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Boosting auto sector through consumer financing amid low interest rates

Pakistan’s auto market is considered among the smallest, but fastest growing in South Asia. Over 280,000 cars were sold in the fiscal year 2016-17, rising from just above 200,000 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.

Pakistan is a market of more than 200 million people. 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. Auto demand is expected to rise further in 2017 due to following factors:

  1. Expected increase in per capita income.
  2. The burgeoning incomes of the top level and middle-class population.
  3. Government plans to provide taxis to lower middle class.
  4. In a country like Pakistan, where the job market is tough and employment is low, app-based taxi services like Uber & Careem have opened the doors of self-employment to otherwise unemployed or under-employed youngsters. At the moment, there is no other industry or service in the country that has created close to 10,000 new, well-paying jobs in a matter of just over a year.
  5. Change in customers’ preferences for hybrid and e-cars.
  6. Companies have started to invest more in auto-financing to afford their fleet of cars.

Consumer financing has seen a surge in the last two fiscal years primarily due to a big jump in auto loans. Consumer finance serves as the source of financial stability and uplifts the economic and social status of the household. At the macroeconomic level, consumer financing has significantly contributed to economic turnaround by stimulating consumption and investments. There has been a phenomenal increase in private consumptions due to easy availability of credit from banks. Low interest rate spread is an important indicator of the efficiency and competition in the financial systems and helps in economic growth through increased investments. Auto loans make a large part of consumer financing and since the new policy is aimed at balancing the protection level enjoyed by local assemblers and encouraging cheaper imports and entry of new car makers, it is but natural for banks to examine this policy from their business point of view.

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. Still, a lot of people are 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.


The increase in consumer financing has come with many challenges facing the national economy as well as the individual borrowers. As the consumer-financing portfolio is increasing, quality of related banking services is becoming a serious issue. Processing delays, service inefficiencies, unauthorized debits and non-compliance with requirement of providing monthly bank statements are few examples of poor quality of banking services. Other issues such as non-transparent advertisements, violation of agreed terms and conditions, levy of unjustifiable charges, and arduous complaint redress mechanism, etc. also reflect upon the poor quality of consumer services.

The issue of consumer education is equally important. Most of the bank users do not have enough understanding of the very basic rules and terms and conditions. Another problem is that the documents prepared by banks are usually technical and the information, which may affect financial rights of the consumers, is never stated clearly and plainly in these documents. Indeed, scheduled banks have excluded consumers as a legitimate stakeholder in formulation of, or any change in policies and procedures. There is a need to focus on public awareness about the financial rights of the citizens, and the forums available to them for accessing justice, if these rights are violated.

The problems in interest rate spread and service delivery notwithstanding, consumers have benefited a lot from the consumer-financing sector. A large number of people have been able to meet their real needs by accessing credit from the banks. Therefore, steps need to be taken for sustainability of this sector. This requires the banks to develop databased lending strategies to manage the risks associated with this sector.

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, some of which are as under:

  1. Car4U (MCB)
  2. UBL Drive
  3. HBL Car Loan
  4. Car Finance (Faysal Bank)
  5. Car Ijarah (Meezan Bank)
  6. Al-Falah Auto Loan
  7. Auto Finance (Dubai Islamic Bank)
  8. CarAamad (JS Bank)
  9. Apni Car (Bank Al-Habib)
  10. Humsafar (NBP Islamic)

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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