2010

[Type the company name]

Mohammad Ahsan Dahar I.D :_ 8683

Section:- C

[CONSUMER FINANCING]

Contents INTRODUCTION ...... 4 CONSUMER FINANCING ...... 4 What is Consumer Financing? ...... 4 Growth of Consumer Financing in Pakistan ...... 5 Types of Consumer Financing ...... 6 (a) Personal Loans: ...... 6 (a.1) personal loan what banks hide from you: ...... 6 (b) Auto Loans ...... 7 (c) House Financing: ...... 7 (d) Credit Cards: ...... 8 Need of I.T in Consumer Financing ...... 10 Fast application processing: ...... 10 Better Services to customers: In ...... 10 Mass consumer client record handling: ...... 10 Reduce calculation errors: ...... 10 Efficient loan recovery ...... 10 Auditing and fraud detection: ...... 11 Reviewing Consumer Financing through Articles :- ...... 11 (1) 'High interest rate hampers consumer financing growth' ...... 11 (2)Consumer financing losing luster:- ...... 13 Prudential Regulations ...... 14 Pre-operation Requirements ...... 14 Minimum Standards for Consumer Financing Activities ...... 14 Information Disclosure ...... 15 Exposure Limits ...... 15 Risk Mitigation Ability ...... 15 Margin Requirements ...... 16 Borrower’s Eligibility ...... 16 Insurance Premium ...... 16 Auto Loans ...... 17 House Financing ...... 17 Personal Loans ...... 17

CONSUMER FINANCING IN PAKISTAN : ...... 18

BANK ALFALAH LIMITED ...... 18 Bank Alfalah ...... 18 Schedule of Charges ...... 21

UNITED BANK LIMITED ...... 25 UBL CREDIT CARD … MAZAY MEIN RAHO! ...... 25

MUSLIM COMMERCIAL BANK LIMITED (MCB) ...... 27 Conclusion ...... 30

INTRODUCTION

Over the last seven years, Pakistan’s banking sector has robustly engaged in consumer financing by unleashing a variety of products such as credit cards, auto loans, housing finance, and personal loans, etc. The unprecedented growth of consumer financing is largely attributed to the liberal economic policies attuned to the principles of free market economy, and huge liquidity available to the banks in the aftermath of 9/11. This environment prompted many banks to make their pie of profits bigger by selling consumer financing products through tactical and persuasive strategies, even where no genuine demand existed. As a result, supply-driven approach and aggressive marketing have further catalyzed the boom. From a macroeconomic standpoint, consumer financing has considerably contributed to economic turnaround of Pakistan by stimulating consumption and investments. There has been a phenomenal increase in private consumptions due to easy availability of credit from banks. In tandem with this development, a number of problems and challenges have emerged with adverse effects on the national economy as well as the individual consumers. At the macroeconomic level, the boom in consumer financing has demonstrated strong inflationary impact despite stringent monetary policies. Personal and auto loans, for example, have resulted in increased demand for consumer goods, expansion of road networks, and imports of petroleum products. From a consumer’s standpoint, a whole plethora of issues has emerged as a result o unfair profit-earning strategies of banks in absence of consumer awareness about terms and conditions, rules, and regulations, etc. In this context, Consumer Rights Commission of Pakistan (CRCP) has undertaken this research with financial support of The Asia Foundation. The main objective is to map and highlight the emerging issues and challenges associated with consumer financing.

CONSUMER FINANCING

What is Consumer Financing? Consumer financing means any financing allowed to individuals for meeting their personal, family or household needs. The facilities categorized as Consumer Financing are given as under: Like personal loans, auto loans, house financing, and credit cards. These finance give people to live these own . All the people can not afford to achieve their desired. But they want to enjoy the life, and then they go to banking and applying for financing. The bank takes some necessary steps and then allow to people to enjoy the life. Rapid growth in the consumer finance portfolio of the banking sector in recent years has generated an ensuing debate, mostly critical of its alleged role in inducing consumption led growth in the economy. The general perception is that consumer finance has created problems for the less financially literate customers. The aims to explore some of these perceptions and present data and evidence in perspective, while taking into account the high sensitivity of these loans to increasing interest rate dynamics. Notably, the household sector in Pakistan is underleveraged by global standards, and emergent risks are well managed by the banking sector . Consumer finance is an established financial product across the globe, particularly in mature economies, where it constitutes a significant portion of banks’ lending portfolios. In the Pakistani banking sector, however, the evolution of the consumer financing portfolio is a more recent phenomenon, as banks have traditionally focused on lending to the corporate sector and public sector entities. While two prominent foreign banks took the lead in introducing credit cards in the banking sector in the mid- ‘90s, their outreach was limited to the top tier of salaried customers and businessmen. Emulating the experience of various foreign banks who had a head-start in this area, domestic private banks have exhibited remarkable adeptness in adopting new procedures for credit risk assessment, setting up the requisite policy and collections units, and upgrading the scope of their IT based systems. In doing so, they successfully introduced several innovative products for the individual consumer segment. On the demand side, the consumer, who previously did not have to bank credit without sufficient liquid collateral, responded well to these initiatives. A combination of factors are responsible for the widespread popularity of consumer finance in recent years: the financial liberalization process over the last decade or so, has led to the creation of a banking system which is largely owned and operated by the private sector, and is free to allocate resources in response to the demands of a market based mechanism. Secondly, the influx of liquidity in the banking sector since FY02 motivated banks to diversify and expand their earnings base by venturing into previously untapped areas, and third, the easy monetary policy stance of the central bank from FY05 to FY09 provided eligible customers with financing options at historically low rates to meet their consumption demand. In this backdrop, consumer finance has emerged as one of the most promising asset products for banks. Providing access to purchasing power to the middle-class consumer has been the most significant achievement of this product class. Not only have people been able to raise their standard of living by purchasing various consumption goods which were previously treated as luxuries in reach of only a few, demand for these goods has also led the manufacturing sector to expand its capacity, such that both backward and forward linkages have contributed to the expansion in economic activities. Banks’ auto loans product and loans for consumer durables, for instance, have been instrumental in this aspect. Though still small in proportion, the rising demand for mortgage finance reflects the individual consumer’s need and financial capacity, to acquire private ownership of housing units. Hence in promoting their consumer financing products, banks have played their due role in promoting economic development in the country.

Growth of Consumer Financing in Pakistan Until the early 1990s, consumer financing was not offered by commercial banks in Pakistan. Just Credit cards were offered to only a selected band as a convenience for bill and not for financial support. In 2001, excess in liquidity of the banks due high inflow of remittances in the 9/11 aftermath and low interest rates motivated banks to enter into consumer financing business. Then the bank of Pakistan jump in to consumer financing and gives finance to all people who fulfill the requirement of banking.

