Consumer financing portfolio has been witnessing a declining trend for the last two years as the overall outstanding amount of the banking industry has come down to Rs 225 billion from Rs 255 billion during these years.
However, the banking industry is once again gearing up for consumer financing in order to overcome the rising percentage of Non Performing Loans (NPLs).
This was stated by Muhammad Raza, Head of Consumer Banking, Meezan Bank Ltd while talking to Business Recorder exclusively.
He said that consumer financing is a tricky business but on the positive side, in consumer financing, banks continuously receive payments from the borrowers that keep reducing the size of Non Performing Loan's portfolio. If a bank does not increase the financing portfolio constantly, NPLs to financing ratio would surely show a healthy surge, he added.
"Once financing portfolio shrinks, the size of NPLs starts going up (percentage wise) presenting a negative picture which may not be the case in reality. Now the banks in Pakistan have realised this issue, therefore, they are once again gearing up for consumer financing in order to get rid of the rising percentage of NPLs," he said. Raza said that consumer financing has witnessed a decline of over Rs 30 billion and the decrease is logical, as several banks in Pakistan have either slowed down or completely stopped financing, thus, there is no question of growth. He said that presently, the mark-up rate of different consumer financing schemes ranges between 17 to 19 percent on different products. However, on credits cards and personal loans it's over 30 to 35 percent due to the factor of insecurity.
Talking about the performance of Islamic banking industry in the country, he said that despite all odds, the sector is performing well and is growing at a rate of 10-12 percent annually. The share of Islamic banking in overall banking sector has reached 6.5 percent and with the current growth rate hopefully its share will touch 10-12 percent by 2014. He said that 2008 was the only year when the Islamic banking industry faced several difficulties and most of the banks couldn't achieve their deposit targets. The slow down in economy, he added has also disturbed the targets of other banking sectors, therefore now the banks are reshaping their policies and developing new plans to fetch maximum business and deposits.
"State Bank of Pakistan has been very supportive and has played a key role in the growth of Islamic banking industry in the country. It solved our biggest challenge of lack of investment opportunities by introducing Sukkuks for Islamic Banks," he said adding that with the introduction of Sukkuks, the liquidity placement issue has been resolved which has greatly helped the Islamic Banks especially Meezan bank to increase their investments and profits. He said that Meezan bank being the largest Islamic bank of the country with over Rs 131 billion of deposits, is the biggest beneficiary of Sukkuks.
Talking about the bank's performance, Raza said that Meezan Bank recorded 61 percent growth in its after-tax profit for the year ended December 31, 2010. Profit after tax for 2010 was Rs 1.65 billion compared to Rs 1.025 billion in 2009. Deposits grew by 31 percent, from Rs 100 billion in December 2009 to Rs 131 billion in December 2010. In addition the Bank opened 21 new branches during 2010 and now it operates with a network of 222 branches spread across 63 cities of Pakistan. "Investment of the Bank has increased by 139 percent from Rs 23 billion in December 2009 to Rs 55 billion in December 2010 mainly due to investments in GoP Ijara Sukuk issued by the Government of Pakistan during the year," he elaborated.
He said that with the good size of deposits available with Islamic banks, they have now two options, one is financing while the other is investment. The investment side is doing well after the issuance of Sukkuk, as the Islamic banks are getting large deposits, they are also exploring different initiatives, planning to enter new areas, making new investments and developing new products for their customers, he addedd.
"Meezan bank doesn't have any exposure to such products and the only insecure product we have is Umrah Financing. We have received a good response from the consumers and there is not a single default in Umrah Financing," Raza said.
Consumer financing portfolio of Meezan Bank is around Rs 6.8 billion, approximately 12 percent of overall investment of the bank. Out of Rs 6.8 billion, Rs 4.3 billion is of Car Ijarah while Rs 2.6 billion is invested in housing finance. He said that Meezan Bank has adopted a very cautious approach in consumer financing in order to avoid defaults.
"I see huge untapped potential of consumer financing in Pakistan as there are millions of consumers who are at distance from banking due to various reasons. We believe that being the pioneer of Islamic banking in the country, Meezan bank has to exploit this potential," he said.
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