Review of car financing in Pakistan

Studies identified that the significance of the financial system rises with the passage of time as states are moving towards economic development. As the economy becomes wealthier, the financial sector becomes larger. People need to borrow funds from the financial institutions to buy those assets which they want.

It is said that car financing is one the facility of both system; Islamic banks utilized the word Ijara for this. It is necessary for both systems to know the factors that influence their demand and purchasing behavior of the customers/clients. In this fast world the managing of personal and professional life is very tough and if people do not have their personal transportation life can become more hectic. To make their life easier people always try to find a reliable mode of transportation in any state.

Car is considered more significant because it is a secure mode of transportation, but everyone has not financially stable and capable of buying their car. To complete their requirements of a car they go towards the banks and obtain a car loan for the long as well as short term payment. Furthermore in Pakistan, dual banking systems are working which means one product is offered through two dissimilar financial institutions with dissimilar strategies.

Conventional banks and also Islamic banks in Pakistan offered car loan facility to people with some agreement. It is also said that the chief difference between conventional and Islamic banks is interest (Riba). No doubt, Pakistan is an Islamic country and in Islam Interest is not permitted, but both Islamic and conventional banks have their clients/followers. Present statistics show that car financing through banks in the country soared to an all-time high of Rs 326 billion in August 2021, as the financing became reasonable for more people in the wake of low interest rates amid the Covid-19 pandemic.

The August-2021 statistics for car loans depicted a 46.8 percent year-on-year (YoY) jump, mostly owing to low interest rates. It is also analyzed that Car loans rose 3.8 percent month-on-month (MoM) in August, while they reached at Rs 314 billion in July.

The growth in auto financing during Q3 FY2021 is chiefly attributed to low interest rate environment, growing prices of passenger cars, which affected the consumers’ capacity to buy on cash, and new entrants in the automobile market that provided wider options to the consumers. This was consistent with an across the board increase in the sales of auto assemblers during the period under review. In particular, cars below 1,000cc and jeeps were in higher demand.

A slowdown in auto financing is predicted through experts because of the high cost of borrowing, adding that the central bank raised interest rates by 25 basis points to 7.25 percent presently to moderate demand growth. Sources recorded accommodative financial conditions had offered critical support to growth recovery since the start of FY2021, the Monetary Policy Committee (MPC) pointed. Private sector credit increased by greater than 11 percent during FY2021 after historic cuts in the policy rate and the introduction of SBP’s coronavirus-related support packages. It grew on the back of consumer loans followed through a broad-based expansion in credit for fixed investment and finally working capital loans.

The MPC felt that some macro prudential tightening of consumer finance may also be appropriate to moderate demand growth as part of the move toward gradually normalising monetary conditions Meanwhile, statistics also identified that bank lending to consumers grew near to 34 percent YoY in August 2021. Consumer loans like home, car and personal, and credit cards rose to Rs742 billion in August from Rs550 billion a year ago. In last I would like to mention here, in present market situation where competition forces the firms to launch new products in order to be competitive and profitable in uncertainties, financial institutions offering car financing are facing tough competition. In order to sustain their market share they offer dissimilar options for car financing for dissimilar sorts of customers.

A car loan is a personal loan for the specific purpose for purchasing a new or used car customer to borrow money from a bank and agrees to repay with the specified period. It’s usually 12 months to 7 years customer will repay the amount that borrows from the bank with some interest. The end users of the system are people, so it is necessary to seek out what they want and which factors affect their decisions.

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