The State Bank decision allowing banks to offer lease finance to the general public for purchase of consumer durables is aimed at fuelling economic growth through increased spending. The decision is in line with the trade policy of the current fiscal year wherein it was said that lease finance facility for consumer durables would be made available through banks.

Consumer durables include such household items as televisions, refrigerators, computers, etc. The central bank has not laid down any rules of business for this purpose and has asked the banks to draw their own strategy to start lease finance facility. But senior bankers say the SBP may issue some guidelines in the absence of which it is difficult for them to initiate the process.

To encourage the banks to start giving loans for the purchase of consumer durables the SBP has also exempted them from submitting a copy of income/wealth tax statement of the borrowers if their borrowing falls below Rs 100,000.

It is hard to deny that consumer financing has a strong linkage with the industrial and trading activity as mentioned by the SBP in its circular issued on this subject. But an equally strong argument is that liberalisation of consumer finance in a country like Pakistan cannot be very helpful in fuelling real economic growth. Because the country being a signatory of the World Trade Organisation is progressively lowering its import tariff walls —and phasing out concessions available to the local industry on the demand of the IMF/World Bank. So even if the liberalisation of consumer finance through banks lead to greater spending by the household sector it will be the foreign suppliers of consumer durables that would gain most out of it: the local industry is not in a position to avail of this opportunity to enhance production and reach out to new customers.

The reasons are very obvious: (i) the input cost including the financial input cost is very high and may not come down in the near future; (ii) infrastructure facilities are crumbling and there is no hope for an immediate buildup taking place; (iii) all industry-specific subsidies have either been withdrawn or are in the process of being eliminated.

Local industrialists do admit that the liberalisation of consumer finance may lead to increased competition among the makers of consumer durables thereby improving their efficiency and economic viability. But they say that this limited gain would be more than offset by flooding of imported goods into the local market.

They say that the consumer finance regime is being liberalised to help a few multinational companies engaged in manufacturing and supply of consumer durables in Pakistan. Officials of these companies do not deny this but they say that the indigenous industry must strive to get its share from an enlarged pie of consumer durables’ buyers.

Pakistani industrialists also argue that the decision to liberalise consumer finance will basically help foreign banks operating in Pakistan make up for the fall in their profits in the post 9/11 situation. Foreign banks generally witnessed a decline in their profits for a couple of reasons including the decision by their principals to scale down their activities in this country. More recently car-bombings in Karachi have also led these banks to keep a low profile and avoid taking big exposures. So in the changed situation what suits the foreign banks well is that they continue to invest surplus liquidity into treasury bills and other government security papers—or lend money only to selected multinationals and top Pakistani companies—and that too not in a liberal way. Since this arrangement does not guarantee very huge profits it is natural for the foreign banks to look for new areas where high profit could be earned without running high risks. The consumer finance is one such area where banks can earn as high a profit as 20 percent or even more.

Those local and foreign banks that are engaged in house financing and car financing are already charging annual interest closer to 20 percent.

The SBP decision to engage banks in lease financing for purchase of consumer durables is also going to have a negative impact on the leasing industry that has already been facing odds after the banks have entered into car leasing. Once banks enter into the liberalised consumer finance regime smaller and weaker leasing companies may be forced to close down or merge themselves with larger and stronger ones to stay afloat.

That indeed would serve the SBP vision of a compact but strong financial sector with lesser number of players having greater access to financial resources and larger number of customers to care for. Another important point with regard to liberalisation of consumer finance is that whether this can improve the level of employment generation. There is no denying the fact that the banking sector reforms sponsored by the World Bank and monitored by the IMF as a yardstick to judge Pakistan’s seriousness in pursuing the Fund’s agenda has helped the banks put their house in order. But in the process the banks have rendered thousands of people jobless in the past few years. The current IMF programme that Pakistan has been following since last year also has led to retrenchments in government departments and state-run organisations but it has not generated job opportunities. It is strange that the programme titled poverty reduction and growth facility does not envisage anything that can help Pakistan tackle the problem of increasing joblessness: the critics of IMF say that it may rather add to the gravity of the problem.

That is why economists say that instead of trying to revive the economy through demand-induced measures the government should focus more on the supply side. They believe that if the local industry is made more viable by reducing the input cost and by saving it from super-imposed competition with foreign manufacturers the economic growth would come handy.

The philosophy of liberalising consumer finance to stimulate the economy also seems defective due to the fact that it may lower the already low rate of savings of household sector. A general feeling is that it would strengthen the newly-introduced consumerism in Pakistan the benefits of which are going to the multinationals that are on the hunt for new consumer markets in this region after reaching a point of saturation in their home countries in the developed world.