If you go to any tier-two city in Pakistan or even a lower-income neighbourhood of the metropolises, you will notice certain shops selling all kinds of items in instalments, typically charging exorbitant interest rates. Needless to say, they all operate outside the ambit of regulation, which requires businesses undertaking lending activities to have some sort of license, such as banking, microfinance, etc.

However, for large segments of our population, this informal and expensive credit is the only possible route as conventional banking doesn’t really cater to them. To an extent, microfinance is plugged in the gap, but now, part of the industry (i.e., banks) is undergoing serious capitalisation while the remaining half (institutions) are typically small and have far less coverage.

In many markets, including India and Indonesia, non-banking finance companies have positioned themselves as a major player in lending to consumers and small and medium enterprises. While Pakistan, too, has this license, its size and coverage remained rather small, especially after leasing and other specialised entities struggled.

For a long while, there was a gap until tech-enabled players in credit took the non-banking financial company (NBFC) route, starting with Tez Financial getting the license to offer nano loans in 2018.

With 19 opened branches, QistBazaar claims to have disbursed over 55,000 loans worth Rs3.4bn to consumers

Other players, such as SeedCred and Sarmaya, followed, while a new breed of fintech startups entered the small and medium enterprise (SME) finance space in parallel. Yet, consumer credit for durable goods never got much attention.

That changed when Jordan Olivias, a US citizen, moved to Pakistan to establish QisstPay and got the first-ever ‘buy-now, pay-later license’ from the Securities and Exchange Commission of Pakistan (SECP). For whatever reasons, the startup didn’t really work out, but it revived some interest in the segment. Noticing this, Arif Lakhani moved back to Karachi and founded QistBazaar.

“My family started this business in the 1980s under the name Electro, which used to offer electronic items, including computers, in instalments. At its peak, we had more than 10 shops across the country, but this was all outside any regulatory ambit and rather small. So when QisstPay got the nod from the SECP, I felt we could do the same thing at a bigger scale with a proper license,” Mr Lakhani tells Dawn.

Initially, the co-founders put in their own money, but since then, QistBazaar has raised a little over $3.7 million of funding, including a recently announced $3.2m Series A, from the likes of Indus Valley Capital, Gobi Partners as well as Bank Alfalah.

What makes QistBazaar a little different is its distribution. Unlike many fintechs, the company doesn’t exclusively rely on digital channels to reach the customer; instead, it has opened 19 physical branches. “We are offering loans to a rickshaw driver or the guy working at a tandoor so our target audience doesn’t always have a smartphone,” says Mr Lakhani.

Yet, only 12 per cent of their customers come through these branches, which begs the question: why take this costlier route at all? “In the lending business, recovery is a function of trust, which comes when you see something with your own eyes. “Moreover, many of the items we sell are bulky electronics such as refrigerators or washing machines, where you want to first look at the product before purchasing it. This is usually the case around the world.”

So far, the company claims to have disbursed over 55,000 loans worth Rs3.4 billion, while the outstanding financing is around Rs1bn. For context, the total number of consumer durables and personal loans by scheduled banks in Pakistan as of March was 761,000. However, QistBazaar’s license comes with some inherent limitations.

Unlike banks, it cannot mobilise low-cost deposits and thus has to either build the book on equity or borrow from other financial institutions. In both cases, it’s more expensive, which means the interest rates to the consumer should also be higher.

“The model is slightly different as our margin has two components: the discount from the vendor given our volumes and the markup charged to the borrower. As we scale further, the former goes up, allowing us to pass on the benefits to the end user,” explains Mr Lakhani. Now, with monetary easing at last, the borrowing costs will also come down gradually and help reduce the end rate charged to the borrower. At the same time, consumer financing by banks is expected to bounce back a bit and give an impetus to demand for electronics in the country.

However, given their lack of incentive and interest in actually doing anything beyond investing in government securities, can NBFCs like QistBazaar rise to the occasion and expand personal credit in Pakistan?

Mutaher Khan is the co-founder of Data Darbar

Published in Dawn, The Business and Finance Weekly, September 30th, 2024