Carmudi 2015

Overview of Pakistan's Economy

Pakistan, while not often thought of as an economic powerhouse, has seen tremendous economic growth across the board in the last several years, leading to increased optimism among citizens and investors.

There are several economic indicators that have contributed to Pakistan’s economic growth. Foreign-exchange reserves have more than doubled, to $17.7 billion. Tax revenue has risen, thanks to the government’s efforts to broaden the tax base, cut exemptions, and focus on collection (the revenue agency has sent over 150,000 tax notices to non-payers).

There has also been a downward trend in poverty, which decreased from 35% in 2002 to 13.6% in 2011. This increase of the middle class has led to increased lending for those with higher disposable income and increased spending on automobile and home related purchases. In the last year, cement sales, which are a guide to how much construction is taking place, rose by 5.5% from July to March. Car sales rose by 22% over the same period.

In May, The International Monetary Fund stated that Pakistan made “significant progress” by achieving targets under its $6.6 billion loan program. The IMF predicted a 4.5% growth in the economy in the year starting July 1st, following a 4.1% expansion during the last fiscal year. All these factors contributed to Moody’s Investors Service raising Pakistan’s credit rating from stable to positive on the back of the country’s improving macroeconomic indicators. This upgraded outlook can only further improve investor’s confidence.

Overview of Auto Industry in Pakistan

As economic growth in Pakistan accelerates, demand for cars is on the rise. Car sales in Pakistan hit a high in 2012, and are beginning to increase once again. In fact, May 2015 car sales saw a 30% increase in car purchases since May of 2014. We expect that this trend will continue since consumer lending is also on the rise. Car financing is currently estimated at 30%, compared to 5% in the previous years, thanks to the lowest interest rates seen in forty-two years. In July 2015, the Central Bank cut interest rates for the fourth year in a row from 8% to 7% in a bid to spur economic growth.
Between June 2011 and July 2012, new car sales hit an all time high at 157,325 cars, and then dropped for the following two years. From July 2014 to June 2015 Pakistan saw a large increase in new car sales with 151,134 cars purchased.

Recovering Auto Industry in Pakistan


The import of cars, over 90% of them used, saw 35% growth in the first ten months of this fiscal year, to $218.4 million compared to $161 million in the previous year. Roughly 33,000 imported cars arrived in Pakistan between July 2014 to April 2015. US and European cars dominated Pakistan’s market after the country gained independence from Britain in 1947, but fuel prices made their compact, efficient Japanese rivals more popular and from the 1960s until now, manufacturers like Toyota, Suzuki and Honda gained a stranglehold on the market. Despite the heavy taxation on imported vehicles, Pakistan’s tremendous economic growth looks set to attract new players from Korea and Europe into the market.

With a population of 190 million, Pakistan locally produces just 116,000 cars a year. The automotive industry, employing over 3.5 million people, contributes the second most amount of tax revenue, after oil and petroleum. Toyota, Suzuki and Honda all have car assembly plants and Business Insider reports that representatives from Volkswagen are exploring opening a plant.

Car demand is extremely high. According to a 2014 study by Nielsen, 78% of online consumers in Pakistan plan to buy a new or used cars in the next two years. Auto demand in Pakistan will be the strongest within the MENAP region, followed by UAE (75%), Egypt (74%) and Saudi Arabia (72%).

Based on Nielsen’s survey, 82% of respondents in Pakistan plan to buy a new car. The survey also states that, aside from financial reasons, the love of driving is the strongest trigger in buying cars. Owning a car for efficiency and practicality (81%) or as a status symbol (67%) are the main drivers that will influence future automotive demand in Pakistan.

The Nielsen survey results show a balanced 44% for respondents who have a car at their disposal and for those who do not have. Only 12% of online consumers in Pakistan own more than one car per household. This study also shows that 10% of Pakistani consumers drive two cars and 2 % owns four cars or more. In contrast to other MENAP results, over half of consumers in Pakistan (51%) have at least one motorcycle in their household as means to go around town.

