Consumer Banking in Pakistan: A Trap or Solution

Reuters photo

By

Zeeshan A. Shah

In 1994, the World Bank decided to do a review on the potential for consumer banking in Pakistan, market dynamics within the country and its impact on the consumer population, their buying power and overall business banking options. Traditionally, the core purpose of consumer banking was coined as the provision of product and services to meet the financial needs of individual with a steady and verifiable income flow and to improve customer standard of living by granting structured credit facilities to acquire basic necessities such as residential homes for living, cash to spend and vehicle purchase and investment plans for families and their children.

The report also indicated the risks associated with extending credit to all income groups and special criteria were established to ensure that people who were earning up to a certain sum of money in local currency should be given a multiple of their incomes as spending limits as a substitute of cash. The warnings were given to governments in those days and ignored. As foreign investments were coming through, financial futures were committed upon hungry governments at a visibly hidden cost to the economy.

Borrowing was an alien concept to the local public – the perfect jackpot for foreign investors and a profit machine for foreign banks. No one at that time pointed out that most of their profits are sent back overseas to the shareholder as opposed to being reinvested within the country.

With no state policy in place on RTI-rights to information and a not-so-powerful media; the race would be unchecked and unstoppable.

In a country where over 80% of the wealth is accumulated by a mere 10% of the population, the average man out there earns less than $2 a day – which is way below the poverty line and then suddenly, the thought of being able to spend 10 times more than what you are earning is nothing less than the eternal dream for an average simple customer. Obviously, no one realized the hidden cost of the false dream.

The report also highlighted the risk of sustained compulsive dependency on credit consumption through banks and the inability of people to maintain constant payback patterns in the long term, as our economy is primarily cash-based where you pay for what you buy based on your income out of your saving pools. The new ways to spend money required training by banks, recruiting honest and dedicated staff to ensure sales and services to potential customers, enhanced reputational risk awareness programs to create consumer product awareness and adopting prudent prudential regulations via a central bank to provide the best value for money to the client at a certain acceptable rate of profit to be charged by the bank.

All this was supposed to apply in letter and spirit but was far from the truth that would emerge decades later. Clearly, we as consumers were not aware of the hidden risks of associating with aggressive lending practices by banks. A person earning PKR 10,000 in those days now had his own spending cash limit 5 times more than his earnings.

A new term was coined: ”Buy Now – Pay Later’. You could buy anything from a shop, get your fuel tank filled, buy clothes and shoes for your children, and get a ticket to go anywhere. W.O.W -Welcome to the Jungle – it was banking for the people by the people in Pakistan, one of the emerging poor nations of the world – creating a lifestyle boom within every sector and class of our social fabric. Fatal attraction – easy money –unlimited options!

Local and foreign banks started issuing credit cards with attractive features to lure cash craving customers who went ballistic spending way beyond their means buying almost everything they could get their hands on, without realizing that one day they have to pay back to the banks at twice the cost or face unlimited extra financial charges. Earlier banks like Citibank and ANZ Grindlays were ahead in the race and were dominating the foreign bank sectors in those days and became pioneers in serving the newly built market segments and decided to target the salaried class segments of society within key cities of Pakistan and then further expending into urban and rural cities and segments identifying the never ending ever flowing market.

On the flip side, the World Bank report was ignored and warning signs were kept aside and people went on with their lives. Banks started minting money, fleecing people, depriving them of their hard earned savings and have been minting money for decades leaving the average consumer unsatisfied financially.

In fact, banks will always find ways to flood the markets and charge people higher due to the immense risk appetite in this market for them to play with. People will always end up consuming, hence “Consumer Banking”. For utilizing value-services at a higher cost to their pockets simply because it looks good – felt great then and feels great now. One can always pay later –a typical lifestyle move. Today if I have one car, I want another one because the other person has three cars and this is what consumer banking feeds you – Need for greed.

The fact that we are not a rich country and our average consumer needs to focus on savings not spending is important to note but the fact remains that as long as there are poor people who could afford to dream and live beyond their expenses and had families to feed – consumer banks here will continue to thrive in our country. What banks offer is a temporary solution and takes little or no responsibility of future risk for the customer, that remains hidden under the perpetual blanket of consumer financing.

