Reduction of mark-up : Bank financing gives impetus to car sales

The banks have increased financing of the automobile sector after reduction of mark-up rates, which has contributed to pick up cars sales in the country.

According to the industry officials, car financing by the banks witnessed a growth of 5% in less than one year, which gave impetus to sales of different models of the automobile assembling companies.

The available statistics of the industry, as reported in the economic survey for 2013-14, suggest that the bank financing of automobile posted a growth of 20% to stand at Rs12.7 billion during July 2014 to March 2015.

The reduced policy rates have compelled the banks to reinvigorate its consumers financing portfolio to generate their revenues, which seemed a good omen in the industry as masses of a significant income group are getting benefits of the banking services.

Majority of the banks charge more than KIBOR+5, whereas the Islamic banks are more active in auto financing despite having comparatively higher profit rates than conventional banks’ mark-up rates.

KIBOR rates also depend on the period of financing which usually constitutes higher mark-up or profit rates of the banks for longer period along with various charges, including insurance and Takaful.

BankIslami Product and Business Development Head Muhammad Faisal Sheikh said the Islamic banks are dominating the market of car financing in the banking industry, having more than 60% shares at present.

The Islamic banks keep their special focus on consumer financing because of their limited scope of doing business due to Shariah compliance, he added.

The Pakistan Automotive Manufacturers Association (PAMA) statistics show that the cars’ sales increased to 13,697 units in July and August 2015 as compared to 7,952 units of July and August 2014, showing a handsome growth of 72%. In the outgoing year, the sales of automobile companies also showed impressive growth. Indus Motor Company (IMC) Chief Operating Officer Ali Jamali said the reduction of policy rates increased the share of car sales through banks financing, which would increase further with the recent reduction of policy rates.

He said the mark-up rates should be reduced to KIBOR+3 to pass on the slash of policy rates to attract more customers, mainly when the automobile companies have kept the prices stable for long period.

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