A New Era of Wholesale and Retail Finance – Journal


The ongoing economic recovery has increased the demand for credit in the wholesale and retail sector. Banks are apparently responding to this additional demand.

This is an encouraging development. Banks, however, need to identify unserved or underserved borrowers and explore untapped credit demand for this important sub-sector of the economy. Small and medium-sized enterprises (SMEs) run by women and based in rural areas, businesses started by young knowledge workers or SMEs in the green energy supply chain now deserve greater attention from banks. Aggressive lending to businesses in these categories is not only important for closing the gender gap and rural development or for youth empowerment and environmental sustainability. It is also important for transforming banks into responsive and forward-looking financial intermediaries.

In the first seven months of this financial year, banks offered net lending of Rs 26.4 billion to wholesale and trade as the economy began to recover from the loss of 0.4% of GDP last year, according to data from the State Bank of Pakistan (SBP).

But it’s not just the economic recovery that has helped banks to lend aggressively in this sector. Small business documentation required for concessional loans under the Covid-19 stimulus package also played a key role.

Similarly, the very high demand for financing from the medical and pharmaceutical industries amid the pandemic has also led to an acceleration of wholesale and retail lending in the supply chain of these industries, according to data analysis. on credit.

It all depends on how quickly Pakistan can attract international retailers to its domestic market

Wholesale and retail trade covers commercial activities such as the sale, maintenance and repair of motorcycles and cars, the wholesale trade of agricultural raw materials, agricultural machinery and live animals, foodstuffs and beverages, textiles, clothing and footwear, household goods — and building materials and equipment, etc. It also covers retail in the above-mentioned areas and many others, including clinical and pharmaceutical products, masks and disinfectants, computers, laptops and mobile phones, etc.

Over Rs 26 billion in net wholesale and retail lending in seven months indicates banks have started to release ‘approved’ funds under the SBP’s concessional finance scheme to help businesses stay afloat after the Covid-19 closures. The release of detailed private sector credit data for February by the end of this month could show an additional inflow of bank lending by individuals and businesses involved in wholesale and retail trade. Indeed, credit to the private sector generally accelerated from February.

Wholesale and retail play an important role in the economy. It has been and remains the backbone of domestic trade and serves as the main supply channel for imported goods. This is why an increase in the demand for financing from the wholesale and retail trade sector often coincides with an increase in industrial production and imports. In July-December 2020, production of large-scale manufacturing or LSM increased by 8.2% year-on-year. And, in July-February 2020-2021, Pakistan’s merchandise imports increased by around 7.5% in dollar terms.

This upward trend in LSM production and imports is expected to continue as the economy recovers this year and is expected to continue to grow moderately in the future. Thus, the wholesale and retail trade will not only continue to grow, but its demand for formal financing will also increase.

The ongoing documentation campaign, supported by deeper penetration of IT and IT-based services in the economy, will make it increasingly difficult for wholesale and retail to operate in the sector. informal – and use their retained earnings for expansion.

Rather, it will make the demand for formal credit even stronger.

This is where banks need to plan for their future role and develop more conservative credit reporting systems for wholesale and retail funding and ensure their meticulous implementation.

What will make this task easier – and a bit harder at the same time – is the penetration of fintech into the banking sector. Fintech provides easier solutions for data analysis and electronic payments. But using fintech to collect real-time data on approximately 1.5 million to 2.2 million wholesale and retail establishments, analyze this metadata to understand the unique financial demands of trade sub-categories, and integrate all of this in credit reporting systems is a challenge. This requires banks to leapfrog multiple levels of decision-making, expand the pool of technology-trained employees, and appoint more executives who can oversee regulatory compliance and operational efficiency of lending.

The future of wholesale and retail sector financing depends as much on banks finding new lines of credit as on the consolidation of this sector. The faster spread of the internet and digitization of payment methods across Pakistan can accelerate this consolidation. But while banks will find such consolidation helpful in meeting the financial needs of an underserved sector more effectively, its effect on employment levels may pose a challenge to the incumbent government.

The launch of Pak Retailers – a mobile app that aims to bring together end consumers, retailers and business customers on one digital platform – is a good example of what can be done for retail consolidation.

For the consolidation of the retail sector, much also depends on how quickly Pakistan can attract more international retailers to its domestic market and how quickly the base of goods produced in the country expands.

Currently, wholesale and retail trade attracts just over 7% of foreign direct investment (FDI) into the country, according to the SBP. And, it is the fifth largest sub-sector in terms of FDI inflows preceded by information and communication (39pc), financial and insurance activities (16.7pc), manufacturing (11pc) and mines and quarries (10.6 pc).

If the country experiences healthy development in all these areas, the wholesale and retail sector has the potential to become one of the main drivers of private sector credit demand. This process has apparently begun. But this will only continue if the documentation of this sector continues unabated and its growth potential is harnessed through supportive policies.

Posted in Dawn, The Business and Finance Weekly, , March 15, 2021


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