Business | Automotives

Car dealers begin to feel bite of new Central Bank rules

Sales drop by 20% to 40% as financing regulations take effect

  • By Manoj Nair, Associate Editor
  • Published: 00:00 June 6, 2011
  • Gulf News

Morning traffic on Al Maktoum Bridge
  • Image Credit: Ahmed Ramzan/Gulf News archive
  • Morning traffic on Al Maktoum Bridge. Prospects for June car sales do not look promising, with families having competing spending needs such as vacations and are thus less inclined to put up the 20 per cent down payment that new car transactions require.

Dubai: It may not have been a full crash, but it came close enough. New car sales in the UAE in May could have been much worse than was initially thought as the impact of the Central Bank restrictions on auto financing took hold.

The second fortnight of the month was particularly tough, industry sources added. While local dealerships have not put out any data on the extent of the drop, anecdotal evidence suggests it could be anywhere from 20 to 40 per cent.

Sources in the insurance sector confirm this to be the case.

"The volume of new car policies that we wrote during May was off by over 30 per cent compared with March's tally," said a manager with a local insurer that is one of the leaders in auto insurance.

Feedback from other insurers and brokerage firms attest to this, though their average drop in new automobile underwriting during May was around the 20 per cent mark. It must be kept in mind, however, that auto sales during March and April were exceptionally high.

Double whammy

The Central Bank guideline on auto financing came into effect from May 1, and requires that banks cannot exceed the 80 per cent loan exposure mark on each individual transaction. A double-whammy was provided by another restriction, which said that an individual's overall loan commitments should not exceed more than 50 per cent of his monthly income.

"Many buyers actually brought forward their purchases to March or April with 100 per cent financing ahead of the May deadline and that created artificially high volumes," said an official with a bank. "So the drop in May was expected; the actual impact of the Central Bank regulations can only be gauged by what happens this month and the next."

The mid- to high mid-end models — of Dh70,000 to Dh120,000 — have been particularly affected by the drop in volumes during May. Prospects for June do not look too promising either, with families having competing spending needs such as on vacations and thus less inclined to put up the 20 per cent down payment that new car transactions require.

"Limits placed on an individual's financing levels obviously has its impact on any consumer industry and this is what's happening with the May auto sales numbers," said the general manager at a dealership for a leading European make.

"But buyers will soon start taking it in their stride and a little bit of fiscal discipline is good all round."

And how soon can that sentiment come into play?

"Post-summer and in time for the new model year launches could signal an improvement," he added.

But local dealerships are already trying to kick-start a bit of momentum into the proceedings. In recent days, the dealerships for Toyota and Honda have both announced financing schemes.

Arabian Automobiles had earlier come up with the Nissan Freedom initiative, through which it lessened the individual's monthly installment outgo on a new car transaction.

"Dealership led financing initiatives will come through more forcefully into the marketplace," said a sales manager for a Japanese brand. "No one needs to reinvent the wheel on this; it has been done in other markets with a great deal of success and was used quite creatively by all the major US dealers during the recession. The time for that has obviously come in the UAE."

Others agree. "What we are seeing now is just a temporary blip and all the industry participants will come up shortly with new schemes or arrangements to woo customers," said Rishee Sudarshan, CEO of Insighters Insurance.

How dealers cope

Al-Futtaim Honda has rolled out its Honda Advantages initiative, which will have individually tailored financing available to buyers. It is based on a model called "personal contract purchase", and offers guaranteed trade-in at a future date and an option to upgrade to a new vehicle after the second or third year.

"The Honda Advantages solution means you can afford a higher spec vehicle than perhaps you initially envisaged," said Mark Kass, managing director of Al-Futtaim Honda.

Al Futtaim Motors, the Toyota distributor, has come up with the Fuel & Go ownership package, which incorporates many of the costs associated with owning a car in one monthly payment.

Comments (2)

  1. Added 16:21 June 6, 2011

    I will now not buy a new car with a 20% deposit as a car is a current asset and therefore not an investment due to depreciation. They will have to revise this rule as I'm sure that dealers will start to lose a massive amount of business.

    Jason Cook, Dubai, United Arab Emirates

  2. Added 10:35 June 6, 2011

    My family was thinking on taking a new car as a replacement of the old one, but now we will keep the old one for some 1-2 years more as it is not possible and also not financially reasonable for us to pay 20% down payment. We rather repair the old one. I believe that many people will do the same and this is not good as, yes, from one side you will be more wary on what you are spending, but a new car spends less petrol and pollutes less the environment, so at the end keeping your old car is not financially savvy for you and for the country as the government will have to spend more eventually on environmental projects. As for the 50% cap on repayment of loans, I have to say that I understand the reason behind it, but in UAE for some reason banks do not acknowledge the total family income and only look at the personal income., which do not reflect positively on the repayment fees and also on the purchasing capability of the family. In Europe and USA the bank is taking into account the full family income divided by the number of people in the family and only then the 50% cap is applied. I believe that UAE bank should be more flexible and user-friendly to accommodate the needs of users and companies.

    Mariya Pasheva-Omolo, Dubai, United Arab Emirates

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