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An insight into auto financing in Pakistan

Pakistan’s automotive industry is the one of the fastest growing industries of the country while accounting for 4 percent of Pakistan’s GDP and employing a workforce of over 1,800,000 people. Currently there are 3,200 automotive manufacturing plants in the country, with an investment of ₨92 billion (US$880 million) producing 1.8 million motorcycles and 200,000 vehicles annually. Its contribution to the national exchequer is nearly ₨50 billion (US$480 million).

The sector, as a whole, provides employment to 3.5 million people and plays a pivotal role in promoting the growth of the vendor industry. Pakistan’s auto market is considered among the smallest, but growing fast in South Asia. Over 180,000 cars were sold in the fiscal year 2014-15, rising to 206,777 units during fiscal year 2015-16. At present, the auto market is dominated by Honda, Toyota and Suzuki. However on 19th March 2016, Pakistan passed the “Auto Policy 2016-21”, which offers tax incentives to new automakers to establish manufacturing plants in the country. In response, Renault-Nissan, Kia Motors, Audi, Volkswagen and Hyundai have expressed interest in entering the Pakistani market.

OVERVIEW OF FINANCING IN PAKISTAN FROM 2004 TILL TODAY
2004-2007
Majority of cars purchased via credit
2010
End of easy credit
2011
Strict measures to fight default
2012
Mild growth for financial market
2013
Rebound in consumer credit
2014
Major growth in consumer credit
2015-16
Relaxed regulations and low interest rates

When the auto finance was launched back in 2004, the banks decided for auto-financing based on easy credit, which turned out to be a real benefit for the Pakistanis because car loan were sanctioned at 14-18% by banks. But this market leading expansion was brought to a sudden halt in 2010-11, when the country’s banking sector decided to adopt extreme measures to counter high default rates. The reason being, till 2010 more than Rs265.5 billion had totaled up the consumer finance sector, which included car loans of approximately up to Rs66.4 billion. Because of the strict measures to fight high default rates, car financing became more difficult and market displayed a dismal picture of -3.9% growth in the year 2011.

But these strict policies weren’t imposed for very long; the country’s improving economical footing had brought in some investors who saw the potential. Companies had started to invest more in auto-financing to afford their fleet of cars. At the end of the fiscal year 2013-14, the auto-financing sector witnessed a momentous growth of Rs371.4 billion and the credit to the private sector posted an all-increasing growth of 11.1 percent. In 2015, when the government decided to allow the car loan of up to 9 years old vehicles by making some amendments, the growth of the market increased by 8 percent as compared to the previous year’s market.

CONSUMER ATTITUDES TOWARDS LENDING IN PAKISTAN

Conventional banking has facilitated car financing, generally and auto financing has positively contributed in the new as well as used car business. Whereas Islamic banking also enables auto finance for consumers who strictly follow the Islamic principles of riba-free business and lending. Though Islamic banking counts only 1 percent of global banking business but it is rapidly growing all over the world and especially improving into Pakistani market. According to a survey, 77 percent people are using conventional banking, 16 percent reported using Islamic banking while 7 percent using both.

A lot of people are still shying away from the auto-finances. People are wary of the hidden charges since banks have complicated the terms & conditions, which sometimes are very difficult to digest, as they contain very elusive language and overwhelmingly long clauses.

Reasons why people avoid car financing:

High prices of cars (which means monthly payment is big which many people cannot afford)

Avoidance of interest (riba), people do not go for conventional banking.

Paperwork requirements: Most companies do not give any sort of paper to their employees (such as appointment letter, contract, job card, salary slip, and thus the employees cannot fulfill the paperwork requirement by the bank, even if the salary is good)

Car theft: there is high chance the car is stolen and/or snatched and worse is it gets spotted in a crime so people prefer to buy a car which has less chance to be stolen/snatched.

People do not have long term jobs. So, even if one buys a car now, never know when the job would be lost. Therefore people avoid long-term financial commitments.

Continuing point No.5, if people have long term jobs (contract or permanent), usually the company would give them a car, once every 3 years or 5 years, the old car goes to their house, the new car is financed by the employer.

FUTURE OF CAR FINANCING IN PAKISTAN

Based on the micro and macro-economic indicators, political stability and increases in foreign investment in Pakistan – a market of nearly 200 million people – the economy is predicted to further stabilize. Auto demand will rise following the expected income per capita increase. Given the right environment and low car financing rates, the car financing industry in Pakistan will continue to grow.

The lowest car financing rates in 43 years by commercial banks have spurred demand for new cars. As a result, the car financing rose up to 30 percent in 2015-16, up from 22 percent in 2014-15. The burgeoning incomes of the top level and middle class population and government plans to provide taxis to lower middles class are some of the other key factors behind rising car sales.

Car financing is an integral part of the auto industry and recent trends are giving a positive outlook to both consumer financing and automobile industry. Now, more and more people are inquiring about lease and financing options and it’s very healthy to see financial institutions coming up with new offerings.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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