Types of Consumer Financing The consumer financing have four major types a Personal loans. b Auto loans. c House financing. d Credit cards.

(a) Personal Loans: mean the loans to individuals for the of goods, services and expenses and include Running Finance / to individuals. There are two kinds of personal loans, secured and unsecured. Secured loans are backed by some form of collateral such as an automobile, a home or property. They are usually for longer periods of time and for larger amounts than unsecured loans. Secured loans are easier to qualify for because the lender takes on less risk with the presence of collateral. Because of the lowered risk they generally have lower interest rates. Secured loans are best for borrowing large amounts, people with bad or imperfect credit history and those that want longer repayment periods.

(a.1) personal loan what banks hide from you: It is very easy getting a personal loan these days. You can walk into a bank or a consumer finance company and get a loan in a very short period of time. Or it can be the other way round as well. A direct sales agent can come to you and convince you to take a personal loan. While convincing you to take a personal loan, the bank or the direct sales agent is likely to tell you that the rate of interest charged on these loans is in the region of 20- 25%. The logic given is something like this: Let us say an individual decides to take a personal loan of Rs 75,000 to be repaid over a period of three years. You are told that to repay this loan you would have to pay an amount of Rs 3,400 every month. Hence, over a period of three years, the total amount you would have paid would work out to Rs 122,400. Of this Rs 75,000, is the loan that you have taken. Hence, you pay an interest of Rs 47,400 (Rs 122,400 - Rs 75,000) over a period of three years. An interest of Rs 47,400 works out to Rs 15,800 (Rs 47,400/3) per year. An interest of Rs 15,800 in a year on a loan amount of Rs 75,000 implies an interest rate of around 21%. This figure is arrived at by dividing Rs 15,800 by Rs 75,000 and expressing this as a percentage. Banks and direct sales agents call this way of expressing interest is known as the flat rate of interest. But this is not the right way to calculate interest. Banks and consumer finance companies in their zeal to give you the loan do not tell you the truth. In order to repay the loan, you have to pay a certain amount every month to the bank, or the consumer finance company, you have taken the loan from. Every month. When you make this payment a certain part of the principal amount -- i.e. the actual loan that you had taken -- gets repaid. Given this, the interest is to be calculated on the loan outstanding at any point in time, instead of on the principal. This is the right way of calculating interest and is known as the reducing balance method of calculating interest. When this method is used to calculate interest the actual rate of interest is the example taken above comes to 35%. Hence, the actual interest rate that you are paying on the loan is almost 15% higher than what banks and consumer finance companies lead you to believe. For charging such a high rate of interest, the reason usually offered is that personal loans are unsecured, i.e. the individual taking the loan does not need to offer them a security. And since giving out such loans is risky business, the rate of interest is high. The explanation is acceptable. But what is not acceptable is the fact that banks and consumer finance companies charge a rate of interest as high as 35% on their personal loans and tell their borrowers that the rate being charged is as low as 20%. This clearly is a marketing ploy. It is easier to get people to borrow at lower rates than at higher rates.

(b) Auto Loans : mean the loans to purchase the vehicle for personal use.

(c) House Financing: means loan provided to individuals for the purchase of residential house / apartment / land. The loans availed for the purpose of making improvements in house / apartment / land shall also fall under this category. The Pakistani housing finance situation has much common with that of many other emerging markets around the world. Despite a large and persistent housing deficit (6 million households), a number of factors such as low income levels, legal property issues, and large informal economy result in scarce demand for mortgage loans. Financial institution’s growth in mortgage lending- and the subsequent improvement in terms and conditions which might increase further demand in turn has been hampered by a lack of long term funding, inadequate incentives to lend to lower income households, with most banks performing to concentrate their activity on high income groups and the corporate sector (average loan size is Rs. 2.6 million). The housing finance market in Pakistan at end December, 2007 amounted to Rs. 126 billion doubling its size from 2005; a massive growth of 112 % in almost three years. This growth has most probably been favored by greater demand resulting from the accompanying rise in GDP per capita in Pakistan over the past few years, remittance growth and growing competition among banks have also contributed to this trend. Ultimately, however, most of the recent expansion of mortgage lending in Pakistan can be traced to SBP’s efforts to increase the supply of mortgage lending through relaxing restriction on housing finance. Despite these developments in mortgage market, growth, albeit significant, is still small in both relative and absolute terms: mortgage lending in Pakistan barely amounted to 1% of GDP in 2007, far from the 14 % registered in Chile, 5 % in Colombia, 2.5 % in India and 65% in USA. Though the mortgage market is moving in the right direction and efforts are under way to promote housing finance activities, a large part of the population continues to be unable to obtain a mortgage loan due to high cost of borrowing, lack of financial support from the government for low cost housing and land titling issues. Having successfully encouraged banks to service the middle class, the government efforts must now focus on developing mechanism to address the needs of lower income groups and foster further expansion of the housing finance market. The government should also play a role in promoting mortgage lending by breaking barriers to entry and offering well-designed incentives such as mortgage risk insurance and creating an enabling environment for housing finance activities in Pakistan.

