Important segment of banks

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INTRODUCTION

Consumer finance is a recognized financial invention across the world, mainly in established economies, where it constitutes important segment of banks lending range/portfolio. In the Pakistani banking segment, though, the progress of the consumer financing range is a latest experience, as banks have habitually paying attention on lending to the corporate segment and public sector entities.

In the previous 5 to 6 years, consumer banking had an extraordinary expansion in Pakistan. This extraordinary expansion has followed privatization of state-owned banks, banking reforms brought regarding via the SBP and progressively more market oriented approach principally meant by banks at a huge urban consumer base. Whether large banks or small, international or national, all of them is geared towards creation of its spot in an already cutthroat setting which is the effect of consumer banking, international banks such as standard chartered, Citibank and ABN AMRO have the hold up of the information base and finances of their overseas principals which is made them first to bring in consumer products in Pakistan.

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UBL, HBL and MCB were the recently privatized banks which have engaged in consumer financing actions not only in big cities but also smaller ones too. Due to their massive branch set-up they generated high volumes of dealing but also at the identical time reducing the prices of their products and services they offer. In year 2002, HBL's consumer banking range was value less than a billion rupees but at the end of year 2004, it is value 17 billion.

A set of factors is accountable for the extensive attractiveness of consumer finance in recent years: the financial liberalization progression over the previous decade or so, has led to the formation of a banking system which is mostly owned and operated by the private segment. Secondly, the invasion of liquidity in the banking segment from fiscal year 2002, forced banks to diversify and enlarge their income base by venturing into formerly untouched areas and third, the easy monetary procedure attitude of the SBP from 2002 to 2005 provided appropriate customers with financing options at little rate to meet up their consumption demand.

Under the supervision of the State Bank of Pakistan, all banks and DFI's work. State bank of Pakistan divided the operations of the banks into four main segments which is Corporate, agriculture, SME and consumer. All those banks which operate in Pakistan should follow the regulation made by the state bank of Pakistan.

Problem definition:

In a very little time span of consumer banking in Pakistan, it has made an outstanding progress and performed a very positive role in boosting our economy and also in meeting the needs and necessities of the customers. Whether large banks or small, international or national, all of them is geared towards creation of its spot in an already cutthroat setting which is the effect of consumer banking. Due to growing economy of the country and betterment in the level of household income in Pakistan have formed many more opportunities for consumer banking. But at the same time it has also some drawbacks in their regulation and also difficulties for borrowers and lenders in the current system. In this research statement the present, past and future of the consumer banking industry will be analyzed.

Problem Statement

The problem statement of my research is,

  • "Need and Scope of Consumer Banking in Peshawar"

I will only focus on this very factor and its effect on the lenders, borrowers and economic growth.

Objectives of the study

In this study, it will try to take out the problems in the present structure of consumer banking from both borrowers and lenders point of observation and also will try to find out the opportunities in consumer banking in the coming future.

  • Hurdles/problems faced in the existing system of consumer banking.
  • Consumer banking function in country economic growth.
  • Exploring opportunities in the field of consumer banking in future.
  • Local and foreign banks assessment/comparison by their services.

Scope of work

The region under attention is needs and scope of consumer banking especially in the area of Peshawar. As consumer banking segment is a fast growing sector of both local and internationals banks in Pakistan but facing issues like, problems in consumer banking system. For that reason some of the banks for the time being stop consumer financing. Beside this some other banks have not yet provided full consumer banking.

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What are the opportunities in consumer banking and its result on economic growth of the country will be analyzed. But due to the time restraint and lack of experience with research study their many be some area remain uncovered.

Assumptions

For this research, I am taking some assumptions.

  • In consumer banking industry, equally borrowers and lenders are confronting problems.
  • Huge interest, incorrect policies, lack of learning, etc are the factors for the turn down of industry.
  • Consumer banking has a bundle of potential to rise in Pakistan.

Research Methodology

The population for my research consists of both genders of diverse ages who are working in banks and also from the customers 0f the bank that has an account in any of the bank of Peshawar region. In total sixty-five samples, researcher will be taking from customers out of hundred forms and thirty-five from the banks employees.

There will be different survey forms for both bank employees and customers through whom researcher can be able to identify troubles for both lenders and borrowers and their solutions in the area of consumer banking. In this research the researcher will target both local and foreign banks working in Peshawar. Along with survey forms researcher will also take interviews from managers of different banks.

All these survey forms and interviews will be from the employees working in banks and customers of the banks in Peshawar region because in this research the researcher targeted only the Peshawar region.

Sources of Data

  • Secondary source: - Most of the secondary data is collected from different published papers and from different websites on which relevant data is available. As on this area we don't have sufficient data available specifically for Peshawar, so I could only estimate/assume it from the whole Pakistan.
  • Primary source:-primary data will be collected through survey forms from both customers and employees of the banks as well as researcher will take interviews from managers of the banks.

