.3 billion. While the overall trend in consumer financing loans is on a downward trajectory, there is a contrasting surge in credit card usage. This increase in credit card usage could potentially be attributed to the inflationary pressures prompting individuals to rely on credit cards to finance their purchases.

The prohibitive costs of borrowing have dissuaded the private sector from seeking funding for investment and expansion endeavors. The IMF also recently downgraded Pakistan’s GDP growth estimate for fiscal year 2024 to 2% from October’s estimate of 2.5%. While a rate cut would make borrowing affordable for the private sector, a premature rate cut could lead to higher consumption and thus inflation.

Automobile financing in Pakistan continued to drop in March, with the loans dropping to Rs239.44 billion, a fall of 1.45% MoM compared to Rs242.95 billion recorded in February 2024, according to the latest data released by the central bank.

On a year-on-year basis, car financing decreased by 24.45%, as in the same period last year, the figure for financing was reported at Rs316.92 billion. This decline is mainly attributed to higher interest rates, an increase in car prices, regulative curbs for acquiring loans, and higher taxes on the import of automobiles and their parts. Going by the data provided by the State Bank of Pakistan (SBP), consumer financing for house building stood at Rs205.76 billion by the end of March 2024, down by 4.25% YoY. Month-wise, the financing for house building has decreased by 0.67% compared to Rs207.14 billion incurred in the previous month. Meanwhile, financing for personal use clocked in at Rs242.05 billion, down by 3.63% YoY and 0.03% MoM.

Thereby, the overall credit disbursed to consumers registered a decline of 8.18% YoY to clock in at Rs807.13 billion. Compared to the credit of Rs810.79 billion in the previous month, consumer financing has recorded a 0.45% MoM drop. The data released by the central bank further showed that outstanding credit to the private sector rose 0.72% YoY to Rs8.41 trillion in March 2024. On a sequential basis, private sector loans reported a drop of 0.16% MoM compared to the credit of Rs8.42 trillion in February. Under the credit to the private sector, the loans to the manufacturing sector clocked in at Rs4.84 trillion in the review period, up by 2.26% YoY while down 0.39% MoM. The borrowing from the construction sector stood at Rs194.43 billion in March, down by 0.59% YoY and 2.09% MoM. Going forward, the data further shows that loans to the agriculture, forestry, and fishing sectors rose to Rs392.15 billion in the month under review, up by 15.69% YoY, and on a sequential basis, the loans to the same sector recorded a fall of 2% MoM.

Consumers’ confidence in the country rose by 6.1% MoM or 1.93 points to 33.6 in March 2024, according to a survey report released by the State Bank of Pakistan (SBP).

The results of the latest Consumer Confidence Survey (CCS) showed that the Current Economic Conditions (CEC) index improved by 2.9 points to 30.9 and the Expected Economic Conditions (EEC) index by 0.9 points to 36.4 in March 2024 over the previous wave. The CCI for urban households increased slightly by 0.1 point to 32.9, whereas for rural households, it improved significantly by 8.2 points to 36.0 in March 2024 over the previous survey. The CCI of fresh households recorded an increase of 2.8 points to 34.7 in March 2024. For rotating households, it increased slightly by 0.2 point to 31.5 in March 2024 compared with February 2024. The CCI report assesses consumers’ confidence about the economy as well as their personal financial situation. The overall CCI is calculated from survey results and evaluated within a range of 0-100, indicating an optimistic outlook when the index is above 50 while showing a pessimistic attitude towards future economic situations when it is below 50. The index reflects the ‘current situation’ — economic changes witnessed in the last six months — as well as ‘future expectations’ that take into account changes expected in the next six months across the country. The results show that consumers’ Inflation Expectations increased by 0.5 points to 72.7 in March 2024 as compared to the previous wave of the survey. Meanwhile, consumers’ sentiments about the suitability of time to purchase durable goods over the next six months surged by 15.8% MoM to 27.8 in March 2024 compared to 24 in February 2024. When asked about their future income a year later, consumers’ expectations worsened by 4.0% compared to the last survey conducted in February 2024.