(d) Credit Cards: mean cards which allow a customer to make payments on credit. Supplementary credit cards shall be considered part of the principal borrower for the purposes of these regulations. Corporate Cards will not fall under this category and shall be regulated by Prudential Regulations for Corporate / Commercial Banking or Prudential Regulations for SMEs Financing as the case may be. The regulations for credit cards shall also be applicable on charge cards, debit cards, stored value cards and BTF (Balance Transfer Facility). The State Bank of Pakistan today issued comprehensive operational guidelines for credit card business of commercial banks/DFIs, outlining code of conduct for various aspects of credit card operations including their marketing, interest rate charges, recovery of dues, billing processes etc. According to the guidelines, banks/DFIs are advised to quote interest rate and service charges on annual basis. Although, they are free to set the aforesaid rates, banks/DFIs are required to set well-defined service level for each of the product/service; whether charged or free. Banks/DFIs should also inform the credit card holder on the interest rate or services charges through advertisement and/or sending information to card holders on their addresses. Banks/DFIs should not levy any charge that was not explicitly mentioned either in the User Guide or Application Form or Schedule of Charges provided to the customer at the time of selling credit card, without the prior consent of the card holder. However, this would not be applicable to excise duty or other charges which may be levied by the Provincial or Federal Government or any other statutory authority from time to time. Banks/DFIs should, however, timely update the customers on the imposition of such levies. Banks are also advised that interest amount should be charged on net credit i.e. after deducting the amount paid by the card holder. The outstanding amount due to rounding off of paisa should not be considered as partial payment and interest amount should not be charged on it. According to the guidelines, banks/DFIs must ensure that their recovery/collection officers should not resort to any verbal or physical harassment of the delinquent credit card holder, their family members, referees and friends during recovery/collection efforts. Recovery/collection officers should also not humiliate publicly or in private or intrude the privacy of the credit card holder’s family members, referees and friends. Telephone calls and visits to credit card holders for recovery of unpaid dues should be restricted to a convenient time and the same may be defined in the Bank/DFIs public policy and should be properly communicated to customers at the time of issuance of credit card. In addition, recovery should only be made from principal card holder and in no case supplementary card holders shall be resorted to any sort of pressure to pay the unpaid amount. However, supplementary card holders may be contacted only to enquire about the whereabouts of the principal card holder. Moreover, banks/DFIs should not start recovery process for reported disputed transactions until the investigation carried out by card_issuing Bank/DFI/Banking Ombudsman/State Bank of Pakistan is completed. In case of wrong/ inappropriate basis of rejection of customer claim, bank/DFI would be liable for penalty. With regard to marketing of credit cards, banks/DFIs should discourage aggressive and hard selling & marketing practices during working/office hours; except with prior appointment of the prospective customer. In case a customer is called during office hours for seeking appointment, he/she should be first asked for the option to continue with the call or not. Banks/DFIs should seek prior consent of their customers/account holders for informing them on new products and services on telephone as and when introduced. In this regard, banks should maintain a “Don’t call list” comprising the contact details of those customers who do not want to be contacted. The list should be accessible to all marketing staff and they should be advised not to contact such customers /account holders for introducing or offering new banking products. In this connection, banks should update the database of existing customers within three months from the date of issue of these guidelines. Banks/DFIs should follow the Code of Conduct for marketing of credit cards which will be issued by Pakistan Banks’ Association (PBA) in consultation with SBP. Guidelines stipulate that credit card may only be issued by the banks/DFIs, pursuant to a written application duly filled and signed by the prospective customer. However, in order to reward and retain high end existing customers, pre_embossed cards may be issued after a proper acceptance by the customer, which may be in the form of any verifiable mode such as recorded phone call. Nevertheless, these pre_embossed Credit Cards should be activated only after receiving complete application form from high_end customers and criteria for selecting high end customers must be defined in the bank policy. Keeping in view the complex nature of credit cards, the banks/DFIS are advised to simplify the credit card terms and conditions, and keep them clear and understandable both in English and Urdu languages. In order to mitigate fraudulent use of credit cards, banks/DFIs should have built in functionality in their systems to monitor the usage of credit card. Additionally, it should also promptly identify unusual or out of pattern transactions. In this connection, banks/DFIs may introduce checks or limits on certain category of transactions, customers, merchants etc. Under the SBP guidelines banks/DFIs are required to dispatch monthly Statement of Account to credit card holders at least 15 days before the due date. Towards this end, banks/DFIs may offer online, email or IVR billing facility, with appropriate security measures. If the customer lodges complaint regarding non receipt of monthly Statement of Account, the statement should be dispatched to him/her free of cost, within two working days from the date of complaint. Banks/DFIs are also advised that they should have an appropriate complaint resolution structure in place commensurate with the volume of complaints and better service consideration. Credit card complaints resolution mechanism must be prominently disclosed on the official website of the Bank/DFI. The Bank/DFI may also arrange online complaint registration on their websites. Complaint number should be provided to each complaint submitted to bank/DFI and same should be communicated to the Credit card holder. Banks/DFIs must resolve the disputed transactions/complaint of the credit card holder promptly and as per the franchise rules of VISA, MasterCard, AMEX or any other international , taking into account nature of the transaction, distances, time zones, etc. However, in no case complaint resolution time should exceed 45 days from the date of complaint for the transaction(s) under originated within Pakistan. In addition, interest amount should not be charged to customer during investigation period. Bank/DFI will recover interest amount accumulated during investigation period only when the dispute is settled in favor of bank/DFI. If decision turns in favor of the customer, the bank/DFI needs to refund the amount of disputed transactions, even to those customers who had made the payment of disputed transaction and cancelled the card after lodging complaint. Under the guidelines, banks/DFIs are advised to develop sound risk evaluation procedures for enlisting /registration of merchants keeping in view the franchise rules of their respective franchiser. The enlistment/registration process may interlaid include proper identification, verification and good credit history, clean track record in Visa’s National Merchant Alert Service and / or Master Card’s Member Alert to Control High Risk Merchants etc. Banks/DFIs providing ‘acquiring services’ need to educate their merchants about the use of Point of Sale (POS) Machine, genuineness of credit cards, signature verification, their rights and responsibilities under the agreement. Acquirer banks/DFIs are required to facilitate merchants by providing prompt payments and timely maintenance/service of POS machines. Acquirer Banks/DFIs should maintain track record of merchant’s performance and categorize them, based on risks, involvement in frauds & disputed transactions etc. and develop a data base or negative list of merchants involved in fraudulent activities. The merchants involved in credit card related frauds should be delisted and their particulars should be shared with other banks/DFIs through PBA.

Need of I.T in Consumer Financing Now a days Information Technology is no doubt plays a significant role in the growth of other industries. Its need in consumer financing can be justified by the following key considerations where only IT infrastructure can help to handle these issues.

Fast application processing: By using information technology, the application processing of the customer can be made fast. Electronic transactions take less time to process the application than manual because all the information is available online and relevant application processing persons just have to take the decision on the data available online.

Better Services to customers: In this era of high competition, it is the better service which attracts the customers toward doorstep. In consumer financing, this can be done by solving all the hurdles that come in front of the customer to avail the product. In this perspective, the information technology seems to be quite useful such as easy accessibility of resources online, fast and easy availability of the product by fast application processing described above.

Mass consumer client record handling: This problem is a big concern for CBSP. In consumer banking, the number of clients is very high and to keep the record of all customers manually is not only hard to maintain but also time consuming and resource intensive. By using any good consumer banking software solves this problem with an ease.

Reduce calculation errors: By using a good consumer banking software makes the tiring and time taken calculations faster and error free.

Efficient loan recovery : Because the number of consumer financing clients is large and everyone is not innocent and responsible enough to pay the repayments or dues in time, there is always a need to recover the loan amount from defaulter. Any efficient collection or repayment software is very useful in this context to support the collectors as they need to trace the defaulters frequently to take appropriate action against them for recovery.

Auditing and fraud detection: With I.T framework, banks can closely monitor accounts for risk analysis. They are better equipped to determine patterns of fraudulent activity and identify fraud in time to prevent it, saving their money.

