Surge in UAE car sales may boost car loan market

As sales of new cars in the UAE continue to increase, growth in the car loan market still remains low but is being to stabilise and show signs of recovery, Arabian Business has learned.

Toyota, the world’s biggest automaker, accounts for 40 percent of all new car sales in the UAE and local agent Al Futtaim Motors said sales in the first four months of the year were up 45 percent year-on-year.

“In the first four months of the year we have sold over 30,000 units… We are very happy with that,” said Simon Firth, managing director of Al Futtaim Motors.

While sales of new cars are racing ahead, the results of the Arabian Business debt survey showed only 37 percent of respondents have a car loan and half of those have less than AED50,000 ($13,612) outstanding, a clear sign borrowing rates still appear to be low among new car owners.

Last year, General Motors claimed over a third of applications for car finance were now being rejected by UAE banks. “These are people walking into our showrooms and wanting to buy that new [car] and not being able to get financing,” Mike Devereux, outgoing managing director of GM Middle East operations told Arabian Business.

However, this appears to be changing and the car loan market is beginning to increase, said Shekhar Krishnamurthy, head of retail assets and liabilities at Emirates NBD, the UAE’s largest lender.

“The first half of this year has been good for our business and we have seen double digit growth compared to the last year,” said Krishnamurthy. “We believe that in months to come volumes will further improve. The latest industry figures indicate that the market is expected to register a 10 percent to 15 percent growth in volumes this year and a 15 percent to 20 percent growth in units.”

This would appear likely, if the figures in a survey by IHS Global Insight are proved correct. The report forecast sales of new cars are set to rise to 240,000 this year, up from 210,000 in 2010 but still a lot lower than the 324,000 sold in the boom era of 2008.

However, in a bid to prevent the excesses of the boom era when many borrowers got into debt by borrowing recklessly, the UAE has introduced changes to the terms allowed for new car loans. Borrowers must now have a minimum monthly salary of AED5,000 ($1,361) – 66 percent more than during the boom era.

“With the new regulations, auto loans are offered up to 80 percent of the vehicle price, for a maximum tenor of 60 months and total installment to income ratio capped at 50 percent,” added Krishnamurthy.

While showrooms are anticipating higher demand and lenders are forecasting a growth in car loans, Stephanie Vigier, senior market analyst at IHS Global Insight said the new regulations were unlikely to see a return to the boom era before the credit crunch struck.

"Stricter banking rules and higher interest rates will curb new car sales," she said. "We think that it will be difficult to come back to the 2008 level as the government has learnt the lesson and will not open widely credits and car loans."

Click on the links below to see results of the Arabian Business debt survey:

Results: Total personal debts

Results: Bank loans

Results: Credit cards

Results: Car loans

Results: Scale of skips

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