Recently, there has been a lot of talk in Pakistan’s digital lending industry about putting limits on lending rates. A lot of people in the industry are worried about the Securities and Exchange Commission of Pakistan’s (SECP) decision to put a limit on the Annual Percentage Rate (APR), which means that lending rates can’t be more than ten times the policy rate. While the main goal of these rules is to protect consumers from paying ridiculously high interest rates, there is growing concern that they may hurt the Fintech scene, the possible growth of digital banking, and, in turn, Pakistan’s economy.

Limiting the amount of interest that digital lending companies in Pakistan can charge people who borrow money. The goal of this measure is to keep people from having to pay too much in interest on loans, which can put them in serious financial trouble. The plan aims to make sure that borrowers understand and can afford the terms of their loans by putting a clear cap on interest rates. Digital lending companies also have to pay for things like running their businesses and buying new equipment. These costs, along with the risks that come with foreign exchange because of changing currencies, make things very hard for people in the industry. The digital lending industry in Pakistan could fail in the long run if the right steps aren’t taken to reduce these risks. Making non-banking financial companies (NBFCs) and digital lending platforms subject to regulation by the SECP makes sense. They want to protect consumers’ financial interests. But it’s important not to forget how these strict rules will affect the growing Fintech industry. By setting strict limits on lending rates, the SECP could stop new ideas from coming up and slow the growth of digital lending startups. These startups are very important for promoting competition, sparking new ideas, and making it easier for people who don’t have much access to credit to get it. In this way, a complex framework for possible growth landscape is created.

The costs that digital lending companies have to pay to run their businesses and buy new equipment are very high. These costs, along with the foreign exchange (FX) risks that come from changing currencies, make things very hard for people in the industry. The long-term health of Pakistan’s digital lending industry could be at risk if the right steps aren’t taken to reduce these risks.

SECP’s focus on lending rate caps doesn’t get to the root of problems like consumer awareness and financial literacy. Instead of relying only on government’s action, it is very important to give borrowers the information and tools they need to make smart financial choices. Consumer education programs can be very helpful in encouraging smart borrowing and lowering the risks that come with high-interest loans. Concerns have been raised about how appealing Pakistan’s digital lending sector is to foreign investors as an investment opportunity since lending rate caps have been put in place. Foreign direct investment (FDI) helps economies grow and new ideas come to life in a world that is becoming more connected. Regulations that are too strict and keep foreign investors away could hurt Pakistan’s economic growth in a big way. A balanced approach to regulation is necessary. Instead of imposing arbitrary limits on lending rates, policymakers should work to create an environment that supports new ideas, encourages competition, and encourages responsible lending. This could include efforts to make things more clear, strengthen protections for consumers, and give companies a reason to use the best methods in their work.

To make sure that regulatory decisions are well-informed and include everyone, it is important to encourage regulators, industry stakeholders, and consumer advocacy groups to work together. A clear and open set of rules will not only protect consumers’ interests but also help Pakistan’s digital lending industry grow in a way that lasts. There are several possible benefits to the plan to limit lending rates in Pakistan’s online lending market. As a first step, it wants to protect people from predatory lending practices by keeping interest rates reasonable and within reach. For example, this can keep weak people from getting stuck in debt and having money problems. Second, the proposal makes the digital lending industry more open by laying out clear rules on interest rates. This gives borrowers confidence that the terms of their loans are fair.

Putting limits on lending rates may also help make the economy more financially stable by lowering the chances of credit markets getting too hot and lenders taking too many risks. The proposal also fits with larger efforts to promote financial inclusion by making credit easier to get and more affordable for people who aren’t getting enough of it. This would give them more power to take part in economic activities.

Consumer protection and financial inclusion are good goals, but it’s important to be careful with how you react to the Securities and Exchange Commission of Pakistan decision to cap lending rates in Pakistan’s digital lending sector. To make sure that the digital lending industry in Pakistan stays open and successful in the long term, and to keep the economy from getting worse, the government must take a balanced approach to regulation that encourages new ideas, competition, and consumer empowerment.

The author, Nazir Ahmed Shaikh, is a freelance, writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at