VZCZCXRO9302
RR RUEHLH RUEHPW
DE RUEHIL #3104/01 2671130
ZNR UUUUU ZZH
R 231130Z SEP 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9009
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBUL/AMEMBASSY KABUL 9177
RUEHNE/AMEMBASSY NEW DELHI 3813
RUEHLO/AMEMBASSY LONDON 8753
RUEHKP/AMCONSUL KARACHI 0376
RUEHLH/AMCONSUL LAHORE 6118
RUEHPW/AMCONSUL PESHAWAR 4929
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 02 ISLAMABAD 003104 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PREL PK
SUBJECT: DECREASE IN CONSUMER FINANCE LIKELY TO IMPACT INDUSTRIAL 
PRODUCTION 
 
Summary 
- - - - 
 
¶1. (SBU) Growth in consumer financing slowed in FY07-08 compared to 
FY06-07, due to rapidly increasing food and energy costs, coupled 
with stagnant incomes.  These have eroded consumers' ability to pay 
large loan installments, thereby reducing the demand for new 
lending. Banking executives report to local media they are confident 
the consumer finance market will revive once the political situation 
stabilizes, inflation is brought under control, and the cost of 
credit is reduced.  However, with banks becoming more cautious and 
consumers more reluctant to borrow, demand is likely to decrease, 
and lower demand, coupled with higher costs of production, could 
result in decreased industrial production.  End Summary. 
 
Decreasing Consumer Financing 
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¶2. (SBU) Consumer finance, including personal loans, mortgages and 
credit cards, grew by 3 percent in FY 07-08, down from 17 percent 
growth in FY06-07.  In absolute terms, the value of outstanding 
commercial loans grew by PKR 11 billion (USD 144.7 million) during 
the previous fiscal year, versus PKR 51 billion (USD 671 million) in 
the FY06-07.  Pakistan's total stock of consumer loans currently 
stands at PKR 359 billion (USD 4.72 billion).  Banking executives 
reported to local media that the slowdown in consumer finance is due 
mainly to a rise in the cost of borrowing.  The State Bank of 
Pakistan (SBP) discount rate is currently 13 percent and has been 
increased four times in the last 14 months.  Local commercial banks 
are reportedly more cautious in approving consumer loans and are 
actively targeting clients with good credit histories for future 
business. 
 
Mortgage Lending Increases; Personal and Car Loans Decrease 
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¶3. (SBU) The share of personal loans in overall consumer loans 
dropped to just below 39 percent in FY07-08, from close to 41 
percent in FY06-07:  PKR 140 billion (USD 1.8421 billion) in FY07-08 
from PKR 142 billion (USD 1.8684 billion) in FY06-07.  Car loans 
dipped slightly to PKR 104.99 billion (USD 1.381 billion) from PKR 
105.44 billion (USD 1.387 billion), with the percentage of car loans 
in total consumer loans dropping to 29 percent from over 30 percent. 
 Mortgage loans in FY07-08 rose to PKR 66.55 billion (USD 875.7 
million) from PKR 54.67 billion (USD 719.3 million) in FY06-07, with 
the share of mortgage loans in outstanding consumer loans increasing 
to 18.5 percent from 15.69 percent.  Credit card loans climbed 
modestly to PKR 44.45 billion (USD 584.9 million) from PKR 42.82 
billion (USD 563.4 million) - its share of total consumer loans 
increasing in FY07-08 to 12.4 percent, as compared to 12.2 percent 
in FY06-07. 
 
State Bank Says Consumer Financing Still Strong 
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¶4. (SBU) Rapidly increasing food and energy prices, coupled with 
stagnant incomes, eroded consumer ability to pay large loan 
installments, thereby reducing the demand for new lending.  However, 
the State Bank of Pakistan (SBP) said in its FY07-08 third quarter 
report that the overall quality of the consumer finance had been 
good, although it had started weakening somewhat in 2006.  It noted 
that, "as compared to other sectors, consumer finance has so far 
shown a very low level of non-performing loans".  The SBP reports 
that Pakistan's 14 percent share of consumer credit in total private 
sector credit is still low compared to India, with 24 percent, and 
Indonesia, with 30 percent. 
 
Banking Executives Predict Consumer Financing Rebound 
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¶5. (SBU) Banking executives report to local media that they believe 
the current slowdown in the consumer finance market will rebound 
once Pakistan becomes more politically stabile, inflation is brought 
under control, and the cost of credit decreases.  They note that the 
consumer credit market in Pakistan still remains very small but has 
great potential to grow and drive the overall economic development 
of the country.  Since mortgage and auto loans are adequately 
secured, rising exposure in these areas may not pose serious credit 
risk to banks, but the high level of unsecured lending - personal 
 
ISLAMABAD 00003104  002 OF 002 
 
 
loans and credit cards - 
may warrant attention. 
 
Comment 
- - - - 
 
¶6. (SBU) Until recently, much of the growth in the manufacturing 
sector, particularly in the manufacturing of automobiles, 
electronics, and consumer durables, has been led by higher consumer 
demand spurred on by increased consumer lending.  The steep fall in 
consumer financing growth contributed to a slowdown in many parts of 
the manufacturing sector in FY07-08.  Many economists have 
questioned the GOP policy of pushing consumption-led growth and have 
warned of heavy defaults as personal indebtedness and the cost of 
credit increase; consumer income remains stagnant.  With banks 
becoming more cautious and consumers becoming more reluctant to 
borrow, demand for consumer financing is likely to continue to 
decrease.  In the current fiscal year, this decreased demand for 
consumer financing coupled with higher costs of production, could 
further slow manufacturing growth, which currently stands at 3.7 
percent.  End Comment. 
 
PATTERSON