Qudsia Bano

Consumer financing in Pakistan has witnessed a significant decline, with net retirement reaching Rs52.6 billion during the July-March period of FY24. This compares to a retirement of Rs21.1 billion during the same period last year, indicating a substantial reduction in consumer credit. Experts attribute this trend to the prevailing economic conditions, high inflation rates, and tightened monetary policies. Dr Hameed Qureshi, an economist at the Sustainable Development Policy Institute, commented, "The decline in consumer financing reflects the cautious stance of both lenders and borrowers in the current economic climate. High inflation and increased interest rates have made borrowing more expensive, leading consumers to reduce their reliance on credit." He noted that this trend was not surprising given the central bank's efforts to control inflation by maintaining a high policy rate of 22%."

The State Bank of Pakistan's tight monetary policy, aimed at curbing historic high inflation, has significantly impacted consumer lending. With interest rates remaining high over the past two years, the cost of borrowing for consumers has increased, leading to a contraction in demand for consumer loans. Bilal Ahmed, a financial analyst at a leading startup, said: "Higher interest rates have a direct impact on consumer financing. When borrowing costs rise, consumers are less likely to take out loans for big-ticket purchases like homes, cars, and appliances. This decline in consumer credit is a direct outcome of the central bank's anti-inflationary measures." "Furthermore, the economic uncertainty and reduced purchasing power due to inflation have made consumers more cautious about taking on new debt. Many households are prioritising essential spending and debt repayment over new borrowing.

Consumers are feeling the pinch of high inflation, which has eroded their real incomes. In such times, people tend to cut back on discretionary spending and avoid taking on additional financial burdens," said Bilal. The decline in consumer financing also has broader implications for the economy. Reduced consumer spending can slow economic growth, as consumption is a significant component of GDP. However, experts argue that this decline might also lead to healthier financial habits and reduced default risks. While the reduction in consumer financing could dampen short-term economic activity, it might also lead to a more stable financial environment. Lower consumer debt levels reduce the risk of defaults, which benefits the banking sector.

Credit: INP-WealthPk