Reviewing Consumer Financing through Articles :-

(1) 'High interest rate hampers consumer financing growth'

KARACHI (October 05, 2010) : Slow economic activity and high interest rate have hampered the growth of consumer financing and posted rise in non-performing loans (NPLs) as overall banking sector NPLs under consumer financing have reached 13 percent.

This was stated by Muhammad Raza, head of consumer banking in Meezan Bank while talking exclusively to Business Recorder . He said that Meezan Bank has adopted a very cautious approach in consumer financing to avoid defaults and ensure that only those people get consumer financing who can handle its financial burden amicably.

He said that the NPLs of the entire banking system of Pakistan are on the rise mainly due to recession, high inflation and interest rates, which have affected the repayment capacity of the customers. He said: "Even Meezan Bank's consumer finance NPL has increased to 4 percent, from previous 2 percent, which is still the lowest in overall banking system of the country. Even for the Islamic banking alone the average NPL ratio is 7 to 8 percent."

He said: "Despite this, we can still claim that our ratio of non-performing loans in the consumer business is the lowest in the market due to our highly strict due diligence and complete compliance with our policies and procedure." He added that the key "to our success is the quality of our credit and we never compromise on it". He appreciated State Bank of Pakistan for launching the fraud monitoring process eg ECIB, which has largely reduced the possibilities of bank frauds, thus providing a feasible working environment to financial institutions.

Taking about the high financing rate he said that the major challenge that all conventional and Islamic banks are facing right now is the high interest rates due to which the cost of consumer financing has gone out of common people's range.

He said that high interest rate has hampered the growth of consumer financing and growth rate is much less than previous years. High interest rate is also a reason of rising non-performing loans of banking sector. "The SBP should focus on the growth of economic activity by decreasing the interest rate, instead of increasing interest percentage upon government borrowing and inflation," Raza suggested.

Meezan bank does not have any recent plans to introduce credit card as Shariah supervisory board has not given approval. "Nevertheless, we are planning to add more features to our existing Visa to facilitate our consumers," he said.

On liability side, Meezan Bank has grown consistently and the deposits grew at a rate of 42 percent in 2009 as compared to 9 percent growth in the banking industry. "Even this year, our deposits have grown at 25 percent during the 9 months of the year. This clearly shows the trust of the customers on Islamic banking and Meezan Bank," Raza said.

"I personally see huge untapped potential of consumer financing in Pakistan as there are millions of consumers who are at a distance from banking due to various reasons," he said. He sad that being the pioneering Islamic bank in Pakistan, Meezan Bank has to go a long way and bring these potential consumers in its net, as consumer financing is still relatively new and its demand would stay in Pakistan.

Talking about products he said that currently Meezan Bank offers Car Ijarah (car financing), Easy Home (housing finance), Motorcycle Financing and Labbaik Umrah and Hajj financing products for Pakistani consumers. He added that the Bank would soon introduce laptop and generator financing, too.

Meezan Bank's Car Ijarah provides car financing, based on the principles of Ijarah and is free from the element of interest. Meezan Bank' Car Ijarah is a car rental agreement, under which the Bank purchases the car and rents it out to the customer for a period of 3 to 5 years, agreed at the time of the contract. Upon completion of the lease period the customer has the option of purchasing the car from the bank, he said. 'High interest rate hampers consumer financing growth' An Islamic Ijarah is an asset-based contract, ie the lessor should have ownership of the asset during the period of the contract. Under Islamic Shariah, all ownership-related rights and liabilities should lie with the owner, while all usage-related rights and liabilities should lie with the user.

Meezan Bank's 'Easy Home' works through diminishing Musharakah. The nature of the contract is co-ownership, and not a loan, because the transaction is not based on lending and borrowing, but on joint ownership in the house, Raza said. Creating joint ownership and then gradually transferring it to the customer, instead of simply lending money, is the major factor that makes 'Easy Home' Shariah-compliant, he added.

Another challenge remains mass public awareness of the fact that Islamic banking provides a comprehensive business solution to all. That could only be possible with a strategic presence of Islamic banking branches across the country. "Currently, we have a network of 202 branches in 54 cities of the country, and Meezan Bank has received an outstanding response from the public. We plan to close the year at 222 branches," he said.

(2)Consumer financing losing luster:-

KARACHI: Every segment of consumer financing from credit card to car purchasing witnessed a sharp contraction during the last fiscal year 2009- 10 that ended June 30, the State Bank of Pakistan reported on Monday.

The overall consumer financing plunged by Rs50 billion, or 17 per cent, during the year under review over the previous fiscal year. The outstanding stock of consumer loans fell to Rs244 billion in 2009-10 against the Rs294 billion in 2008-09.

The data showed that well-advertised credit card business also shrank significantly. The loans under the credit card had fallen to Rs28 billion from Rs35 billion the previous year.

The lucrative credit card business, which has a great influence in developed and developing economies, failed to get significant space in the domestic market.

Most of large domestic banks and foreign banks had been involved in this business, however, a report recently issued by Banking Ombudsman showed that the highest number of complaints were against the credit card business.

Analysts believe that low quality performance of banks in case of credit card is the real hurdle in promotion of plastic money business.

The car purchasing was the second highest attraction for the consumers but the outstanding loans in this particular sector showed steep fall during the last couple of years.

The outstanding loans for car purchasing fell to Rs64 billion till June 30, 2010. The same was Rs78 billion in 2009 and Rs105 billion in 2008.

Despite fall in the loans for car purchasing, the prices of cars went up due to high demand and short supply, a policy adopted by the local car producers due to their monopolistic domination in the market.

Some reports also indicate that purchasing of cars on cash has increased mainly due to higher liquidity in agriculture sector as growers got much higher prices for their cash crops like sugarcane, wheat and rice during last couple of years.

Higher volume of loans given under the consumer financing was of personal loans which also witnessed sharp decline. The stock of personal loans reduced to Rs94 billion in 2009-10 from Rs115 billion in 2008-09. In 2007-08 it was Rs140 billion.

Loans for house building under the consumer financing dropped to Rs54.5 billion from Rs61 billion the previous year. In FY2008, it was Rs66 billion.

Consumer durables were the poorest among the different segments of consumer financing as the outstanding loans were just Rs211 million in 2009-10 as against Rs420 million in 2008-09 and Rs499 million in 2007-08.

The private sector performed much below the expectation in the last fiscal year while the overall economy remained under pressure owing to rising inflation, higher cost of production and unpopular agreement with the IMF.

Prudential Regulations

The SBP issued Prudential Regulations for Consumer Financing (PRCF) in the last quarter of 2003, and came into effect on January 1, 2004. Previously, prudential regulations were designed for a predominantly public sector banking system and geared towards wholesale and commercial banking. The objective of PRCF is to carefully monitor and supervise the consumer financing activities of the banks and DFIs by limiting their exposure in terms of equity, devising predefined criteria for the financial institutions undertaking this activity, and encouraging self-regulation through more transparency and greater disclosure. In this respect, disclosure requirements have been prescribed by the SBP.