Sample size: - My target are the customers and employees of the banks in Peshawar but its too difficult to take interviews and fill survey forms from all of customers and bank staff, so researcher will be taking a sample size of hundred (100) which include sixty-five (65) customers and thirty-five (35) employees of the banks in Peshawar as well as five (5) interviews from managers of the banks in Peshawar.

Inclusion criteria: - persons who has an account in any of the bank in Peshawar area and has understanding of consumer banking will be included and employees who are currently on services in banks of Peshawar.

Tools to be used: - I will be using two tools for taking information.

  • Survey forms/questionnaires
  • Interviews

Study plan:-

Chapter- II of the research is based on the literature review (secondary data) and industry overview which will give the researcher a base of the consumer banking industry in the Pakistan, consumer banking products and services offering by the local and foreign banks and their comparison and a short introduction of few banks.

Chapter - III of the research will be the research methodology, which consists of sample size, population, and technique of the research and tools for data analysis.

Chapter - IV of the research is all about analysis and findings from the data which the researcher collected from the customers and employees of the banks.

Chapter - V of the research will give recommendation and conclusion on the basis of the research findings and analysis.

Literature review

Consumer financing has extended in Pakistan at an extraordinary speed over most recent seven years. Banks earned record income within the generous room for credit rule provided by the SBP. The important matter in consumer financing from national economy and individual consumers point of view is, that Pakistan has the maximum interest pace spread in the world. While result of Consumer Right Commission of Pakistan analysis with situation to auto loan, it showed that the proportion of respondents whose request for car financing were discarded is higher (24%) than the borrowers who are at present availing car financing facility (14%). Also the report highlight the difficulty of credit card users, that 47 percent respondent complained that without any information providing to us they renovate in the plan of charges, and 11.3 percent respondents which suffers because of hidden charges.[1]

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Fast expansion in consumer banking range of the banking sector in current years has generated an ensuing dispute. The general opinion is that consumer finance has created troubles for less financially educated customers. In Pakistani banking sector it is new trend, while two key banks take an initiate in introducing credit cards in banking segment in the mid of 90s but that was just restricted to the salaried customers and businessmen. The financial liberalization progression over the previous decade or so, has led to the formation of a banking system which is mostly owned and operated by the private segment. Secondly, the invasion of liquidity in the banking segment from fiscal year 2002, forced banks to diversify and enlarge their income base by venturing into formerly untouched areas and third, the easy monetary procedure attitude of the SBP from 2002 to 2005 provided appropriate customers with financing options at little rate to meet up their consumption demand. Providing purchasing power to the medium class customer has been the mainly important accomplishment of this product set. Not only people been capable to high their standard of existing life by buying a variety of consumption goods which were formerly treated as luxuries.[2]

Banking sector acted as a vehicle in the improvement of the economy of the Pakistan. The development in the banking segment has not just in terms of asset expansion and profitability but also in of diversification of products and risk profile. The banks have targeted some of the formerly underserved segment like consumer finance which has witnessed significant growth in the past few years. Main factors behind such a huge expansion in consumer finance might includes little interest rates, flush of liquidity, product modernism, greater than before competition, financial liberalization, and highly growing income level is the main cause of high economic growth. At the same time, indefensible consumer expansion in less strong macroeconomic environment, unsuccessful prudential and regulatory structure, not a strong risk management system and lawful infrastructure can form systemic vulnerabilities. In 2006, Consumer loans increased by 29 percent or increase of Rs72.4 billion and reached from 252.6 billion to Rs325 billion. Due to determined higher growth, the share of consumer finance in all of the loans has increased to 13.5 percent in 2006 from 9.4 percent in which was in year 2004. [3]

The increase in credit card purchases was corresponding by the expansion in credit extension to further products such as individual loans, banks overdraft, car loans, store cards, payment of utilities in debts, and increase in consumer credit via mortgage lending. All of these products have its personal unique features, so that the consumer financial segment includes a blend of credit and interest rate hazard in difficult economic and financial surroundings. Consumer credit is huge not only in monetary expressions but also large numbers of customers involved and also the impact on those who deprived of consumer credit. The enlargement in consumer credit outstanding in the last 50 years is truly stunning. In the US and Canada for total trade banking and consumer lending is huge, it cross over corporate debt by almost 50 percent with household debt in the united states crossing $7.2 trillion in the year 2000, almost double the value owed in 1990. Not all of this increase is because of borrowing on credit lines. Credit cards have become more and more important as a method of wealth transmission. In the UK, 1316 million dealings by plastic cards in 1993 of which 724 million were by credit card compared with 3728 million dealings by cheque. But in year 2002 plastic card practice had overtaken cheque practice with 4814 million dealings on plastic card of which 1687 million were by credit cards.[4]

