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Islamic Car Financing Revving Up Car Sales in Pakistan

Carmudi has recently published a white-paper that encompasses current and future state of the flourishing car financing market in Pakistan, and how consumer attitudes towards credit have transformed in recent years, especially with the growing trend of Islamic banking and Finance. The report is based on studies of data and reports by government institutions, authorities and interviews with financial institutions, car dealers, and banking experts throughout Pakistan.

Growing Islamic Banking and particularly Islamic Auto Finance remained the main focus of the study. According to the report in Pakistan conventional banking has facilitated car financing, generally. And auto financing has positively contributed in the new as well as used car business. Whereas Islamic Banking also enables auto finance for consumers who strictly follow the Islamic principles of riba free business and lending either. Though Islamic Banking counts only 1% of global banking business but also Islamic banking is rapidly growing all over the world and especially in Pakistani market. Nowadays banks like Meezan bank, Dubai Islamic Bank, Al Falah Car Ijarah and KASB Modaraba are providing riba free auto finance.

Based on the micro and macro-economic indicators, political stability, and increase in foreign investment in Pakistan, the economy is predicted to further stabilize. Further in the wake of rising per-capita income auto demand will also be high. Enabling environment, low car financing rates and Islamic financing ensures growing  Auto finance industry in Pakistan. “Car Financing is an integral part of the Auto Industry and the recent trend of Islamic Car Financing is giving a positive outlook for both consumer financing and automobile Industry. We see more and more people asking us about the lease and financing options and it’s very healthy to see financial institutions come up with new offerings”, commented Raja Murad Khan, Managing Director of Carmudi Pakistan.

In May 2015, the IMF stated that Pakistan made “significant progress” by fulfilling targets under its $6.6 billion loan program. The country’s economy is on a high with low crude oil prices and $14 million in remittances from 6 million workers abroad. Following a 4.1% expansion during the last fiscal year, the IMF predicted a 4.5% growth in the economy starting July 1st of this year that was mainly driven by increased domestic demand in car sales and construction of 20% and 5% respectively.

According to a study by Nielsen in 2014, 78% of Pakistanis were having plans to purchase new or used cars during next two years. Whereas 89% were focusing on upgrading their existing vehicles subject to financial soundness, stated in the report. The auto industry won high sales in 2012 that is again expected in the wake of sustainable economic growth and subsequently increased lending coupled with 9.5% penetration rate of Islamic financing during current financial year.

It is also noted that between July 2014 to March 2015, consumer financing saw a growth of 6.4% (Rs. 16 billion), down from 9.8% (Rs 21.5 billion) in the same period of the previous year. Due to high demand for new car models and amended regulations permitting banks to provide financing for vehicles older than nine years old, auto loans posted a 20% increase, up from 17.8% the year before. Increased income per capita, improved agricultural sector and the kickstart of the economy also contributed to the healthy growth in consumer credit, particularly in the auto sector.

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