Pre-operation Requirements According to the regulations, the pre-operation requirements for undertaking consumer financing activities include preparation of a comprehensive consumer credit policy duly approved by the Board of Directors of the banks and DFIs, establishment of separate risk management capacity staffed by expert and experienced personnel, development of a specific program for every type of consumer financing activity, development and implementation of efficient computer-based Management Information System (MIS) capable of generating periodical reports, development of comprehensive recovery procedures for the delinquent consumer loans, preparation of standardized set of borrowing and recourse documents, and acquiring membership of at least one credit information bureau. Every bank is obligated to clearly disclose, by publishing in the form of brochures, all important terms, conditions, fees, charges, and penalties for the ease and reference of customers.

Minimum Standards for Consumer Financing Activities The minimum standards to be observed while carrying out consumer financing activities include risk management process, such as identification of repayment source and assessment of customers’ ability to repay, record of customers’ dealings with banks/DFIs and the latest information obtained from CIB about credit worthiness of the customer. Besides, the PRCF require the banks to obtain written declaration from the customer containing details of all consumer financing facilities of other banks availed by the customer. The objective is to help banks avoid exposure against a person having multiple facilities from different financial institutions on the strength of sole source of repayment. In many cases, the banks do not obtain this declaration, and process the applications with minimum documentation with the aim of profit maximization. In addition, the internal audit and control system, as well as, properly equipped and managed accounting and computer systems are also requisites for processing and management of consumer financing activities.

Information Disclosure An important condition in the regulations is with reference to disclosure and ethics. Under the regulations, every bank is obligated to clearly disclose, by publishing in the form of brochures, all important terms, conditions, fees, charges, and penalties for the ease and reference of customers. This pre-requisite is an important step forward by the SBP for protecting customer’s right to information. However, the manner in which this information is presented by the banks is not very helpful for customers. Most often, the banks do not disclose to the customer all applicable charges. Similarly, technical terms and types of charges used in the statements and information broachers are not fully explained. Access to information is a critical issue, which has been addressed in the regulations only partially.

Exposure Limits The regulations are frequently updated to incorporate the emerging innovative products and risks emanating from them. They link consumer credit exposures of the banks to their track record of Non-Performing Loans (NPLs) and equity. Exposure limits have been set on part of both the borrowers and lenders. According to regulations, banks are limited to a maximum consumer credit exposure of 10 times of their equity provided that the ratio of their classified consumer loans to total loans is below 3%. However, if it is higher, the exposure limit is accordingly reduced. For example, for the ratio at 3-5%, the maximum limit reduces to 6 times of the equity and for up to and above 10%, it is reduced to merely 2 times of the equity. This linkage ensures that the total exposure to consumer credit remains within limits and is tied further to the bank’s The SBP has restrained the banks from charging any amount under the head of “insurance premium” unless written consent of customer is obtained in advance.

Risk Mitigation Ability Moreover, in addition to the required provisioning, the regulations require an additional general reserve of 5% for unsecured and 1.5% for secured consumer loans as additional risk premium so that additional losses incurred could easily be absorbed without taking additional hit on capital. During 2006, the level of compliance by the banks and DFIs was assessed and these institutions were categorized into Largely Compliant, Partially Compliant and Non Compliant with respect to meeting these preconditions. Furthermore, to ensure safety and soundness of the bank/DFI itself, the lender is required to ascertain that the total installment of the loan being approved is commensurate with the monthly income and repayment capacity of the borrower. The banks have also been restricted from transferring any classified loan or facility from one category of consumer financing to another.

Margin Requirements A noteworthy point is that the regulations do not put any limit on the margin requirements on consumer financing facilities provided by the banks/DFIs. They have been given discretionary powers to decide the margin requirements after assessing the risk profile of the borrower. However, the SBP has the authority to fix or reinstate margin requirements on consumer financing facilities for various purposes, as and when required. In addition, the restrictions applicable on corporate/commercial banking have been declared applicable on consumer financing activities, which would assist the banks to lend in a secure manner.

Borrower’s Eligibility All the banks/DFIs are required to develop a special programme including the objective and qualitative parameters for the eligibility of the borrower.The regulations on credit card have limited the maximum unsecured limit to a borrower to Rs.500, 000. This ceiling also includes the limit assigned to any supplementary credit cards. The bank is required to provide the credit card holders a statement of account at monthly intervals, unless there is no transaction or outstanding balance on the account since last statement.

Insurance Premium The SBP has restrained the banks from charging any amount under the head of “insurance premium” unless written consent of customer is obtained in advance. This regulation relieves the customers by guarding them against forced and undesired insurance premium. However, the monthly statement and insurance premium regulations are not fully honored by the banks. Banking Surveillance Department, The Banking System Review, 2006, State Bank of Pakistan. "Banks are not allowed to finance cars older than five years. Moreover, the banks are also required to keep the customer informed about the repayment schedule and changes made in it from time to time."

Auto Loans As far as auto loans are concerned, the maximum tenure of loan cannot exceed seven years, while minimum down payment cannot fall below 10% of the value of the vehicle. The banks/DFIs are allowed to extend loan only for the ex-factory tax paid price fixed by the car manufacturers without adding any premium charged by the dealers and/or investors. The regulations also provide the opportunity of repossession of vehicle. The regulations require the bank to mention a clause of repossession in the loan agreement and publicize the maximum amount of repossession charges in the schedule of charges. Banks are not allowed to finance cars older than five years. Moreover, the banks are also required to keep the customer informed about the repayment schedule and changes made in it from time to time.

House Financing The regulations related to house financing allow the banks to determine the finance limit, both in urban and rural areas, in accordance with their internal credit policy, credit worthiness and loan repayment capacity of the borrowers. However, the total monthly amortization payments of consumer loans, inclusive of housing finance, are not allowed to exceed 50% of the net disposable income of the prospective borrower. The maximum debt-equity ratio for housing finance has been set 85:15. The maximum time limit for housing finance is 20 years, but the regulations do not prescribe any minimum time limit. Like auto finance, provisions for housing finance have been set as 25%, 50% and 100% for the substandard, doubtful and loss categories, respectively.

