Lowest car financing rates by banks have spurred demand for new cars
Banks need to introduce more viable schemes
[dropcap]U[/dropcap]ndoubtedly, the car leasing and financing facilities has given rise to the increase in car sales by a multiplier effect in the country, as buying on credit has enabled consumers to experience an increase in their purchasing power.
In previous years, when Pakistan’s car industry was booming, car rental businesses also sprang up and appeared to be feasible business options. However, the prosperity of the Pakistani car industry was hindered by the financial crisis. As a result of which, prices followed an upward trend and the demand for cars fell. It was from 2012 that the sales of cars began to rise once again.
Experts told PAGE that the level of motorization is associated with level of economic development. As the country develops, the number of passenger cars increase in the country owing to enhanced purchasing power which ultimately increases the size of the market. When the per-capita income crosses the $4,000 mark, the country is considered as an upper middle income country with an expanded middle class. This expanded middle class brings economies of scope followed by economies of scale, they opined.
In order to first achieve economies of scale for the car industry, an increase in the size of market is required, which is possible through a decent level of economic growth. There are around 10 cars available for every 1,000 passengers in Pakistan with a per-capita income of $1,200. Achieving the milestone of economies of scale still requires a reasonable amount of time considering the current level of development, experts elaborated.
In a capitalist system, the experts noted that cheap credit is a key to promoting investment and consumption. In advanced economies, artificial demand is created through cheap credit. Under normal circumstances when the interest rate goes down, consumers start to buy cars and other durable consumption goods; invest in residential and real capital. Since the income of high worth individuals is slightly affected during stagnation, their purchasing power remains intact. In this regard, the composition of car sales provides a quite interesting picture, they said.
According to them, our banks are heavily depending on consumer financing and the need of the hour is to facilitate consumers by extending them relief in heavy rates. The instrument of interest rate works well to create artificial demand for small and medium engine sized cars as happened during the previous boom. This phenomenon could be a rough proxy for wealth inequality in the country.
As per estimates, the share of 1,300cc and above cars is 49%, while the share of 800cc cars is around 30%. This shows that the tilt of car industry is towards high income bracket individuals and companies.
According to sources, car sales in Pakistan will be higher in 2017 than they have been in the last five years. With the greatest number of cars being sold in the country within a month, three cars manufacturers contributed to this, namely the Toyota Corolla, the Suzuki and the Honda.
Car financing is also picking up gradually (currently estimated at 30% versus 5% few years back), thanks to 42-year low interest rates in the country, analysts said.
NEED TO TAP NEW MARKETS
Currently, auto is one of the industries in Pakistan, while others — ranging from textiles to farm products — are hit hard by stagnating exports. Reduced foreign demand, difficulties related to the international oil price crash and energy shortages are key factors hitting other industries. The auto industry is now focusing on enlarging output of its cars and export more units to countries in its neighborhood. It needs to tap new markets in Central Asia, they insisted.
Market survey reveals that the lowest car financing rates by banks have spurred demand for new cars.
New companies studying investment prospects include several Europeans such as Renault of France, Volkswagen of Germany and Fiat of Italy. Others have made initial enquiries for starting assembling business in Pakistan. They also see the likelihood of exporting their cars to third countries, besides feeding the domestic market in Pakistan, sources claim.
The Pakistani auto market is wide open. People like all sorts, sizes and price range of cars, from Mercedes to Toyotas, but new investors will have to face financially and technically well-entrenched Japanese auto giants like Toyota, Honda and Suzuki, as well as China’s Faw and the South Koreans thrown in.
While 22 Islamic banks are operational in the country apart from 17 conventional banks are also operating Shariah-compliant branches, a number of people in search of car and home financing were opting for Islamic banks as their first choice. “Islamic banks are enjoying more than 50% market share in car and home financing in the country,” sources said.
As per estimates, car sales will rise from 2016-17 to 2020 at a compound annual growth of 12 percent due to an improvement in the law and order situation, rising auto financing owing to low interest rates and increasing disposable income. Another projection of future growth is that Pakistan, which had 13 cars per 1,000 population in 2015-16, will rise to 20 cars per 1,000 by 2019-20.
Car sales will go up by five to eight percent in the present fiscal year 2016-17, with a possible shift in market share in the 1,000cc category, estimates show. The market will see good gains as all projections for auto production and sales indicate positive trend in time ahead as owning a car is no longer a luxury but a necessity. Auto loan/car financing is a standard product offered by most banks, for both new and used cards. The first and the most important decision you make when opting for an auto loan/car financing is realizing the maximum cost you can comfortably afford, since this is a long term commitment of up to 7 years. You need to ensure that you can comfortably afford the monthly payment of the auto loan, in addition to fuel and maintenance expenses. Given this, car financing will continue to grow this financial year and time ahead.