Recent weeks and months have witnessed generous advertisements by banks, both in dimensions and frequency, on consumer financing, i.e. for purchase, on instalments, of durable consumer goods such as automobiles, household electronic goods, housing units,etc., dotting the national print media, heralding emergence of a new sector in commercial banking and financial-services sector of the economy.

At long last, the banking sector has thought of doing something positive for the common consumer of Pakistan. So far, banks have hardly cared for the consumer except as the cheap source of funds for diversion to the powerful and influential with inter-linkage to the establishment, engaged in trade,industry, farming or service sector.

The savings of small earners or of middle-class, anxious to save for rainy days, constitute the bulk of bank deposits. Banking has been one of the instruments of the exploitative structure that goes by the name of politico-economic order in this country where politics has always dictated economics; squeezing the shrimps to feed and fatten the sharks. Initiation and promotion of consumer financing is a very welcome development, as a potential source of contribution to socio-economic stability and towards growth of middle class envisaged to be the back-bone of democracy.

As a corollary to the absence of active and effective movement to protect consumers’ interests, consumers’ needs for loans by the money market have merited scant attention of the banking system in Pakistan over the past decades. As such consumer credits launch by the banking and financial-services sector can be billed as a positive measure macro-economically. Advanced and progressive economies striving to attain socio-economic equilibrium, are known for offering opportunities, both for producers and consumers, resorting to the lending system to meet their requirements for cash on loan. One of the reasons for socio-economic stability and the promotion of democracy in these countries can be traced to this arrangement.

After all, the prime function of a socio-economic order is to create conducive conditions where individual citizens can seek improvement in the material conditions of human existence. Given effective legal safeguards and protection, both for the lenders and the borrowers, equity and fairplay in the conduct of transactions as well as full information and transparency, consumer financing in a country like ours, can go a long way to blunt the bite of deprivation among the middle and lower income classes by exercising a tolerable degree of financial self-discipline, and can also assure commercial viability of the venture for lenders.

Given the reliable flow of income, one has the possibility to enjoy the benefits of larger range of goods and facilities financed through credit than going in for their one-shot out-of-pocket purchase. In rich economies, where this arrangement is a common practice, it has also greatly contributed to their economic dynamic. To consume something,first needs to be produced; consumption by one, is the production by other: this is how modern productive system operates.

The current consumer finance scenario in Asia is rather interesting and insightful. The 1997-1998 financial crisis hitting all the economies of South East Asia, and its reverberations impacting the economies beyond Asia, seems to have caused a sea-change as far as the consumer financing sector in these countries is concerned. While this spelt, to a great extent, end of cronyism, protectionism and government regulation, it marked the beginning of political, social and economic reform and change.

Still the economies of East and South East Asia, excepting China and Hong Kong, as per published figures, showed their per capita GDP lower in 2002 than in 1996. At the core of the crisis were non-performing loans granted to politically super-connected, with the management of the banking system being under political pressure as well as part of the establishment, and thus ignoring the professional criteria of bankability of loans in the form of collaterals and the credibility of the borrower.

Thus once the reforms set in, banking system in these countries was their first target. This called for sorting out non-performing or bad loans and to pre-empt a re-run of the same in future. With post-crisis economic recovery asserting itself, improving balance of trade and the caution by the banking system to avoid cronyism and pitfalls of the past, resulted in liquidity available with the banking and financial services sector for consumer financing. For banks the consumer is more than the cheap source of funds; he is, in equal measure, the source of the future profits. While in 1997 loans by the East Asian banks to households amounted to 27 per cent of total lending, now they amount to 40 per cent.

Like other developed economies, consumer financing has emerged as a vital sector in Japan, promising fat profit for lenders. Since early 1990s the industry has been a rare success story in Japan’s bleak financial-services market. The value of outstanding loans under this heading has risen at a double digit pace and now stands at 12 trillion yen ($100 billion).

Compare this figure with estimated $1.2 trillion of non-performing loans resting with Japanese banks. Consumer loans dominate this sector that is shared in other rich countries with overdrafts and credit-card debt. The market is so lucrative that foreign groups such as Citigroup, the world’s largest financial institution, with assets estimated at $1 trillion, whose chief Sandy Weill accumulated his professional expertise, as well, with consumer-finance company Commercial Credit, and GE Capital, the financial arm of General Electric, whose last CEO/Chairman Jack Welsh was adjudged as the most successful and respected corporate chief worldwide, have been buying into Japan’s personal-loan market. Citigroup is stated to have 8 per cent of the outstanding loans in this category.

