NationalVOLUME 15 ISSUE # 12

Household indebtedness

Various research surveys have revealed that most households in Pakistan rely on temporary loans to run their daily affairs but the true extent of household indebtedness is not known. Now a new study has thrown some light on the subject.

Household debt is an understudied subject in Pakistan, whereas the much-needed cross-sectional datasets and surveys required to assess the underlying short- and long-term trends and problems are hard to find. In their recent working paper titled “Household debt in Pakistan: Conflict, borrowing and structural indebtedness,” author Sajid Amin and his colleagues note that even “literature on household indebtedness in Pakistan is very scant, despite household borrowing being common in the country.”

This gap in information encouraged the authors to assess the general prevalence and magnitude of household indebtedness in Pakistan, along with the impact of prolonged conflict on household borrowing from the informal credit market. Their chosen area and nature of conflict was the war-on-terror hit Swat valley.

According to their findings, an average of one-fifth of households in Pakistan are indebted, whereas in the conflict-affected Swat district about 52 percent of district households are in debt. These estimates are based on trends seen over the last fifteen years using data from the Household Integrated Economic Survey.

Among other things, the survey found that nearly 76 percent of indebted urban households in Pakistan consume 30 percent or more of their income to repay their household debts. This lends credence to domestic banking practice where bankers insist that an individual’s debt servicing burden should be no more than a third of their monthly income. Another interesting finding is that bank lending and other forms of formal lending is rather small in the country. Most household loans are informal in nature, constituting about 85 percent of total borrower households. The study also shows that everyday household consumption needs, and crop-related activities are the primary reasons for borrowing, where “roughly 80 percent of indebted households across Pakistan” have consistently been unable to repay their loans between 2005 and 2016.

These are important findings and provide a base for short and long-term policy making. Even though only 20 percent of households appear to be in debt as against the popular perception that a wide majority is mired in debt, these findings provide a basis to discuss the problem of household indebtedness in detail and develop feasible solutions based on past and current trends.

An analysis of the issue must also take into account the fact that about 35 percent of household debt is interest-based involving arthis, money lenders and banks. An interesting question in this regard is which agencies provide interest-free loans to those in need. It is equally important to find out the sources and purpose of debt separately for urban and rural households, segmented across income brackets. In this context it will also be fruitful to assess the size of household debt as a percentage of GDP, which in turn could help explore the prospects of latent demand for bank loans.

We must keep in mind that given Pakistan’s cultural peculiarities, family values and religious considerations, many people still choose to borrow from friends, family, neighbours and closest grocery store than from the formal sector, be it a commercial or a micro-bank. The relevant trends in this regard need to be ascertained so that any future policies on the issues are more realistic and result-oriented.

Our economy has a big informal component in which millions work and earn their livelihood. It is relevant to note here that the IMF looks at formal sector household debt, whereas the SLRC paper covers both formal and informal debt. But one cannot be too sure about the size, trends, and drivers of both formal and informal household debt unless further research questions stemming from SLRC’s paper are answered and compared. In the meanwhile, Pakistan Institute of Development Economics (PIDE) and World Bank should initiate another round of surveys on population and development.

Without further delay, the government must prepare to launch another countrywide household survey as the last one was conducted more than a decade ago and all demographic and other calculations now are mere guesswork and not based on scientific research. Needless to say, this is the reason why most of our planning goes awry and does not produce the intended results.