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Car financing reviving auto sales in country

Car financing reviving auto sales in country

LAHORE: Carmudi’s report on “Car Financing in Pakistan” provides a look into current and future state of the flourishing car financing market and how consumer attitudes towards credit transformed in recent years.

In May 2015, the IMF stated that Pakistan made “significant progress” by fulfilling targets under its $6.6 billion loan program. The country’s economy is on a high with low crude oil prices and $14 million in remittances from 6 million workers abroad. Following a 4.1% expansion during the last fiscal year, the IMF predicted a 4.5% growth in the economy starting July 1st of this year that was mainly driven by increased domestic demand in car sales and construction of 20% and 5% respectively.

Based on a 2014 study conducted by Nielsen,78% of respondents in Pakistan plan to buy a new or used car in the next two years. Results from the report also showed that 89% of Pakistani respondents plan to upgrade their vehicles when they are financially sound. Car sales in Pakistan peaked in FY2012, reaching over 157,000 units, and are beginning to increase once again along with the rise of consumer lending amidst the healing economy. Due to the rapid decline in international oil and commodity prices, auto demand in Pakistan has gone up and has had a trickledown effect on car financing demand in the country.

Between July 2014 to March 2015, consumer financing saw a growth of 6.4% (Rs. 16 billion), down from 9.8% (Rs 21.5 billion) in the same period of the previous year. Due to high demand for new car models and amended regulations permitting banks to provide financing for vehicles older than nine years old, auto loans posted a 20% increase, up from 17.8% the year before. Increased income per capita, improved agricultural sector and the kickstart of the economy also contributed to the healthy growth in consumer credit, particularly in the auto sector.

Consumers in Pakistan belong to two school of thoughts when it comes to financing: Conventional banking and Islamic banking that is interest-free, restricts riba and gharar (speculative income). Despite Islamic banking being considered an ethical way of banking from both consumer and the Islamic point of view, most millennials in Pakistan do not object to following conventional bank practices when applying for loans.

Based on the micro and macro-economic indicators, political stability, and increase in foreign investment in Pakistan, a market of nearly 200 million people, the economy is predicted to further stabilize. Auto demand in the country 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.
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