“Car Financing has helped those people who otherwise would find it extremely difficult to own a vehicle. Owning a car in a heavily populated city, like Karachi, is now a necessity. Car Financing services offered by banks in Pakistan are of high quality and  have played a big role facilitating car sales.”

Mr. Khalil Rehman from Car Deals Karachi

Consumer Credit in Pakistan

Based on a 2011 World Bank study, roughly 90 percent of Pakistan’s citizens do not have an account at a formal financial institution. With no or limited access to electronic payment services or products and formal financial services including prepaid, debit and credit cards, businesses and consumers are left with no option but to resort to using cash in their daily transactions.

Despite high numbers of unbanked citizens in Pakistan, data shows that borrowing is not uncommon. According to the World Bank’s Global Findex, almost half of Pakistani citizens borrowed currency in 2014. Citizens sought to borrow at significant rates from friends and family, as well through retail store credit programs.

Borrowing Rate in 2014

Borrowing Rates: Friends & Family

Borrowing Rates: Store Credit

In 2005, the credit card industry in Pakistan was on the fast track for high growth when Pakistani banks started their aggressive marketing campaigns on consumer finance to attract the country’s growing middle class. Still, loan portfolios of consumer banking has dramatically slowed down since that period due to risks of non-performing loans. However, thanks to e-commerce, the use of debit cards is taking off.

Consumer financing hit an all time low in 2012, but began on the road to recovery in 2013. From 2013 to 2014, the outstanding position of loans under the consumer financing category went up 11.8%. As the economy recovered and consumer confidence increased, banks responded to the positive sentiment and consumer financing saw a substantial increase mainly on the back of credit extended for the purchase of vehicles.


The Rebounding Car Credit Market in Pakistan


A total of 19.5% of vehicles purchased in July 2014-June 2015 were bought by consumers through car financing. From January-June 2015, a total of 2.5% of vehicles purchased financed by banks were used cars. 

The average auto financing rate offered to consumers in Pakistan is set at KIBOR (presently 7%) plus a banking spread. Banks offering car financing charge a spread between 8% and 11%, which brings the total auto financing rate charged to consumers between 15% to 18%. The loan amount offered by financial institutions for small cars averages Rs. 900,000, while the average duration of the loan offered by banks is around 2.5 to 5 years.

The amount of auto loans increased by 20%, up from 17.8% the year before. The increase is largely due to high demand for new models, plus amended regulations which permit banks to finance older vehicles. In July of 2014, the State Bank of Pakistan allowed the financing of cars older than five years and up to nine years.

Car financing options can be accessed from conventional banks, Islamic banks, and leasing companies. There has been a visible uptick in the number of cars that are being financed by banks across Pakistan, with Bank Alfalah, UBL, HBL, and MCB Bank leading the pack. Other notable banks offering auto financing are KASB, Meezan Bank Car Ijarah, NIB and Bank Fastest Car Loans. 

“The central bank’s move will allow people to get financing for economical cars as low as Rs0.3 million. This will be helpful for those who do not buy cars with a price tag of over Rs0.5-0.6 million”

Muzammil Aslam, MD Emerging Economics Research  

Consumer Financing Timeline

Overview of Financing in Pakistan from 2004 to Today

  • 2004 - 2007

    Majority of Cars Purchased via Credit

    A boom period for car financing when shares were 70% to 75% out of total car sales thanks to the different incentives and banks’ liberal policy. Auto loans were sanctioned by banks at 14% to 18%.

  • 2010

    End of Easy Credit

    Consumer financing totaled to Rs 256.5 billion in February 2010, which was the last time banks in the nation extended credit for cars, durables, home purchases, credit cards and personal loans generously. By the end of May 2010, commercial banks had ongoing car loans approximate to Rs 66.4 billion.

