UAE Car Finance Market has showcased compelling opportunities in the last few years with resilience showcased at multiple levels by banks and private finance companies. Our recent interview with Mr. Namit Goel, Director, Ken Research aided us to understand the market scenario.
Q1. How Car Finance Market is positioned in UAE?
The United Arab Emirates is the second-largest automotive market including cars, parts and accessories, trailers and semi-trailers, trucks, public transport vehicles, and tractors in the GCC after Saudi Arabia. Passenger cars account for majority share in the UAE automotive market, with commercial vehicles such as trucks, vans and buses accounting for the minority share. Owing to low car prices, well constructed highways, and most importantly the low fuel prices and easy availability of car finance, owning a car is relatively easier in UAE.
UAE’s financing methods are different from the conventional methods of financing. Majority of the banks and finance companies follow the Sharia system which does not include the concept of interest. Until May 2011, the customers were eligible for 100% loan on cars; a system of down payment did not exist for car loans.
In May 2011, the government, as a reform to tighten car financing, introduced the system of down payment. From then, the customers can obtain 80% of the cost as loan and 20% of the cost is mandated to be paid as down payment by them.
During the review period, 2011-2016, the market has displayed a decent growth until 2015, but by the end of 2015 the market started declining. A fall in the credit disbursement had been observed during 2016 that was resulted out of the falling oil prices, increasing loan rejection rates, stringent lending policies adopted by the banks due to the piling up of non-performing loans and other such factors. However, upcoming trends such as increased demand of electric vehicles, growth of used car market and others are expected to enable the market recover in the coming years.
Q2. How the Competition is prevailing in the Car Finance Market?
UAE car finance market is highly fragmented with the presence of many players including banks and private finance companies. A tough competition is prevalent in the market between these players and they together offer many financing schemes for both used and new cars. The primary motive of these financial institutions is to offer convenient and easily repayable car loans to the public and attain reasonable profit. These players compete against each other on the basis of interest rates, schemes offered, tenure, down payment systems, terms of loan, early settlement fees, minimum salary requirements and others.
There are two types of banks in UAE such as conventional and Islamic banks, which offer car loans to the public on different terms, major difference being the concept of interest. Conventional banks include interest in their practices whereas Islamic bank runs on the Ijarah system under the Islamic law which promotes profit sharing system between the borrower and lender. The conventional banks are competing with each other majorly on the basis of interest rates to attract more customers.
Further, increased competition in the market has induced the banks to offer existing products in the market with additional features. Many banks follow a risk based pricing structure, wherein they reward customers who maintain a good relationship with them. Additionally, banks offer rewards and loyalty programs to attract customers in a competitive business landscape.
Hence, we can observe that the market is highly competitive with large number of players offering distinctive finance schemes and offers at varying terms and conditions.
Q3. What is the future Outlook for the UAE Car Finance Market?
The market is expected to recover during the forecast period from the fall that was observed towards the end of the review period. It is anticipated that the car finance market in the country will grow at a CAGR of 6% during the forecast period 2017-2021. The recovery is presumed to be at a slow pace due to various factors such as low deposit rates prevailing in the market and high rate of non-performing loans compelling the banks to consolidate their existing activities rather focusing on growth. Moreover, the impact of credit reports made available by the credit bureau is expected to raise the loan rejection rates.
However, a growth is expected to be observed in the market even in the midst of all the aforementioned factors, which will be supported by an increased number of bundled offerings, new innovative strategies adopted by the banks and dealers and other entities. In accordance with the current trend, the used car penetration is displaying a consistent lift. Hence, it is anticipated that a rise in the demand for used car serve as a driving force for the proliferation of car finance market.
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