Around the time of independence, the major form of transportation in Pakistan was railways. In comparison, the road network was essentially a farm-to-market linkage.

The road public transport was then limited to a tramway system in Karachi, an omnibus service in Karachi and Lahore, and a fleet of trucks inherited largely from the Second World War, mainly of British origin. It was used largely for short-haulage (farm-to-market); the long-haul freight and passenger traffic was catered to by the railways.

According to a recent Karandaaz study on the workings and financing of Pakistan’s transportation sector titled ‘Bankability of the Transport Sector’, the first mention of transport planning in Pakistan is found in the First Five Year Plan (1955-60) when the Government decided to establish the Pakistan Road Transport Board and announced a policy to increase road passenger long-distance travel. As a result, 500 new buses were inducted in Karachi. An additional 1,200 buses-700 for Karachi Road Transport Corporation and 500 for inter-city traffic through the West Pakistan Road Transport Board- were inducted in the next five years. The First Plan period also saw the introduction of automobile assembling (cars, buses and trucks).

The transportation sector in Pakistan is governed by a mixture of old and new laws. There has been no implementation of a Transport Plan or Road Transportation Policy in Pakistan. The National Transport Policy, developed by the Ministry of Communications in 2012, was not approved. In 2017, the Government of Pakistan commenced a two year project funded by the Department for International Development (DFID) and administered by the Asian Development Bank (ADB), to formulate a National Transport Policy for the country. The plan seeks a safe, efficient, and sustainable transport system to realize Pakistan’s Vision 2025.

With the advent of multimodal transportation, there is a need to update the legal regime to protect the interests of the parties involved under the modern commercial environment. This protection has to be in line with global standards and conventions in order to satisfy the country’s trading partners. Given the potential to expand overland trade with Pakistan’s neighbors and within the Economic Cooperation Organization (ECO), Central Asia Regional Economic Cooperation (CAREC) and South Asian Association for Regional Cooperation (SAARC) regions, it is paramount for Pakistan to modernize its laws and strengthen enforcement.

More than 95 percent of financial transactions conducted to purchase vehicles, passenger or freight, take place through personal savings of the proprietors. Therefore there is a huge potential in the market that could be utilized by financial institutions.

How does a financial institution expand outreach in a market where penetration is low? Owners buy vehicles outright, and mainly through their own savings, sale of assets and personal income. This implies that owners do have access to collateral. Further there is an opportunity for financial institutions since the main reason why owners do not expand their fleets is shortage of capital.

Completely independent operators will find it difficult to enter on their own and need to go through existing channels (mainly social networks). The social capital (conceptualized as the cultural and economic relations within the transport sector) might not allow ease of entry unless some prior informal social criteria are met, such as personal networking with the potential clientele. It has been made clear that while entry is easy, it requires social connections and introductions for new entrants.

Hence, new financial intervention will need to bridge not just the large financial gaps potential buyers face, but also access specific social networks. A potential entry point may be locating branches near major transport hubs, allowing greater access for vehicle owners as well as aspiring candidates. Informal financing is obtained mainly from Lahore and Karachi for all category of vehicles. Peshawar was cited by respondents owning large pick-ups and large trucks.

As also discussed in the Karandaaz study on transportation, familiarity with the banking sector might allow some ease of entry into the formal financial sector. Furthermore, their bank account statements can be used by financial institutions in the loan documentation process. The financial profile of transport owners is different from typical microfinance clients in the rural or urban sector. The transport sector, given its scale and financial issues, is more similar to the SME sector than the microfinance sector (investment size required is large). However, rickshaw owners can be added to the microfinance segment as investment required is small.

In the passenger segment, it is found that on average, most of the respondents own two vehicles, however, in the case of deluxe buses, and the average number of vehicles owned is five. The deluxe bus segment is therefore a potential entry point into the transport segment.

For any financial institution who is willing to provide financial resources to the freight and passenger sectors, it will be far easier to locate and provide loans to those prospective owners who have at least three vehicles. This will lower the transaction costs of financial intervention and could also address the issue of collateral.