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Informal credit for consumer durables

January 13, 2013

SHAH ZAMAN, a young shopkeeper, gestured to a loader to lift the generator and made way for the customer through a cramped shop of consumer durables. The parting greetings of buyer and seller were long.

The trader must be happy over selling the product at his dictated price, the purchaser was visibly fascinated by his newly acquired possession that he bought on down payment of a fraction of its market value. Zaman said he expected 10 per cent in commission from his supplier and 40 per cent as increment on price for spreading payment over two years.

Some 4000 similar outlets are said to be operating all over the country selling consumer durables on credit. They offer customers between six to 60 monthly installments and project value of monthly installment to attract buyers, understating the rise in the actual cost in the deal.

According to one estimate, every third household in low income localities in urban areas avails informal system of consumer financing. In absence of the formal banking option — as banks are oriented to serve educated people placed higher on the social ladder — the demand for credit is met through informal means.

Data show that consumer financing of banks has shrunk. Over the past five years, some commercial banks abandoned consumer financing but indicators suggest that informal credit operations expanded in the country both horizontally and vertically.

It was stated that the pace of growth of informal consumer financing was actually faster in rural areas and smaller townships, particularly in Sindh and Punjab.

“The market is at work here. The specialised credit for durables enjoys patronage of traders and manufacturers for obvious reasons. The system serves people as it enables them to purchase pricy items such as motorcycles, fans, sewing machines, etc that they cannot afford to pay for upfront”, an analyst commented.

The dynamics of short-term informal commercial credit system is anchored on social nexus. “Its utility and successful business model has proved to be rewarding to the people and the economy”, commented an economist.  The shop mentioned in opening paragraph is located in Neelum Colony in Karachi and sells electrical appliances on credit. An informal survey by Dawn revealed that there is a network of exclusive retail shops servicing swath of working families across the country.

Zaman told Dawn that the purchaser of the generator was an employee of his uncle, who became his guarantor in the credit deal. Giving details, he said the generator worth Rs20,000 was sold for Rs28,000. The payment will be received in 24 installments over two years. Sidelining a question about the logic to charge 40 per cent interest on two-year credit, he chuckled: “The man paid just Rs1500 to own a pricy machine. The deal was not forced. He was agreeable to pay more for something that would otherwise be beyond his means”.

The business was not as brisk at Zaman’s shop as it was four years back when on an average 90 deals materialised in a month against 15 currently. Zaman did not blame the slump on the sagging economy alone.

“The increase in family incomes have failed to keep pace with peoples’ rising aspirations but there are host of other factors as well playing into the situation”, he said. He mentioned competition and more caution exercised by sellers and guarantors owing to the economic slowdown.

Explaining dynamics of their trade, some operators approached by Dawn said that defaults were rare. “In the last five years about two per cent of our customers ditched us, about 10 per cent failed to stick to the payment schedule but the rest upheld their commitment”, Nazim, who owns a similar shop in Dehli Colony, said.

“We issue a sale card as soon as a transaction is closed with basic particulars of buyer and guarantor and mark monthly payments on it. The record is maintained at the shop and sometimes purchasers are reminded of deadline in advance”, he said.

The need of legal cover was dismissed by business operators. “It is a trust-based business that operates on the strength of social bonds. Here buyer and sellers know each other directly or through people. They are willing to make adjustment but there is zero tolerance for breach of trust. The volumes take care of whatever little problems occur at the margins”, Salim, another trader who owns a shop in Korangi 3, commercial area, said.

Some market watchers criticised high interest rates charged by traders. Senior officials at SECP confirmed that for regulators no such credit offering bodies exist. “In absence of regulator governing their activities only competitions can dissuade traders from abusing vulnerable petty creditors”, an analyst commented.

“The exploitation is rampant in places where supplier controls the market but in bigger cities it would be counter-productive. Traders can only cross limits at the cost of their reputation”, he added.

the government and rising cost of consumer financing as defaults pile up dissuaded leasing companies and banks to focus there. Over the past four years they virtually abandoned their consumer financing operations in the country.

“However, as SBP shifted stance to monetary easing and slashed the interest rates one can again sense change. There are some faint signals of revival of consumer financing departments in bigger banks. The informal lending to under-privileged has never been looked at as a business opportunity by established institutions. It, therefore, has its own dynamics and exist parallel to institutionalised banking”, Sohail Ahmed, CEO Topline Securities, commented.

“Poor people are anxious to live better and ready to avail all available options to this end. It would be unfair to equate the wish of a household without fans to aspire for one, to people leasing cars bigger than ones they can afford”, commented an observer.