State bank regulations in those days and even now serve governments who want to bring in foreign culture and spending habits in a country where people were prone to saving their money and could not afford to live beyond their means. The big difference in our societies versus the west was the sheer dependency on our own savings versus borrowed cash as in the west. We were better off in those days without the burden of debt and were not in the rat race to go on spending recklessly but the whole new world of easy money and plastic cards was thrust upon our consumer with stylish marketing campaigns and advertising – by all banks and lending institutions. Today every Pakistan child carries a debt of Rs.115000 upon birth.

The journey went on. In the years to follow people got accustomed to spending, going from one bank to another in the hope of accumulating financial wealth or so they thought it was – the wealth that would be everlasting. Dream a little dream – you can achieve it all and have it all. This is one theory that has worked very well in a nation where the rich gets richer and poor gets poorer.

Classic rule: Give credit to the people who don’t need it, then charge them excessively by keeping them at the mercy of the vicious cycle. They will pay back all their lives, always paying more than what they can afford to spend till they are totally indebted to the bank in the name of lifestyle and convenience.

Pakistan has one of the largest banking spreads in this part of the world with the deposit to lending ratio being the highest touching anywhere between 10 to 12% on average, almost all banks being aware of the impact that has on the customer.

A traditional conventional mode of banking in the eighties was more focused towards tailored solutions to enhance savings and providing options for people to place their funds and earn adequate profit on their earnings and securing their future, whereas banking in the post nineties era was all about creating maximum market share and building sales momentum, generating revenue through collecting charged-funded income (interest-income) and non-funded income (annual fees) to create ultimate profit maximization at all costs.

If a bank is earning millions but is giving profit at the rate of 2% a month to the depositor while lending the depositors money forward at 12 to 13% in the market, an average spread of 10% or higher is generated making huge profits to the bank itself while the average customer hardly makes a happy profit over his savings. Ideally, the deposit rate should nullify the inflation impact and not fall below the inflation rate.

Credit cards have APR -Annual Percentage Rate, that the bank charges the customer on an annual basis, again; one of the highest APRs touching 35 to 40% which is the real killer cost to the customer. There are other ways to also make money of customers through late payments charges, limit enhancement charges, card renewal and replacement fees and financial charges on revolving the balance, etc.

Post 2008, the recession hit the world of consumer banking where most banks reduced the lending by shutting off consumer banking businesses across the world and shutting down their branch networks and offsetting their operating and fixed costs. One of the primary reasons was the ratio of NPLs – Non Performing Loans, in their credit cards and personal loans business referred to as unsecured lending (without collateral) as well as home financing and auto sales (secured lending against collateral), arising out of the sheer inability of customers to pay back what they owe and finally the issuance of Debit. A difference between a credit and a debit card is that the former gives you the option to revolve your outstanding balance by paying it off at a later date in coming months with interest – something that was discouraged back then by policy makers of the world but continued as a practice in Pakistan, while the latter gives the choice of buying what you need but paying it off at the end of the month as the money is debited through your bank account every time.

Today, the markets remain volatile and uncertain. The big money is toast as another recession cycle hits the planet in the Post-Brexit era today. Investment banking is a no-go for the average consumer as people head back to the basic save-mode.

The deadly game of consumer banking is basically a tool by the western economies to get their societies completely dependant on borrowing reducing the chances of an interest free world and keeping the customer totally under debt throughout his life paying off what he borrowed.

Recent demolition on the banking and a financial sector globally leads to one question and that is: Is consumer banking really a trap or a solution?

The answer lies in the minds of the people who utilize the money they do not earn and then end up paying for what they have spent, from the money they have saved. The vicious circle of consumer banking is not exactly the best thing for the consumer today – it only satisfies the bank.

The future holds challenges where there will be an absolute customer demand for higher saving rates and better services and for banks to have more lenient credit policies towards collections or recoveries of loans, enabling central bank support to ensure customer safety and comfort. Above all, customers need to educate themselves more as to what kind of banking products they really require and above all – to live within optimal means so they save money for their future.

Consumer banking therefore is not the solution.

Zeeshan A. Shah

The writer is a Director at CNNA Pakistan – a leading advocacy institute and is an expert on International Relations and Education Policy.

With over 150 publications in major local and global social media & newspapers, he has been instrumental in producing over 5000 radio broadcasts aired globally.

A thought leader, environmental journalist, media broadcaster and a change maker with an acute focus on development affairs & education for Pakistan.