In the absence of a national credit register, the top consumer-finance firms have developed sophisticated risk-management systems that has greatly added to their success. How lucrative consumer finance market in Japan is, can be judged from the fact that while the average financing costs for the banks hover around 2 per cent, consumer-finance firms charged up to 40 per cent, that was cut to 29 per cent in 2000.

Most charge about 25 per cent and there is a move by some politicians to trim the ceiling to around 20 per cent. It sounds rather paradoxical that while consumer financing sector can throw up such high profits, still the banks in Japan are plagued by the biggest heap of non-performing loans in Asia.

The apparent explanation is that every political government with vested electoral interests is shying away to take radical measures to get rid of such loans that are presently the biggest headache of the Japanese government and the prime source of economic slump besetting Japan. In our own case, end of June 2002, the stuck-up/bad loans amounted to Rs279 billions; in most cases being owed by the most powerful and most influential of the country to our banking system that just played to the tune set by the incumbent political powers, whether in civil or in khaki.

The financial crisis of 1997-98 in East and South East Asia amply laid bare that non-performing loans, once having reached the level of critical mass, can cause disaster for the economy. This realization led to the restructuring, mergers as well as shutting some of banks and finance companies in the countries hard hit by the crisis. This has brought caution for both corporate borrowers and banks as lenders.

The situation has resulted in lot of liquidity with banks keen to do their job of allocating capital in the economy while making a healthy return for themselves. This ushered in a phase where consumer financing offers a growth- promising segment in financial services, “the single most powerful theme in Asian financial services” as termed by SSB part of Citigroup.

Governments are equally positive since this concerns the real economy. Whether it is the construction of houses being financed by mortgages, purchase of long-life consumer goods or revolving credit-card loans and unsecured loans, they all contribute to create demand, promote production and generate employment.

Post financial-crisis South Korea stands out in this regard where households debt has been rising by 25 per cent a year and now accounts for half of all bank lending. As the published data indicate, two years ago China’s banks had just $6.5 billion in outstanding mortgages; today they are 5 times higher. The Bank of China, one of the more successful of the four big banks of the country, expects that in five years’ time consumers will account for half of the banks loans.

Consumer financing is deemed to spur the domestic demand, keeping the national productive machinery running even if their exports register decline in view of the feared slump in some of the importing countries. Developing Asia promises to be the fastest growing market for the industry. GE Capital developed a highly profitable credit card business in Thailand, charging interest rates as high as 30 per cent, until the government imposed a ceiling of 18 per cent. With 5 per cent of share at $112 million in the Shanghai Pudong Development Bank, Citigroup would have its first minority stake in a Chinese bank. HSBC, 2nd biggest bank of the world, has acquired a similar stake in Bank of Shanghai. The interest by banking and financial-services sector of USA and Europe in the consumer financing sector of Asia indicates the massive potential this segment holds for future.

The recent interest by banking and financial-services sector in consumer financing in Pakistan is a healthy sign to log on to the trends and directions emerging in Asia. While the performance of the NAB over the past years leaves a lot to be desired, it has certainly sent a shock wave for potential credit sharks that acquisition of heavy loans without intention of paying back, may prove highly unpleasant and torturing. This pressure must not be relaxed.

This would contribute to the liquidity of banking sector to finance households’ loans requirements.The State Bank has also a positive approach in this regard. What is required, is to set parameters for a total environment conducive to successful and effective consumer financing. The banks are required to set affordable mark-ups, the manufacturers of durable household goods to avoid supply of sub-standard products, the vendor/trader should not over-shoot in quest of profits and the households/consumers would have to keep up credibility while enjoying the benefits of consumer financing.

The concerned state institutions would have to ensure a viable and equitable watch-dog function so that all stake-holders in the venture share the benefits. A well conceived, implemented and monitored and macro-economically organized scheme of consumer financing can be a potent contributor to lift up the economy and generate employment.