  • 2011

    Strict Measures to Fight Default

    Extreme measures to counter high default rates were adopted by the nation’s banking sector. Seeking car financing became more difficult and expensive.

  • 2012

    Mild Growth for Financial Market

    Consumer loans registered a modest growth during July-March, 2012-13, as it stood at 4.2 percent against the negative growth of 3.9 percent recorded in the same period last year. Expansion of loans has been witnessed in auto and personal loans, as it stood at 5.1 percent and 11.5 percent respectively.

  • 2013

    Rebound in Consumer Credit

    The 2013-2014 fiscal year witnessed a momentous increase in credit to the private sector despite the tight monetary policy stance, as it registered a net expansion of Rs. 371.4 billion in 2013-14, against the net retirement of Rs. 19.0 billion in 2012-13. On year on year basis, credit to the private sector posted a growth of 11.1 percent which is the highest level in past five years.

  • 2014

    Major Growth in Consumer Credit

    Consumer Financing hiked with outstanding position of loans reaching 254.9 billion or 11.8 percent higher at end of August compared to the 2013.By the end of August 2014, outstanding loan position for auto purchases totaled over Rs 65 billion, 24.7% higher than the comparable figure in August 2013.

  • 2015

    Relaxed Regulations and Low Interest Rates

    Car financing gradually grows thanks to the stabilizing macroeconomic indicators and the lowest interest rates in the past 42 years (currently estimated at 30 percent compared to 5 percent a few years back). Auto loans increased by 20.0 percent, compared to 17.8 percent during the same period of the previous year. The increase in auto financing is largely due to amendments in regulation for car financing, which enabled banks to finance cars up to nine years old.

Consumer Attitudes Towards Lending in Pakistan

Consumers in Pakistan belong to two school of thoughts. One that strictly follows Islamic banking and one that doesn’t object to following conventional banking followed globally. Conventional banking is dominant, but Islamic banking is rapidly growing.

In the largest survey done on Islamic banking in Pakistan, 77% of respondents reported using conventional banking, 16% reported using Islamic banking, and 7% reported using both. The survey found that the majority of Islamic bankers were male head of households.

Islamic banking only represents 1% of the global banking industry, but it is growing rapidly, with an annual average growth of 20%. Islamic banking is interest free banking that restricts riba, and gharar (speculative income) and those activities which involve no risk and only fix profit on investment in case of profit and loss in both conditions. Islamic bank considered an ethical way of banking from the customer and Islamic point of view because in Islamic banking investor likely equal to know about the investment. Pakistan, which has the second largest Muslim population in the world, is among three countries that have fully committed to Islamic banking (along with Sudan and Iran).

The Future of Car Financing in Pakistan

Looking at the micro and macro economic indicators, increase in foreign investment, political stability, the security situation turning a corner and the initiation of the China-Pakistan Economic Corridor (CPEC) – We predict that Pakistan’s economy will further stabilize. We are a market of nearly 200 million people.There is no doubt that as our per capita income increases, the demand for mobility will rise. Given the continuation of low car financing rates and a progressive automotive policy, the industry will continue to grow.

The government’s proposed automobile policy is at advanced stages of development and is likely to introduce major incentives for encouraging fresh investment and promoting car financing and reduce duties on auto-part imports. Assuming the plan is passed, the policy should enable increased competitiveness amongst auto manufacturers and incentivize new carmakers to set up their manufacturing units in Pakistan (e.g. Audi, Volkswagen, Nissan), leading to lower retail prices.

Managing Director of Carmudi Pakistan, Raja Murad Khan, concludes:  “Car Financing is an integral part of the Auto Industry and the recent trend is giving a positive outlook to both consumer financing and automobile Industry. Auto Financing and automobile sales go hand in hand, and it goes without saying that a thriving leasing industry gives a massive boost to sales in any economy. Auto sales in Pakistan have been boosted by comparatively inexpensive financing options, and I am sure the industry for new and pre-owned vehicles will thrive as innovative and consumer focused products are made more accessible.”