Encouraged by growing demand for wholesale and retail business financing, banks had started focusing on this area some years ago so that now wholesale and retail financing has emerged as a key segment of their borrower base.

Economic growth, expansion in wholesale and retail businesses as part of a growing formal and informal economy and dramatic rise in online modes of trading have created big credit demand by wholesalers and retailers.

On the other hand, issuance of specific sets of guidelines by State Bank of Pakistan (SBP), high levels of liquidity and banks’ willingness to broaden the base of borrowers have led them to lend aggressively to the same.

Now, the question is: is this lending spree sustainable and if so, on what basis and for how long?

“It’s sustainable because there is still a lot of scope for growth in wholesale and retail businesses and these businesses are going to remain a big, powerful segment of our borrowers as long as banks can treat them as such,” says a senior executive of Habib Bank Ltd.

Commenting on less than Rs1 billion bank lending each to wholesale and retail businesses in four months of this fiscal year he and several other bankers say this just reflects the fact that businesses retire more bank credit in the first few months of the new fiscal year than they borrow.

Is this lending spree sustainable? And if so, on what basis and for how long?

“At the end of the fiscal year, I don’t think bank lending to these two sectors would be far below the average we have seen in the past four, five years,” one of them, an official of MCB bank told this writer.

Wholesale businesses in Pakistan have traditionally been dominated by the local private sector. They include distribution agencies, commodity trading houses and upstream and downstream supply networks of all major industries.

But as foreign investment is trickling in through FMCGs and foreign brands, and as e-commerce is taking root, the dynamics of the domestic wholesale market are also changing. Distribution networks of cellular phones are one big example. Many banks are capitalising on this change with tailor-made products, bankers claim.

In food, clothing, personal care businesses, several foreign brands have opened retail outlets which continue to encourage the urban shift from traditional shopping outlets to chains of retail stores, super market and malls.

“This is fuelling banks’ lending to retail sector because modern-day shopping malls and chain stores are well-documented and, thus, more credit worthy than traditional scattered outlets,” says a senior official National Bank of Pakistan.

“Besides, credit demand of each mega point of retailing is big enough to attract banks that don’t want to lend small amounts to a large number of credit-worthy retailers as it adds to the cost of credit appraisal and disbursement.”

Growth of wholesale and retail businesses, having a correlation with industrial growth, can accelerate further as large-scale manufacturing is on the rise in the country. When large-scale industries such as food and textiles grow, they need to boost domestic sales of their end-products as well, more so when exports don’t grow as fast as they plan.

Besides, when particular industries show fast growth but the sector they are operating in begins to saturate, then they also tend to diversify their business in more promising areas.

Construction of shopping malls and shopping plazas (for housing wholesale and retail outlets) is one such sector where investment is pouring in these days from other profit-making local industries. Lucky One shopping mall, chiefly known for cement making, is an example.

Foreign investment is also entering the food and FMCG sectors. In the last fiscal year a little over half a billion dollars trickled in just the food, beverages and tobacco industries.

Foreign investment in these sectors spurs growth in large-scale manufacturing. And then, as its corollary effect, retail businesses involved in ancillary sectors are sure to benefit from it, bankers say. This, in turn, means more business for banks that are ready and well-equipped for retail business financing.

The merger of Metro and Makro-Habib wholesale businesses in the beginning of FY13, the phenomenal rise of Imtiaz superstore and the horizontal expansion of Hyperstar in recent years have changed the dynamics of wholesale businesses as well.

FMCG companies including MNCs operating in Pakistan like Unilever and Proctor & Gamble have boosted their sales, taking advantage of these retail-cum-wholesale giants.

In fact, Imtiaz and Metro-Makro are also catering to a large number of traditional retailers who buy stuff from there at wholesale rates instead of relying on distributors of FMCG companies or visiting traditional wholesale markets of Karachi and Lahore.

High growth in automobile industry is also supporting wholesale and retail businesses including chains of super stores, hotels, restaurants and e-commerce web portal managers are using light commercial vehicles as delivery vans.

Senior bankers though say banks prefer dealing with only those wholesale and retail establishments that pay taxes, the fact that countless undocumented retailers thrive on registered wholesalers and semi-wholesalers, sometimes a fiscal policy aimed at regulating the later can backfire.

In FY15 when the government initiated a move to document the country’s retail sector this had a negative impact on banks’ retail financing, they recall.

Instead of complying with the government’s order to get them registered with the tax authorities, retailers opted to deal in cash to avoid paying withholding tax. It was only after the government showed leniency in this regard that banks’ retail financing began rising again.

Published in Dawn, The Business and Finance Weekly, November 27th, 2017