Car financing: More banks open up to the idea of used cars

While second-hand are in demand, locally assembled vehicles are still selling well.

KARACHI:

When it comes to buying cars in Pakistan, an overwhelming majority of consumers like to make full cash payment upfront and choose a second-hand car, according to this survey.

Some 79% consumers chose full cash payment upfront while 65% claimed they bought a second-hand car, according to the research that surveyed users of PakWheels.com, a leading automobile classifieds website. Only 32% respondents bought new automobiles, the research showed.

“New automobiles have become very expensive. The country’s cheapest and second highest selling car Suzuki Mehran that once sold for Rs400,000 is now selling at Rs650,000,” said Mehdi Hussain, Sales Manager at the consumer arm of United Bank Limited (UBL) while explaining why used automobiles are selling more than new ones.

The trend of buying cheaper automobiles was also reflected in the YouGov and Pakwheels.com survey. One in every four respondents paid less than Rs500,000 for the car they drive, the research found.

“200 to 300 automobiles, mostly small ones, are imported every two weeks from Japan alone,” said an official of Orix Leasing Pakistan (OLP) – a leasing company. People go online and buy these vehicles – small ones mostly – which are cheaper and offer many different models.

The growth in the second-hand, particularly imported automobiles, segment has made the market highly competitive. Conventional banks, Islamic banks and leasing companies are all financing used automobiles, in addition to the locally assembled new automobiles.

The Express Tribune spoke to a range of auto financing business – Habib Bank Limited, United Bank Limited, Faysal Bank, Meezan Bank and Orix Leasing Pakistan – and found that all of them were financing both used and new vehicles. While the aforesaid research shows used cars are in high demand, locally assembled new vehicles are still driving the growth of the financial institutions.

All of the aforesaid institutions are doing both conventional and Islamic auto financing. They serve both corporate clients and individuals on almost similar conditions. Only five-year-old, unregistered imported cars are taken into consideration in which a 20% down payment is made and 5% of the principal outstanding amount is made in case of early termination. Most institutions said they have an average 20% early termination rate. Suzuki, Toyota and Honda were the top selling brands at all these institutions.

Interestingly, all the institutions claimed their automobile financing was growing – an indication that the growth in used cars segment has yet to make a notable impact on the sales of new cars. Not a single institution, The Express Tribune spoke to, said they financed more used than new cars.

Definitely, new locally assembled automobiles are being financed more than the used automobiles at Meezan Bank, said the bank’s Head of Consumer Financing, Muhammad Raza.

While all these institutions are doing both Islamic and conventional auto financing, for some it is the Islamic financing that’s driving growth while others still say they are big on conventional mode of auto financing.

“Our Islamic auto financing has come neck-and-neck with our conventional auto financing,” a sales agent at Faysal Bank said. “As people’s awareness increases, Islamic auto financing will take over conventional banks,” he said.

By contrast, UBL’s Hussain said they are still making more money from conventional mode of auto financing.

Consumers who can avail a variety of car financing options from conventional banks, Islamic banks as well as leasing companies – which are fewer in number – once, had a ‘Pathan Financing’ option as well, according to industry sources.

Explaining this financing mode, the source said, one could purchase an automobile through individuals – who would charge a fixed interest on the cost of vehicle. The name ‘Pathan Financing’ was coined as majority of people offering this kind of financing were Pushtoons – commonly referred to as Pathan.

That option doesn’t exist anymore, the source said, explaining the interest charged in that option was too high while the contract period was also very short. Under that mode, the buyer was responsible for buying insurance himself.

Auto manufactures in industrialised countries, according to industry sources, have their own leasing companies. They offer leasing without any advance payment (upfront payment), sources said, which helps manufacturers improve sales.

Two months ago, a leading auto manufacturer said they were considering opening their own leasing company – an indication, Pakistan will soon have this system, the sources said.

Published in The Express Tribune, September 10^th, 2012.