Personal Loans The personal loans cover all loans that individuals avail for the payment of goods, services and expenses. It also includes running finance/ revolving credit to individuals. The SBP has assigned a general clean limit of Rs.500,000 for all types of personal loans. The prime customers, who have extraordinary strong repayment capacity, can be assigned clean limit beyond Rs.500,000, but not more than Rs.2 million. The banks are also allowed to offer the loan up to one million, but only when the loan is appropriately secured by tangible security with appropriate margins. The time limit set for such loans is not allowed to exceed five years except for the advances given for educational purposes, which can be extended to seven years. In case of running/revolving finance the banks are required to ensure that at least 15% of the maximum utilized loan during the year is cleaned up by the borrower for a minimum period of one week, except the banks that require their customers to repay a minimum amount each month and where the aggregate cumulative monthly installments exceed the 15% clean up requirements. Like other consumer financing products, provision for personal loans have also been set as 25%, 50% and 100% for the substandard, doubtful and loss categories, respectively.

CCCONSUMER FFFINANCING IN PPPAKISTAN :::

In Pakistan, more or less all the major banks are providing consumer financing. The industry is highly competitive, fairly efficient and has a high potential of future development. Generally banks provide the same kind of options in terms of consumer financing. In this report, Credit cards of the following 3 banks has been explained.

 Bank Alfalah Limited

 Muslim Commercial Bank Limited (MCB)

 United Bank Limited

BBBANK AAALFALAH LLLIMITED

Bank Alfalah Credit Card

Your Bank Alfalah Credit Card is your partner everywhere and is globally accepted and welcomed at locations displaying the VISA logo. It is accepted at nearly 27 million locations in more than 150 countries around the globe and over 22,000 Bank Alfalah’s establishments in Pakistan.

Alfalah VISA lets you pay for shopping, travel, entertainment, meals and much more. Card members are facilitated through a number of promotions from time to time. In addition, there are a number of strategic business partnerships with leading local and international brands for purchase of home appliances at exciting Step-BY-Step (SBS) monthly installment plan with free home delivery at lowest interest rates. Salient features are:

• No Joining / Annual / Renewal fee • Electricity, Sui Gas, PTCL and Warid bills payment through 24 hour Call Center and Auto Debit instructions • SMS for card usage, mini statement, payment receipt confirmation, etc. • Cash withdrawal at all 1LINK ATMs • Special offer on Warid post paid connections

Rush now to avail matchless features offered by Alfalah VISA.

Platinum Card

It is accepted at nearly 27 million locations in more than 150 countries around the globe and at over 22,000 establishments in Pakistan.

Titanium

Titanium MasterCard is your partner everywhere and is globally accepted and welcomed at locations displaying the MasterCard logo.

Gold & Silver

A perfect card combination for all segments of salaried & professional individuals.

Young Professional

This Card is for you, if you are: • a Graduate... • has just started your Career.

As a Classic Blue Cardholder you have a privilege of having access to all features of Alfalah VISA Credit Cards including two free supplementary cards.

Women Exclusive

Now for the first time in Pakistan , Bank Alfalah has introduced a credit card exclusively for women. This card has its unique features which have been tailor made for women in Pakistan.

Student Card

For the first time in Pakistan, Bank Alfalah introduces a credit card for Students. This card is for you if you are enrolled in a professional university (as per Bank Alfalah’s approved list) with 15 years of schooling experience.

Now you can pay your fee, buy books or just with Alfalah VISA... :-) Not only this but you will also earn reward points and can redeem them for a TV, Mobile Phone, CD player & DVDs etc.

Supplementary Card

Now you can give Free Supplementary Cards to anyone you care for.

All Bank Alfalah Basic Card members can apply for supplementary cards in separate categories including Son’s Card, Daughter’s card (children who are above 13 years of age) and House Staff’s card. This feature has been introduced for the first time in Pakis tan, yet another beginning made by Bank Alfalah Credit Cards. In addition, supplementary cards can be issued to anyone you like thus giving you complete freedom of choice (Only 1 supplementary card will be issued to Awami Card holder).

Visa Mini

Visa Mini is a practical and convenient part of your everyday life - whether you go for shopping, dine out, buy grocery, want to go for holidays or feel like buying something of interest while you are out just for a jog! You can take it with you anywhere y ou like with no hassle as it has a perforated hole in the bottom left corner making it attachable to your key chain, mobile phone or other day-to-day carry along device.

• 43% smaller than the regular sized credit card with the same features and benefits. • Ac cepted at over 27 million merchants worldwide and around 22,000 establishments in Pakistan (used on electronic POS terminals only). • Has the same security features as the regular sized Alfalah VISA credit card.

Schedule of Charges

The following Schedule of Charges is associated with your Alfalah VISA Platinum Card & Titanium MasterCard.

Schedule of Charges

Service Fee 3.00% per month (36% APR) on 3.00% per month (36% APR) on retail transactions 1.50% per month (18% APR) on BTF transactions

1.75% per month (21% P.A. flat rate) on SBS transactions (APR 31.23% to 36.74%) Step-By-Step (SBS) - Factors & APR details: Installment Plan Factor APR

3 months 0.350833 31.23%

6 months 0.184167 35.15%

9 months 0.128611 36.36%

12 months 0.100833 36.74%

18 months 0.073056 36.68%

24 months 0.059167 36.22%

30 months 0.050833 35.66% 36 months 0.045278 35.07%

0.99% per month (11.88% P.A. flat rate) on BTF to SBS transactions (APR 17.73% to 21.44%) BTF to SBS - Factors & APR details: Installment Plan Factor APR

3 months 0.343233 17.73%

6 months 0.176567 20.09%

9 months 0.121011 20.90%

12 months 0.093233 21.25%

18 months 0.065456 21.44%

24 months 0.051567 21.37%

30 months 0.043233 21.21%

36 months 0.037678 21.01%

24% APR on Credit on Phone to SBS Transactions

Credit on Phone to SBS - Factors & APR details: Installment Plan Factor APR

3 months 0.34675 24.00%

6 months 0.17853 24.00%

9 months 0.12252 24.00%

12 months 0.09456 24.00%

18 months 0.0667 24.00%

24 months 0.05287 24.00%

30 months 0.04465 24.00%

36 months 0.03923 24.00%

Late Fee Rs. 600/- or 10% of minimum amount, whichever is higher.

