InFocus | Auto Loans Insurance
Cruising along smoothly
Almost every sector is basking in the sunny days that the UAE economy is experiencing. The automotive sector, in particular, is cruising smoothly thanks to the double-digit growth the industry witnessed in 2005.
- By Neesha C. Salian, Staff Writer
- Published: 00:00 August 19, 2006
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Almost every sector is basking in the sunny days that the UAE economy is experiencing. The automotive sector, in particular, is cruising smoothly thanks to the double-digit growth the industry witnessed in 2005.
The mood is buoyant, says Abhijit Pandit, Head of Marketing, Arabian Automobiles, exclusive distributors for Nissan, Infiniti and Renault in Dubai and the Northern Emirates. Pandit says the market grew 20 per cent last year and that the sector shows signs of repeating its double-digit growth this year too.
"Figures for 2005 showed that about 189,000 cars were imported into the UAE, of which around 15 per cent were re-exported to different markets. So approximately 160,000 were for this market."
This growth and demand has also affected the auto loans sector because of its symbiotic relationship with the auto industry.
More than half the cars bought in the region are financed. According to Khalid Bin Deemas Al Suwaidi, Head of Retail Banking, National Bank of Abu Dhabi, "the auto finance market has the growth potential of about 15 to 20 per cent linked to its two main segments, which target individuals and business entities including transport and rent-a-car companies."
"Based on research, it is estimated the UAE auto finance market is worth around $2.1 billion (Dh 7.71 billion), which would roughly translate to about 140,000 to 150,000 successful applicants per annum," says Raymond O'Neil, Managing Director, HSBC Middle East Finance Company Limited (MEFCO).
Competitive market
Most of the banks and financial institutions in the UAE offer expatriates and nationals auto-financing schemes that include similar terms and conditions, most often for new, used and commercial vehicles. In fact, according to O'Neil, the market is saturated and so aggressive that established operators and new entrants are competing on price/interest and incentives.
"The competition among financial institutions has worked to the advantage of the consumers, who are receiving superior products, even more competitive profit/interest rates and longer tenures and faster turnaround times," says Faisal Aqil — GM Retail Banking, Emirates Islamic Bank.
Banks are stacking their auto loans with value-added factors such as reduced turnaround time for a loan approval, bundling other credit offerings with loans, reduced charges, zero down payment options, dealer tie-ups and insurance schemes, according to Gaurav Jain, Distribution Expansion Head-Branch Banking, Citibank UAE.
Service has also become a deciding factor, says Owen Belman, Consumer Banking Head, Standard Chartered Bank, UAE. "There is an increasing number of banks in the UAE that are offering financing for new and used vehicles to a relatively small target population. In the absence of any differentiation, banks are offering lowered rates and have increased their focus on service as a response to intense competition."
According to Steve Williams, Chief Operating Officer, Lloyds TSB Group Middle East, "we believe good customer service is a key factor in ensuring customers stick with us and, of course, this should be considered when people think about taking out an auto loan."
Fixed or floating
The real deal though is with the terms and conditions that constitute the loan. These stipulations vary among different banks. Jain says they depend on factors such as the type of vehicle being financed, if the customer has an account with bank, the company and the salary band, among others.
For instance, a number of banks offer options for both a fixed flat rate of interest and a floating interest rate to customers while some offer only loans at a fixed flat rate of interest.
NBAD is one of the banks that only offer a flat rate of interest. "Our interest is flat per annum and the advantage there is that all loan parameters, including the instalment amount, interest and total loan amount, are clearly pre-defined from day one, so there are no surprises in store," says Al Suwaidi.
O'Neil says that banks that offer both options give the customer more of a choice.
"A fixed, flat rate of interest enables customers to plan their cash flow more effectively over the lifetime of a finance transaction, whereas a floating rate option will give a customer the flexibility and ability to benefit from reduced interest rates and repayments in a declining interest rate environment."
Some banks such as Citibank, Standard Chartered and Lloyds TSB Group Middle East charge interest on the reducing balance. According to Jain, "the advantage of such a feature is that the interest rate calculations are clear to the customer and he knows his exact monthly pay-out while applying for a loan."
Belman says the interest portion is equally spread throughout a loan on the customer's outstanding principal amount.
Islamic finance schemes are also gaining ground in this region as banks are offering finance packages that comply with Sharia standards. Standard Chartered, HSBC (MEFCO) and Emirates Islamic Bank are among them.
"Sharia-compliant auto finance schemes are getting popular, as more people now understand that Islamic financing is not just applicable to Muslims but open to everybody. In fact, the two bigger players in the car finance market are Islamic banks," says Aqil.
