A major development in Pakistan’s largely conservative banking sector has been consumer banking which is making rapid headway. Initiated by major foreign banks like the Citibank and the Standard Chartered Grindlays Bank, after the American Express had severe setbacks here, they came up first with credit cards and then branched out in other directions. Other banks have followed them avidly.
Some leasing companies and other commercial outfits have been ventured into this area which have made it possible for the rather affluent people to buy today and pay with tomorrow’s earnings, or as in the case of leasing companies spread over three years. Institutions like Home Alliance and Electro Traders are doing brisk business in this area. And the people are happy they can buy today what they could not afford ordinarily by making cash down payments.
Consumer banking is flourishing as the commercial banks are reluctant to give large capital to investors and risk default or face the prospect of large non-performing loans. Secondly, the number of financial institutions in the country, including large number of non-banking financial institutions, like leasing companies, has increased greatly. Thirdly the interest rate has come down sharply, with banks like Al Falah advertising credit for cars at 9.5 per cent. Some others go up to 11 per cent.
But what upsets those who use credit cards is the rate of interest for the cards has not come down, while bank interest rates have come down to almost half of what it used to be particularly for depositors. The major card-issuing companies say they have little real competition in that area and hence no need for reducing the interest rate on the cards. But their rates, too, are bound to come down in course of time. In fact with lower interest rate more persons will use credit cards.
Consumer banking as it functions in Pakistan now has a major defect. It does not help industrialization of the country. It does not increase employment as such. Instead it increases imports and will inflate the import bill in the years to come. What it does at best is to increase the import trade.
Many of the cars, air-conditioners, hi-fi equipment, including large tv sets, are manufactured abroad. Or they are assembled here using imported components. We are at best assemblers of such products, not manufacturers. And the consumption of such items increases as they are available on hire-purchase or instalment basis.
And if some of the less expensive components are manufactured here they are made using imported raw materials in terms of metals, minerals, etc.
If the items used in this manner are cars we have to import petrol or diesel, tyres and other parts.
That is not how we fight poverty or meet middle class needs in Pakistan. Instead of meeting the real needs of the people the present system is trying to meet the wants of the people which keep on increasing. Advertising creates the wants.
While that is good for foreign banks and foreign companies which supply such equipment,it is not good to the basic economy of Pakistan. It has been argued by experts who want to fight poverty and meet the basic needs of the people that we should be providing better and far more buses, which are run efficiently and provide a better railway system, as we are trying to do now, with the help of China.
Promoting consumerism is not the right way to fight poverty or strengthen the economy in a developing country where clean drinking water is scarce even in cities where people are forced to use three kinds of water—piped water which is too scarce, tanker water which is not clean and bottled water, which is too is not reliable except for a few brands.
More people are having cars and some far larger cars than they can normally afford, only because they are available on lease. They may be able to afford them now, but can the country afford them without straining its economy and causing varied new tensions in it?
It is easy to promote the sale of such luxuries or expensive items through modern style advertising. Vance Packard wrote a series of books in the 1980s and 90s beginning with the “Hidden Persuaders”, “Status Seekers” and “People-Shapers”, to highlight that,
When the consumer banking came to the US most of the items were manufactured in that country using its own raw materials. But we are depending on imported items, imported components and imported raw materials, oils and chemicals, and power produced by imported oil. Hence we need real restraint in this area which needs a policy of promoting indigenous industrialization and increasing employment instead of soaring consumerism of a conspicuous kind.
The $10 billion foreign exchange reserves built up by buying much of that money is not the solution for all our problems or a licence to spend foreign exchange freely on imported luxuries.
The one area where consumer banking can do a great deal of good to the country, the economy and the people is in promoting house-building. The materials like cement, earth, woods which are used in construction are locally produced. And large scale house-building can promote about 40 industries in Pakistan. And it can provide employment to millions of workers and housing for many more millions. That should be the model for consumer financing.
But the IMF comes up now with the demand a 15 per cent general sales tax be levied on construction materials, which the government has rightly rejected. Such a GST will make the already expensive house-building far more expensive and so should be rejected. If house-building is to gain greater ground now the cost of construction should be lowered by reducing the high taxes on the construction industry and materials instead of taxing them far more.
The economic reforms will ultimately help the people by creating new jobs, says finance minister Shaukat Aziz. If he wants to see how many new jobs are being created and how many old jobs are lost he should arrange for publication of monthly figures, as done in the US unfailingly. He and the country are now operating in this sphere on the basis of guess estimates which can be misleading in a country with increasing unemployment suicides.
The inflow of imports in the electronic sphere might not have been so large, and almost total, if we had not neglected the electronic industry over the years or decades. Foreign electronic companies like the Philips, and NEC and Hitachi of Japan set up their assembling units here and were hoping to expand them. But the large number of such sets brought in by Overseas Pakistanis or smuggled in and sold cheap, while there was heavy duties on the locally assembled products made them abandon their expansion plans and later reduce the established capacity as well. India followed a different policy and encouraged more and more of assembling and manufacturing. And overseas Indians were not allowed to bring in unlimited electronic goods in reality, or taxed heavily. Hence most of the Hi-Fi sets available in India are locally manufactured and cheap.
Hence instead of rejoicing over the consumer boom which consumer banking is promoting in Pakistan we should also look at the damage it is doing to the economy in the age of Hi-Tech. Our manufacturing sector should be strengthened and made more competitive instead, to face competition if not abroad, at least at home in a period of falling import tariff which has come now to 25 per cent on an average. It is wrong to brush aside the protests and demands of the industrial sector as unreasonable or unacceptable. Instead their case should be examined on merit case by case and the more reasonable among their demands accepted.
The success of our consumer banking may make our main roads shine with gleaming new cars and a few of our homes lighten up with blazing new equipment obtained on hire-purchase. But if along with that 4,000 of our industrial units are sick and few new units are coming up and our economy remains cotton-based, we are not following the right policy for a land of 140 million people. Hence let not the glitter of consumer banking create in us a false sense of sudden success.
