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

This is a heartening development. Banks, however, need to identify unserved or under-served borrowers and explore untapped credit demand for this important sub-sector of the economy. Women-driven and rural-based small and medium enterprises (SMEs), businesses initiated by young knowledge workers or SMEs in the supply chain of green energy now deserve greater focus of banks. Aggressive lending to the businesses in these categories is not just important for closing the gender gap and rural development or for youth empowerment and environmental sustainability. It is equally important for transforming banks into responsive and futuristic financial intermediaries.

In the first seven months of this fiscal year, banks offered Rs26.4 billion net loans to wholesale and trade as the economy started recovering from the last year’s GDP loss of 0.4 per cent, data by the State Bank of Pakistan (SBP) shows.

But it is not just economic recovery that helped banks lend aggressively in this sector. The documentation of small businesses required for concessional loans under the Covid-19–related stimulus package also played a key role.

Similarly, extra high demand for finance originating amidst the pandemic from medical and pharmaceutical industries also led to accelerated lending to the wholesale and retail trade in the supply chain of these industries, the analysis of credit data shows.

A lot depends on how fast Pakistan can attract international retailers to its domestic market

The wholesale and retail trade covers trading activities like sales, maintenance and repair of motorcycles and cars, wholesale of agricultural raw materials, agricultural machinery and live animals, of food and beverages, of textiles, clothing and footwear, of household items — and of construction material and hardware etc. It also covers retailing in the above-mentioned areas and in many more, including clinical and pharmaceutical products, masks and sanitisers, computers, laptops and cell phones etc.

Over Rs26bn net lending to the wholesale and retail trade in seven months indicates that banks have started releasing funds “approved” under the SBP’s concessional financing scheme to help businesses stay afloat after Covid-19 lockdowns. The release of detailed data of private-sector credit for February by the end of this month might show additional intake of bank loans by individuals and firms involved in the wholesale and retail trade. The reason is that private-sector credit, on the whole, gathered greater momentum from February.

The wholesale and retail trade plays an important role in the economy. It has been and still remains the backbone of inland commerce and serves as the main conduit of supply of imported goods. That is why an uptick in demand for finance from the wholesale and retail trade sector often coincides with an increase in the industrial output and imports. In July-Dec 2020, the output of large-scale manufacturing or LSM grew 8.2pc year-on-year. And, in July-Feb 2020-2021, Pakistan’s merchandise imports grew about 7.5pc in dollar terms.

This uptrend in the LSM output and imports is likely to continue as the economy recovers this year and as it looks set to keep growing moderately in the future. So the wholesale and retail trade will not only continue to expand but its demand for formal finance will also increase.

The ongoing documentation drive backed by deeper penetration of IT and IT-enabled services in the economy will, meanwhile, make it more and more difficult for the wholesale and retail trade to operate in the informal sector — and use their retained earnings for expansion.

This will rather make formal credit demand even stronger.

That is where banks need to foresee their future role and develop more prudent credit appraisal systems for wholesale and retail sector financing and ensure their meticulous implementation.

What is going to make this task easier — and a bit more challenging at the same time —is the penetration of fintech in the banking sector. Fintech provides easier solutions for data analysis and e-payments. But using fintech to collect real-time data of an estimated 1.5 million to 2.2m wholesale and retail trade establishments, analysing this metadata to understand unique financial demands of sub-categories of the trade and feeding all this into credit appraisal systems are challenging. It requires banks to cut through the multiple tiers of decision-making, enlarge the pool of tech-savvy 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 the banks’ quest for newer areas of lending as on the consolidation of this sector. The faster spread of the internet and digitisation of modes of payment across Pakistan can expedite such consolidation. But whereas banks will find such consolidation helpful in catering to the financial needs of an underserved sector more efficiently, its outcome on employment levels may pose a challenge for the government of the day.

The launching of Pak Retailers — a mobile app that aims at bringing end-consumers, retailers and business customers on a single digital platform — is a good example of what can be done for retail consolidation.

For the retail sector’s consolidation, much also depends on how fast Pakistan can attract more international retailers to its domestic market and how rapidly the base of domestically produced goods expands.

Currently, the wholesale and retail trade attracts a little more than 7pc foreign direct investment (FDI) in 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 mining and quarrying (10.6pc).

If the country witnesses some healthy developments in all these areas, the wholesale and retail sector has the potential to become one of the key drivers of private-sector credit demand. This process has apparently begun. But it will continue only if the documentation of this sector continues unabated and its growth potential is exploited through supportive policies.

Published in Dawn, The Business and Finance Weekly, , March 15th, 2021