November 24, 2002	Sunday	Ramazan 18, 1423

KARACHI, Nov 23: Pakistan’s economy will never take off unless “we put money in the people’s pocket” and improve their purchasing power that would benefit banks, industry and the government.

These are observations, not of the elected representatives in the National Assembly but the head of a leading state-owned bank, unveiling his ten-year strategic vision of consumer banking’s role in economic development.

For the country, NBP president Ali Reza says, consumer banking, though it is just a beginning, would be a major step. It would increase purchasing power substantially. When purchasing power expands, business will expand. When business will expand, there would be more capital investment, more domestic and foreign investment, and that would increase tax revenues.

He sees his bank’s future linked to consumer banking and a radical shift from corporate banking to consumer banking in 5-10 years. “This is the way to put money into the pockets of the people,” he adds.

On the potential of consumer and retail banking Mr Ali Reza, talking to Dawn, expressed high hopes. Referring to mortgage business he says, “almost hundred per cent of the homes in the country are equity financed. There is a lot of money lying in the form of equity, which can be unleashed. People have little cash, very little savings but they have enough assets.”

If these assets are leveraged, the people get money. They can get personal loans and bank finance for buying of consumer durable or cars, he added.

In the field of consumer banking, bankers agree that housing building finance holds the greatest promise. And the State Bank is organizing a two-day conference on housing finance system next month.

The SBP governor, Dr Ishrat Husain, says housing is the largest single asset class in Pakistan with an estimated worth of Rs1700 billion. He says that there is a strong argument for reviving the economic activities through housing as it has a direct and indirect bearing on numerous industries and sectors.

Yet, as Dr Ishrat Husain says housing finance is estimated to be less than one per cent of the GDP, in part because there is no vibrant system of housing finance.

Recognizing the need of house finance for a broad-based economic development and to improve the quality of life of the people, the State Bank is organizing a conference of all stakeholders in housing sector, that may throw up ideas and proposals to realise the potential of housing and house finance.

For the future, says Ali Reza, it is very important that we develop consumer products, looking at the emerging banking scenario. He explains: “Interest rates would be coming down. Corporate borrowers would be moving away from banks to the capital market. Spread has come down. So, we have to go into consumer finance.”

“In the consumer finance, the yield is better and you have fee-based products. So, you increase the ratio of non-interest incomes to interest-based incomes.”

The state-run banks have taken a start, both National Bank and Habib Bank are at it. Currently, it is zero per cent of their assets that are consumer-based finance. In next five years, at least 25 per cent of NBP assets will be in the retail finance, whether in the form of mortgages, auto loans, personal loans or it will be co-branding with manufacturers of durable and other products. Under a ten-year plan, the National Bank envisages that 50-70 per cent of its assets will be in consumer finance.

“If you look at the pattern of developed countries, Ali Reza says, this is what happens. Corporate businesses are basically disintermediated. They issue commercial papers for short-term borrowing and bonds for long term money. They do not borrow from banks. It is cheaper to raise funds through bonds. These are instruments that are tradable. There is secondary market and these are bought by the investors and pricing is quite favourable.

In Pakistan, corporates are also raising money from the capital market. From a mere zero-one billion rupees a few year ago, the bond (TFC) market is between Rs15-20 billion and is growing at a high rate. That is why we want to go into retail financing, he added.

Financial analysts, however, say that consumer financing needs strong regulatory framework and monitoring to protect the consumers from arbitrary decisions that are often taken at the cost of small borrowers or customers and also without informing them.

Even, in the United States, numerous serious cases have surfaced where banks have profited from ignorance of small borrowers and their weak bargaining position.

Often, in the developed economies, such incidents are ignored because of strong bank lobbies despite autonomous character of central banks and financial regulatory authority. The State Bank has here an effective role to play.