Sharia standards
"A Sharia-compliant scheme provides finance in accordance with Islamic law (Sharia). We provide Islamic finance on a 'Murabaha' structure, which indicates that instead of lending out money, the capital provider (the bank) purchases the desired commodity (the vehicle) from the dealer and re-sells it at a predetermined, higher price to the customer. By paying this higher price over instalments, the customer has effectively obtained financing without paying any riba (interest)," explains O'Neil.
SCB's Sharia-compliant scheme also operates on the same principle where a customer is clearly communicated the MSRP, a profit amount, and agrees to pay the sum of the aforementioned amounts in equal monthly instalments over their chosen tenure.
"In addition to the HSBC Amanah vehicle finance (car finance in a Sharia-compliant manner), we offer hire purchase (the traditional method of finance), a balloon payment structure, financial leases (rent-to-own), which reduces the monthly instalment of consumers substantially and an innovative operating lease product that provides off-balance sheet finance to companies," says O'Neil.
Emirates Islamic Bank also offers Sharia-compliant finance schemes for new and used cars. They have a zero down payment option, finance repayment up to 60 months and a profit rate of 4.15 per cent per annum on a flat basis. No salary transfer is required and the documentation involved is minimal.
Free goodies
Customers who apply for vehicle finance through HSBC MEFCO receive a free HSBC credit card for the first year and an HSBC cheque account with a minimum balance waiver. In addition, customers have the option to finance insurance for multiple years, service contracts, extended warranties, annual licence renewal fees and roadside assistance. No salary transfers, or other related restrictions are required.
"Standard Chartered also offers new car financing and used car financing for up to five years with features such as deferred payment, roadside assistance, extended warranty and insurance," says Belman.
Expansion plans
NBAD offers only conventional auto loans and is in the process of establishing its Islamic subsidiary, which will handle Sharia-compliant schemes. "We offer auto finance schemes for up to 72 months with a nil down payment option, free for life credit cards, grace periods up to 60 days, and no limitations on the customer's choice of the brand of the vehicle. We also offer insurance," says Suwaidi.
Citibank and Lloyds TSB also offer standard loans. "We aim to provide approval within 30 minutes on a best-effort basis. The loans are based on reducing balance basis for interest calculations. Auto loans are offered up to a maximum of 60 months.
Another value addition is the insurance tie-up with Gargash Insurance Services and the Lebanese Insurance Company. The motor insurance comes at a very special rate exclusively for our customers, which is applicable on 4 x 4 and saloon cars, new and used cars. The value addition on the insurance involves agency repairs for the first 13 months while the geographical extension covers Oman. Competitive interest rates and the option to take a credit card and other loan facilities (once the auto loan is approved) are part of the deal," says Jain.
Lloyds TSB auto loans also offer financing for a maximum tenure of five years. "We offer an interest rate of 8.99 per cent on a reducing balance method and offer a reduced rate of 8.74 per cent for 'collective advantage' customers, (which is applicable if at least three employees of a company have an account with the bank). Our customers have the option of zero down payments and can expect fast approvals on their auto loans. There are no penalties on early lump sum repayments or full repayment of the auto loan. The same rate of interest is applicable for auto loans for both new and used cars," says Williams.
In addition to banks mentioned above, leading banks such as Emirates Bank, Arab Bank, Invest Bank, Mashreq Bank, RAKBank and National Bank of Dubai, among others, also offer auto finance.
While customers can find a plethora of loans to suit their requirements, there are several issues that affect the sector. According to O'Neil, increased competitive pressures, reduced margins and the question of sustainability are some of the problems facing the sector. "As a bank or independent auto financing company, captive or non-captive, one must regularly justify one's existence to the parent company, shareholders, dealers, customers and partners in the industry. To succeed in this effort, institutions must focus on the value conveyed to its stakeholders," he says.
Jain says there are too many banks chasing a few customers. Excessive competition has led to some banks reducing their rates drastically to get a piece of the market. However, these banks do not invest in other important areas such as customer service requirements, extended banking hours and easy banking options.
Biggest challenge
Transparency is also one of the biggest challenges facing the auto loan industry in the region. "There are many instances where interest rates offered or advertised by banks and lenders actually do not reflect the actual rates paid by customers. It is very confusing for the ordinary customer to differentiate between the advertised 'headline rate' and the 'actual rate' that is calculated on a reducing balance," says Williams.
"The rising interest rate scenario has resulted in severe compression of margins, which has made it extremely difficult to remain profitable in the auto loan industry. In the future, the alternative transportation industry (TRAM) might provide a stiff challenge to the demand for vehicles," says Belman, who adds it is far too early to predict what effect it will ultimately have on the auto loan industry.