Cash Payment Processing Rs. 100/- per transaction. fee

Merchant Discount Upto 5% of transaction amount. Charges VISA Mini Card Rs. 500/- Supplementary Fee

Cash Withdrawal Fee: - Cash Advance Fee/Call Rs. 500/- or 3% of cash advance amount, whichever is higher & Pay Fee 1% of cash advance amount - Acquiring Bank Charges 1% of transaction amount or Rs. 300/-, - Acquirer Cash Counter whichever is higher Fee (off us cards) Cheque / Cash Pickup Fee Rs. 200/- (available in cities having Bank Alfalah branches)

Over Limit Fee Rs. 600/- or 2% of Over Limit amount, whichever is higher

Voucher Retrieval Fee Local: Rs. 350/- and International: Rs. 800/-

Card Rs. 500/- Replacement/Upgrade Fee

Cheque Return Charges/ Rs. 800/- Rejected Auto Pay Service Fee

Duplicate Statement Rs. 200/- (whenever 1 month old) Charges

Step-By-Step (SBS) / 2% of transaction amount Credit on Phone to SBS Processing Charges

Step-By-Step (SBS) / 5% on balance amount or Credit on Phone Rs. 1,000/-, whichever is higher to SBS Premature Settlement Charges

Credit Cover Premium 0.50% of outstanding amount

Utility Bill Payment Rs. 25/- per utility bill Charges

Platinum / Titanium Upto US $4.71 per annum Priority - Annual Fee

Platinum / Titanium Upto US $28.25 per visit Priority - Airport Lounge Visit Fee

SMS Alert Fee Rs. 25/- per month

Mobile Banking Fee Rs. 5/- per transaction

Mobile PIN Issuance Rs. 10/- per PIN

Foreign Transactions Upto 5% over prevailing market rate or as per SBP directive. Third currency transactions will be first converted into US Dollars as per rate quoted under arrangement with VISA and MasterCard. Cross border transaction fee will also be charged as per VISA / MasterCard rules.

Arbitration Charges US$ 500/-

Insurance Plans Rs. 100/- Cancellation Charge (Life & Education Insurance Plan)

Chip Maintenance Fee Rs. 300/- for Principal Card member Rs. 300/- for Supplementary Card member

UUUNITED BBBANK LLLIMITED

Welcome to the world of UBL Credit Card, the most exciting and vibrant credit card brand in Pakistan. We offer you a range of innovative and exciting cards that is not only powered by the security of chip but also enable you to personalize it any way you want. In order to get more information on our credit cards range.

UBL CREDIT CARD … MAZAY MEIN RAHO! Welcome to the world of UBL Credit Card. Pakistan’s 1st Chip Credit Card that guarantees you both enjoyment and high value. It assures you global acceptability in more than 22 million establishments worldwide in 130 countries and in more than 12, 000 outlets within Pakistan.

CHIP based credit cards have globally proven to be the most secure way of conducting credit card transactions. This unique high tech CHIP guarantees your financial security while conducting transactions on credit cards, both within Pakistan and around the world.

FEATURES & BENEFITS Your UBL Credit Card’s exciting and value added features will change your life in a manner which will ensure that you constantly enjoy living it. Cash Advance You can now withdraw cash through your UBL Credit Card’s instant cash advance facility from any designated UBL Card Payment Branches nationwide and more than 780,000 ATMs and financial institutions worldwide displaying VISA/PLUS logo.

The service charges for cash advance will be applied from the day of the transaction. A cash advance fee will also apply for each cash withdrawal.

Buy Today, Pay Later Your UBL Credit Card gives you the financial flexibility to buy today and pay after a month at no extra charge. You have the option of paying a minimum 5% of the outstanding balance or any other amount of your choice up to your total account balance.

A service charge of only 3% per month will apply to whatever remaining unpaid balance that is carried forward.

Credit Guardian UBL takes care of its Credit Card members payments in time when they cannot. Our Card members can now get total peace of mind and insure themselves against unforeseen emergencies. In the event of any temporary disability where UBL Card member is unable to pay his/her monthly dues, Credit Guardian will allow payment of the outstanding monthly amount. Moreover, in the unfortunate event of permanent disability or death, the entire outstanding amount will be waived off. Credit Guardian Facility is available for a minimal fee, charged automatically on the card balance every month.

Free Travel Accident Insurance Each time our Card members use their UBL Credit Card to purchase airline, train or bus tickets, they are automatically covered against any sort of accident that might befall them while traveling:

The coverage amounts are:

Classic Card: Up to Rs. 3.5 Million Gold Card: Up to Rs. 7 Million.

MUSLIM CCCOMMERCIAL BBBANK LLLIMITED (MCB)

Smart cards / Debit CARDS

MCB now brings you MCB Smartcard -a secure and convenient instrument of payment with unmatched functionalities. It provides 24 -hour direct access to your bank account.

The convenience and flexibility of MCB Smartcard will help you live a smarter life. It not only helps you manage your ex penses, but also eliminates undue interest on your day to day credit card transactions. Your balance is always within your reach and you spend accordingly.

MCB is the only bank to introduce a debit card that gives the option to choose from domestic and int ernational cards for local and global usage respectively. You can avail the following functionalities on your MCB Smartcard

Smart Features.

SmartCard is your debit card for cash free convenience. Use it for your shopping and purchases at a rapidly growing nationwide network of merchant locations including petrol pumps, stores, bakeries, departmental stores, jewelers, travel agents, restaurants, chemists, hospitals etc.

It’s simple, safe and convenient to use:

Shop at locations displaying the Cash Free sign and the MCB Cards logo.

For payment, no need to pay cash. Simply present your card.

Merchant will swipe your card for the amount of the transaction.

You simply authorize your transaction by entering yo ur PIN (Personal Identification Number) yourself. The PIN is for extra security.

The purchase amount is debited from your account

To make your transaction safe and secure, MCB has installed State of the art smart terminals at your merchant locations, t o ensure your personal convenience. At restaurants & fuel Stations your merchant will bring portable terminals to you for your PIN entry. Smart Support

Whether you are traveling for business, vacation, or performing Haj or Umrah, SmartCard gives you access to your bank account in Pakistan. Your International SmartCard with and Cirrus logos is welcome at over 5 million merchant establishments displaying the Maestro signs at their outlets. In addition, your card is accepted at 634,000 ATMs with Cirrus logo.

Your international SmartCard gives you round-the-clock convenience and helps avoid unfavorable exchange rates of money changers as well as time wasted in providing documentation while converting traveler cheques. MCB VISA

MCB Visa is not just another card in your wallet. It not only provides the conventional credit card services in a manner that is superior in comparison, but goes an extra mile.

Makes MCB Visa the most affordable credit card in your wallet.

MCB VISA offers you a wide range of products that will cater to your diversified taste perfectly.

Intelligent Reward Monitoring and Redemption System.

Buy now and pay off latter in easy and affordable monthly installments!

Saving you from the hassle of making multiple payments on your various credit cards.

You need cash and want to pay back in installments. Just Dial for it!

Life is too precious to be spoilt by unforeseen events and mishaps.

How About a credit card that acts like hard cash.

Now Experience peace of mind of having a credit card free from fraud or misuse!