The present era of cutthroat competition, it becomes a requirement to success to have a huge and successful selection of products and services through which the banks can encourage and then triumph their customers. In consumer banking they offer such as loans, credit cards, simple installments and many more. Not each bank could offer a credit card and not every one of the banks could provide the services so consistently that do currently. There were few international banks that attempted to provide anything remotely similar to consumer banking. International banks such as standard chartered, Citibank and ABN AMRO have the hold up of the information base and finances of their overseas principals which are made them first to bring in consumer products in Pakistan. UBL, HBL and MCB were the recently privatized banks which have engaged in consumer financing actions not only in big cities but also smaller ones too. Due to their massive branch set-up they generated high volumes of dealing but also at the identical time reducing the prices of their products and services they offer. In year 2002, HBL's consumer banking range was value less than a billion rupees but at the end of year 2004, it is value 17 billion.[5]

Commercial banks had entirely ignored consumer financing as an action Form almost fifty-four years in Pakistan, There was negligible realization of the matter that the trademark of healthy economies is not idealistically high dependence on exports but on demand nationally, and expansion of indigenous resource and industrial bases that favors domestic utilization. The big desirability in extending financing services to the passive consumer sector is the vision of earning high interest rate, because consumers are flexible targets as far as haggling over interest rates taxable to them are concerned. Banks are belatedly trying to rectify this huge macroeconomic structural inequality but given the remarkable pattern of economic developments, but their efforts to promote consumer finance. While lesser interest rates have definitely enhanced borrowers' capability to borrow and service consumer loans, the recently created demand is approaching prices of consumer durables to out of reach.

Consumer finance is an uncertain ball game. The well-known yellow cabs system was the only big test in consumer finance in Pakistan, which was definitely a bad experience for nearly all banks who took part in it. Admittedly, political twists played a giant role in the breakdown of the system but operational inadequacies of banks played a superior role in this enormous failure. A key factor in that failure was the operational deficiencies in banks, mainly in assessing an individual's future refund capability keep in view his or her varying circumstances.[6]

In Pakistan, consumer finance regardless of fast growth in early period of 2-3 years has moved towards declining. It has absolutely raised a lot of questions about its further prolongation and growth in coming years. The mainly important query is: can it work as a medium of economic development mainly at a time when exports have revealed slow growth, state saving rate is low, inflationary stress is determinedly there over the three years, national and international markets and economic group of actors have become extremely aggressive and banking sector is highly concerned to defend its capital and enhance itself with higher profits on loans than government's concern regarding boosting economic development. Lending by credit cards, public/individual loans, automobile loans, loans designed for durables and housing finance comes out the main products of consumer finance. They formed domestic insist and lending policy by the banking sector in quite delicate ways. Consumer finance has also brought social transform through huge circular of money and easiness of income constraints for borrowing mainly among those medium class people. That was excited to become main part of rising economy and benefit from economic growth. The genuine beneficiaries of consumer finance are those people/citizens who did not have capability to purchase luxurious household items in a solo go but could pay for them due to consumer finance; the profit-making banks due to consumer finance have been earning huge interest and high returns on their investment and the economy that got momentum for growth.[7]

References:

  1. Khalid, S. (2008, July 28). "Consumer financing expands at high rate". The News.
  2. Babar, S. Z., Iqbal, J., and Afzal, R. (2007-8). "Perspectives on Consumer Finance in Pakistan", Financial stability report, pp 87-88.
  3. Malik, L.F., Rizwan, M., and Ali, A. (2006). "Consumer sector", Banking system review, pp 24-25.
  4. Thomas, L.C., Oliver, R.W., and Hand, D. J. (2005). "A Survey of the Issues in Consumer Credit Modelling Research", The journal of the operational research society, Vol. 56, No. 9, pp1006-1008.
  5. Ahmad, S. I. (2005). "Consumer banking in Pakistan", Marketing association of Pakistan.
  6. Shahid, A. B. (2003, March 10). "Consumer finance: what are its chances of success?"
  7. Sharif, M. (2008). "Trends in consumer finance and implications for macro-economic indicators", business and finance review.
  1. Khalid, S. (2008, July 28). "Consumer financing expands at high rate". The News.
  2. Babar, S. Z., Iqbal, J., and Afzal, R. (2007-8). "Perspectives on Consumer Finance in Pakistan", Financial stability report, pp 87-88.
  3. Malik, L.F., Rizwan, M., and Ali, A. (2006). "Consumer sector", Banking system review, pp 24-25.
  4. Thomas, L.C., Oliver, R.W., and Hand, D. J. (2005). "A Survey of the Issues in Consumer Credit Modelling Research", The journal of the operational research society, Vol. 56, No. 9, pp1006-1008.
  5. Ahmad, S. I. (2005). "Consumer banking in Pakistan", Marketing association of Pakistan
  6. Shahid, A. B. (2003, March 10). "Consumer finance: what are its chances of success?".
  7. Sharif, M. (2008). "Trends in consumer finance and implications for macro-economic indicators", business and finance review.