SCHEDULE OF CHARGES

GoldGoldGold Classic

Joining Fee FREEFREEFREE FREEFREEFREE

Annual Fee FREEFREEFREE FREEFREEFREE

Chip Maintenance Fee upto PKR. 500 p.a upto PKR. 350 p.a

Supplementary Annual Fee FREEFREEFREE FREEFREEFREE

Supplementary Chip Maintenance Fee PKR. 300 p.a PKR. 300 p.a Conclusion

Consumer financing has expanded in Pakistan at an unprecedented growth rate over the last seven years. The banks have intensively capitalized upon the demand for consumer financing and earned record profits within the generous space for credit policy provided by the State Bank of Pakistan (SBP). This space has further motivated the banks to get into unsolicited financing by aggressively marketing products even where no genuine demand exists. Despite that a regulatory framework is in place, the banks appear to have failed in terms of full compliance with SBP regulations, and in satisfying majority of their customers against various service parameters. At the macroeconomic level, consumer financing has significantly contributed to economic turnaround by stimulating consumption and investments. There has been a phenomenal increase in private consumptions due to easy availability of credit from banks. However, in tandem with this development, the manner in which consumer financing is being delivered has seriously jeopardized the competitiveness in economy. A cartel-like pattern appears to have emerged in the banks, given that interest rate spread is among the highest in the world. Moreover, consumer financing has significant impact on inflation, which is rising sharply. In face of the economic challenges facing Pakistan, the SBP can no longer afford to overlook the state of poor competition in the financial sector. From a consumer perspective, consumer financing has been helpful in improving the quality of life of the people who have the capacity of servicing the loans. However, there is mounting evidence that this capacity is deteriorating due to high spread and variable interest rates on loans. Depositors are not getting due returns due to high difference between lending and deposit interest rates. Further, the volume of consumer complaints is rising day by day due to processing delays, service inefficiencies, hidden charges, and poor disclosure practices. Lack of consumer education on banking terms and conditions, policies, rules, and regulations is also a critical factor in securing financial rights. The consumer banking industry has many opportunities to grow, customer wants convenience mode of banking for which new products & services should be introduced on the other hand it is giving huge profits to bank while the level to risk is less in consumer financing as compare to others. Wealth Management Service which is a new service in Pakistan Consumer Banking industry its awareness should be increased as in our survey it reveals that most of the respondent even don’t have any idea of consumer financing. Bank’s customers want new services to be introduced in which Interbank Transfer Facility & Money at door step the most are demanding services. In recent years the regulation for tenure and amount of consumer financing has been changed many times but still the bank’s customers are not totally satisfied by the tenure of consumer financing. Improper guidance, slow processing and bank statement are the major problems faced by bank’s customers in getting consumer loans. The reason for these problems is that people applying for consumer loans don’t have proper information about the requirements by the banks and due to high number of applications & lengthy procedure by banks the loan processing is slow. Very few borrowers know that the rate of interest being charges on consumer finance by the financial institutions is too high as compared to prime interest. Incase of credit cards the respondents in our survey marked High Markup Rate as the major problem they are facing in Credit Cards. Despite of many changes in bank policies and strict regulations by SBP still bank’s customers are facing hidden charges problem. Due to unclear policies and term & condition of banks, customers are not able to know about different charges of banks and the problem of hidden charges occurs. Although CIB provide complete and accurate information about the bank’s customer Credit records but still loans default occurs in consumer financing the problem is not with only due false customer records but also due to wrong policies and improper assessment by bank which cause defaults on consumer loans. The target market for issuing consumer loans for banks in the middle class because they have the strong ability to pay off their loans, banks should make adequate polices to provide loans to lower class on easy terms and low markup rate. Upper class is generally not focused for consumer financing because they have enough resources & purchasing power to buy any asset. Due to high markup personal loans and credit cards are among the most preferred category of consumer financing by the banks. While in terms of loans amount the biggest category of consumer loans are auto & mortgage loans and they are preferred by banks because they have collateral which provide security in case of any default. According to bank’s staff the major reason for defaults on consumer loans is improper assessment and consumer willingness to pay the loan. Auto loans have become very trouble-some for the private banks. The rate of defaults has increased at phenomenal rates. The cars are auctioned at lower prices which do not recover the entire amount invested by bank. House and car financing are safe modes of financing from the banker’s point of view as the every rising real-estate and car prices coupled with safety margin in the shape of down payment allow the bankers to enjoy a sound night sleep. Most of the bank’s customers prefer local banks for general banking activities this is mainly due to large branch network, wide range of services and low service charges provided by the local banks. But for consumer banking, customers prefer foreign banks in Pakistan this is due to high range of consumer banking services provided by them. Foreign banks are the introducer of CB in Pakistan still retains the major share of consumer financing in Pakistan. During the last five years consumer banking had witnessed a high growth in Pakistan but its growth rate is declining now which is due to the high markup rate charged by banks and high increase in NPL with low recovery rate. Maintaining the critical balance between savings, investment and borrowers debt-servicing ability is possible if input prices remain stable affording business to sustain their profitability and interest rate should remain stable. There is no denying to the fact that consumer credit within prudent and sustainable limits is desirable for economic growth, smoothing consumption and improving credit risk diversification. At the same time unsustainable consumer growth in weak macroeconomic environment, ineffective prudential and regulatory framework, weak risk management system and legal infrastructure can create systemic vulnerabilities. The consumer finance is money lending affairs to a needy perform for improvement of his well beings and ultimately his living standard in the society. It is financing facilities that generally and wholesomely support consumption and as a result improves the overall living standards of house holds. Credit card is a risky mode of finance as no collateral is available to cover risk. Perhaps this is the reason that this segment of bank finance has been allowed to operate o the terms of the bankers without any worthwhile monitoring by SBP. The growth in our economy has led to increasing consumption trends, resulting in the widening demand and supply gap. However as the people of the country become more educated they have realized the benefits and conveniences of using plastic money as a mode of payment. At the moment less than 1% population of the country is using plastic money in Pakistan; therefore one can put complete blame of inflation and price hike on it. Inflation in basic food items which is 11% is not directly linked to plastic money or consumer financing. Developed countries facing rampant consumerism find plastic money most efficient and acceptable mode of payment. The total NPL of commercial banks in Pakistan have touched level of Rs.154 Billion which is covered by 66% provisions in 2008. The local private banks have loan loss coverage of 63% as on June 30, 2008. And for public banks and foreign banks this ratio stood at 74% & 86% respectively. Foreign banks in Pakistan have loan loss coverage of 86% and they have provided more than the required provisions against NPL. (Sharif, 2008) Besides average borrowing of an individual is small but a lot of time and effort have to be spent on documentation, etc. Therefore there is valid reason for charging high interest rates from individuals borrowers.